Download - Merger & adquisition: Case Analysis
Pfizer Split-off of Consumer Healthcare Unit:
Johnson & Johnson Acquisition
Mergers and Acquisitions
Term ProjectNovember 24, 2010
Group 3:Eduardo Munoz
Alibek DjumankulovXeniya Berdnikova
Contents
• Pharmaceutical Industry Background Industry Overview Industry Cycle Industry Risks Over-the-Counter Drug Market Mergers and Acquisitions
• Companies’ Profiles Johnson and Johnson Pfizer Pfizer Consumer Healthcare (PCH) Unit
• Current Situation • Valuation and Bidding• Ex-Post Analysis • Back-Up Information
Pharmaceutical industry
• $ 800 billion dollar industry• Cyclical • Heavily regulated• Higher entry barrier • ROI is time consuming• Blockbuster drugs• Inelasticity or low elastic price
Industry cycle
R&D• Capital intensive• Time consuming
Patent• Crucial • Self-enforcing
Testing• More than 5 years
Sale• No competition• Charge premium
Industry risks
• Prone to litigation• Intellectual property theft• No return on investments• Highly cyclical • Capital extensive
Over-the-counter (OTC)
• Health care products sold in stores, which can be purchased without prescription. Example: Listerine
• Increase in disposable income drives up the demand for OTC
• Increase in number of Health conscious people
Ranking of companies based on sales revenue 2005
Factors of increase of M&A
• Demographic change• New markets• Slow growth in developed nations• Health conscious people• Information technology• Growth of disposable income• Rise of medical care costs
List of M&A in Pharmaceutical industry
• Established in 1886• Largest health care product
firm• 3 divisions comprising of 200
companies• Stable business model• 6 blockbuster drugs with more
than $1 billion in sales revenue
Company Profile
• CEO & Board of Directors
• Centralized decision making on investment, sales and marketing
• Decentralized on day-to-day operations
Corporate Structure
• Acquisition of smaller firms, which lack commercial expertise and capability to market their drugs
• Strategic choice of therapeutic areas
Growth Strategy
Sales Breakdown
Sales Breakdown
Sales Breakdown
Consumer Products
Consumer Products
• Established in 1849• Oldest and respected
pharmaceutical company • Invented penicillin• More than $ 40 billion in sales
revenue• Market capitalization is almost
$ 200 billion• $ 5 billion invested in R&D
highest in industry
Company Profile
• No CEO• Executive Leadership Team• Two research divisions • 9 health care businesses
Corporate Structure
Sales Revenue Breakdown
Pfizer Consumer Healthcare Unit
2004 2005 $1,600.00
$1,650.00
$1,700.00
$1,750.00
$1,800.00
$1,850.00
$1,900.00
$1,950.00
$2,000.00
United StatesAll other countries
Revenues (in millions US$)
• Provides over the counter health care products containing 9 brands including Listerine
• In 2005 $3.9MM in sales (50% international) and a growth of 8% annually• Oral care, tobacco dependence• Skin care
Consumer Products
Current Situation
Feb 2006: Pfizer announcement of
Sale or Split-off HCU
Motivation for Restructuring: • Pfizer wanted to concentrate in its core business of inventing drugs via Research and
Development.• Wall Street view the division as outsider of Pfizer‘s (stock price undervalued@$25)• Blockbuster drug Lipitor patent would expired soon with a possible decrease in sales revenues.
Split-off or Sale : Health Care Unit• Analyst valuation of unit were between $8billion to $10 Billion. (Based on Price Sales and/or
Price Earning Multiples of 2.5)
Health Care OTC
Current Situation
Feb 2006: Pfizer announcement
increase its stock 2% to $25.64
June 2006: Five Companies start a
Bidding competition.
Bidding Competition: Unit Market Value Increases
• J&J (US, #7 Pharmaceutical) • GlaxoSmithKline (UK, #4) • Colgate-Palmolive (US, #1 in Health Care OTC) • Reckitt Benkiser (UK, #1 in Household Products) • Boots (UK, #1 Pharm Retailer)• Bids: GlaxoSmithKline (UK ) made highest bid at the time ($14B to $16B)
↑$
Current Situation
June 2006: J&J –Glaxo become the most serious
bidders.
J&J Strategy: • Diversification , wanted to increase its consumer product division (Sales
revenue of only 18% )• Pfizer’s unit had strongly established brands like Listerine (Alone = $1B p/year) • Unit’s International sales power (especially in developing countries) will
generate synergy to J&J• J&J had failed in a previous biding this year to acquire Gudiant to Boston
Scientific (Bought@$27B). J&J was going to pay in cash therefore it has currently $16B leftover.
ValuationValue of
Pfizer Unit
(before acquisition)
Value of J&J
(before acquisition)
Synergy Value
(J&J and Pfizer Unit)
Bidding Price Financing
Discount Rate
Rf - 4.6%• US T-bill, 6yrs, 2006
Rm-Rf -6%• Bloomberg, 2006
βL - 0.9
βU - 0.84
Tax - 35%
CAPM 9.63%
Assumptions
Sales growth rate
- 7%• industry average, (Forecast, 2006)• expected sustainable long-term growth rate due to innovative products, strong research and development pipeline and operating efficiencies (research of Klein, 2005)
WC - percentage of COGS
CAPEX - change in PPE + Depreciation
Taxes - effective tax rate, 34%
Expenses - percentage of sales CV growth rate
- 5%• forecast for OTC drug market
Sensitivity Analysis
WACC 2006 2007 2008 2009 2010 CV, 2011 Total EV
10.31% $313,004.44 $318,556.10 $307,431.39 $296,802.05 $286,575.47 $6,087,097.06 $7,609,466.51
9.63% $313,004.44 $319,619.34 $309,487.04 $299,783.89 $290,420.69 $6,655,884.67 $8,188,200.07
8.92% $313,004.44 $321,710.79 $313,550.59 $305,707.45 $298,097.17 $8,073,549.84 $9,617,640.27
7.00% $313,004.44 $327,487.58 $324,912.20 $322,473.19 $320,091.87 $16,997,531.93 $18,597,521.21
Valuation
Discount Rate
Rf 4.6% ( US T-bill, 6yrs, 2006)
Rm-Rf 6% (Bloomberg, 2006)
βL 0.31
Kd 5.23
Tax 35%
D/E 0.05
CAPM 6.46%
WACC 6.31%
Assumptions
Sales growth rate
- 8%• industry average (Forecast, 2006) • profit earning industry with a positive and a growing trend• one of the leading pharmaceutical companies in US• strategies for diversification and expected expansion of abroad sales
WC - percentage of COGS
CAPEX - change in PPE + Depreciation
Taxes - effective tax rate, 35%
Expenses - percentage of sales CV growth rate
- 3.2%• inflation rate, 2006
Sensitivity Analysis
WACC 2006 2007 2008 2009 2010 CV, 2011 Total EV
6.31% $4,610.32 $3,887.44 $3,920.59 $3,956.67 $3,995.57 $137,967.11 $156,323.69
7.00% $4,610.32 $3,862.40 $3,870.25 $3,880.71 $3,893.63 $110,065.04 $128,168.34
8.00% $4,610.32 $3,826.64 $3,798.91 $3,773.91 $3,751.41 $83,952.15 $101,699.34
9.00% $4,610.32 $3,791.53 $3,729.53 $3,670.99 $3,615.62 $66,962.88 $84,366.87
10.00% $4,610.32 $3,757.06 $3,662.02 $3,571.78 $3,485.93 $55,066.62 $72,139.74
Value of Pfizer Unit
(before acquisition)
Value of J&J
(before acquisition)
Synergy Value
(J&J and Pfizer Unit)
Bidding Price Financing
Valuation
Assumptions
Sales J&J + Pfizer Unit
Costs Efficiency indicators
COGS J&J 5% more efficient => 95% of Pfizer Unit’s COGS
G&A, Marketing J&J 12% more efficient => 82% of Pfizer Unit’s costs
WC 95% of Pfizer Unit’s WC
Depr., Amort., R&D -
WACC 6.31%
Sensitivity Analysis
WACC 2006 2007 2008 2009 2010 CV Total Equity Value
6.31% $4,610.32 $4,528.54 $4,563.33 $4,601.18 $4,641.91 $160,117.68 $181,048.96
7.00% $4,610.32 $4,499.38 $4,504.74 $4,512.85 $4,523.48 $127,735.94 $148,372.70
8.00% $4,610.32 $4,457.72 $4,421.70 $4,388.65 $4,358.25 $97,430.64 $117,653.28
9.00% $4,610.32 $4,416.82 $4,340.94 $4,268.97 $4,200.50 $77,713.74 $97,537.30
10.00% $4,610.32 $4,376.67 $4,262.38 $4,153.60 $4,049.83 $63,907.55 $83,346.34
Value of Pfizer Unit
(before acquisition)
Value of J&J
(before acquisition)
Synergy Value
(J&J and Pfizer Unit)
Bidding Price Financing
Summary
J&J’ value without synergy: $156,323.69bl. J&J’s value with synergy: $181,048.96bl.
Synergy effect: $24,725.27bl.
JP Morgan’s valuation: $8~10bl. Pfizer Inc.’s expectation: $10bl. GlaxoSmithKline: $14~16bl.
Price Range (in billion US$)
Minimum Proposed Maximum
8,188.2 16,800.00 24,725.27
Value of Pfizer Unit
(before acquisition)
Value of J&J
(before acquisition)
Synergy Value
(J&J and Pfizer Unit)
Bidding Price Financing
Financing
Financing: Cash
J&J’s initial plan Form 10-Q Quarterly Report Filed May 10, 2006: Cash & cash equivalents ……. $16,822
Purchase Price: $16.8 billion
Value of Pfizer Unit
(before acquisition)
Value of J&J
(before acquisition)
Synergy Value
(J&J and Pfizer Unit)
Bidding Price Financing
Post Case Analysis
Post Case Analysis
• November 2006: After intense bidding competition, J&J was chosen as the preferred bidder.
• December 2006: J&J announced the closing of its acquisition of Pfizer Consumer Healthcare for $16.6 billion in cash, which was approved by the boards of both companies.
• December 2006: J&J shares fell $1.57, or 2.6 percent, to $59.75 . Pfizer shares rose 56 cents, or 2.5 percent, to $23.20, after dropping 19 percent in the past year.
Post Case Analysis
• December 2006: Competition Bureau of Canada concluded that the transaction would likely prevent or lessen competition for the supply of only one product, zinc oxide-based diaper rash ointment.
• December 2006: J&J and the Commissioner reached an Agreement requires Johnson & Johnson Inc. to divest the Zincofax®
• There was substantial growth in the J&J sales from 2006 through 2007, 2008. And in case of Pfizer we could observe steady gradual growth in sale which was not influenced by the 2008 financial crisis.
Analyst :” J&J paid a "scarcity premium" to beat out competitors.”
“The acquisition could be regarded as a successful one for both the acquirer, J&J, and the target, Pfizer. “
Back-Up Information
Founders: Robert Wood Johnson I James Wood Johnson Edward Mead Johnson
Headquarters: New Brunswick, NJ, US
Chairman and CEO: William C. Weldon
Employees (2009): 118, 700
Website: JNJ.com
Back-Up Information
Founders: Robert Wood Johnson I James Wood Johnson Edward Mead Johnson
Headquarters: New York City, New York, US
Key people: Jeff Kindler, Chairman and CEO Frank D’Amelio, CFO
Employees (2009): 116,500 (2010)
Website: www.pfizer.com
Thank You!