Milk - Why Pfizer sells and Nestle buys



Wyeth products in China.
Photo source jacynkong.blogspot.co.uk

Pfizer and Nestle, two of the largest names in industry, are once again adorning the front pages as Nestle bids $9bn for Pfizer’s nutrition unit. But why are Pfizer selling and Nestle buying?

Since acquiring the unit from Wyeth in 2009, Pfizer’s nutrition unit has been performing well. Revenues from the unit have increased ~15% from 2010-2011 to reach $2.1bn (~3% of Pfizer’s total revenue). And this trend is likely to continue considering Pfizer’s strong presence in China’s milk market, which already accounted for ~25% of the global market in 2009 (ubic-consulting) and its annual growth rate is in two digits. The business, therefore, should effectively diversify Pfizer’s offerings and the revenues generated help shield Pfizer from drying revenues elsewhere. Why then, would Pfizer sell?

As it turns out, Pfizer is selling the unit to refocus its business and, in fact, offset the negative impact of the patent cliffs. Several of Pfizer’s bestsellers, including Lipitor, Xalatan, Effexor, and Zosyn, are facing patent cliffs between the years 2011-2013, affecting roughly $17bn of its sales in 2009. As a result its share prices are down and shareholders are tested with the low return on investment.

Selling the nutrition unit will give Pfizer three strategic advantages. Firstly, the move eases the pressure from investors as it can be viewed as Pfizer’s commitment to uphold the CEO’s promise to “take advantage of our core capabilities” and concentrating on its most profitable and competitive capability; making drugs. Secondly, the sale will increase the capital it have available for pipeline expansion through M&A, funding R&D, or increasing dividends to shareholders. And lastly, China’s milk market, though lucrative, is not without its dangers. The market has suffered numerous scandals resulting in overwhelming buyer distrust of locally produced milk. Pfizer’s Wyeth, which produces its milk in China, may therefore struggle to compete with importers such as Mead Johnson, who currently dominates the market. Pfizer, then, has made a wise choice to exit this market.

Nestle milk under inspection.
Photo source http://www.duchawang.com/

Nestle, on the other hand, has its core capabilities within the nutrition market and needs Wyeth in order to stay within China’s milk market and to diversify its product range. Unlike Wyeth, Nestle has been the center of numerous Chinese milk scandals, making it one of the most distrusted milk brands in China’s rapidly expanding milk market. But if it acquires Wyeth, it will regain its foothold and become the third largest infant milk provider in China. Wyeth’s research on medical value-added aspects of infant milk will also help Nestle, a purely nutrition focused company, diversify its global product range.

And the deal itself is also looking free of barriers. Deeper pockets have helped Nestle out bid fellow competitors such as Danone. Chinese officials are expected to take a favorable view on the deal to prevent market monopoly. Without surprises then, both parties will soon go home to do what they do best – making drugs and producing milk.