What 2015 Will Bring For Pfizer?

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Pfizer‘s (NYSE:PFE) investors will be hoping for something significant in 2015. The company has been scouting for acquisition candidates in a bid to spur its stunted growth. There are some drugs that are doing well, but a large portion of them have been under competitive pressure from generics. In our opinion, Pfizer is doing the right thing by entering licensing deals pertaining to oncology and investing in new and innovative areas such as gene therapy. If some of these partnerships succeed, its topline can receive a strong boost. We expect Pfizer’s growth to remain under pressure in 2015.  But at the same time, we believe that the company will be anticipating that some of its investments start to bear fruit. We won’t be surprised if it goes for another big acquisition attempt this year.

Our price estimate for Pfizer stands at $35, implying a premium of about 10% to the market.

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Growth Concerns Will Remain

In 2014, Pfizer’s revenue growth was negatively impacted by the continued decline in legacy drug sales and termination of some co-promotion agreements. The year 2015 may not be much different, and we expect the company’s overall revenues to come down slightly. Except for the oncology segment and the Prevnar vaccine franchise, we expect sales from all drug segments to decline moderately reflecting the situation mentioned above.

Enbrel is a drug used for the treatment of plaque psoriasis, rheumatoid arthritis and psoriatic arthritis. Pfizer and Amgen had co-marketed this product in North America (U.S. and Canada) until a year ago. The co-promotion agreement has ended resulting in loss of sales. Pfizer is still the sole marketer of this drug outside North America so its sales are still secured there. However, the issue is that while biologics have got a strong protection in the U.S. (generic equivalent or biosimilar of Enbrel can not be approved in the U.S. until 2028), the same is not the case in international markets. In fact, Cipla has already launched a generic version of Enbrel in India and chances are, something similar can happen in Europe as well. Enbrel’s sales from international markets stood at $3.77 billion in 2013. This revenue base is likely to become more uncertain going forward.

Apart from this, the company will also face the continued impact of termination of the Spiriva collaboration in some geographies, along with the patent expiry and the resulting competition for Detrol LA in the U.S. Pfizer’s other legacy products will also facing competitive pressure. The revenues from ‘global established products’ segment declined by 8% in the first nine months of 2014. These products still form a big portion (roughly half) of Pfizer’s pharmaceutical revenues which implies that even if the percentage decline is small, other growing and yet relatively small product categories will have to accelerate their growth in order to make up for the revenue shortfall.

Pursuit Of Oncology May Push Pfizer For A Big Acquisition

It is clear that Pfizer intends to pursue oncology drug development. Besides tax savings and cost synergies, a key motivation behind Pfizer’s failed attempt to acquire AstraZeneca was its promising cancer drug portfolio (including the drugs in the pipeline). In fact, AstraZeneca’s management is very bullish about its oncology pipeline, and is targeting a growth of 75% in its revenues by 2023. [1] In early 2014, it presented promising clinical trials data on two of its experimental drugs for the treatment of lung cancer. The peak sales for each of these drugs have been estimated to be between $3.0 billion and $6.5 billion. [2] Overall, the company expects to launch 10 new drugs in the next seven years.

Thwarted in its effort to acquire AZ, Pfizer has been pursuing alternative cancer therapies.  In June 2014, Pfizer signed a licensing deal with Cellectis, a French biotech company. The research collaboration between the two companies will help develop cancer drugs that leverage the body’s immune system to fight cancer cells. In November 2014, the company struck a deal with Merck KGaA for the development of the latter’s investigational anti-PD1 drug. Under the terms of the deal, Pfizer will make an upfront payment of $850 million, with additional payment of $2 billion contingent on regulatory and commercial milestones. This is a massive investment for Pfizer considering the drug’s stage. However, the potential reward could also be big as immuno-oncology market is expected to pick up over the next few years.

Although this is speculation, we won’t be surprised if Pfizer goes for a big acquisition in 2015 considering its oncology pursuit, its thirst for cost savings and its corporate history of making such big and bold moves. We have written about this possibility in detail (read Pfizer’s Acquisition Strategy: Will Pfizer Still Go For A Big Acquisition? (Part 1 of 2)).

Europe Slowdown May Impact Pharma Spending In The Region, Thus Affecting Pfizer

After a brief period of recovery, the Euro Zone is again showing signs of faltering. Government debt as a percentage of GDP has increased in several countries including Greece, Portugal, Italy, Ireland and France. This figure has gone up for the United Kingdom as well. Additionally, fiscal pressure has increased sharply for Greece. Declining oil prices and possibility of Greece exiting Euro has disturbed investor sentiment. The decline in European stocks is manifestation of these events along with the fear of deflation. Overall, 2015 is not looking too good for the region and the possibility of certain austerity measures could weigh on the sales of pharmaceutical products.

A high percentage of healthcare spending in Europe is funded by the government. The faltering economy may pressure the public sector to take strict measures and cut financial corners. While healthcare spending is largely fixed, European governments may try to optimize the variable part of the expenditure which is largely related to drugs. This can take form of strict pricing policies and promotion of cheaper generic versions. Evidence suggests that while pharmaceutical spending growth has remained above GDP growth in the EU, this phenomenon changed during the financial crisis of 2009. (Read about the impact of austerity on European pharmaceutical policy and pricing, in a report by Deloitte) It won’t be surprising if it happens in 2015 also.

Also, governments use IRP tool (or international reference pricing) to benchmark prices across geographies. For instance, Deloitte’s report suggests that a host of countries in Europe and other regions of the world reference their pharmaceutical pricing to Greece. If Greece exits Euro currency, its own currency is likely to depreciate which will make its Euro-denominated debt even more expensive, thus resulting in further austerity measures and economic slowdown. The pricing and sales of pharmaceuticals could be impacted too, and this effect can spread to other countries.

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Notes:
  1. How AstraZeneca escaped Pfizer’s clutches this time, Reuters, May 27 2014 []
  2. AstraZeneca shares fall after Pfizer walks away from deal, The Guardian, May 27 2014 []