24/7 Wall St. 2007 Break-Up Values: Wyeth $54 (Current Price $50.43)

By Ryan Barnes. Edited By Douglas A. McIntyre

Wyeth has done well for themselves to bounce back after the “fen-phen” debacle, which for a while threatened to bankrupt the company.  All told, the company has already doled out or set aside over $21 billion to settle various class-action and individual lawsuits.  According to management, the costs have been fairly estimated and they don’t anticipate any further “material” additions to this amount; of course, when it comes to litigation (and punitive damages!), anything is possible, but we will assume the issue is addressed and evaluate the company outside of this very large overhang on the stock.

Wyeth operate in three business segments; Global Pharma, Consumer Health, and Animal Health, with Pharma representing nearly 85% of current revenues.  The Consumer Health segment contains some solid brands, such as Robitussin, Advil, and Centrum, but sales have been flat for a couple of year, and a sale to a company with a more established distribution channel could fetch a good price (we’re estimating 11x segment earnings) and bring well-appreciated cash to Wyeth to the tune of about $7b.  The Animal Health segment has mature products and decent revenue growth in the range of 7-10%, and if sold would be worth a little over $1b. 

Wyeth actually has a pretty good portfolio of drugs both at market and in pipeline, so our valuation multiple will be on the high end of industry ranges at 3.8x sales, which puts the value at nearly $64b.  Cash flow at Wyeth is strong enough to maintain the company’s credit ratings (back near investment-grade) and take care of any straggling costs relating to litigation matters.  The net of current accounts minus LT debt is a wash, so the cash infusion from the segment sales could be used to increase R&D spending on Wyeth’s strong pipeline and repurchase some shares, bringing the total breakup value to a little over $54/share.

Ryan Barnes

Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others.  Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

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