Pfizer's (PFE) announced acquisition of Hospira (HSP) doesn't materially change our fair value estimate, as the new product gains largely offset the purchase price. However, we plan to raise our Hospira fair value estimate to the acquisition price of $90 per share as we believe the deal is very likely to close (probably in the second half of 2015).
Pfizer is gaining specialty injectable pharmaceuticals (68% of Hospira sales), which should strengthen the company's wide moat. Within the generics market, the limited number of players offering injectable products has led to stronger pricing power and better returns than the typical small molecule generic market. Further, Hospira's biosimilar business should complement Pfizer's efforts to expand into this market. In addition to Hospira's recent launch of biosimilar Remicade in Europe and the upcoming expected launch of biosimilar Epogen in the U.S., Hospira's large biosimilars pipeline (thanks to its partnership with Celltrion) should accelerate Pfizer's growth in this emerging field. Beyond the injectable business, we expect Pfizer will look to sell Hospira's medical device products (less than 20% of Hospira sales) as we don't see this business line adding much strength to Pfizer's competitive positioning. Existing players in the infusion pump market, such as Fresenius SE (FMS) or Baxter (BAX), could be interested in taking the device segment off Pfizer's hands.
Despite the high 39% premium to Hospira's stock price, we believe the acquisition price is justified based on Pfizer's ability to unlock more value with its global reach. While Hospira holds a leading product portfolio, the company has the majority of its sales in the U.S. (80% coming from the Americas). Armed with Pfizer's global presence, we expect these products will have much stronger growth prospects. Further, Pfizer's global manufacturing should strengthen the competitive positioning of the products given Hospira's checkered manufacturing history.
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