When in 2010 Ian C Read, chief executive of the world’s largest pharmaceutical company, put forward the idea to split Pfizer (NYSE: PFE) into two core businesses, investors and shareholders alike had doubts that the move would create more value and generate attractive opportunities for the company’s innovative and essential health operations.
After almost six years of extensive planning and evaluations, and a costly $600 million exercise, Pfizer announced that it would abandon its plans to split and remain one company – a move which is seen by many as helpful to Pfizer’s retention of operational strength, efficiency and financial flexibility.
Following Pfizer’s decision to remain one consolidated business, we can expect the pharmaceutical giant to concentrate on maximizing future shareholder value creation through pursuing attractive M&A deals and developing and launching new drugs.
Failed mega deals led to acquisitions of smaller companies
In 2014, Pfizer seemed keen to press ahead with its plans to split the successful patent-driven business, which was focused on developing new fast-growing drugs, from the generic drug arms dedicated to producing established drugs, as market valuations then suggested that these two businesses could be worth more as separate entities than part of the complex single entity.
Yet, over the course of the following two years, increased market competition and two failed acquisitions diverted Pfizer from its plans to separate the businesses. In May 2014, Anglo-Swedish pharma major AstraZeneca (LSE: AZN) rejected Pfizer’s $118 billion takeover bid, and more recently Pfizer’s $160 billion deal with Ireland-headquartered drugmaker Allergan (NYSE: AGN) was turned down on the grounds of US tax inversion rules.
These unsuccessful mega deals put Pfizer on the road to acquire small innovative pharma companies to boost its product pipeline. Seen as key to the growth of the company, Pfizer is now increasingly focusing on buying and developing new drugs in areas such as oncology and other therapeutic areas.
Lucrative M&A deals to bolster Pfizer’s drug pipeline
The hunt for M&A targets is a trend we can expect to shape Pfizer’s strategy going forward. Bolstered by a strong balance sheet, with an estimate of $21 billion in cash, Pfizer will look for more deals to strengthen its roster of new medicines by purchasing companies with highly profitable products.
Traces of this strategy are already evident with Pfizer’s recent acquisitions. In 2015, Pfizer completed the $15 billion takeover of Hospira, an injection-drug company – a deal which boosted the company’s wide array of generic hospital products.
In June 2016, Pfizer acquired dermatology company Anacor Pharmaceuticals for $5 billion in order to enrich its inflammation and immunology portfolio.
The most significant transaction came in April this year, as Pfizer purchased Medivation for $14billion, a cancer specialist, adding blockbuster Xtandi (enzalutamide) to its growing roster of cancer drugs.
These three acquisitions are estimated to increase Pfizer’s revenues to $52.8 billion in 2016 and $54.88 billion in 2017. Yet, industry experts are pointing to the possibility that the current competitiveness for pharma deals may mean that Pfizer is overpaying for the assets it is acquiring.
Pfizer defeated Amgen (Nasdaq: AMGN), Gilead (Nasdaq: GILD), Celgene (Nasdaq: CELG), Novartis (NOVN: VX) , AstraZeneca and Sanofi (Euronext: SAN) to take over Medivation for $14 billion – a deal which many regard as Pfizer’s first overpayment.
Launching innovative drugs to support growth
As Pfizer faces more patent expirations on some of its key products, it will need to support its acquisitive strategy with investment for the development of new products to rekindle its growth.
Recent strong performance of innovative products (and the inclusion of Hospira) have driven the company’s 2016 earnings. Investors have been encouraged by Pfizer’s move into immuno-oncology, which is seen to bring in significant revenue potential.
Last year alone, the innovative drug production part of the company made $26.8 billion in profits in 2015, and Pfizer projects $51 billion in profits this year, mainly from its vaccines and cancer drugs.
Greater consolidation to strive off growing competition
We can expect the world’s largest pharmaceutical company to continue its legacy of deal-making and pursue further growth through acquisition and innovative drug development. Recent deal activity has also highlighted the need for greater consolidation of the business structure to help improve competitiveness.
While a split has been ruled out, for now, as being too costly and disruptive to its production, what remains to be seen is whether Pfizer will consider splitting up its operations in the future as it continues to grow in size and complexity.
This article first appeared in Pharma Health, and can be found here