Pfizer announced this week that the company will not pursue separating the company into two independent companies, one focused on the company's innovator products and the second on the company's established products. So what may in store for Pfizer?
Following its unsuccessful mega mergers of AstraZeneca in 2014 and Allergan in 2016, Pfizer had said that it would evaluate splitting the company into two separate companies, one focused on innovative products and the second on established products. Now that the company has decided to keep the company as one, what are the challenges and opportunities facing the company? DCAT Value Chain Insights takes an inside look.
|Ian Read Chairman and CEO Pfizer
Staying as one
Pfizer manages its commercial operations through two distinct businesse: Pfizer Innovative Health (formerly the Innovative Products business) and Pfizer Essential Health (formerly the Established Products business). Earlier this week, Pfizer reported that the its Board of Directors and executive leadership team determined the company is "best positioned to maximize future shareholder value creation in its current structure and will not pursue splitting Pfizer Innovative Health and Pfizer Essential Health into two, separate publicly traded companies at this time."
Pfizer's decision to separate into two companies was initially based on segmenting its higher-performing innovator products business from its lower-performing established products business; however recent performance in both segments has been good.For the full-year 2015, Pfizer reported revenues of $26.8 billion in its Innovative Products segments, a 11% gain year over year, but a 14% decline in its Established Products business to $21.6 billion from $25.1 billion in 2014. For the first six months of 2016, Pfizer Innovative Health, which as the name implies includes the company's innovator pharmaceutical products, reported sales of $14.1 billion, a 14% increase year over year, Pfizer Essential Health, which includes the company's established products (i.e., products late in product lifecycle or generic, including the legacy products from Pfizer's $17 billion acquisition of Hospira in 2015), reported revenues of $12.0 billion, a 16% increase year over year.
"With this decision, our two distinct businesses will remain separately managed units within Pfizer, which we believe is currently the best structure to continue to deliver on our commitments to patients, physicians, payers and governments, and to drive value for our shareholders,” said Ian Read, chairman and chief executive officer, in a company statement. “We believe that by operating two separate and autonomous units within Pfizer, we are already accessing many of the potential benefits of a split–sharper focus, increased accountability, and a greater sense of urgency–while also retaining the operational strength, efficiency, and financial flexibility of operating as a single company as compared with operating as two, separate publicly traded companies. We will continue to generate the financial information necessary to preserve our option to split our businesses should factors materially change at some point in the future.”
Pfizer said the process for making a decision was guided by criteria that included evaluating the performance of each business within Pfizer, determining if each business could compete as a stand-alone entity, assessing if trapped value existed in a combined entity, and if any trapped value could be unlocked efficiently. In addition, the company evaluated whether key strategic and operating imperatives could best be achieved in the current structure versus two, separate publicly traded companies.
“When we first explored the trapped value question several years ago, market valuations of other companies suggested that our two businesses could potentially be worth more as separate companies than they are together in a single company,” explained Frank D’Amelio, executive vice president, business operations and chief financial officer, in a company statement. “However, over time, any potential gap between Pfizer’s market valuation and an implied Sum of the Parts (SOTP) market valuation has closed. In our analysis, we concluded that splitting into two companies at this time would not enhance the cash-flow generation and competitive positioning of the businesses and the operational disruption, increased costs of a split and inability to realize any incremental tax efficiencies would likely be value destructive.”
Pfizer’s strategy for growth: will it deliver?
Pfizer said it believes it can grow its Innovative Health and Essential Health businesses, pointing to several recent developments. Over the past several years, the company rebuilt its pipeline and transformed its approach to R&D. Pfizer also created a dedicated R&D capability for its Essential Health business and formed the Global Product Development Group, which is a unified center for late-stage development to maximize the value of its R&D investments. Since 2010, Pfizer has received 20 new drug approvals (new molecular entities and new indication for existing therapies) and launched multiple products, including: Ibrance (palbociclib), a drug to treat HR+/HER2- metastatic breast cancer; Xalkori (crizotinib), a drug for treating metastatic non-small cell lung cancer; Bosulif (bosutinib), a drug for treating Philadelphia chromosome–positive chronic myelogenous leukemia; Inlyta (axitinib), a drug to treat advanced renal cell carcinoma; Eliquis (apixaban), an anticoagulant; Prevnar Adult, a vaccine for pneumococcal disease; and Trumenba, a vaccine for meningitis B.
In Pfizer Innovative Health, the company further points to incremental revenues from the company’s most recently launched products and the recent acquisitions of Anacor Pharmaceuticals and Medivation, two smaller acquisitions that the company completed this year.
Pfizer acquired.Anacor Pharmaceuticals, a biopharmaceutical company developing and commercializing small-molecule drugs from its boron chemistry platform, for approximately $5.2 billion, earlier this year. Anacor’s lead product, crisaborole, a differentiated non-steroidal topical PDE4 inhibitor with anti-inflammatory properties, is currently under review by the US Food and Drug Administration (FDA) for the treatment of mild-to-moderate atopic dermatitis, commonly referred to as eczema. Anacor also holds the rights to Kerydin, a topical treatment for onychomycosis (toenail fungus) that is distributed and commercialized by Sandoz Inc. in the US. Kerydin was approved by the FDA in 2014. In July 2014, Anacor entered into an exclusive agreement with Sandoz to which PharmaDerm, the branded dermatology division of Sandoz, distributes and commercializes Kerydinin the United States.
This week, Pfizer closed on its $14 billion acquisition of Medivation, a San Francisco-based biopharmaceutical company to boost the company's oncology portfolio.The key gain for Pfizer is Medivation’s prostate cancer drug, Xtandi (enzalutamide), an androgen receptor inhibitor that blocks multiple steps in the androgen receptor signaling pathway within the tumor cell. Xtandi generated approximately $2.2 billion in worldwide net sales over the past four quarters as recorded by Astellas Pharma Inc., with whom Medivation entered an agreement in 2009 to develop Xtandi globally and commercialize jointly in the US. The drug was approved by the US Food and Drug Administration (FDA) in 2012. Medivation and Astellas are continuing a development program for Xtandi, including two Phase III studies in non-metastatic prostate cancer and another Phase III study in hormone-sensitive prostate cancer. It is also being further developed in Phase II studies for the potential treatment of advanced breast cancer and hepatocellular carcinoma.
In addition, Medivation has a late-stage oncology pipeline, which includes two development-stage oncology assets, talazoparib and pidilizumab. Talazoparib, currently in a Phase III study for the treatment of BRCA-mutated breast cancer, has the potential to be a highly potent PARP inhibitor and could be efficacious across several additional tumors. Pidilizumab is an immuno-oncology asset being developed for diffuse large B-cell lymphoma and other hematologic malignancies and has the potential to be combined with immuno-oncology therapies in Pfizer’s portfolio.
The acquisition of Medivation adds to Pfizer’s pipeline and commercial portfolio in oncology. The key product in Pfizer’s commercial oncology portfolio is Ibrance (palbociclib), a drug to treat HR+/HER2- metastatic breast cancer. Pfizer projects that Ibrance and Xtandi will be two of the top 10 oncology products by 2021, according to an investor presentation by Pfizer in outlining the Medivation acquisition. Ibrance posted 2015 sales of $723 million and is the key product in Pfizer’s onology portfolio. Analysts project potential blockbuster status for Ibrance. A recent Thomson Reuters analysis projects sales of $4.6 billion for Ibrance by 2019. Ibrance is a small-molecule oral inhibitor of CDKs 4 and 6, which are key regulators of the cell cycle that trigger cellular progression. It was first approved by the FDA in February 2015, and it was a major revenue driver in 2015 for Pfizer in its global oncology portfolio.
In 2015, Pfizer’s global oncology revenues increased 61% operationally, primarily driven by continued strong momentum following the February 2015 US launch of Ibrance for advanced breast cancer and, to a lesser extent, stronger demand globally for Sutent (sunitinib), a drug for treating gastrointestinal stromal tumors and advanced renal cell carcinoma, and Xalkori (crizotinib), a drug for treating metastatic non-small cell lung cancer. Sutent was Pfizer’s top-selling oncology drug in 2015 with sales of $1.12 billion and Xalkori was third (behind Ibrance, which was second at sales of $728 million) with 2015 sales of $488 million. The other key commercial oncology product for Pfizer is Inlyta, a drug to treat advanced renal cell carcinoma, which had 2015 sales of $430 million.
In its oncology pipeline, immuno-oncology assets, in particular avelumab, an investigational fully human anti-PD-L1 IgG1 monoclonal antibody, are key for Pfizer. Avelumab is part of the immunotherapy alliance that Pfizer and Merck KGaA formed in November 2014 under which the companies will collaborate on up to 20 high priority immuno-oncology clinical development programs, including combination trials. The clinical development program for avelumab involves study of more than 15 tumor types, including breast cancer, gastric/gastroesophageal cancer, head and neck cancer, Merkel cell carcinoma (an aggressive form of skin cancer), mesothelioma, melanoma, non-small cell lung cancer, ovarian cancer, renal cell carcinoma, and urothelial (e.g. bladder) cancer.
Pfizer believes that its Essential Health business is positioned to return to sustainable growth over the next few years driven by the sterile injectables and biosimilars businesses and anticipated continued growth in emerging markets. The business was further bolstered with the $17 billion acquisition of Hospira in 2015, the 2015 acquisition of Innopharma, and the pending acquisition of AstraZeneca’s small-molecule anti-infectives business. Over the same period, Pfizer captured approximately $32 billion from the disposition of its Capsugel and Nutrition businesses and the initial public offering and share exchange associated with the spinoff of its animal health business and has returned $88.1 billion to shareholders through dividends and share repurchases since 2010.