The healthcare sector has been undergoing a widespread consolidation, triggered mainly by the loss of exclusivity for numerous top-selling drugs. And a central theme emerging from this merger-and-acquisition frenzy is that deals are seemingly coming out of left field, leaving analysts and pundits alike flummoxed in their quest to predict the next big buyout.
Pfizer (NYSE:PFE), for instance, has already surprised the investing community twice in only the past year or so with its acquisition picks. As a reminder, the drugmaker initially went after British pharma giant AstraZeneca in what would have been an absolutely monstrous deal in an effort to enter the immuno-oncology space and lower its effective tax rate. After that fell through, however, Pfizer gobbled up Hospira for $17 billion, presumably for its market-leading position in the field of biosimilars.
Given that buyouts can quickly change the complexion of a company, as well as its forward-looking prospects, I think it's definitely worthwhile to consider possible buyout scenarios. And what we've learned from Pfizer so far is that pairings that may seem "obvious" to the investing community don't necessarily reflect the thinking of management. In fact, I don't recall anyone predicting that AstraZeneca or Hospira were on Pfizer's radar, before the initial tender offers became public knowledge.
Armed with this "under-the-radar" concept, I'm predicting that Pfizer will shock the Street yet again with its next buyout. Before revealing my pick, though, here is a little background to help you understand how I arrived at this choice.
Pfizer is so ridiculously large...
You may not even know it's a leader in area of rare diseases. When people think of Pfizer, I would bet dollars to doughnuts that drugs such as Viagra or Lipitor generally come to mind. And if you narrow the scope to Pfizer's shareholders, I would imagine that some finer detail might emerge, with these folks probably citing newer products such as Prevnar 13 and Ibrance as the face of the company right now.
But did you know that Pfizer is one of the world's largest developers of drugs for rare diseases? According to a report from Evaluate Pharma, Pfizer is expected to become the fifth largest orphan-drug maker by 2020, with nearly $10 billion in annual sales:
Backing up this assertion, Pfizer's management highlighted the company's extremely active rare-disease drug pipeline in its latest clinical update:
To show the immense scale of Pfizer's rare-disease pipeline, all you need to know is that it's on par with specialist companies such as BioMarin, and absolutely dwarfs most others, such as Aegerion Pharmaceuticals and Sarepta Therapeutics.
Yet rare-disease drugs tend to be an afterthought among Pfizer's shareholders, and they rarely, if ever, draw commentary from analysts covering the stock. But that could be about to change.
Pfizer would become the world's largest orphan-drug maker by buying this company
Because rare-disease treatments come with extended exclusivity, premium pricing structures, tax benefits, faster review times, and little to no pushback from payers, and because they tend to be biologics that have built-in defenses against generics, orphan drugs have become hotly pursued items in the pharmaceutical world.
Topping it off, the rare-disease market completely blows away far more popular trends in biopharmaceuticals, such as immuno-oncology and biosimilars, in terms of market size.
By 2020, for example, immuno-oncology drugs are estimated to reach around $35 billion in sales. Orphan drugs, on the other hand, should see sales in the upper stratosphere of $130 billion.
That's why I think Pfizer is going to buyout Shire plc (NASDAQ:SHPG), which has become a leader in the orphan-drug space through its acquisitions of ViroPharma and NPS Pharmaceuticals. Besides offering double-digit sales growth for both its orphan and non-orphan pharma products, the Dublin-based Shire would also enable Pfizer to pursue a tax inversion to lower its effective tax rate, making it a more profitable company over the long haul.
The confluence of an attractive orphan-drug pipeline and the added benefit of a foreign address leads me to believe that Shire is almost certainly on Pfizer's buyout list, even though nobody is talking about it right now.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends BioMarin Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.