Why Pfizer May Need Another Big M&A for Growth
May 17, 2017
By Mark Terry, BioSpace.com Breaking News Staff
Citi’s Andrew Baum downgraded Pfizer from “neutral” to “sell” and dropped the price target from $38 to $31. Baum’s argument for a downgrade is related to perceived risk over Pfizer’s drug prices for its cancer drugs covered by Medicare Part D—Xtandi, Ibrance and Xalkori.
HealthBlogger, writing for Seeking Alpha, takes a closer look at Pfizer. Seeking Alpha allows for analysts to publish under pseudonyms. HealthBlogger notes that Pfizer has a 3.8 percent dividend yield and solid free cash flow, but doesn’t believe its risk versus reward is compelling.
The breakdown, for example, notes that one of Pfizer’s key growth drivers is Prevnar 13, a pneumococcal vaccine against 13 strains of the bacteria Steptococcus pneumoniae. It generated more than $6 billion in sales last year, but the company has suggested that most adults in the U.S. who are likely to get the vaccine already have.
In the company’s first quarter conference call, Pfizer stated, “We continue to believe and expect that Prevnar 13 will be flat to declining this year. Slightly declining this year, exactly as we have said it in the past. With the first quarter, the 7 percent decline in the U.S. is driven by the U.S. adult that went down 32 percent.”
Pfizer’s Ibrance is used to treat HR+/HER2- metastatic breast cancer. In 2016, it raked in more than $2 billion, and Wall Street projections suggest at its peak it should bring in more than $5 billion. HealthBlogger writes, “I’m a bit more cautious about the opportunity for Ibrance over the long term, given that Pfizer will face increasing competition by Eli Lilly ’s abemaciclib and Novartis ’s Kisqali.”
HealthBlogger uses two different models to parse Pfizer’s future earnings, generally looking at worst-case scenarios. HealthBlogger writes, “I assume revenue growth of about 0 percent in 2018-2022, which is below consensus. There isn’t a specific driver behind this scenario, but it reflects a bear case of pricing pressure in the U.S. market and limited success of Pfizer’s pipeline in immunotherapy (i.e. avelumab).”
HealthBlogger further sums up, “Under this worst-case scenario, Pfizer is slightly overvalued by approximately 19 percent (Perpetuity Growth Method) and by approximately 22 percent (EBITDA Multiple Method).”
HealthBlogger further sums up, “Under this worst-case scenario, Pfizer is slightly overvalued by approximately 19 percent (Perpetuity Growth Method) and by approximately 22 percent (EBITDA Multiple Method).” Although he doesn’t explicitly say so except in the title of the piece—“There Is No Upside Without M&A”—many investors and analysts believe the cure to Pfizer’s sluggishness is more acquisitions, potentially big ones. Certainly the company has never shied away from trying big mergers, such as Allergan.
An April research note to investors by Credit Suisse analyst Vamil Divan speculated on a possible acquisition by Pfizer of Bristol-Myers Squibb . The Motley Fool’s Todd Campbell made the case for an acquisition of Ann Arbor, Mich.-based Esperion Therapeutics .
Pfizer’s deals in 2016 included Anacor Pharmaceuticals , Bamboo Therapeutics, Medivation , and AstraZeneca ’s Small Molecule Anti-Infective Business Unit. BioTechLogic notes, “Rather than the inversion opportunity driven mega-merger Pfizer hoped to close with Allergan in 2016, they made four acquisitions totaling about $21.3 billion. Each of the four deals strengthened Pfizer’s position in emerging treatment areas. For example, their acquisition of Anacor included a compound called crisaborole that represents great promise for the treatment of eczema—a large patient population. Could be blockbuster opportunity.”
Pfizer are currently trading for $32.36.