Breaking Down Pfizer’s Acquisition Of Hospira

+3.20%
Upside
27.72
Market
28.61
Trefis
PFE: Pfizer logo
PFE
Pfizer

Earlier this month, Pfizer (NYSE:PFE) announced its $17 billion acquisition of Hospira. The company has been looking at new avenues for growth and its vaccines business and oncology pipeline hold some promise. But given its mammoth size, we believe that the next phase of growth may come from acquisitions. The announcement related to Hospira is indicative of this. Last year, Pfizer made an attempt to acquire AstraZeneca and the deal eventually fell through, but the company is not going to stop at that.

Pfizer’s sales have declined significantly over the last few years amounting to $49.6 billion in 2014. The continued impact of generic competition, as well as the expiration of certain co-promotion agreements weighed on the company’s revenue growth last year. Its recent drug launches haven’t been successful enough to stem the revenue loss. For instance, its kidney cancer treatment drug Inlyta and lung cancer treatment drug Xalkori have seen weak sales over the last few years. Except for oncology and the Prevnar/Prevnar 13 franchise, Pfizer’s revenues, in our view, are likely to fall across all sub-segments including cardiovascular, immunology, metabolism and musculoskeletal. As a result, there is a lot of pressure from investors to restructure the business and revive the growth. While Pfizer is making R&D investments to improve its drug pipeline, it is also looking at acquisitions and divestitures as viable strategic options. With Hospira’s acquisition, the company not only gains access to the former’s promising biosimilars pipeline, but also strengthens its declining GEP business segment (global established products). Because the Hospira acquisition significantly boosts its innovative products segment, there may well be increased impetus to spin off the established products segment, which may now have some suitors.

Our price estimate for Pfizer stands at $35, implying a slight premium to the market.

Relevant Articles
  1. Should You Pick Pfizer Stock At $30 After A 30% Fall In A Year?
  2. Should You Pick Pfizer Stock At $30?
  3. Down 25% In A Year Will Pfizer Stock Rebound To Its Pre-Inflation Shock Level?
  4. Will Pfizer Stock See Higher Levels Post Q1 Earnings?
  5. Is Pfizer Stock Undervalued At $40?
  6. This Logistics Company Appears To Be A Better Pick Over Pfizer Stock

See our complete analysis for Pfizer

Is The Price Paid Justified?

Pfizer is paying $17 billion for the acquisition. Hospira’s EBITDA (earnings before interest, taxes, depreciation and amortization) for the year 2014 stood at $776 million, a significant jump from 2013. [1] The revenues for the same period totaled $4.46 billion. [1] This gives us a revenue multiple of 4.46 and EBITDA multiple of roughly 22. If we look at Pfizer, the company is trading at a revenue multiple of 4.4 and EBITDA multiple of 9.8. This indicates that the company is valuing each dollar of Hospira’s profit much higher than the market is valuing Pfizer’s. This indicates Pfizer’s confidence in Hospira and can be attributed to the growth potential of Hospira’s biosimilars. Its biosimilar version of J&J’s blockbuster drug Remicade has been approved in the EU and the expectation is that sooner or later, it will get approval in the U.S. as well. That said, the procedures and laws governing biosimilar approval are only now coming into view. Biosimilars can be the next big thing considering that they are cheaper than branded biologics, even though the price difference is likely to be only about 20% to 30%. This implies that the profit opportunity could be much bigger as compared to regular generics, assuming health organizations and professionals easily switch to biosimilars. The fact that these drugs are not easy to replicate and are not exact copies of the original drug  may deter the adoption at first. However, the global push for making healthcare more affordable bodes well for their future. According to Pfizer’s estimates, the market for biosimilars could be as big as $20 billion by 2020 with Hospira potentially commanding a big share of it. Therefore, we believe that the price of $17 billion is justified.

Where Does Pfizer Go From Here?

We believe that Pfizer will still be hungry for more acquisitions. More specifically, it may still be interested in tax inversion deals, even though the prospect has become less attractive with the recent amendment to the U.S. tax laws. However, it will need to acquire a much bigger target for the deal to make sense. Tax savings and effective deployment of foreign held cash will make the company more competitive globally. The U.S. government is pushing for a bill that will levy one time tax on foreign cash holdings of corporates. Even though the bill may not be passed anytime soon, we believe Pfizer is likely to make use of its foreign cash reserves by funding acquisitions before such bill becomes a law. In other words, we believe that one of the likely courses for Pfizer could be to spin off its global established products and go for a big acquisition that bolsters its oncology and vaccine pipeline.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Hospira’s SEC filings [] []