Will Upjohn's $12B cash—and tighter focus—send Pfizer back to the buying board?

Albert Bourla incoming Pfizer CEO
Even with the $12 billion additional cash from the Upjohn-Mylan deal, “I still do not see the need to do a large deal right now,” Pfizer CEO Albert Bourla said. (Pfizer)

By offloading its established medicines business to Mylan, Pfizer will have $12 billion in additional cash. It'll also have a tighter focus on—and need for—innovation. Does that add up to a return to Pfizer's big M&A habits?

The short answer is “no,” but there’s a twist. “We’ll never say never,” CEO Albert Bourla told analysts during a call on Monday—and his definition of “not-so-big” may be rather stretchy.

Dealmaking at the post-Upjohn Pfizer will focus on “bolt-on opportunities,” he said, echoing the company's usual assessment—and the conventional wisdom about megadeals. “That would be on early- to mid-stage opportunities, where maybe there is higher risk as you know, but the value creation is further greater. And the risk of operational disruption is perhaps lower.”

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“I still do not see the need to do a large deal right now,” he added, “because that can only create disruptions.” Those were basically the same words the then-CEO-to-be uttered during Pfizer’s third-quarter 2018 analyst’s call in October.

In fact, the $12 billion cash from the transaction will go toward paying down debt and returning dividends to shareholders, Pfizer’s Chief Financial Officer Frank D’Amelio said on the call. 

But if one looks at the size of Pfizer’s recent buyout of Array BioPharma, $11.4 billion is by any measure a large-scale deal, if not a megamerger. As Wolfe Research analyst Tim Anderson noted, Pfizer management has a record of back-tracking from their M&A promises, as is evident with the Upjohn selloff.

RELATED: Pfizer's big split is finally here, thanks to a giant generics merger with Mylan

Back in 2011, Pfizer pondered a generic sale or spinoff. “The company felt it had become too large to grow through its past megamergers, and would always be battling [loss of exclusivities] that would neutralize new revenue streams coming from, for example, drug launches,” Anderson said in a Monday note to clients.

But the company nixed the generics-divestment idea in 2017, mainly because valuations for the established products in that portfolio had declined, he explained. Not to mention the “disruption” Bourla talked about with any big transactions.

Despite the drop, though, those drugs, such as Lipitor and Viagra, are still major cash cows that have helped fund Pfizer’s R&D efforts. And Pfizer is facing the very same risks today with the Upjohn spinoff-and-merger.

Yes, the remaining Pfizer will enjoy higher growth, but “if Pfizer’s pipeline disappoints, it has less M&A firepower,” Anderson noted.

Moody's SVP Michael Levesque echoed those sentiments in announcing that his firm would review Pfizer's credit rating in light of the Upjohn deal. The hive-off itself isn't the problem, Levesque said, but it will reduce Pfizer's scale and product diversity and significantly cut its free cash flow.

“In addition, the Upjohn separation tilts Pfizer’s business mix towards that of a pure-play innovative pharmaceutical company, which Moody’s views as higher risk due to factors including R&D risk and the volatility created by patent expirations,” the firm said.

On the bull side though, Pfizer seems confident its pipeline won’t disappoint. Its innovative-only base business boasts big-sellers such as breast cancer drug Ibrance, prostate cancer med Xtandi, pneumococcal vaccine Prevnar 13, and fast-growing JAK inhibitor Xeljanz—even though a new FDA boxed warning has to some extent dampened its growth outlook.

RELATED: Red flag upgrade for Pfizer: FDA limits Xeljanz in colitis, slaps black box on label

Plus, analysts have pegged blockbuster numbers to Pfizer's newly launched tafamidis franchise in ATTR-cardiomyopathy, and Array's colorectal data for BRAF-MEK combo therapy Braftovi and Mektovi have also triggered blockbuster talk. A 20-valent Prevnar follow-up vaccine is well on its way in phase 3.

But not all is rosy. For example, its investigational Duchenne muscular dystrophy gene therapy raised some safety flags in a recent phase 1. Mikael Dolsten, Pfizer's chief scientific officer, reassured analysts that “the integrated data set are sufficiently encouraging.”

Now, Bourla said the new Pfizer will be a “smaller, more focused, science-based company with a singular focus on innovative pharma.” Without generics and the burden of Lyrica's patent cliff, Pfizer now expects to deliver revenue growth in the next five years at the high end of mid-single digits—versus previously mid-single digits—on a risk-adjusted, non-M&A basis.

“Our product portfolio and pipeline will more easily move the needle in terms of growth impact given the smaller size, which will also make the growth more sustainable,” he said.

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