Acquisition Of Hospira And Boosted Guidance Make Pfizer Inc. (NYSE:PFE) An Interesting Stock
It looks like better times are on the way – coming soon. What’s interesting? Pfizer Inc. (NYSE:PFE) completed the purchase of Hospira, Inc. (NYSE:HSP) just a few weeks ago and it has already moved to sweeten its fiscal 2015 outlook. The move is telling and there are a few things you can quickly deduce from the development. Pfizer appears to be immensely impressed with the early pace and prospect of Hospira integration.
What Hospira is bringing to Pfizer?
Pfizer’s $17 billion acquisition price for Hospira may seem mindboggling, but looking deeper into the prospects of the deal makes you feel it’s an immensely wise move by the management of Pfizer.
Hospira is a specialty drug company and one of the frontrunners in the biosimilar space with the potential of making Pfizer a leader in the emerging and potentially lucrative biosimilar market. The acquisition of Hospira immediately increases Pfizer’s late-stage biosimilar candidates to five drugs, all of which have multibillion dollar revenue potential in the near-term. But that is only the beginning. Hospira has several other biosimilar drug candidates at various stages of development, and these should widen Pfizer’s biosimilar pipeline and market opportunity.
In Pfizer’s own estimates, biologics worth $100 billion will lose their patent protection over the next five years, thus expanding the market for biosimilars. Therefore, Pfizer sees the addressable market for biosimilars rising to approximately $20 billion by 2020. That should be a rapid growth considering that the market for biosimilars was less than $1 billion in 2012 and is only forecast to reach $3 billion by the end of 2015.
Because biosimilars are easier and faster to produce than biologics, their makers can heavily discount them compared to branded rivals and still make meaningful profits. That explains why billions of dollars will be up for grabs in the next few years as top-selling biologics lose their market exclusivity. For example, AbbVie Inc (NYSE:ABBV)’s arthritis drug Humira (Adalimumab) is posed to be off-patent protection in 2016. The drug generated $12.5 billion in revenue last year.
Hospira has been creating and marketing biosimilars in Europe for years. Because of the rising demand for specialty drugs, Hospira has been able to register significant revenue leap over a few years. The company’s sales rose to more than $4.46 billion in 2014from less than $2.75 billion in 2008. Specialty medicines account for roughly 68% of Hospira’s revenue.
In Europe, regulators have already given the green light to Hospira’s three biosimilar drugs. Among Hospira’s approved biosimilars are alternatives to Remicade (for autoimmune) and Neupogen (for cancer).
Although biosimilars have been sold in Europe for years, the market is just beginning to open up in the U.S., and the potential is huge. Earlier this year, an FDA advisory panel recommended the approval of a biosimilar. The recommendation by the FDA panel is an important step to opening the doors for biosimilar approvals in the market.
The combination of Pfizer Inc. (NYSE:PFE) and Hospira also seems perfect considering that successful biosimilar campaigns require huge R&D budgets that Pfizer can afford better than many of its rivals. Moreover, the availability of research funds should accelerate Pfizer-Hospira’s drug development projects to take advantage of the anticipated opportunities in specialty treatments.
The aging populations in developed countries and the widening middleclass in the emerging economies together create a huge market for highly-priced specialty medicines. The expanding middleclass in developing countries means that more people there are able to afford expensive drugs.
Cushion for Pfizer’s financials
Since the loss of patent protection for the anti-cholesterol drug, Lipitor, Pfizer’s top and bottom line growth has weakened. Lipitor used to bring in annual revenue of $12 billion at its peak when it still enjoyed market exclusivity. However, after losing patent protection, revenue from Lipitor have declined to just about $2 billion.
The acquisition of Hospira should be able to strength top and bottom line growth at Pfizer.Hospira is already a revenue-generating and profitable business that will be immediately accretive to Pfizer’s top and bottom line. There are also cost synergies of about $800 million to 2018 for Pfizer to enjoy from the deal. No wonder Pfizer has sweetened its fiscal 2015 performance expectations.
Sweetened 2015 outlook
Pfizer Inc. (NYSE:PFE) saw it coming. When it announced the deal to acquire Hospira, the company guided that the deal would result in a boost to its EPS of between $0.10 and $0.12 in the first year. It seems that is coming to reality faster. Pfizer has increases its revenue and profit outlook for fiscal 2015 to reflect the anticipated impact of Hospira acquisition.
The company sees 2015 sales coming in the range of $46.5 billion to $47.5 billion. It previously guided sales of $45 billion to $46 billion for 2015.
Pfizer expects to post adjusted EPS of between $2.04 and $2.10 in 2015, up from the previous guidance of between $2.01 and $2.07.
Pfizer observes a 3.5% forward dividend yield. There is a likelihood of future dividend payments rising as Pfizer’s top and bottom line numbers increase thanks to the positive effects of the Hospira acquisition.
A cheap stock to own
With P/E of 21, Pfizer has a much lower ratio compared to many big pharma names, for example Bristol-Myers Squibb Co (NYSE:BMY) with P/E of 53. Although Merck & Co., Inc. (NYSE:MRK) has P/E of 15, lower than Pfizer’s ratio of 21, Pfizer has a much better near-term outlook than MRK. That is why among these equally respectable peers, Pfizer shines the brightest, especially for an investor looking to play biosimilars from the front.
As such, the Pfizer Inc. (NYSE:PFE)’s biosimilar prospects together with its discounted stock valuation make it one of the most attractive big pharma names out there. It is exciting that less than a month after closing the acquisition of Hospira, Pfizer is already modeling a brighter fiscal 2015.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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