A Combined Pfizer and Hospira: The Implications for Pfizer
Pfizer’s proposed $17 billion acquisition of Hospira will add to Pfizer’s Global Established Pharmaceutical business, including biosimilars. What are the implications for Pfizer on both a product and manufacturing basis? DCAT Value Chain Insights (VCI) takes an inside look.
Pfizer’s Chairman and Chief Executive Officer Ian Read announced last week that the company has agreed to acquire Hospira, a provider of sterile injectables and infusion technologies, for $17 billion. Although not reaching the scale of Pfizer’s pursuit of AstraZeneca in 2014, the deal provides a targeted vehicle for Pfizer to grow its global sterile injectables business, including generic sterile injectables, as well as further position Pfizer in biosimilars. So what are the implications for Pfizer on a product and manufacturing basis? DCAT Value Chain Insights (VCI) examines the deal.
A look at the deal
Under the deal, Pfizer agreed to acquire Hospira for $90 a share in cash for a total enterprise value of approximately $17 billion (inclusive of debt). The boards of directors of both companies have unanimously approved the deal. The transaction is subject to customary closing conditions, including regulatory approvals in several jurisdictions and approval of Hospira’s shareholders, and is expected to close in the second half of 2015.
Chairman and CEO
The deal provides a growing revenue stream and a platform for growth for Pfizer’s Global Established Pharmaceutical (GEP) business by combining Hospira’s generic sterile injectables products, including acute care and oncology injectables, with a number of differentiated presentations, with Pfizer’s GEP’s branded sterile injectables, including anti-infectives, anti-inflammatories, and cytotoxics. “The proposed acquisition of Hospira demonstrates our commitment to prudently deploy capital to create shareholder value and deliver incremental revenue and EPS [earnings per share] growth in the near-term,” said Read in a statement. “In addition, Hospira’s business aligns well with our new commercial structure and is an excellent strategic fit for our Global Established Pharmaceutical business, which will benefit from a significantly enhanced product portfolio in growing markets. Coupled with Pfizer’s global reach, Hospira is expected to drive greater sustainability for our Global Established Pharmaceutical business over the long term.” .
The deal also further positions Pfizer in biosimilars. “The combination also reinforces GEP’s growth strategy to build a broad portfolio of biosimilars in Pfizer’s therapeutic areas of strength through the addition of Hospira’s portfolio that includes several marketed biosimilars,” said Pfizer in a statement. “Pfizer will also use its existing commercial capabilities, global scale, scientific expertise, and world-class development capabilities to significantly expand the reach of Hospira’s products, which are currently distributed primarily in the United States, to Europe and key emerging markets, where GEP has a significant presence.”
Pfizer expects to finance the transaction through a combination of existing cash and new debt, with approximately two-thirds of the value financed from cash and one-third from debt. In addition, Pfizer anticipates the transaction to deliver $800 million in annual cost savings by 2018. Slightly more than half of these savings will come from selling, informational, and administrative expenses with the rest coming from savings in cost of goods sold and to lesser extent research and development. Pfizer expects to realize 50% of the $800 million in annual costs savings by the first full year after closing, 75% in the second year, and 100% by the third year after close.
In a conference call with analysts last week, Pfizer provided highlights of its proposed acquisition of Hospira. Hospira, which will be reporting its 2014 financial results on February 12, 2014, had revenues of $4.422 billion for the last 12 months, with specialty injectable pharmaceuticals accounting for 68% of the company’s revenues. Medication management systems, which include infusion, pain management, and ambulatory devices, accounted for 19% of its revenues, and other pharmaceuticals, 13%. On a geographic basis, the Americas (US, Canada, and Latin America) represent the majority of its revenues, accounting for 80% of revenues. The EMEA (Europe, the Middle East and Africa) accounted for 12%, and APAC (Asia & Japan and Australia & New Zealand) accounted for 7%.
Hospira is a provider of generic sterile injectables with more than 200 products in different presentations (i.e., vials, prefilled syringes, bags, and lyophilized products). Pfizer’s sterile injectable business consists of 73 products, primarily gained from acquisitions, and focused on anesthetics, anti-infectives, and oncology. The acquisition of Hospira further complements Pfizer’s 2014 acquisition of InnoPharma, a specialty pharmaceutical company based in Piscataway, New Jersey. Pfizer acquired InnoPharma for an upfront cash payment of $225 million with up to $135 million of contingent milestone payments. At the time of the announced acquisition in July 2014, InnoPharma’s portfolio included 10 generic products approved by the US Food and Drug Administration (FDA), a pipeline of 19 products filed with the FDA, and more than 30 injectable and ophthalmic products under development. InnoPharma is focused on developing novel formulations of existing drugs, including hard-to-make products, such as those that require complex manufacturing capabilities or delivery forms, such as pens and depot injectables.
In acquiring Hospira, Pfizer hopes to take advantage of strong growth prospects for generic sterile injectables, and on its call last week, the company offered market data to support that position. The global generic sterile injectables market is projected to grow from $37 billion in 2013 to $70 billion in 2020, representing a growth rate of 10% versus 6% projected growth for the combined branded and sterile injectables segments. Future market growth is anticipated to be largely driven by China with 13% growth, the US with 6% growth, and other emerging markets with 12% growth. Pfizer’s projections show that growth will be driven by both generic sterile injectables volume and emerging markets as well as differentiated presentations in hard-to-make products in developed markets. Of the approximate $38 billion for generic sterile injectables in 2013, the US accounted for $7 billion, the EU5 (France, Germany, Italy, Spain, and the United Kingdom) $6 billion, and the rest of the world (ROW) $25 billion. By 2020, these three segments in the projected $70-billion generic sterile injectables market are forecasted to be $51 billion for ROW, $10 billion for the US, and $9 billion for the EU5.
Biosimilars represent the other important product area for Pfizer in its proposed acquisition of Hospira, where again Pfizer sees market opportunity. More than $100 billion of biologics are expected to lose patent protection in the next five to ten years, according to information offered by Pfizer in its analysts’ briefing. The global biosimilars market is projected at $3 billion in 2015 and is projected to increase to $20 billion by 2020.
Biosimilars are an important business for Hospira as it progresses its biosimilar pipelines and commercial products. In December 2014, Hospira submitted a biologics license application to the FDA for Retacrit (epoetin zeta), a proposed biosimilar to Amgen’s Epogen (epoetin alfa) and Janssen’s Procrit (epoetin alfa). The biosimilar application was submitted under the new 351(k) approval pathway created by the Biologics Price Competition and Innovation Act of 2009. Retacrit is one of three approved biosimilars for Hospira in Europe. Retacrit was launched in Europe in early 2008, and Nivestim (filgrastim) entered the European market in 2010 and Australian market in 2011. Inflectra (infliximab) was the first biosimilar monoclonal antibody approved in Europe in 2013.
Hospira also has three pacts to advance biosimilar development and commercialization. In February 2015, Pfenex, a clinical-stage biotechnology company, and Hospira formed an exclusive agreement to develop and commercialize on a global basis, PF582, Pfenex’s biosimilar candidate to Genentech’s Lucentis (ranibizumab injection). Under the collaboration, Pfenex will receive an upfront payment of $51 million once the collaboration receives antitrust approval, and, over the next five years and beyond, will be eligible to receive a combination of development and sales-based milestone payments up to an additional $291 million, and tiered double-digit royalty on net sales of the product. Pfenex and Hospira will share the Phase III equivalence clinical trial costs, and Hospira will be responsible for manufacturing and commercializing the product worldwide. The collaboration will be governed by an Executive Steering Committee consisting of equal representation from Pfenex and Hospira. The agreement also allows for additional future product collaborations. Pfenex is currently conducting a Phase Ib/IIa clinical trial of the ranibizuma biosimilar. The clinical trial’s primary objective is to evaluate safety and tolerability of PF582, with secondary objectives including comparative pharmacokinetic and pharmacodynamic evaluations to help demonstrate biosimilarity to Lucentis.
Hospira also has an ongoing relationship with Celltrion, a developer of biosimilars based in Incheon, South Korea, to develop and market certain biosimilar molecules, under an agreement formed in 2009. As of September 30, 2014, Hospira’s biosimilar development pipeline, including exclusive and co-exclusive commercialization rights for biosimilars developed with Celltrion, consisted of up to 11 compounds. These include Inflectra, Hospira’s infliximab biosimilar as well as a potential infliximab biosimilar in the US. In August 2014, Celltrion submitted an infliximab biosimilar for FDA approval in the US, and Hospira has exclusive commercialization rights to the Celltrion infliximab product in the US and certain other territories. The companies also are partnered for a biosimilar of trastuzumab, the active ingredient in Roche’s Herceptin, a breast-cancer drug. Once available, Hospira has exclusive commercialization rights from Celltrion to the Celltrion trastuzumab product in the US and certain other territories. The companies are also partnered for biosimilar erythropoietin.
In 2013, Hospira and NovaQuest Co-Investment Fund I, LP formed an agreement for three biosimilar products: Hospira’s erythropoietin biosimilar (in the US and Canada), filgrastim (in the US), and pegylated filgrastim (globally). Hospira is responsible for research and development, regulatory approval, commercialization, and distribution, and NovaQuest is contributing development funding up to $120.0 million with contributions not exceeding $50.0 million in any single year with Hospira making milestone payments to NovaQuest upon achieving the first commercial sale for each product and royalties.
If the proposed acquisition proceeds as planned, Hospira would become part of Pfizer’s GEP, one of two distinct businesses within Pfizer. At the beginning of fiscal year 2014, Pfizer began managing its commercial operations through a new global commercial structure consisting of two distinct businesses: an Innovative Products business and an Established Products business. The Innovative Products business is composed of two operating segments: the Global Innovative Pharmaceutical segment (GIP) and the Global Vaccines, Oncology and Consumer Healthcare segment (VOC). The Established Products business consists of the Global Established Pharmaceutical segment (GEP). The company’s GEP segment reported 2014 revenues of $25.149 billion, down 9% year over year, and a 3% decline in GIP revenues to $13.861 billion. Revenues in its Global Vaccines business were up 13% to $4.480 billion. Revenues in its Consumer Healthcare business were up 3% to $3.466 billion, and revenues in its Global Oncology business were up 12% to $2.218 billion.
With the proposed acquisition of Hospira, some have speculated that Pfizer might seek to split its GEP business from its GIP segment. At its analysts’ call last week, Pfizer emphasized that it is not seeking to separate the businesses at this point and that such a decision would not be made until the company had at least three years of auditable results based on the new commercial structure (i.e., 2014, 2015, and 2016), so no options would be made until 2017 and that the proposed acquisition of Hospira does not change that timeline.
“At this time we have not made and, frankly, are not in a position to make any decision regarding potential future action that could involve an external split of any of our businesses,” said Read in the analysts’ call. “We believe it will take the next few years to fully realize the potential of these businesses, which is predicated upon the success of our product launches, these brands in our Innovative pipeline; strengthening our capabilities to grow all our patent profile, which this deal certainly has done; continuing effective cost management and capital allocation. So, frankly, this deal, we are doing it because it fits strategically, fits with the GEP business, and the transaction is expected to maximize the growth opportunities and drive greater sustainability in the GEP business.”
In acquiring Hospira, Pfizer will also be acquiring Hospira’s manufacturing network for which certain facilities have come under regulatory scrutiny as a result of certain quality issues. As of December 31, 2013, Hospira operated 14 primary manufacturing facilities globally. Its largest largest facilities were located in Rocky Mount, North Carolina; Austin, Texas; LaAurora, Costa Rica; McPherson, Kansas; Irungattukottai, India; and Mulgrave, Victoria, Australia. In 2013, products manufactured at these plants accounted for approximately 72.8% of Hospira’s net sales. Over the past several years, certain Hospira facilities have been subject to warning letters and inspection observations as a result of certain quality issues cited by the FDA and other regulatory authorities. Hospira received Warning Letters from the FDA related to matters affecting: its pharmaceutical manufacturing facility in Mulgrave, Victoria, Australia; its pharmaceutical and device manufacturing facilities in Clayton and Rocky Mount, North Carolina; its device manufacturing facility in La Aurora de Heredia, Costa Rica; its pharmaceutical manufacturing facility in Irungattukottai, India; and its device quality systems and governance in Lake Forest, Illinois.
On its call last week, Pfizer was asked if it had concerns about these issue. Tony Maddaluna, executive vice president of Pfizer Global Supply, said that the company conducted a review of Hospira’s manufacturing network and had several discussions with the company’s operations and quality management and visited three key sites (Rocky Mount, Costa Rica, and Vizag, India.) “As a result of this review, we feel very comfortable that the issues raised by the regulators have been addressed or are being properly addressed. Consequently, we are comfortable with the transaction based on this review,” said Maddulana.
Hospira has progressed in addressing these issues. In January 2015, the FDA notified Hospira that it had lifted the import alert that previously prohibited US importation of infusion pump devices manufactured in Hospira’s Costa Rica device manufacturing facility. Hospira is now able to sell these infusion devices to new and existing customers without medical necessity certificates and is allowed to resume the importation of these devices into the United States. The remediation of its Costa Rica device manufacturing facility was part of Hospira’s device strategy, announced in May 2013, which was intended to establish a streamlined and modernized product focus while supporting continued advancement of device remediation, including device quality improvement efforts.
Despite making improvements at its facility in Clayton, North Carolina, Hospira announced in January 2015 that it planned to close the facility in Clayton in the second half of 2015. The closure will include the discontinuation or transfer of the products manufactured at the site to other Hospira locations or third parties. In April 2010, Hospira received a Warning Letter from the FDA in connection with the FDA’s inspections of the company’s pharmaceutical and device manufacturing facilities in Clayton, North Carolina, and Rocky Mount, North Carolina. In the 2010 Warning Letter, the FDA cited current good manufacturing practice (cGMP) deficiencies related to particulate in certain emulsion products at the Clayton facility and the failure to adequately validate the processes used to manufacture products at the Rocky Mount facility. The 2010 Warning Letter also asserted other inadequacies, including procedures related to the quality control unit, investigations, and medical reporting obligations. Since issuing the 2010 Warning Letter, the FDA completed multiple follow-up inspections at both the Clayton and Rocky Mount facilities. In June 2013, after the latest FDA inspection at the Clayton facility, the facility was designated as “no action indicated” (NAI). An NAI inspection classification occurs when no objectionable conditions or practices were found during the inspection or the significance of the documented objectionable conditions found does not justify further actions. In February 2014, the status of Rocky Mount’s pharmaceutical manufacturing was upgraded to “voluntary action indicated” (VAI). A VAI inspection classification occurs when objectionable conditions or practices were found that do not meet the threshold of regulatory significance. Inspections classified with VAI violations are typically more technical violations. In June 2014, after the latest FDA inspection at the Rocky Mount facility, the FDA did not issue any Form 483 observations. Under NAI or VAI status, the company can pursue new product approvals and export certifications for pharmaceutical products manufactured at Clayton and Rocky Mount.
Hospira continues to advance construction on a specialty injectable pharmaceutical manufacturing facility in Vizag, India, which began in 2011, with an overall investment of $375 million to $450 million. In March 2014, the FDA concluded a pre-approval inspection at the Vizag facility which resulted in the FDA issuing a Form 483 listing 10 observations. Hospira responded to these observations, and in July 2014, the company received an untitled letter requesting additional information regarding two of Hospira’s corrective actions. Hospira responded to this letter and is working to resolve the FDA’s concerns, according to the company’s third-quarter 2014 filing.
Hospira also has access to additional manufacturing capacity in India through a recent acquisition as well as an ongoing alliance. In 2014, Hospira acquired the active pharmaceutical ingredient (API) manufacturing facility in Aurangabad, India and an associated research and development (R&D) facility in Chennai, India from Orchid Chemicals & Pharmaceuticals Ltd., an Indian pharmaceuticals company, for approximately $247 million. The acquisition enabled Hospira to vertically integrate into beta-lactam antibiotic APIs (penems and penicillins). The API manufacturing facility has capabilities for manufacturing sterile APIs and at the time of the completed deal in July 2014 employed approximately 665 employees, including chemists, engineers and technicians. The R&D facility staffed approximately 110 scientific personnel. Post deal, Orchid retains its cephalosporin API business and facilities, and also certain non-antibiotic, non-sterile businesses and facilities it owns. Orchid will continue to supply Hospira with cephalosporin APIs.
Hospira also has an unconsolidated joint venture with Cadila Healthcare Limited, a pharmaceutical company located in Ahmedabad, Gujarat State, India. The joint venture, Zydus Hospira Oncology Private Limited (ZHOPL), operates a manufacturing facility in a special economic zone outside of Ahmedabad, which has been inspected and approved by the FDA and the United Kingdom’s Medicines and Healthcare Products Regulatory Agency. Under the joint venture agreement, the facility manufactures a number of cytotoxic drugs for sale by both Hospira and Cadila.
Hospira also outlined the progress of other quality remediation efforts in its third-quarter 2014 filing. In May 2013, Hospira received an FDA Warning Letter based on the agency’s inspection of Hospira’s device quality systems and governance in Lake Forest, Illinois in January and February 2013. The 2013 Device Warning Letter cited cGMP deficiencies, including failures related to design controls, corrective and preventive actions, complaint handling, purchasing controls and document controls and other inadequacies, including deviations from the medical device reporting regulation. Hospira’s Lake Forest site does not manufacture any device products but performs many portions of Hospira’s quality system procedures that support all of Hospira’s device products and operations. In May 2014, the FDA issued a Form 483 listing observations after inspection of Hospira’s Lake Forest site. A number of the observations dealt with events that occurred prior to the quality systems remediation actions taken by the company. In June 2014, Hospira submitted a written response to the observations that included actions to address the FDA’s concerns.
Also in May 2013, Hospira received a FDA Warning Letter related to the FDA’s inspection of Hospira’s pharmaceutical manufacturing facility in Irungattukottai, India in October 2012. The 2013 Warning Letter cited cGMP deficiencies, including failure to establish and follow appropriate written procedures, including failure to validate all aseptic and sterilization processes, and failure to appropriately maintain manufacturing facilities. In December 2013, the FDA completed a follow-up inspection of this facility. At the close of the inspection, the FDA issued a Form 483 listing observations related primarily to processes and procedures. Hospira responded to the specific FDA observations in January 2014, having already completed a majority of the identified corrective actions. In April 2014, the FDA issued an untitled letter from the facility. The untitled letter was based on the December 2013 inspection and Hospira’s corresponding response. Hospira does not anticipate any impact to product supply from this facility as a result of the untitled letter and expects to continue working cooperatively with the FDA regarding the scope and timing of remediation efforts at the facility.
Also, in September 2014, Hospira received a Warning Letter from the FDA in connection with the FDA’s inspection of Hospira’s pharmaceutical manufacturing facility located in Mulgrave, Victoria, Australia. In the 2014 Mulgrave Warning Letter, the FDA listed inspectional observations, including: discrepancies in certain manufacturing processes, the need to implement better corrective or preventive actions, and the need to establish certain written procedures and an adequate system for monitoring environmental conditions. In October 2014, Hospira responded to the FDA’s observations.