Lingering LOE Threat; Cash Build-Up Suggests M&A

Transcription

1 UPDATE Pfizer Inc. Lingering LOE Threat; Cash Build-Up Suggests M&A WHAT S CHANGED After the release of Q4 Earnings, even though the fall in revenue was expected, the market reacted with a 3.1% drop in the share price. The Dow s plunge on the February 5 worsened the situation as the share price ended at $34.67 as of February 5. However, PFE experienced $9 billion tax benefits due to the remeasurement of deferred tax liabilities under the enactment of the Tax Cuts and Jobs Act (TCJA). It anticipates a $15 billion tax bill over eight years to repatriate its overseas cash. Furthermore, PFE reaffirmed its plan of selling some of its Consumer Health assets, such as Advil and ChapStick, to generate about $20 billion. As PFE is expected to suffer in upcoming years, mainly in 2019, due to the loss of exclusivity on highmargin drugs (Lipitor, Viagra, Zyvox, Celebrex), a M&A activity can be anticipated for the current fiscal year or the next to enhance its revenue growth before the launching of potential blockbusters in its pipeline, which should all be launched by As PF (potential biosimilar to rituximab) and Talazoparib (MDV3800) showed positive result during their Phase 3 trials, the future revenue from the pipeline is marginally modified with earlier impact and stronger growth. IMPLICATIONS The fall in the Essential Health revenue was greater (10.6%) than anticipated (8.75%). However, as the Innovative Health revenue is expected to increase by 8.20% and the Phase 3 pipeline products revenue is estimated to be materialised in 2018E, the revenue growth will be positive henceforth. KEY DATA Recommendation Sell 12-month price target ($) Upside/downside (%) (3.37) Price as of February 5 ($) Market cap. ($ mn.) 206,657.7 Enterprise value ($ mn.) 234,045.7 INVESTMENT PROFILE Growth* EV/EBITDA P/E Op Margin 0th 20th 40th 60th 80th 100th Percentile rank within industrial peer group. * Calculated as 12-month EPS estimate over current EPS FINANCIALS $ MN. 2017A 2018F 2019F 2020F Revenue 52,546 54,445 55,156 56,799 % Growth (0.53) EPS % Growth (36.65) EBIT 13,671 14,080 13,843 13,997 % Growth EV/EBITDA P/E PRCIE CHART VALUATION Assuming a WACC of 8.4% and terminal EV/EBITDA multiple of 9.7x, we have adjusted our 12-month price target to $33.50, implying a 3.37% discount over its current share price. Hence, the recommendation now is to sell. If no further revenue-driving activity is reported, such as M&A, the pessimistic outlook remains. KEY RISKS Consolidation among MCOs has increased the negotiating power of MCOs and other private insurers, hence biopharmaceutical companies may face greater pricing pressure from private third-party payers, who will continue to drive more of their patents to use lower cost generic alternatives Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 RELATIVE PRICE PERFORMANCE % 3M 6M 12M Absolute (1.84) Relative to S&P 500 Index (0.62) Sources: Company data, Bloomberg; Thomson Eikon CONTRIBUTORS Nikita Khodkov Partner n.khodkov@warwickfinancelab.org Will Chung Analyst w.chung@warwickfinancelab.org Darren Limantara Partner d.limantara@warwickfinancelab.org This report has been prepared solely for educational purpose and does not constitute a recommendation to any person or entity as to whether to undertake any investment contemplated in this report. The commercial merits or suitability or expected profitability or benefit of such investment should be independently determined by the direct recipient of this report based on its own assessments, relying on such information and advice from the recipient s own professional advisors and such other experts as it deems relevant.

2 Valuation Outlook We updated our 2018E base case price target to $33.50 PRICE TARGET INVESTMENT BACKGROUND Upside case $40.00 Pfizer is one of the biggest pharmaceutical firms in the U.S. Around 50% of its revenue is generated in the U.S. and 8% in Japan. As Pfizer is an active acquirer, future forecast may be inconsistent. Its future revenue growth is expected to be mostly from Alliance revenues, Oncology, Vaccines, and other products in pipeline Base Case $ Conservative Case $ Feb 16 Aug 16 Feb 17 Aug 17 Feb 18 Aug 18 Feb 19 UPSIDE CASE $40.0 (+15.4%) Terminal EV/EBITDA multiple of 10.7x The negative impact of loss of exclusivity on blockbuster products, such as Lyrica, is lower than expected and is accompanied with a strong growth of Ibrance. The possible M&A activity may raise the share price even further and record the terminal unadjusted EPS of $2.62. The upside case valuation is based on DCF driven by an 8.4% WACC. BASE CASE $34.14 (-1.5%) Terminal EV/EBITDA multiple of 9.8x With the assumption of 8.4% WACC and 9.8x EV/EBITDA multiple, we adjusted our price target to $ The terminal unadjusted EPS in 2021E is $2.08. We believe Pfizer s patent expirations on major products, such as Lyrica, will lead to a slower growth in 2019E. As Pfizer s cash is continuously increasing due to the tax reform and the possible sale of Consumer Healthcare, M&A activity main be required to maintain its growth in next two years. CONSERVATIVE CASE $29.10 (-16.1%) Terminal EV/EBITDA multiple of 8.7x The downward pricing pressure is worsened due to the increasing negotiating power of MCOs, PBMs, and possible alliance of Amazon, Berkshire, and JPMorgan. Furthermore, it is also based on lower sales from Ibrance, Prevnar, and Xtandi. Hence, the expected terminal unadjusted EPS is dropped to $1.63. The conservative case valuation is based on DCF driven by an 8.4% WACC. WHY UNDERWEIGHT / As PFE reported Q global Ibrance sales below forecasts, the growth rate of Ibrance is lowered. / Negative quantitative impact of yet inactive cash / Negative impact of sterile injectable shortage POTENTIAL CATALYSTS / Positive Tax Cuts and Jobs Act (TCJA) impacts / Pipeline news flow / External M&A / Strong biosimilars / Increase in R&D efficiency POTENTIAL RISKS / Execution risk with regard to the global expansion strategy into emerging markets / Execution risk with regard to stabilising revenue declines in the established products business / Inability to offset the Lyrica patent cliff / Pricing pressure from healthcare reform / International competition especially from China / Inability to develop or acquire suitable pipeline assets / Political risk associated with multi-national operations / Possible exchange rate risk

3 Model Base case: 9.8x terminal EV/EBITDA multiple $ MN. EXCEPT PER SHARE ACTUAL PROJECTED (BASE CASE) DCF FISCAL YEAR ENDING 2014A 12/31/ A 12/31/ A 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/2021 TERMINAL YEAR 9.8x EV/EBITDA Revenue 49,605 48,851 52,824 52,546 54,445 55,156 56,799 58,777 58,777 % Growth n/a (1.5) 8.1 (0.5) EBITDA 19,547 16,672 17,239 20,088 21,093 21,501 22,171 23,057 23,057 % Growth n/a (14.7) EBIT 13,424 10,846 10,791 13,671 14,080 13,843 13,997 14,336 % Margin Effective Tax Rate (73.5) EBIAT (NOPAT) 10,015 8,442 9,343 23,723 12,391 12,182 12,317 12,642 Depreciation and amortisation 5,748 6,364 6,954 7,489 7,935 Stock-based compensation Accounts receivable 343 (285) (107) (246) (297) Inventory 1163 (97) (75) (172) (208) Accounts payable (490) Accrued expenses & def revenues Other current assets (inc. non-trade receivables) Deferred tax assets (DTAs) Other assets (1,052) (705) (689) (557) (432) Other non-current liabilities (1,412) (1,412) (1,412) (1,412) (1,412) Unlevered CFO 28,692 16,974 17,611 18,228 19,134 Less: Capital expenditures (1,878) (1,934) (1,992) (2,052) (2,113) Less: Purchases of intangible assets (9,502) (6,397) (7,188) (7,956) (8,671) Unlevered FCF 17,313 8,644 8,431 8,221 8,350 8,350 % growth (50.1) (2.5) (2.5) 1.6 Discount factor 10% 91% 191% 291% 391% 391% Mid-period adjustment factor Present value of Unlevered FCF 17,245 8,300 7,524 6,765 6,337 6,337 VALUATION Enterprise Value 209,172 Less: Net debt 13,272 Less: Trapped cash 0 Equity Value 195,900 Equity value per share $33.50 Market premium/(discount) (3.37) Implied TV perpetual growth rate 3.1% ASSUMPTIONS Terminal year exit EBITDA multiple 9.8x Weighted average cost of capital 8.4% Risk-free rate 2.7% Beta 0.96 Effective tax rate 12.0%

4 Model Upside case: 10.7x terminal EV/EBITDA multiple $ MN. EXCEPT PER SHARE ACTUAL PROJECTED (BASE CASE) DCF FISCAL YEAR ENDING 2014A 12/31/ A 12/31/ A 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/2021 TERMINAL YEAR 9.8x EV/EBITDA Revenue 49,605 48,851 52,824 52,546 54,981 56,546 59,134 62,848 62,848 % Growth n/a (1.5) 8.1 (0.5) EBITDA 19,547 16,672 17,239 20,088 23,181 23,951 25,054 26,697 26,697 % Growth n/a (14.7) EBIT 13,424 10,846 10,791 13,671 16,193 16,311 16,888 17,999 % Margin Effective Tax Rate (73.5) EBIAT (NOPAT) 10,015 8,442 9,343 23,723 14,250 14,354 14,862 15,839 Depreciation and amortisation 5,748 6,364 6,954 7,489 7,935 Stock-based compensation Accounts receivable 343 (365) (235) (388) (557) Inventory 1163 (97) (75) (172) (208) Accounts payable (490) (286) Accrued expenses & def revenues Other current assets (inc. non-trade receivables) Deferred tax assets (DTAs) Other assets (1,052) (681) (650) (512) (350) Other non-current liabilities (1,412) (1,412) (1,412) (1,412) (1,412) Unlevered CFO 28,692 18,891 19,655 20,646 22,119 Less: Capital expenditures (1,878) (1,934) (1,992) (2,052) (2,113) Less: Purchases of intangible assets (9,502) (6,397) (7,188) (7,956) (8,671) Unlevered FCF 17,313 10,560 10,476 10,638 11,334 11,334 % growth (39.0) (0.8) Discount factor 10% 91% 191% 291% 391% 391% Mid-period adjustment factor Present value of Unlevered FCF 17,245 10,140 9,349 8,755 8,602 8,602 VALUATION Enterprise Value 261,990 Less: Net debt 13,272 Less: Trapped cash 0 Equity Value 248,718 Equity value per share $40.00 Market premium/(discount) 15.4 Implied TV perpetual growth rate 3.1% ASSUMPTIONS Terminal year exit EBITDA multiple 10.7x Weighted average cost of capital 8.4% Risk-free rate 2.7% Beta 0.96 Effective tax rate 12.0%

5 Model Conservative case: 8.7x terminal EV/EBITDA multiple $ MN. EXCEPT PER SHARE ACTUAL PROJECTED (BASE CASE) DCF FISCAL YEAR ENDING 2014A 12/31/ A 12/31/ A 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/ P 12/31/2021 TERMINAL YEAR 9.8x EV/EBITDA Revenue 49,605 48,851 52,824 52,546 53,605 53,822 54,613 55,875 62,848 % Growth n/a (1.5) 8.1 (0.5) EBITDA 19,547 16,672 17,239 20,088 18,943 19,165 19,498 20,081 20,081 % Growth n/a (14.7) (5.7) EBIT 13,424 10,846 10,791 13,671 11,909 11,490 11,316 11,389 % Margin Effective Tax Rate (73.5) EBIAT (NOPAT) 10,015 8,442 9,343 23,723 10,479 10,111 9,958 10,022 Depreciation and amortisation 5,748 6,364 6,954 7,489 7,935 Stock-based compensation Accounts receivable 343 (159) (33) (119) (189) Inventory 1163 (545) (25) (91) (145) Accounts payable (490) Accrued expenses & def revenues Other current assets (inc. non-trade receivables) Deferred tax assets (DTAs) Other assets (1,052) (744) (712) (597) 466) Other non-current liabilities (1,412) (1,412) (1,412) (1,412) (1,412) Unlevered CFO 28,692 15,047 15,622 15,987 16,606 Less: Capital expenditures (1,878) (1,934) (1,992) (2,052) (2,113) Less: Purchases of intangible assets (9,502) (6,397) (7,188) (7,956) (8,671) Unlevered FCF 17,313 6,716 6,442 5,980 5,821 5,821 % growth (61.2) (4.1) (7.2) (2.6) Discount factor 10% 91% 191% 291% 391% 391% Mid-period adjustment factor Present value of Unlevered FCF 17,245 10,140 9,349 8,755 8,602 8,602 VALUATION Enterprise Value 165,875 Less: Net debt 13,272 Less: Trapped cash 0 Equity Value 152,603 Equity value per share $29.10 Market premium/(discount) 15.4 Implied TV perpetual growth rate 3.1% ASSUMPTIONS Terminal year exit EBITDA multiple 8.7x Weighted average cost of capital 8.4% Risk-free rate 2.7% Beta 0.96 Effective tax rate 12.0%

6 Change in Pfizer R&D Productivity

7 Annual Sales Base business E ($ Millions) Innovative Health (IH) Internal Medicine 2014A 2015A 2016A 2017A 2018P 2019P 2020P 2021P Lyrica (IH) 3,350 3,655 4,165 4,511 4,849 2,910 2,037 1,426 Viagra (IH) 1,181 1,297 1, Chantix / Champix ,117 1, Toviaz BMP Alliance revenues 759 1,256 1,588 2,533 3,532 4,592 5,281 5,439 All other internal medicine Total Internal Medicine 6,729 7,611 8,858 9,684 10,603 9,562 8,583 7,873 Vaccines Prevnar 13 / Prevenar 13 4,464 6,245 5,718 5,601 5,657 5,827 6,002 6,182 FSME / IMMUN-TicoVac All other vaccines Total Vaccines 4,480 6,453 6,071 6,001 6,110 6,345 6,589 6,839 Oncology Ibrance ,135 3,126 4,064 4,877 5,608 5,888 Sutent 1,174 1,120 1,095 1,081 1,079 1,090 1, Xalkori Inlyta Xtandi alliance revenues ,003 1,404 1,685 1,938 All other oncology (inc. Bosulif) Total Oncology 2,217 2,955 4,563 6,056 7,446 8,712 9,776 10,009 Inflammation & Immunology Enbrel (Outside the U.S. and Canada) 3,850 3,333 2,909 2,452 2,084 1,772 1,506 1,280 Xeljanz ,345 1,816 2,270 2,610 2,871 All other I&I (inc. Eucrisa) Total Inflammation & Immunology 4,240 3,917 3,929 3,967 4,138 4,327 4,430 4,481 Rare Disease BeneFIX Genotropin Refacto AF / Xynthaa Somavert Rapamune All other rare disease (inc. Rapamune) Total Rare Disease 2,892 2,425 2,369 2,241 2,159 2,097 2,048 2,010 Consumer Healthcare 3,446 3,395 3,407 3,472 3,541 3,595 3,631 3,667 Total Innovative Health Revenues 24,004 26,756 29,197 31,421 33,998 34,637 35,057 34,878

8 Annual Sales Base business (Cont.) E ($ Millions) Essential Health (EH) Legacy Established Products (LEP) 2014A 2015A 2016A 2017A 2018P 2019P 2020P 2021P Lipitor 2,061 1,860 1,758 1,915 2,011 2,071 2,112 2,155 Premarin family 1,076 1,018 1, Norvasc 1, EpiPen Xalatan / Xalacom Relpax Zoloft Effexor Zithromax / Zmax Xanax / Xanax XR Cardura Neurontin Tikosyn Depo-Provera Diflucan All other LEP 5,242 4,689 4,538 5,133 4,953 4,780 4,646 4,549 Total LEP 13,016 11,745 11,195 10,895 10,680 10,462 10,305 10,186 Sterile Injectable Pharmaceuticals (SIP) Medrol Sulperazon Fragmin Tygacil Precedex Zosyn / Tazocin All other SIP 1,855 2,563 4,579 3,715 3,344 3,076 2,922 2,835 Total SIP 3,277 3,943 6,017 5,672 5,415 5,264 5,223 5,234 Peri-LOE Products Lyrica EH 1,818 1, Celebrex 2, Pristiq Vfend Zyvox 1, Viagra EH Revatio All other LOE products Total Peri-LOE Products 8,856 5,326 4,221 3,224 2,741 2,416 2,187 2,013 Infusion Systems ,

9 Annual Sales Base business (Cont.) E ($ Millions) Essential Health (EH) (Cont.) Biosimilars 2014A 2015A 2016A 2017A 2018P 2019P 2020P 2021P Inflectra / Remsima ,312 1,640 All other biosimilars Total Biosimilars ,154 1,531 1,892 Pfizer CentreOne (inc. Zoetis, Hospira) Total Essential Health Revenues 25,600 22,092 23,628 21,125 20,351 19,988 19,930 20,002 Pipeline Phase III Pipeline ,340 2,921 Phase II Pipeline Total Pipeline ,812 3,897 Total Sales 49,604 48,848 52,825 52,546 54,445 55,156 56,799 58,777

10 Summary of Financials Income Statement 12/17A 12/18E 12/19E 12/20E 12/21E Revenue (US$ m) 52,546 54,445 55,156 56,799 58,777 EBITDA 20,088 21,093 21,501 22,171 23,057 Depr. & amort. (6,417) (7,013) (7,658) (8,174) (8,690) EBIT (US$ m) 13,671 14,080 13,843 13,997 14,366 Net interest exp. (879( (505) (479) (425) (590) PBT (US$ m) 12,307 13,576 13,364 13,572 13,776 Income taxes 9,049 (1,629) (1,604) (1,629) (1,653) Profit after tax 21,356 11,947 11,761 11,943 12,123 Minorities (47) Net income 21,309 11,990 11,805 11,989 12,170 Cash Flow 12/17A 12/18E 12/19E 12/20E 12/21E EBIT 21,356 11,947 11,761 11,943 12,123 SBC Working capital 317 (1,012) (828) (995) (1,055) Others (1,764) (1,417) (1,401) (1,269) (1,144) Cash flow from operations 26,325 16,531 17,190 17,855 18,615 Cash flow from investing (11,379) (8,331) (9,180) (10,008) (10,784) Free cash flow to the firm 14,946 8,200 8,010 7,847 7,831 Cash flow from financing (9,018) (8,340) (12,095) (8,513) (11,592) Changes in net cash 5,713 (355) (4,300) (881) (3,977) Balance Sheet 12/17A 12/18E 12/19E 12/20E 12/21E Assets Cash & cash equivalents 30,679 30,324 26,024 25,143 21,167 Accounts receivables 7,882 8,167 8,273 8,520 8,817 Inventories 5,620 5,717 5,791 5,964 6,172 Other current assets 5,290 5,290 5,290 5,290 5,290 Total current assets 49,471 49,498 45,379 44,917 41,445 PP&E 14,011 14,666 15,276 15,836 16,338 Goodwill 54,458 54,458 54,458 54,458 54,458 Identifiable intangible assets 55,219 58,059 61,202 64,688 68,563 Other non-current assets 5,135 5,135 5,135 5,135 5,135 Total non-current assets 128, , , , ,493 Total assets 178, , , , ,938 Liabilities Total current liabilities 24,577 24,732 24,818 25,016 25,255 Total non-current liabilities 83,765 86,424 85,049 87,231 86,308 Total liabilities 108, , , , ,563 Shareholder equity 69,657 70,364 71,287 72,491 74,079 Total liabilities and equity 178, , , , ,938 Net debt 13,272 16,285 19,211 22,274 25,327 Per share 12/17A 12/18E 12/19E 12/20E 12/21E No. of shares 6,037 5,956 5,884 5,817 5,754 Diluted EPS $3.52 $1.98 $1.97 $2.02 $2.08 Free cash flow per share Earnings 12/17A 12/18E 12/19E 12/20E 12/21E Sales growth (%) (0.5) EBIT growth (%) (1.7) Net income growth (%) (43.7) (1.6) EPS growth (%) (43.8) (0.3) EBITDA growth (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Capital structure & Coverage 12/17A 12/18E 12/19E 12/20E 12/21E Net debt / EBITDA (x) Net debt / total equity (%) Net debt / (net debt + total equity) (%) Capex / depreciation (%) Capex / revenue (%) Valuation 12/17A 12/18E 12/19E 12/20E 12/21E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Asset turnover Returns 12/17A 12/18E 12/19E 12/20E 12/21E ROE ROA