Pfizer, the world’s largest pharmaceutical company on revenues, is definitely not leaving any stone unturned as the company continues its aggressive inorganic growth. Less than two months after completing its acquisition of NextWave Pharmaceuticals, the multinational company is weighing up a $2 billion bid for Strides Arcolab’s Agila Specialties unit.
GlobalData (http://www.globaldata.com) believes the deal will potentially strengthen Pfizer’s injectables business, which generated only $54m – 0.4% of the company’s total revenue ($14 billion) – in Q3 2012.
According to Adefemi Adenuga, GlobalData's Analyst covering Healthcare Industry Dynamics: “Agila’s focus on cancer treatments and antibiotics makes the company a strategic fit for Pfizer’s specialty care and oncology operating segment. Making a swoop for Agila could also be a ploy by Pfizer to ward off other multinationals, including Mylan and Novartis, that are currently interested in the Bangalore-based company. However, Strides may need to reposition itself if the deal goes through, as the Agila unit has so far been crucial to the generics manufacturer’s success.”
Plugging the Revenue Gap
The chasm in Pfizer’s revenues left by Lipitor’s (atorvastatin) loss of patent protection in November 2011 is a classic example of how large pharmaceutical companies, which have historically built their business operations on the blockbuster model, are reeling from patent expirations, says Adenuga. Pfizer’s Lipitor sales have declined by an average of 27.1% each quarter from Q4 2011, with GlobalData conservatively estimating that Pfizer’s annual report for 2012 will show that the drug, which achieved peak sales of $13.4 billion in 2006, generated only about $553m last quarter.
“This deal reaffirms Pfizer’s aim to bolster its bottom line through a series of strategic acquisitions,” explains Adenuga. “On November 28, 2012, Pfizer announced completion of its acquisition of NextWave Pharmaceuticals, a privately held, specialty pharmaceutical company focused on the development and commercialization of products for the treatment of Attention Deficit Hyperactivity Disorder (ADHD). Bolt-on acquisitions such as these are expected to provide a cushion for Pfizer’s short-term revenue gap while the company strategically positions itself to achieve sustainable growth in subsequent years.”
A Strategic Fit
Strides’ Agila unit has emerged as a suitable candidate based on the current business relationship between both companies. Since 2010, Strides has been involved in a collaboration agreement with Pfizer under which the former manufactures off-patent products, primarily injectable cancer therapeutics, which are then commercialized by Pfizer under the company’s established products unit – Pfizer’s name for its generics business.
Agila’s focus on cancer treatments and antibiotics makes it a strategic fit for Pfizer’s specialty care and oncology operating segment, which generated 30.8% ($3.7 billion) of the company’s product sales ($12.1 billion) and 26.6% of total revenue in Q3 2012. In 2010, the company declared its intention of being a major player in the injectables market, which it estimated to be about $10.9 billion, with a goal to be among the world's top five by 2015, and thereafter, leading the market.
Adenuga says: “Pfizer will be aiming to leverage Agila’s expertise in injectables to develop and commercialize products that will yield significant returns on investment. In addition, a successful integration of both companies will potentially result in cost savings for Pfizer.
“It will be interesting to see what path Strides follows if this deal goes through, because the company would have sold its most productive business unit.”
In Q3 2012, Agila accounted for 61.7% (about $68.1m) of Strides’ revenues ($110.3m). During the same period, the business unit generated 80.8% ($24.8m) of Strides’ $30.7m Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Consequently, parting with Agila will have a significant impact on the company’s financial performance.
“Strides is no stranger to shedding business units,” says GlobalData’s industry expert Adenuga. “In January 2012, the company sold Ascent Pharmahealth, its Australian and South-East Asian unit, to Actavis (Watson Pharma at the time) for AUD375m ($396m) in cash. Successful completion of the Agila deal will give Strides substantial asset liquidity, which can be utilized in growing the company’s business, potentially through mergers and acquisitions.
“By Pfizer’s standards, this is not a large acquisition compared with prior mega-deals involving Warner-Lambert and Wyeth, for $90m and $68m respectively. Notwithstanding deal size, the company will be aiming to reap significant returns on its investment in Agila. There is a lot at stake in the current pharmaceutical landscape – no time to rue losses, just play to win.”