Pfizer is known for prescription medicines like impotence treatment Viagra and Lyrica for nerve pain, but many of its biggest brands, including cholesterol treatment Lipitor and painkiller Celebrex, have lost patent protection and are facing cheaper generics. The company needs new products to keep its earnings growing.
Hospira makes generic versions of injectable drugs that are widely used in hospitals, through vials, syringes and bags, as well as pumps used to deliver them and other fluids. It also sells several biosimilars, or copies of biotech drugs, overseas and has others in development.
Pfizer offered $90 per share in cash, a 39% premium to Hospira’s closing stock price yesterday. Hospira shares soared 35% to nearly $88 today, while Pfizer was up 2.7% at $32.93.
The proposed acquisition is Pfizer’s largest since the New York company failed in its attempt to buy AstraZeneca (NYSE:AZN), which rebuffed its $118 billion approach last year but has remained a subject of takeover speculation.
Pfizer said the latest move showed its commitment to deploy capital and deliver revenue and earnings-per-share growth in the near term. The company said it expected the deal to add 10¢ to 12¢ per share to earnings in the 1st full year after it closes.
"I don’t think this deal is a game-changer for Pfizer, but helps them build out their sterile injectables business without wildly overpaying for assets, as the company has done in the past," said portfolio manager Les Funtleyder of E Squared Asset Management.
Pfizer expects the deal, which requires regulatory and shareholder approvals, to close later this year, immediately boosting earnings and enabling the company to cut annual costs by $800 million over the next 3 years.
CEO Ian Read said the Hospira deal would not delay any breakup of Pfizer, an action the company has said it could take by 2017 if an accounting analysis determines it makes sense.
Drugmakers are racing to develop biosimilars, which typically cost 20% to 30% less than the original, as big-ticket patents on biotech drugs expire and cash-strapped healthcare systems cut costs.
Biosimilars are expected to account for about ¼ of the $100 billion in sales from off-patent biological drugs by the end of the decade, according to a study compiled by Thomson Reuters BioWorld.
There are no approved biosimilars in the United States yet.
Pfizer and Hospira are dominant players in the hospital anti-infectives business and are also developing many of the same biosimilars, so Pfizer could wind up selling many overlapping products, Suntrust Robinson Humphrey analyst John Boris said.
Hospira is developing more than a half-dozen biosimilars in partnership with Celltrion (KSDQ:068270) of South Korea and would therefore have to pay royalties on those products coming to market.
"We don’t think this is a major issue for the transaction," Read told analysts on a conference call.
Boris said Pfizer would probably try to divest some of those assets to focus on its own wholly owned biosimilar candidates, including versions of Roche Holding‘s (PINK:RHHBY) Herceptin for breast cancer, Rituxan lymphoma treatment and Avastin lung cancer drug, as well as of Abbott‘s (NYSE:ABT) Humira arthritis treatment.
The total value of the deal is about $17 billion, including debt, the companies said. Hospira had $1.75 billion in outstanding long-term debt as of Sept. 30, 2014, according to a regulatory filing.
Pfizer’s financial advisers are Guggenheim Securities, J.P. Morgan and Lazard, with Ropes & Gray LLP as legal adviser and Clifford Chance LLP advising on international regulatory matters.
Morgan Stanley is Hospira’s financial adviser, while Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates are its legal adviser.