- By Sangara Narayanan
Pfizer's (PFE) results were disappointing this year despite the company showing a clear path forward with the Hospira (NYSE:HSP) and Medivation (MDVN) acquisitions. The stock is up a mere 6.3% since the start of the year and is trading at 12.6 times forward earnings, making it amply clear the market does not expect the top line to grow at a steady rate over the next few years.
The intrinsic value of PFE
Pfizer has made two big-ticket acquisitions in less than two years. The pharma major completed the acquisition of Hospira in September last year for $17 billion, a near 40% premium. Hospira was indeed a significant acquisition for the company because it has its fingers in several growing segments such as biosimilars, injectable drugs and infusion technologies. The biosimilar market is expected to hit $20 billion in sales by 2020 while the generic sterile injectables market is estimated to reach $70 billion by that time.
Biotech products, as the name might suggest, are difficult to develop. The complex process has allowed a lot of drugs to outlive their patents and enjoy robust sales long after those patents expire. But wherever money goes companies will follow. Similar to the way generic companies wreaked havoc on big-name drugs, big pharma majors are now rushing into the biosimilars market to make cheaper versions.
The reason why Pfizer was ready to pay up for the acquisition of Hospira was the potential growth of the biosimilar market. The global biosimilars market contributed an overall revenue of $2.5 million in 2014 and is forecast to generate an approximate revenue of $26.3 million by 2020, growing at a CAGR of 49.1% from 2015 to 2020, according to Allied Market Research .
It's actually ironic that Pfizer is pushing into the biosimilars market. The company has long been known for building up a portfolio of blockbuster drugs such as Lipitor for cholesterol, Lyrica for neuropathic pain, Viagra and many more. But the company was hit hard as one after the other of its top products were hit by generic competition, losing Pfizer billions of dollars in sales. And now it's Pfizer's turn to face the competition that has hit it hard and come up with copycat drugs of its own.
Despite the positive twist to the story, Hospira is not going to yield big results right away. It's going to take some time to deliver top line results. The idea behind the acquisition was to get Pfizer's hands on a market opportunity that awaits the company a few years down the road, and Hospira gives it the hand up to get into that market.
"Pfizer continues to expect the Hospira transaction to be immediately accretive to adjusted diluted EPS upon closing, and accretive by 10 cents to 12 cents per share in the first full year after the close with additional accretion anticipated thereafter. In addition, Pfizer expects the transaction will deliver $800 million in annual cost synergies by 2018." - Pfizer
Pfizer going after Hospira was part of its strategy to shore up future prospects while the recently concluded Medivation acquisition for $14 billion will give it immediate results and steady future growth in the form of prostate cancer drug Xtandi. The drug already sells $2 billion worth annually and is expected to grow bigger over time. The fact that the company paid a hefty premium for both acquisitions shows that it did not have much of a choice in the matter.
Nevertheless, the combination of a short-term benefit and a long-term gain could work out well for Pfizer.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
The intrinsic value of PFE