Hospira moves the needle for Pfizer spin-out

So much for Ian Read’s protestations that Pfizer did not “need” to do an acquisition. Clearly what investors should have listened to last week was his hint that, if anything, his group was biased towards doing transactions with potential to create near-term value.

This is precisely what today’s $17bn takeover of the injectables business Hospira will achieve, especially when you factor in $800m of planned annual cost cuts. The move also backs the case for Pfizer’s plan to split, making a spin-out of its established products division much more logical with Hospira than without.

True, the deal is not spectacularly exciting, but then Pfizer is still licking its wounds after the failure to buy AstraZeneca. At least Astra bulls will now realise that the chances of Pfizer coming back to the negotiating table to bid for the UK group have now vanished.

Hospira is the result of the 2004 spin-out of Abbott’s hospital products division. The business comprises injectable drugs that include established off-patent brands in the acute care and oncology settings, as well as a portfolio of biosimilars.

While the last point is unlikely to make Pfizer a major biosimilars player it could add some scale to the group’s business, though there are notable overlaps, with both divisions working on versions of Enbrel, Herceptin and Rituxan, for instance.

Bottom line

But the most important thing for Pfizer is that Hospira will help protect the bottom line of its established products division – thus making this division look more attractive when the decision on spinning it out is taken in a couple of years’ time.

On this week’s 2014 financials call Mr Read, Pfizer’s chief executive, stressed that no decision had yet been made on whether to break up, and that a split would depend on sufficient confidence of each division’s standalone performance and value. He also said low-cost treatments in emerging markets would be a focus for the established business; Hospira will help here, too.

Better than the sum of its parts? ($m)
2014 2018e
Pfizer established products div
Revenues  25,149 17,391
Pretax income from continuing ops 16,199 11,130
Revenues 4,446* 5,306
Pretax profit (normalised) 584* 928
Savings 0 800
Proforma combination
Revenues 29,595 22,697
Pretax profit 16,783 12,858
*EvaluatePharma consensus estimate

The table above illustrates the differences between the two businesses perfectly: Pfizer’s is shrinking, owing to generic erosion, but is vastly profitable; Hospira’s is hampered by significant administrative costs – $800m of which the acquirer will strip away by 2018 – but its bottom line is growing by around 7% a year.

It is clear that Hospira will not be a huge game changer for Pfizer. However, it will help reduce the damage that patent expiries do to the profitability of its established products division (Pfizer’s big split will require a big bid to release real value, January 30, 2014).

UBS analysts said today that, while the deal price of roughly 19 times Hospira’s earnings before interest, tax, depreciation and amortisation seemed high, the acquisition was “nicely accretive” thanks to the savings and low cost of debt, and would boost the Pfizer division’s credibility as a standalone entity.

With the spin-out of established products, and thus the break-up of Pfizer, now looking much more likely, the question is what form this will take and whether a trade buyer emerges.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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