Pfizer Inks $250 Million Deal With AstraZeneca To Market OTC Nexium

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Pfizer (NYSE:PFE) has struck a deal with AstraZeneca which will help it gain worldwide rights to market over-the-counter (OTC) version of the latter’s blockbuster drug Nexium (commonly known as purple pill). In addition, the two companies will explore the idea to convert AstraZeneca’s other prescription drugs to OTC drugs. [1] The deal could boost Pfizer’s consumer healthcare business even as the company reiterates its focus on its core pharmaceutical business while divesting non-core assets. Recently, the company filed for IPO for its animal health business subsidiary Zoetis.

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Nexium, a heartburn drug, reduces excess stomach acid and is used in the treatment of ulcers and acid-reflux disease. According to the deal, AstraZeneca will continue to manufacture and sell prescription for Nexium while supplying the OTC version to Pfizer. However, Pfizer will have to first win OTC approvals from the U.S. Food and Drug Administration (FDA) and other regulators in other countries. Pfizer will also get the right of first refusal on another OTC drug Rhinocort Aqua, a nasal pump spray to treat hay fever and dust mite allergies.

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Pfizer will make an upfront payment of $250 million as well as other royalty payments on reaching certain milestones. While the deal is certainly good for AstraZeneca, the long-term benefits for Pfizer are yet to be seen as upfront payments will certainly hit the company’s cash flow this year. Pfizer targets to get the OTC version drug on the shelves beginning 2014 when the drug loses its patent exclusivity. The prescription Nexium is one of the world’s largest selling drugs, generating nearly $4.5 billion in revenue in 2011. [2] If the OTC version can replicate the prescription drug’s performance, it could provide a significant upside to our current price estimate.

We currently have a $25 price estimate  for Pfizer, which is 5% above the current market price. We are in the process of revising our price estimate to reflect the recent developments and the earnings. In our model, the consumer healthcare business is part of Pfizer’s Diversified Legacy Drugs & Alliances division which, according to Trefis estimate, currently accounts for nearly 32% of the company’s value.

While in this article we have mainly highlighted the deal terms, we will discuss the impact of other OTC drugs on Pfizer in a separate note.

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Notes:
  1. Pfizer And Astrazeneca Enter Into Agreement For Over-The-Counter Nexium, Pfizer Press Release, August 13 2012 []
  2. 2011 Annual Report, Astrazeneca Webpage []