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The pharmaceutical sector continues to be under appreciated

Pfizer buys generic company Hospira on a 36 x PE FY15; 30x FY16
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Pfizer has paid a full price of $US17bn for Hospira which equates to a PE multiple of 36x for FY15.

Pfizer has acquired Hospira, a speciality pharma and biosimilar drug company, which produces biosimilars of biologic drugs that are off patent.

Consolidation among the big pharmaceutical companies will lead to a rationalisation of their drug portfolios which should lead to increased free cash flow which for investors and will see increased dividends and a potential re­‐rating of the sector,” said Nitesh Patel, Portfolio Manager, Insync Funds Management.

A long-term investor in prescription drug companies, Insync FM is attracted by the dividends and strong year­‐on‐year growth which is supported by the needs of an ageing middle class around the world.

Pharmaceutical terms

Biologic drugs are complex drugs that are made from living cells/tissues or from complex molecules that are derived from humans, animal or microorganisms in the main. Cellular and Gene based biologics are at the edge of new drugs.

Biosimilar drugs are cheaper and highly similar versions of Biologics, akin to generics medicines for smaller less complex molecules which are off patent. Today there are no Biosimilars sold in the USA, the largest drug market on the planet, which should change in the near future. However, Biosimilars are available in other major markets.

Biologics and biosimilar explained

Based on Insync’s analysis, the pharmaceutical sector continues to be under appreciated as the pipeline of new drugs starts to generate stronger revenue and earnings growth along with consolidation in the sector.

“Pfizer say paying 35x 2015 earnings for Hospira and that they can make it earnings accretive in the first full year shows how large pharma companies can make deals look attractive despite what some would call a full price for a smaller drug company.

“M&A is likely to continue in the sector and we should expect more deals that are earnings enhancing.

“Insync is expecting drug company earnings growth to accelerate in the coming years as consolidation occurs with reduced competition, cost savings and the pipeline of critical and novel new drugs coming to the market,” Mr Patel said.

 

 

 

Originally published 9 February 2015