Why Investment In Biosimilars Is Important For Pfizer
Pfizer (NYSE:PFE) bought Hospira in 2015 to strengthen its generic drugs business, and gain a strong foothold in sterile injectables and the growing biosimilar market. It is Hospira’s biosimilar pipeline that holds to the most promise as far as Pfizer’s upside potential is concerned. The company has already launched Remicade’s biosimilar Inflectra in the U.S., and has another biosimilar Retacrit (biosimilar for Epogen and Procrit) in the registration stage. Why is this important to Pfizer? The chart below shows Pfizer’s historical revenue trajectory, and our estimates for the expected growth. It becomes clear that the company will likely need new avenues for growth. With R&D productivity having declined in recent years, especially in small molecule research, and with several blockbuster biologics going off-patent, investing in biosimilars can be a good bet. Pfizer showed that vision by acquiring Hospira.
There is another angle to this. The expanding generics business is generally not what big pharma companies focus on, because generics have traditionally been priced as much as 85-90% below their branded counterparts making them a much less lucrative business. However, biosimilars have commanded much better pricing. In the U.S., Pfizer’s Inflectra is priced just 15% below J&J’s Remicade. It must be noted that although the price discount is much higher in Europe, it is still a lot less than that for small molecule generics. Therefore, there is some value in the biosimilars business, especially for a company that manages its finances astutely. Pfizer has managed its tax liabilities smartly over the years, and has structured its business and subsidiaries to minimize its tax exposure in the U.S., thus lowering its overall tax rate. Therefore, every incremental sales dollar from biosimilars will be more valuable to Pfizer than some of the other firms. Strong financial management, effectively offsets some of the disadvantage of lower pricing of biosimilars.
The image below shows Pfizer’s biosimilar pipeline. It is clear that the company is targeting big names such as Humira, Rituxan, Herceptin and Avastin. The combined sales of these biologics exceeded $35 billion in 2014. Theoretically speaking, replacing their entire sales with biosimilars even with a 50% pricing discount will open up a market worth nearly $18 billion for Pfizer. Our interactive model for Pfizer demonstrates quickly how increase in Pfizer’s biosimilar revenue can result in upside to EPS and price estimate. Click here to see the interactive model.
Our price estimate of $33 for Pfizer is roughly in line with the market.
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