Pfizer Inc. (NYSE:PFE) Acquires Anacor for $5 Bn, is Amgen Next?

Pfizer Inc. (NYSE:PFE) has said that it has completed the process of acquiring Anacor Pharmaceuticals, Inc. As per the firm, the transaction terms provided each outstanding share of Anacor to be converted into the right to get $99.25 net in cash, i.e. without any interest but subject to required withholding of taxes. Pfizer said the tender offer to acquire Anacor shares expired on June 23. As per Computershare Trust, the depositary and paying agent, it received 39.306 mn shares of Anacor as validly tendered ones. The firm indicated that all the conditions of the offer were satisfied and on June 24, the drug firm and its subsidiary, Quattro Merger Sub Inc., accepted the payment. They would pay for those shares that were validly tendered and not withdrawn.

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The drug maker believes the transaction would not impact its current year adjusted financial outlook. Those who were following the firm closely were expecting this to happen anytime soon. Hints were already dropped when the firm had taken part in the Sanford C Bernstein Strategic Decisions Conference earlier this month. At that time, analyst Tim Anderson talked with Ian Read, CEO and Chairman of Pfizer. Ian had expressed confidence in Anacor being a good deal. He said that the price is good and fair to both the seller and the buyer. He expressed optimism about the potential that this deal has.

Amgen is another good target which can add value to Pfizer. The latter is currently considering acting on its plans to reorganize. The drugmaker announced that it would be restructuring itself to focus entirely on some of the key growth businesses, while trimming some of the units.

The restructuring process started after the sale of Pfizer’s infant nutritional products division, in a deal worth nearly $12 bn to Nestle in 2012. The sale was closely followed by Pfizer’s decision to spin off its animal health unit Zoetis, into a separate company. Zoetis was spun off in January 2013 in an IPO worth $2.2 bn. After that, the drugmaker tried to acquire AstraZeneca in 2014. Though the deal wasn’t in essence part of restructuring, it was the firm’s attempt to escape US tax laws, which make it difficult for firms to repatriate cash held overseas. In Pfizer’s case, the major portion of its cash is stuck abroad. Though the acquisition didn’t go through, it didn’t keep the firm from pursuing other inversion deals.

Should Pfizer Buy Amgen?

Last year, Pfizer signed a $160 bn deal to acquire Allergan. The inversion deal was blocked by the US Treasury Department, which announced reforms making it nearly impossible for US companies to invert successfully. However, the firm maintained that inverting wasn’t the motive for the pursuit for Allergan. The acquisition deal was signed by Pfizer to get its hands on Allergan’s high growth assets, which would boost the acquirer’s growth rates. After the termination of the deal, Pfizer announced it would keep looking for high growth assets. Moreover, the firm announced that it would be evaluating its plans to split into two separate businesses.

Pfizer is planning to split its Global Established Products (GEP) business from the rest of the company. The said business, also called Pfizer Essential Health, consists of the already established and off-patent drugs. Pfizer would then comprise the other two major business segments, Global Innovation Products (GIP), and Vaccines Oncology and Consumer (VOC). The drugmaker’s plan of a potential split surfaced a few years back, and the final decision is expected to be announced by the end of 2016. Pfizer has already started preparing for the split and has initiated the reporting of financials from all three of these units separately. The major chunk of revenue is generated by Pfizer Innovative Health, which consists of GIP and VOC units.

GIP is the Pfizer Cash Cow

GIP consists of Pfizer’s newer drugs. They also act as its cash cows, including Lyrica, Enbrel, Xeljanz, and Eliquis. The unit pulled in sales of as much as $3.6 bn for the first quarter this year, accounting for nearly 30% of the firm’s total revenue for the period. Sales for GIP are expected to reach $14.6 bn for 2016. The analysts’ consensus puts EBITDA for this year at $7.6 bn, and EPS at $0.92.

The VOC segment generated sales of $3.4 bn for the first quarter this year, accounting for nearly 29% of the total revenues. The major sales growth drivers for the unit were its best-selling vaccine franchise Prevnar and cancer drug Ibranc. Analysts are expecting the unit to reach sales of $14.7 bn in 2016. EBITDA for the unit is forecasted to reach $8.1 bn, while EPS is expected to climb to $0.95, as per estimates compiled by analysts at Jefferies. The GEP business consists of Pfizer’s older and already-established products, most of which have already lost their patents. During the last quarter, GEP reported sales of $5.9 bn, accounting for 45% of total revenues. Analysts are expecting annual sales from the unit to reach $23.4 bn, and EBITDA to amount to $13.7 bn in 2016. The EPS for the unit is expected to reach $1.61 this year.

Amgen Inc. is one of the most suitable targets Pfizer could possibly consider. With revenue of nearly $22 bn, Amgen has drugs and pipeline candidates which complement all of Pfizer’s segments. The biotech has older well-established drugs, including Enbrel, Neupogen, Neulasta, and Epogen, which generate a major chunk of revenue for the firm. These drugs combined pulled in sales worth more than $3 bn. However, these items, and several other key products are nearing patent expiry, and would be a perfect fit for Pfizer’s GEP.

Apart from that, the firm has a bunch of cancer treatments which are relatively farther from the patent expiry dates, and still have room to grow. These include Xgeva, Prolia, Kyprolis, Vectibix, and Blincyto. The cancer drugs have been forecasted to be potential growth drivers for Amgen. If Pfizer plans to pursue Amgen, these drugs would build upon Pfizer’s VOC segment. Amgen’s cardiology and metabolism drugs would easily blend in with Pfizer’s GIP unit. It also has a rich and robust pipeline, which would also add to Pfizer’s GIP’s development pipeline, strengthening its future outlook.

It may not be difficult for Pfizer to strike a deal of this scale, since it has a history of signing mega-deals. Amgen stock has fallen nearly 7% so far this year, and more than 5% in the past 12 months. The stock has mostly outperformed its biotech peers, and the iShares NASDAQ Biotechnology Index (IBB), which shed more than 23% this year. However, the stock can be expected to further strengthen, as the firm continues to put on an impressive show. This is probably a great time for Pfizer to strike a deal.

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Hiren Mehta

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