Pfizer Could Acquire India’s Stride Acrolab’s Injectables Unit

PFE: Pfizer logo

Pfizer (NYSE:PFE) is vying to acquire Indian company Stride Acrolab’s specialty injectables unit, Agila. Injectables are high specialty drugs used as antibiotics and chemotherapy agents mainly in hospitals. [1] Speculation is that other players, including Roche and Novartis, are interested in joining the bidding process. This doesn’t come as a major surprise as the pharma companies are focusing on revenue sources to fend-off patents expiry.

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Of late, pharmaceutical giants including Pfizer have been grappling with patent cliffs and may continue to face this headwind. Pfizer’s Lipitor, which generated close to $10 billion in 2011, is losing market share at an accelerating pace and sales have nearly halved in a relatively short time frame. The looming patent expiration for Viagra, Enbrel, Detrol, among others, in 2012 will also hurt the company’s revenues. This has left the pharma companies looking for alternative revenue sources to fend off losses. They have been exploring the M&A route besides expansion in emerging markets.

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Recently, many injectable businesses have seen M&A activities. The reason for the gold rush is a huge generic injectable market, which could zoom by high single digit growth to $17 billion by 2020 as more and more injectable drugs are set to lose patent protection in the next few years. Further, emerging markets will drive the growth in healthcare spending on the heels of rising income levels and increased government focus to provide healthcare facilities to everyone. About 95% of hospital drug spending goes to injectables and other non-oral drugs.

In addition, the competition is pretty low compared to the oral drug business due to high entry barriers. There is a shortage of injectables following the closure of many sterile plants after the FDA action and building new injectables plants takes nearly 4-5 years. Further, manufacturing injectables requires specialization. Margins are also better in injectables business.((ref:1))

Agila has the highest number of generic injectable approvals by the FDA. Therefore, the acquisition makes sense for pharmaceutical giants who are vying to expand their generics portfolios in order to fend-off  losses from looming patents expiry. In addition, Agila has a number of big pharma companies, including Pfizer, in its client list. It supplies several sterile injectables for cancer treatment to Pfizer. Through this acquisition, Pfizer can exert better control on the supply while curbing costs.

But, at what price?

Past acquisitions in this space have been valued at 4-5 times their revenues. Therefore, with Agila’s last year sales of approximately $185 million and estimated FY2013 (year ending March) sales of $250 million, the company can be valued at $1.6 to $2 billion. ((ref:1))

However, before strongly defending the acquisition, we would wait for some clarity on Pfizer’s bid on the asset. One should not forget the importance of acquisition price in this generic and emerging market growth rush. A steep price, just to get hold of certain assets, could actually destroy shareholder value, which we discussed earlier. Hopefully, Pfizer has learned its lessons from Lipitor.

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. Last week, the company signed a deal with AstraZeneca to market an over-the-counter (OTC) version of the latter’s blockbuster drug Nexium.

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  1. Pfizer Seen Circling Agila With U.S. Drug Shortages, Bloomberg BusinessWeek, August 17 2012 []