The Long and Short
Pfizer navigates patent cliff with Seagen acquisition
Meredith Contente | March 17, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
In an effort to further address its upcoming patent cliff and hit a $25 billion new revenue target, Pfizer Inc. (PFE) recently announced that it has entered into a definitive merger agreement with Seagen Inc. (SGEN). The all-cash transaction is valued at $43 billion, has been unanimously approved by both boards, and is expected to close in late 2023/early 2024. As a leader in the oncology biotech space, SGEN’s portfolio of antibody-drug conjugates (ADC), will complement PFE’s existing oncology portfolio while enhancing the current pipeline.
While the deal is expected to be financed mostly with new debt, PFE noted that they remain committed to a high investment grade rating, including a tier-1 commercial paper rating. With the potential for over $31 billion of new debt to be issued prior to the close of the transaction, the new deal is likely to re-price PFE’s existing credit curve. Depending on the concessions, the new deal should provide an attractive entry point into a high-quality single-A credit. PFE’s curve is likely to steepen relative to peers including Eli Lilly & Co (LLY) and Merck & Co. Inc. (MRK).
Exhibit 1. PFE Curve vs Healthcare Peers
Terms of the Deal
PFE has agreed to pay $229 per share for SGEN in an all-cash transaction that has an enterprise value of $43 billion, which is inclusive of net debt. This represents a 33% premium to SGEN’s closing price on 3/10/23. PFE has noted that they will look to finance the deal with roughly $31 billion in long-term debt with the remainder of the purchase price to be financed with a combination of cash on hand and short-term debt. Management has noted that there are no financing conditions needed to complete the transaction. Given that SGEN was in a net cash position of nearly $1.7 billion as of 12/31/22, PFE will likely put a term loan or two in place while using some of its strong cash position ($22.7 billion) to fund the $10.3 billion balance. PFE management did note that they would like to maintain financial flexibility for shareholder remuneration, which means they are likely to use less cash on hand and more short-term financing for the balance.
PFE expects the deal to be neutral to slightly accretive to adjusted EPS three to four full years post close. The deal is expected to enhance PFE’s top line growth immediately as SGEN expects to generate more than $2 billion in revenues in 2023, representing 12% growth year-over-year. PFE has estimated that SGEN will account for nearly $10 billion in new revenues by 2030. Additionally, PFE is targeting $1 billion in cost efficiencies by year three post close. Management highlighted that cost efficiencies are expected to be generated by eliminating duplication across several functional lines, not from a reduction in R&D spend.
Addressing the Patent Cliff
The SGEN deal, coupled with four transactions that PFE completed in 2022 (Arena, Biohaven, Global Blood Therapeutics and ReViral) are expected to account for $20.5 billion in new revenues on a combined basis by 2030. PFE management has targeted $25 billion in new business revenues by 2030, to more than offset lost revenues associated with patent expirations. PFE has estimated roughly $17 billion in lost revenues from patent expirations between 2025-2030 (Exhibit 2).
Exhibit 2. PFE Revenue Bridge
Additionally, PFE has a wave of expected launches from its own R&D pipeline over the next 15 months that are estimated to generate nearly $20 billion in new revenues by 2030. Between launches and co-promotions, PFE has thirteen product candidates expected in 2023 and one in 2024. These product launches range anywhere from specialty care products in treating Alopecia to primary care vaccines to prevent RSV as well as a new therapy to treat migraine patients.
Pioneer in ADC Development
SGEN has been considered a pioneer in the ADC space with over 20 years of experience in developing ADCs. SGEN’s portfolio currently has four of the twelve approved ADCs used in cancer care. When combined with existing pharmaceuticals, ADCs become a powerful tool in cancer treatment, as they are designed to harness the power of antibodies and help deliver small molecule drugs directly to tumors. Not only do they help to increase the efficacy of existing drugs but also alleviate certain negative side effects for patients. SGEN’s ADC portfolio complements PFE’s existing oncology portfolio as well as its pipeline. PFE hopes to leverage their protein engineering capabilities to help advance existing ADC technology at SGEN. PFE has noted that the combination of assets has the potential to improve patient outcomes, which could provide a sizeable uplift to its existing oncology portfolio. Furthermore, SGEN’s portfolio will benefit from PFE’s global scale which spans regulatory, commercial, manufacturing and government relations.
Post the announcement, Moody’s affirmed their A1 rating and changed their outlook to negative from stable. The negative outlook reflects the increase in gross leverage, which is expected to rise to roughly 3.3x-3.5x post close. However, Moody’s notes that the acquisition should help to drive material growth opportunities while helping to mitigate the patent cliff. Leverage is expected to decline below the 3.0x area within 18-24 months post close. S&P affirmed its A+ rating and stable outlook but did lower its commercial paper rating one notch to A-1. S&P maintained a higher commercial paper rating than its agency peers and now the A-1 rating is in line with both peers and management’s guidance. Fitch revised its positive outlook to stable, noting that while the transaction will stress leverage in the intermediate term, they expect leverage to remain below their ratings threshold. If leverage were to exceed the threshold, they expect management to use free cash flow proceeds to repay debt in a timely fashion. Fitch estimates that free cash flow should trend in the 6%-7% range of revenues.