Pfizer (
PFE
) is vying to acquire Indian company Stride
Acrolab's specialty injectables unit, Agila. Injectables
are high specialty drugs used as antibiotics and
chemotherapy agents mainly in hospitals. Speculation is that
other players, including Roche and Novartis, are interested in
joining the bidding process. This doesn't come as a major surprise
as the pharma companies are focusing on revenue sources to
fend-off patents expiry.
See Full Analysis For Pfizer here
Of late, pharmaceutical giants including Pfizer have been
grappling with patent cliffs and may continue to face this
headwind. Pfizer's Lipitor, which generated close to $10 billion in
2011, is losing market share at an accelerating pace and sales
have nearly halved in a relatively short time frame. The looming
patent expiration for Viagra, Enbrel, Detrol, among others, in 2012
will also hurt the company's revenues. This has left the pharma
companies looking for alternative revenue sources to fend off
losses. They have been exploring the M&A route besides
expansion in emerging markets.
Recently, many injectable businesses have seen M&A
activities. The reason for the gold rush is a huge generic
injectable market, which could zoom by high single digit growth to
$17 billion by 2020 as more and more injectable drugs are set to
lose patent protection in the next few years. Further, emerging
markets will drive the growth in healthcare spending on the heels
of rising income levels and increased government focus to provide
healthcare facilities to everyone. About 95% of hospital drug
spending goes to injectables and other non-oral drugs.
In addition, the competition is pretty low compared to the oral
drug business due to high entry barriers. There is a shortage of
injectables following the closure of many sterile plants
after the FDA action and building new injectables plants takes
nearly 4-5 years. Further, manufacturing injectables requires
specialization. Margins are also better in injectables
business.((ref:1))
Agila has the highest number of generic
injectable approvals by the FDA. Therefore,
the acquisition makes sense for pharmaceutical giants who
are vying to expand their generics portfolios in order to fend-off
losses from looming patents expiry. In
addition, Agila has a number of big pharma
companies, including Pfizer, in its client list. It supplies
several sterile injectables for cancer treatment to Pfizer. Through
this acquisition, Pfizer can exert better control on the
supply while curbing costs.
But, at what price?
Past acquisitions in this space have been valued at 4-5
times their revenues. Therefore, with Agila's last year sales of
approximately $185 million and estimated FY2013 (year ending March)
sales of $250 million, the company can be valued at $1.6 to $2
billion. ((ref:1))
However, before strongly defending the acquisition, we
would wait for some clarity on Pfizer's bid on the asset. One
should not forget the importance of acquisition price in
this generic and emerging market growth rush. A steep
price, just to get hold of certain assets, could actually
destroy shareholder value, which we
discussed earlier
. Hopefully, Pfizer has learned its lessons from Lipitor.
We currently have a
$25 price estimate for Pfizer
, which is 5% above the current market price. We are in the process
of revising our price estimate to reflect the recent developments
and the earnings. Last week, the company signed a deal
with AstraZeneca to market an over-the-counter (OTC) version
of the latter's blockbuster drug Nexium.
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