Courtesy of Giuseppe Milo of Dublin, Ireland
In a bid to rejuvenate its pipeline and dodge what's left of the patent cliff, Pfizer (PFE +1.21%) is about to make the biggest M&A deal in healthcare history. The acquisition of Ireland-based Allergan (AGN +0.00%)for $160 billion is slated to close in the second half of 2016. Assuming it goes through, the deal will make Pfizer the world's biggest drugmaker in terms of revenue.
So what's ahead for investors? Is Pfizer about to turn a corner, which would make its cheap P/E ratio and solid dividend an appealing reason to jump in and hold it for the next ten years? Or will the synergies and efficiencies that come with mergers fuel short-term growth, to the detriment of the kind of sustained R&D that leads to the development of new drugs?
Predictably, the CEO's of both Pfizer and Allergan have said that the benefits of the merger are "underappreciated." In particular, they point to the combined drug pipeline and potential blockbusters for schizophrenia and depression. In fact, speaking at the J.P. Morgan Healthcare Conference on January 12, Allergan's Brent Saunders said , "This [deal] isn't about cost-cutting. This is about leadership and growth." He added that the companies have "lots of new drugs" they plan to launch in the next few years. For his part, Pfizer's CEO Ian Read has said the tie-up will produce more medicines and boost revenue, not just slash jobs and other costs.
Still, despite a flurry of acquisitions in the past decade, Pfizer hasn't managed to keep up with its peers or the S&P 500. The company notched only a 5.2% average annual total return for investors in the past ten years. Compare that to a 7% average annual total return for major drug manufacturers, or the S&P 500's average annual total return of 6.43% for the same decade.
With a company as huge as Pfizer, sorting out its future is not child's play. But in a bid to help investors, we asked The Motley Fool's healthcare contributors to provide their thoughts on what could lie ahead.
Todd Campbell: Patent expirations will reshape the revenue and profit mix of Pfizer in the coming decade. Because 90% of drugs entering human clinical trials are destined for the dustbin, rather than pharmacy shelves, projecting a decade out is admittedly a bit of a guessing game.
That said, Pfizer has proven it can withstand major revenue shocks tied to the loss of patent protection. Despite losing patent protection on the $13-billion-per-year Lipitor in 2011, which led to a drop in Pfizer's total sales of more than 20%, Pfizer's shares are still trading near 10-year highs!
Therefore, investors may want to give the company the benefit of the doubt in being able to overcome its current patent risk, which is arguably far less worrisome than it was five years ago.
Most of Pfizer's top-sellers will see their patents expire by 2025, but none of those drugs account for more of the company's total quarterly revenue than Lipitor did in 2010. In fact, among drugs losing patent protection during this period, only Lyrica represents more than 10% of Pfizer's quarterly sales (Prevnar's patent expires in 2026).
Because Pfizer's patent risk appears manageable and the company is bulking up its revenue and pipeline through acquisitions (something that should continue given its robust cash flows), I imagine Pfizer will be bigger and more profitable ten years from now than it is today. If so, then it wouldn't shock me if its shares were among big pharma's best performers over the coming decade.
Keith Speights: Could Pfizer become "Biosimilars 'R Us" in the next decade? While the thought of the big drugmaker changing its name might be silly, the underlying idea isn't too far-fetched.
Pfizer's late-stage pipeline includes five biosimilars for several of the most successful drugs on the market: Humira, Avastin, Remicade, Rituxan/MabThera, and Herceptin. Assuming the Allergan merger closes successfully, other biosimilars could be added to the mix.
The global biosimilar market is expected to be around $20 billion by 2020. And that's just the tip of the iceberg, with more big-dollar biologics losing patent protection in subsequent years. Pfizer appears to be positioned to capture a nice chunk of that market. The company certainly possesses the expertise and manufacturing capabilities to tackle the complexities involved with making biosimilar products. While I don't expect the lion's share of Pfizer's revenue to stem from biosimilars 10 years from now, it's likely that they will make up a significant part of the company's portfolio by then.
Cheryl Swanson: Pfizer has said it expects a small lift to its earnings in 2018, from the purchase of Allergan, a boost of 10% in 2019, and a high-teens percentage boost in 2020.
I don't see it. In fact, I'm in the class of those skeptics company executives said "underappreciate" the drug pipeline of the two companies. Why? Because Pfizer's track record in R&D is woefully unimpressive.
For example, Pfizer's cancer drug sales bring in barely 4% of its $50 billion annual revenue. Despite all the money Pfizer has poured into oncology, it lags well behind competing cancer powerhouses.
Leadership in cancer is rapidly turning to new treatments, and Pfizer likes to brag about its immuno-oncology candidates. In that, they are much like the parent who brags about their kids until everyone's eye glaze over. Here's the reality: Pfizer's immuno-oncology drugs are all in Phase I, or even earlier, stages of development. The solitary exception is Pfizer's checkpoint inhibitor avelumab, which it developed in partnership with Merck. Avelumab is unlikely to win approval until next year. Meanwhile, Merck and Bristol-Myers Squibb have already debuted potent drugs in that area.
I'm not convinced Pfizer will end the next decade with a victory lap. While the company leads the M&A pack by a country mile, an over-reliance on M&A almost always damages a company's R&D capability. Pfizer's acquisition of Wyeth is the perfect example. R&D was cut in half, from close to $12 billion between the two companies, to $6.5 billion after the merger. And in a research intensive field like pharma, where new drugs are what fuels the future, that's deadly.
