The Long and Short
Jumbo Pfizer deal reprices pharma curves
Meredith Contente | May 19, 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.
Pfizer Inc. (PFE) tapped the primary market this week with its highly anticipated deal to fund its acquisition of Seagen (SGEN). PFE successfully executed the full $31 billion of financing in one shot, using large new issue concessions to build the order book. Initial price talk included concessions of roughly 40 bp to 70 bp across the eight tranches, leading to an order book of approximately $85 billion. The deal ended up pricing 20 bp tighter than initial price talk, translating to new issue concessions of 20 bp to 50 bp behind secondaries. Given the sizeable pricing concessions, the deal not only repriced PFE’s curve, but helped to reprice its single-A peer group as well.
Given the re-pricing of its peer curves, the PFE deal not only provides for an attractive entry point into the PFE credit, but also provides an attractive entry point into similarly rated peers with lower leverage (Exhibit 1). Both Bristol-Myers Squibb Co (BMY) and Merck & Co (MRK) will have gross leverage that is more than a turn lower than PFE’s leverage pro forma the SGEN acquisition (roughly 3.3x-3.5x). Currently, BMY has no acquisitions pending and MRK’s pending acquisition of Prometheus Biosciences will bring its gross leverage up to roughly 1.6x.
Exhibit 1. PFE Curve vs Healthcare Peers (5/18/23 vs 5/11/23)
SMR Language Updated
PFE included special mandatory redemption language (SMR) in the deal which is common in debt issuance used to finance a pending acquisition. The language would require PFE to repurchase the bonds at a price of $101 should the acquisition not be consummated by September 24, 2024. Originally, the 40-year tranche was going to be the only tranche that did not contain the SMR language. However, given that headlines emerged that the FTC was looking to block Amgen Inc.’s (AMGN) pending acquisition of Horizon Therapeutics, PFE elected to exclude the 10-year and 30-year tranches from the SMR language. Both tranches were the two largest, $5 billion and $7 billion, respectively, and the most liquid parts of the curve. Additionally, both the 20-year and 40-year tranches (which contain the SMR language) were priced below par ($98) to help insulate investors in those tranches should the deal collapse and be called at $101.
Recent Acquisitions Help to Address 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.
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. We note that 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.