|Shares Out. (in M):||6,300||P/E||15.4||13.7|
|Market Cap (in $M):||203,364||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||19,268|
Pfizer is a world class pharma company with limited downside supported by its 3.5% dividend yield and with several levers to generate upside to +$43 per share over the following 12-18 months. We think the three significant catalysts are as follows:
Catalyst 1, transformative M&A: During the recent quarterly conference call, CEO Ian Read stated that “I am optimistic that we’ll be able to deploy our capital in a way that will increment value to shareholders” and that “our inclination” is a transaction in the Innovative Products (GIP) segment rather than in Global Established Products (GEP) given that recent acquisition of Hospira. Given the rapid pace of healthcare M&A and since the failed hostile of Astra in 2014, it is not a secret that Pfizer has been on the prowl for a transformative acquisition, and one that ideally also lowers the company’s effective tax rate - although it remains unclear if PFE is still seeking to invert or if the company will be unable to due to political considerations as we suspect was the cause of the sudden termination of the AZN hostile. Following the acquisition of HSP, we estimate that PFE will have approximately $46 billion of both short-term and long-term cash/investments most of which is likely to be offshore, and think attractive targets that might fit with PFE’s GIP segment include Shire, Allergan, Astra, or Glaxo. We think an acquisition of SHPG may be particularly attractive given the company’s bite size $43 billion market cap that could be fully financed with PFE’s overseas cash, and could drive topline growth, and that SHPG’s recently announced bear-hug of Baxalta seems a defensive move to us and may suggest that at least that the company may feel under threat. Alternatively, PFE could wait until the separation of GEP to announce a merger of equals transaction with AGN, GSK or AZN, in which case a transaction would have a significantly larger impact on the pro-forma stub-co.
Catalyst 2, Spin of Global Established Products: During the recent conference call, management also commented on a potential “break-up of the company, that the criteria include an evaluation of potential “trapped value” and “after-tax value that could be achieved” and that a decision will be made by Q4 at the latest. We think an announcement is likely to come sooner than Q4, and that the GEP segment is underappreciated by investors. More specifically, GEP will benefit from HSP’s sterile injectable generics business, continued shift toward EM and the development of new business lines in biosimilars. Regardless of the timing of the announcement, we think a spin will have at least three tangible benefits. First, we think a spin is likely to optimize the company’s tax structure by lowering the amount of OUS cash needed for the GIP and VOC segments. Second, we think a spin is likely to increase the operational efficiency by focusing on management on costs. Third, as shown below, we think a spin will highlight the company’s sum of parts value.
Catalyst 3, Pipeline:
· Ibrance: We think this could be one of the fastest oncology launches with peak sales approaching $13.0 billion and FY 2020 estimated sales of $4.5-$5.0bn
· Avelumab: We estimate potential peak sales at $3.8-$4.0bn
· Bocoizumab: We expect initial phase III data in late 2015, a filing in 2016 and peak annual sales of $2.2-$2.5 bn
· Ertugliflozin: We expect a fling in 2016 with peak annual sales of approximately $1.0bn
· Inotuzumab: Peak sales estimated at $450-$550mn
· Xeljanz: Peak sales estimated at $1.5 bn
· Global Established Products: We think the segment’s valuation will be supported by its dividend yield. We assume a 60% payout ratio which implies a $0.64 dividend . We assume a 4% dividend yield which implies a valuation of $96 billion or 14x FY 2016 EPS or $15.00-$16.00 per share.
· Global Innovative Products: We value the segment with a discounted 15x FY 2016 P/E multiple which values the segment at $61 billion or ~$10.00 per share.
· Vaccines Oncology Consumer: We value the Vaccines segment at 6x FY 2016 revenue or $33 billion; Consumer 6x revenue or $22 billion; Oncology excluding Ibrance at 5x revenue or $12 billion; Ibrance at $9.0 billion and the rest of the pipeline at $40 billion for a total value of $116 billion or ~$18.00 per share.
Our total sum of parts value is approximately $43.50 per share or 33% above current levels.
1. strategic M&A
2. Spin of GEP