Often as not, the names given to federal legislation disguise, rather than describe, the content of the bill. And, no, we’re not talking about the Patriot Act. What we have in mind is the American Jobs Creation Act of 2004 (AJCA). A close reading of this law reveals certain provisions that permit companies to deduct 85% of certain foreign earnings when they are repatriated under specified conditions laid down in the Act.
This fact has not been lost on pharmaceutical giant Pfizer (NYSE: PFE), which decided in the first quarter to repatriate $28.3 billion of foreign earnings under the Act. In so doing, the company is plumping up its already formidable war chest. All that remains is to find a worthy use for this cash. Sure, you could increase dividends to shareholders, but prudence might tell you to grow your business and ensure being able to pay dividends down the road. Pfizer, it appears, is opting for the latter strategy.
In the wee hours of June 16, Pfizer announced that it is buying Vicuron Pharmaceuticals (NASDAQ: MICU) in a deal valued at $1.9 billion. What Vicuron brings to the table is a set of new anti-infective drugs that, once approved by the FDA, would broaden Pfizer’s own offerings in this field, and prop up earnings as its own anti-infective drugs go off patent.
The manufacturer of such blockbuster drugs as Celebrex (arthritis), Diflucan (infection), Lipitor (cholesterol), Viagra (erectile dysfunction), Zoloft (depression), Zyrtec (allergies), and Zythromax (antibiotic), Pfizer is the world’s largest pharma company.
On a 12-month trailing basis, Pfizer generated revenue of $53 billion, EBITDA of $22 billion and net income of $9.3 billion. Launched in 1992, Diflucan lost exclusivity in July 2004, and has seen revenue from its sales drop off. Zithromax is due to lose American patent protection later this year, and faces a similar decline in revenue as competing generics come to market.
Vicuron is a development-stage biotech focused on anti-infective drugs. An American-Italian company (it also trades on the Nuovo Mercato, under the ticker MICU), it is working on a new class of drugs to treat hospital-based and community-acquired infections. Headquartered in King of Prussia, Pennsylvania, Vicuron runs a research program in Fremont, California, and a research center in Gerenzano, Italy. Italy is also home to a corporate administration center (Milan), as well as a manufacturing site (Pisticci).
Two of MICU’s products are under review for U.S. marketing approval: anidulafungin for fungal infections and dalbavancin for skin and soft tissue infections.
Dalbavancin is indicated for the treatment of methicillin-resistant staphylococcus aurea, a hospital-based infection that is resistant to common antibiotics and has been on the rise since the 1980s.
Unlike vancomycin, the standard treatment for this kind of infection and one that has to be given intravenously once or multiple times daily, dalbavancin can be given once a week and may consequently remove the need for ongoing IV lines in some patients. The FDA review of this drug should be completed no later than September 21, 2005.
The other candidate, anidulafungin, shows promise in being a more potent treatment against fungi responsible for the systematic infections candida and aspergillus.
On a trailing 12-month basis, Vicuron generated revenue of $8.2 million, negative EBITDA of $68 million and a net loss of $70 million. Acquisition multiples, needless to say, are going to be out of whack, reflecting its development-stage status. On the positive side, MICU carries only about $11 million in debt.
Under terms of the deal, PFE will pay $29.10 in cash for each share of Vicuron, which works out to $1.9 billion. This offers MICU shareholders a generous 84% premium to the stock’s prior-day trading price. Much of that premium was lost when, on the announcement of the deal, shares of Vicuron shot up 77% to $27.99 on an electronic exchange while Italian-held shares rose 75% to $27.78.
By 2009, it is estimated, the sales of Vicuron’s new drugs could reach between $200 million and $300 million, which would effectively add at most 3 cents to Pfizer’s earnings. For comparison’s sake, applying the $1.9 billion it is spending on MICU to a stock repurchase program would immediately increase PFE’s earnings by 2 cents a share.
The timing of the deal is propitious, and perhaps overdue. Sales of Pfizer’s own antifungal blockbuster, Diflucan, have been plunging ever since going off patent last year. The choice of Vicruon is no accident, either: the two companies have had an existing deal to develop next-generation oxazolidinones, the first new class of antibiotics in over 30 years.
Lazard Ltd. and Cadwalader, Wickersham & Taft LLP advised Pfizer in this deal. Morgan Stanley and O’Melveny & Myers LLP advised Vicuron.
Getting back to the AJCA. If you can stimulate growth, develop new products and expand sales and markets, all thanks to the proceeds repatriated under the Act, you might actually wind up creating new jobs to handle the demand. Or so, we imagine, the argument goes.