Conjoined triplets

Pfizer on right path for others to follow

Pfizer is on the right path for others to follow. A two-year diet has done more for investors than a decade of acquisitions. The $208 billion drug giant still trades at a discount to rivals. That's fodder for Chief Executive Ian Read to push for a breakup - highlighting areas such as oncology, which today's third-quarter results showed is growing fast. And Pfizer's recovery should encourage others to find similar solutions to sluggish performance.

Some 10 years of mega-mergers may have piled on the weight, but it also caused Pfizer's stock to almost halve in value. That changed in 2012 when Read decided to put the company on a health kick. He sold its baby-food unit to Nestle for $11.9 billion and then in February this year spun off its animal-health division, Zoetis, to shareholders. Highlighting the hidden value in the firm sent the shares rocketing - Pfizer's shares have nearly doubled since Read took over in late 2010.

On top of that, Pfizer has a mix of newly approved drugs and others in the works that are arguably better than its big pharma peers. Yet the company is valued at a 10 percent discount to a basket of peers containing Novartis, Merck, J&J and Eli Lilly based on estimated 2014 earnings.

That's why Read is considering even more radical surgery. This summer he announced that the company would reorganize Pfizer into three separate companies: a fast-expanding firm containing its oncology, vaccine and consumer healthcare businesses; a slower-growth unit containing most of its remaining drugs still protected by patents; and a cash-cow business with all the drugs that are vulnerable to generic competition by 2015. He also said the company is studying whether to break the company up along these lines.

It would be a somewhat artificial split. There's no functional reason vaccines, consumer goods and cancer medications belong in one firm except for their fast growth. And a firm containing drugs lacking patent protection would need to find replacement drugs, or dwindle in size quickly.

There is some financial logic, though. Taking a scalpel to the fattier parts would allow the faster-growing units to attract a high multiple from investors seeking growth, while the cash cow would attract those seeking high payouts.

If successful at closing the remaining valuation gap, this would set a good example for the likes of GlaxoSmithKline, Merck and Sanofi, which all fell victim to misguided merger mania, too. Keeping in trim may soon be all the rage.