Pfizer Divests Hospira Infusion Systems To ICU, Retaining An Interest In The Acquier

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Pfizer Inc. (NYSE: PFE) recently announced that it has entered into definitive agreement with ICU Medical (NASDAQ: ICUI) to sell its infusion systems business, which it had received via the acquisition of Hospira last year. The deal is expected to close in first quarter of 2017. The small medical device business in infusions is an outlier within Pfizer’s very large pharmaceutical portfolio and its divestiture makes sense. But, the nature of this transaction makes it more of investment rather than a pure business sell-off. Here follows an explanation of why this is so.

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What Is The Nature Of Transaction?

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The total deal value is $1 billion with $600 million in cash and $400 million in newly-issued shares of ICU Medical. The equity portion translates to about 16.6% ownership in the resulting company for Pfizer. Further, there is restriction on transfer of these shares for 18 months after the deal is finalized. Moreover, Pfizer will also get to nominate one member on ICU Medical’s board as long as it continues to have over 10% ownership. The restriction on transaction and the board seat indicate Pfizer is not going to sell its equity portion anytime soon.

Why The Deal Is Not Pure Sell-Off?

Pfizer got three businesses on acquisition of Hospira:  injectable drugs, biosimilars and infusion systems. While the first two businesses fit well with the company’s existing portfolio of pharmaceutical products, the infusion systems business is a medical device company, and a small one at that. Over the last reported six months Infusion System generated about $600 million in sales which is less than 3% of the Pfizer’s total revenue for the same period. Also, the business is not large enough for Pfizer to invest independently in its growth. Moreover, ICU Medical already has products in IV systems. It is well-positioned to leverage the combined business and can be a major player in infusion therapy. In simple terms,  Pfizer is divesting a small non-core business.

The pro-forma revenue of joint business (ICU Medical) is around $1.45 billion of which over 75% is from Hospira Infusion System. The $1 billion deal value translates into Enterprise Value-to-Sales ratio of about 0.90x. From this angle the transaction does not seem to be at any premium. But look at what Pfizer is getting: 16.6% ownership in ICUI along with a board seat. ICU Medical’s shares have been consistent performer. Over the last twelve months the stocks have gone up by 21%, before the announcement of this deal. It went up by around 15% after the deal was announced. The infusion therapy market size is estimated at around $6.6 billion and is expected to grow at a CAGR of over 4% for the next 5 years. Moreover, Pfizer is ICU’s largest customer and accounted for 36% of the total 2015 revenue. Of around $340 million in sales, ICU generates over 70% from infusion therapy. After this acquisition, infusion therapy will account for over 90% of the total revenue. Also, Pfizer has distribution rights for some of the ICU’s products.

The management is cognizant of the growth potential in this market, but the best strategy is by combining the businesses of the two companies. In such a case it is better to have small focused firm. Moreover, with a seat on board Pfizer management would be able to keep a tap on its investment in ICU.

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