In this Market Foolery podcast, and with the big news coming out of healthcare, host Chris Hill calls upon the expert insight of Industry Focus: Healthcare host Kristine Harjes.
First, they consider the word that giant Pfizer (NYSE: PFE) is considering spinning off or selling its consumer healthcare business. Then they look ahead to earnings season, where Johnson & Johnson (NYSE: JNJ) and Pfizer will both provide some early interest, especially in the biologic-drug space. As a bonus, Kristine brings back a business insight or two among the souvenirs from her trip to Greece and offers a travel tip for anyone considering a similar vacation.
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A full transcript follows the video.
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This video was recorded on Oct. 10, 2017.
Chris Hill: It's Tuesday, Oct. 10. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio from the Industry Focus podcast, Kristine Harjes.
Kristine Harjes: Hey, Chris.
Hill: Back, back from your adventure, back from overseas.
Harjes: I am back in the States, back in action.
Hill: Tanned, rested, and ready. Which is good, because holy cow, we have healthcare news. And let's start with Pfizer. Pfizer comes out today and says that it is considering selling or spinning off its consumer healthcare business. For the sake of context, market cap for Pfizer is somewhere in the neighborhood of $215 billion. And just the consumer healthcare division alone, which includes brands that everybody knows, like Advil and ChapStick and Centrum vitamins, that division alone is estimated to be worth somewhere in the neighborhood of $14 [billion] to $15 billion.
So, first, do you think this is a good move? Do you think the fact that they are considering either selling this or spinning this off -- because this seems like, among other things, a nice little cash machine for them.
Harjes: That's absolutely what it is. Let me be clear that when they issued this press release this morning, it was a statement that they were considering, which, honestly, I found a little bit silly. Like, yeah, you're considering business opportunities. Aren't you always doing that? That's what you do when you're an executive at this kind of corporation.
Hill: Did it strike you as being just a little bit needy?
Harjes: "Pay attention to me!"
Hill: Like, "Hey, just in case anyone is wondering, we would totally sell this part of our business."
Harjes: Yeah. Like, what, are you just trying to make that part of the business feel bad about itself? I don't know. Whether or not it's a good idea, maybe. Who's really to say? Consolidation has been a huge theme in healthcare for years now, and it seems like we're almost starting to see the pendulum swing in the other direction, where these gigantic corporations are starting to consider breaking apart. You heard earlier this year that the German Merck was also considering a spinoff of its consumer health division, and now here you have Pfizer, who already has a lot of cash, and this would be another move to get even more cash on their books, potentially to make another acquisition in the biopharma arena.
The consumer health business, as you mentioned, that's your ChapStick and your Robitussin. It's slow growth. It's not going to be a huge needle-mover for Pfizer moving forward. But if they're looking to ignite growth and replace some of the lost revenue from drugs that are coming off patent, they do need to make a somewhat splashier acquisition on the pharma side of the business. And this money would allow them to do that.
Hill: So that goes to my next question, which is, they've got the cash on the balance sheet -- what are they doing with this money? This is a stock that, for many years, was such a great stock for investors. Over the last, pick your time frame, one, two, five years, this has really just sort of matched the market, only not quite as well. It's essentially doing about 40% over the last five years. It's not in negative territory, but it's not really knocking the cover off the ball, and I'm wondering, if you're a shareholder of this company, are you looking at Pfizer and saying, "Why don't you return some of that cash to shareholders? Why don't you increase the dividend, or something like that?" Or, as you said, is the better move in terms of rewarding shareholders making a biopharma acquisition?
Harjes: This is a company that does reward its shareholders. It has a little under a 4% dividend yield last time that I checked, and they're going to stick to it. They would be a Dividend Aristocrat, except for some really unfortunate circumstances that happened around the time of the Great Recession, when they had a gigantic acquisition which then really bit them when the entire global market crashed. But as far as what they should do next to actually reward their shareholders, I do think investing it in a larger growth company would be smart.
One thing to consider, though, with Pfizer is that they have been really hung up lately on their tax bill. This is a company that attempted to merge with Allergan, a company that is based in Ireland, to try to reverse-engineer a buyout such that Allergan was buying them so they could have their headquarters in Ireland and pay a lower tax rate. And, of course, that fell through as soon as the U.S. Treasury put the kibosh on that. So now they're sitting on a ton of money that's overseas that they're refusing to repatriate. This is a story we hear across industries, where companies have billions and billions of dollars that they just don't want to bring back into the U.S. to pay taxes on. So this could be a way of getting some money to use here, without having to wait for a potential tax reform.
Hill: Yeah. Gosh. It's amazing to think back to January, when we were looking at a new president taking office, a new Congress about to start its term, and the two things that there seemed to be across the board agreement on was, "Oh, there's absolutely going to be tax reform this year, there's absolutely going to be a cut in corporate taxes, and there's absolutely going to be an infrastructure bill." And here we are closing in on mid-October, and neither of those things. So I get why Pfizer, among others, is looking to do something like this.
Let's go to your trip. Listeners of Industry Focus know you were in Greece. Where else did you go?
Harjes: Just Greece. But I went all over Greece.
Hill: All of Greece. Lot of islands.
Harjes: Most of the islands.
Hill: Before I get to any sort of travel tips, what business takeaways did you come away with on your trip? I know you a little bit, and I know even though you were relaxing and having fun and doing touristy things and all those sorts of things, I know the business part of your brain did not shut off.
Harjes: Despite doing my best to turn Slack off, to turn my email off, I found myself still thinking a little bit about investing. Can't help it. It's where my heart is. So yeah, I was looking around all the time for business ideas and trying to note how their economy was different from ours, which, of course, left and right you get examples of this. One of the biggest ones was how prominent cash is over in Greece. I found myself trying to use my card everywhere, because that's what I do here in the States, and you really can't do that over in Greece. And when you do, you kind of get the stink eye a little bit. Businesses do not want to take your credit card.
Looking at that from an investment standpoint, it looks to me like a company like Square would have a huge opportunity to grab international business, particularly these small and medium-sized businesses, if they can bring down their fees and change the culture a little bit to make it more card-using. And you can see these trends already playing out. Non-cash transactions are expected to grow 10%-15% in 2017 alone worldwide. Credit card volume is expected to grow 54% by 2020. So all the trends that you see are pushing the world in that direction. It's something that is very visible to me here in the States, but it was much more prominent there, where they're even farther behind as far as credit card adoption goes.
Hill: That's unfortunate, that you were getting the stink eye. I thought maybe the reaction would be one of laughter. Like, "Oh, here's another American trying to pay with a credit card. No, we don't do that here."
Harjes: Well, they laughed at me as soon as I walked in with my giant floppy hat. The laughter was over at that point.
Hill: Earnings season coming up. What are you looking at in the healthcare industry as we head into earnings season? And what should investors like me, who are not as engrossed in healthcare as you are every week on Industry Focus, what is, either a specific company that we should be watching, or just a trend that we should be looking for? Because it's not like retail. I know that every quarter matters for the healthcare industry, but certainly for retail, when you're heading into the holidays, it's a lot more important.
Harjes: Johnson & Johnson will kick off the healthcare earnings season, as it usually does. They report on Oct. 17. I'll definitely be looking at their earnings report pretty carefully. Particularly, I'm looking out for a drug called Remicade, which is an autoimmune-disease drug. This is one that has new competition from a Pfizer drug called Inflectra. Inflectra is a biosimilar, which is like a fancy generic for Remicade. There have been a lot of sales decline for Remicade due to Inflectra because it's a little bit cheaper. Although, because of the complexity of it, it's not as much cheaper as a generic usually is compared to its brand-name drug. It's about 10% cheaper. So the drop-off hasn't really been as steep.
But there's this really interesting backstory going on where Pfizer is fighting with Johnson & Johnson about how J&J is talking to the different insurance companies to try to keep Remicade on the formularies and not offer Inflectra at all. There was a really awesome Industry Focus episode on this while I was a way that my coworker, Michael Douglass, covered for me. He and Todd Campbell were talking on the Sept. 27 episode about this whole issue. Really interesting, if any of our listeners want to go check that out over at Industry Focus.
I will definitely be looking through J&J's report to see how Remicade is doing, whether there's some more drop-off, whether management has any commentary about the issue with Pfizer and Pfizer has become more vocal regarding this. I'll also be interested to see Pfizer's earnings as well. Pfizer bought a company called Hospira back in 2015, and this was a gigantic acquisition, something to the tune of $17 billion. And they bought it for the biosimilars portfolio that Hospira had. So it'll certainly be interesting to see whether or not that's starting to pan out with drugs like Inflectra.
Hill: Who comes up with these names? Is it just me, or is the healthcare, the biopharmaceutical industry, it's just, all of these names. Whether it's for companies or drugs, it really seems like they're bending over backward to come up with a name that's either hard to pronounce or has no logic behind it whatsoever.
Harjes: It's a Ouija board, actually. [laughs]
Hill: [laughs] I believe it. Before we wrap up, I appreciate -- and I know, by the way, as Jason Moser will be listening to this episode later today or tomorrow, he will absolutely be high-fiving himself at the point of the show where you were talking about Square, because he's really been banging the drum lately on the war on cash. So he's going to be thrilled for that. But in terms of just traveling to Greece, whether it's food that you recommend, a beverage, give me a little bit of local culture. I've never been to Greece. I hear great things, particularly about the islands and all that sort of things. What's one or two travel tips you have for anyone who's thinking about Greece?
Harjes: I did a lot of hopping around from island to island. I'll preface this by saying that. So something that was really important for me was staying near the ports. The ports are generally the hub. You don't want to travel too far away from the ports -- A, because that's going to take up precious amounts of time to take a taxi or the shuttle or whatever it is to get to your accommodation. The other thing is, that's going to be the cultural epicenter, everywhere except for Santorini. If you go to Santorini, do not stay near the port. There's nothing near the port. I was so disappointed.
Hill: Why is that?
Harjes: Because Santorini is built up on a bunch of cliffs. So the port is all the way down here. I know our listeners can't see me gesturing, but I'm pointing to the floor here. And then, the actual town is way up here, up near the ceiling. So if you stay near the port -- you actually can't stay all the way down at that level, but if you stay right up this big zig-zaggy road that goes from the port to the top layer, you're not near the main town. You actually have to walk 45 minutes down the highway, which I did, to get to Fira, which is one of the main towns, where you can see those gorgeous sunset views that you see in all the pictures, and my current computer screensaver.
Hill: Any concern with, you mentioned something about cliffs there, about buildings being up on the cliffs?
Harjes: I'm not afraid of heights at all. But I think if you were, maybe that would have crossed your mind a little bit.
Hill: I don't know what the earthquake activity is in Greece, but it just seems like --
Harjes: I mean, Santorini is built from volcanic activity, and they do know that this is an active volcano. I believe what they told me is, they'll know a month in advance when there will be the next seismic activity, but they can't predict when that month window will occur.
Hill: Wait, who told you this? Wait, someone told you --
Harjes: My volcanic tour guide. [laughs]
Hill: "We know a month in advance -- "
Harjes: Yeah. So they have all these warnings that'll tell you, with a 30-day window, "Hey, there'll be volcanic activity in about 30 days." But they don't know when that clock will start ticking.
Hill: OK. Volcanic activity, not necessarily earthquakes. Because I thought, boy, if you could get a 30-day head start on earthquakes, people would pay good money for that kind of thing.
Harjes: I don't know what the earthquake system is. They didn't tell me about that one. Only the volcanoes.
Hill: All right. Sneak preview of tomorrow's episode of Industry Focus?
Harjes: Well, we'll cross that bridge when we get to it. [laughs] We're going to talk some more about biosimilars, and I think we're going to talk about a small company called Flexion that just got a drug approval.
Hill: Another great name. Kristine Harjes -- you can check her every week on Industry Focus, the other daily podcast here at The Motley Fool. Thanks for being here!
Harjes: Thanks so much, Chris!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!
Chris Hill owns shares of Johnson & Johnson. Kristine Harjes owns shares of Johnson & Johnson. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.