Despite Failed Allergan Bid, Pfizer Can Not Complain About 2016

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The year 2016 was a transformative one for Pfizer‘s (NYSE:PFE) business. The company managed to turn around its revenue growth after nearly 5 years of consistent decline. Despite the failed Allergan deal, it regained investor confidence with new FDA filings and approvals, smaller acquisitions and capital return to shareholders. In the first nine months of 2016, Pfizer returned about $10.5 billion cash in dividends and share buy-backs, pegging its dividend yield higher than some of its key competitors. We think that Pfizer could use its recent success with Anacor to justify its acquisitive strategy, and continue to make acquisitions as well as some divestitures to make its portfolio more attractive and focused. Let’s take a detailed look at how last year fared for Pfizer.

Our price estimate of $36 for Pfizer stands at a premium of around 10% to the market.

After Five Years Of Decline, Revenue Growth Revived In 2016

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Pfizer’s revenue declined from nearly $67.8 billion in 2010 to $48.9 billion in 2015, implying an average annual decline of 6.3%. Loss of multiple patents, including its biggest drug Lipitor, led to this decline, and new drugs received less than expected adoption. Consequently, Pfizer started looking at new avenues of growth including acquisitions and investment in immuno-oncology.

The year 2016 has been a good one for the company, which saw growth of nearly 12.6% in its revenue during the first nine months of 2016. This was partly due to the impact of the acquisition of Hospira, and partly due to organic growth driven by the success of cancer drug Ibrance, rheumatoid arthritis drug Xeljanz, its flagship vaccine Prevnar, and the blood thinner Eliquis. This was reflected in nearly 20% gain in the stock price between Feb and July, a big portion of which was later wiped out due to the uncertainties surrounding the U.S. presidential elections. There was a general concern in the industry around the potential pricing power of big pharma companies and prescription-drug reforms once the new president takes the office.

Prevnar Vaccine And Cancer Drugs Emerged As Key Growth Drivers

Almost all of Pfizer’s organic growth in 2016 can be attributed to its Prevnar franchise and cancer drugs including Ibrance, Xalkori, Sutent and Inlyta. There are a couple of important observations here. First, Pfizer has a near monopoly in pneumococcal vaccine market with Prevnar, which brings in nearly $10 billion in annual revenues. There is a potential to expand further as the adoption among adults increases. At the very least, we believe that this franchise, and with it a significant portion of Pfizer’s business, will remain resilient. The vaccine is patent protected until 2026.

 Second, the growth in cancer drugs business, especially immuno-oncology, reflects an industry-wide shift wherein every big pharma company is investing heavily in this domain. Pfizer hasn’t missed this important train. We estimate nearly $4 billion in peak sales for metastatic breast cancer Ibrance and the phase 3 oncology pipeline has a combined peak sales potential of nearly $5 billion.

Pipeline Progressed Well

The overall progression of Pfizer’s pipeline in 2016 was decent, with notable progress coming from cancer drugs and biosimilars.

Pfizer was co-developing an anti-PD L1 cancer drug Avelumab with Merck KGaA. It was granted priority review status by the FDA in late 2016. This puts the drug on track to hit the market somewhere in 2017, which is in line with our expectations. The peak sales for Avelumab have been pegged around $3.8 billion. Additionally, Ibrance received expanded approval in early 2016 for use in the treatment of hormone receptor-positive (HR+), human epidermal growth factor receptor 2-negative (HER2-) advanced or metastatic breast cancer in women whose disease has progressed following endocrine therapy. While Pfizer’s own Inotuzumab Ozogamicin progressed from phase 3 to receiving breakthrough designation from the FDA for acute lymphoblastic leukemia, its acquisition of Medivation added another cancer drug Talazoparib to its phase 3 pipeline. The drug is being tested for advanced breast cancer in patients with germline BRCA mutations (mutation of certain tumor suppressing genes).

As far as biosimilars are concerned, Pfizer scored a big one with the approval of Inflectra in the U.S., which is a biosimilar to J&J’s highly successful drug Remicade. Pfizer’s success was further augmented by the FDA approval of eczema drug crisaborole, which was added to its portfolio with the acquisition of Anacor. The estimates peg the peak sales at somewhere around $2 billion. It is worth noting that a big portion of Pfizer’s investment in Anacor paid off rather quickly. Pfizer has a strong presence in the primary care and pediatric treatments, which is what crisaborole will target. Assuming that it takes six-to-seven years for the sales to peak, and 10 year period of patent protection, we may be looking at a drug that’s worth nearly $3 billion based on 7% cost of capital that our valuation model for Pfizer has. Pfizer paid upwards of $5 billion for the entire deal so getting nearly 60% of that back in form of a single drug isn’t bad by any standards. This success can potentially be used as a justification of its acquisitive strategy.

Acquisitions And Divestitures Continued, Attempt At Making Pfizer More Focused

Pfizer acquired Anacor and Medivation in 2016, and attempted to merge with Allergan. The Allergan deal had to be terminated in the wake of new tax laws that negated tax inversion benefits. Additionally, Pfizer entered into definitive agreement with ICU Medical (NASDAQ: ICUI) to sell its infusion systems business, which it had received via the acquisition of Hospira. The deal is expected to close in first quarter of 2017. The small medical device business in infusions was an outlier within Pfizer’s very large pharmaceutical portfolio and its divestiture made sense According to a report by Reuters, Pfizer is also considering the potential sale or spin-off of its consumer health business. All these moves can be viewed as calculated strategy of making Pfizer’s portfolio more focused and lean.

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