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High-Risk Acquisition The Right Prescription For Pfizer?

Posted: Sep 05, 2008 12:39 PM by Stephen Simpson

Tickers in this Article: PFE, MDVN, SNY, MYGN, WYE, ELN

Only a few days ago, my Investopedia colleague Ben McClure ended his contrarian piece on Pfizer (NYSE:PFE) by suggesting that this large-yet-troubled drug company had the resources to beef up its pipeline through acquisition. On Wednesday, the company did just that, striking a bargain with development-stage biotech Medivation (Nasdaq:MDVN) for that company's potential Alzheimer's disease drug candidate Dimebon.

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The Deal
Under the terms of the deal, Pfizer will pay $225 million upfront and as much as $500 million more in milestone payments. As part of the agreement, the two companies will split costs and profits 60/40, with Pfizer taking the larger share. In the United States, the companies will co-promote the drug, while Pfizer will develop and market the drug outside the U.S. and pay Medivation tiered royalties based upon sales levels.

Simply put, this is the price that Pfizer has to pay for putting itself over the barrel. The company not only faces generic competition for Lipitor in 2011 and Alzheimer's drug Aricept in 2010, but the newest hit drug, Lyrica, could face patent challenges at the end of this year. While far from certain, there is at least the risk of generic competition for this relatively new drug as early as 2012. Unfortunately, there's not a lot of promise in Pfizer's current late-stage pipeline, and you can only generate so much growth through cost-cutting before that well runs dry.

Wrong Move?
The question that springs to my mind, however, is whether this is the deal that Pfizer really needed to make. Dimebon is, to put it mildly, not the safest bet that Pfizer could have made. Phase 2 data on this drug has been encouraging, but not without some questions about long-term efficacy, and it represents a new approach to the disease, but the data is not as clean as it could be. The study data we have has been generated in Russia, and there's a real question as to whether those results will be reproducible in a U.S. patient subset. What's more, the current Phase 3 study is designed to enroll 525 patients, and I personally wonder if the new safety-conscious FDA is going to be comfortable with a relatively low total number of patients upon which to judge safety and efficacy.

I also can't forget that Pfizer's most recent big-money gamble, the inhaled insulin Exubera, was pretty much a total failure. In fact, the only real winner with Exubera was Sanofi-Aventis (NYSE:SNY), who wisely accepted a large buyout (roughly $1.3 billion) from Pfizer to surrender its rights to this ill-fated drug.

Alzheimer's Conundrum
It is also worth noting that Alzheimer's disease is an extremely tricky disease for the pharmaceutical sector. It's a very promising market (and a terrible disease where better cures are most definitely needed), but companies ranging from Axonyx to Myriad Genetics (Nasdaq:MYGN) to Wyeth (NYSE:WYE) and Elan (NYSE:ELN) have had setbacks or outright failures in recent years.

This is a bold gamble for Pfizer. Dimebon could be a $1 billion-a-year drug, or it could be a goose egg, and there's really not likely to be much in between. Then again, $225 million isn't really going to dent the cash hoard too much, and it could be a cheap call option on a blockbuster drug.

Bottom Line
Should Pfizer be using its sizable cash hoard to swing for the fences, or should it focus on acquiring drugs with less upside but more certainty of approval? It's an interesting question and I, for one, don't pretend to have the answer. Pfizer investors should take heart that their company isn't simply sitting around, nor hoping to cost-cut its way to prosperity. Instead, it is out there taking risks and seeking growth. That's not such a terrible thing when you think about it.

For further reading on making investments in this sector, read Measuring The Medicine Makers.

By Stephen Simpson

Stephen Simpson, CFA, has worked as an equity analyst for both sell-side and buy-side investment companies, and presently works as a sell-side equity research analyst. He has worked as a consultant for the healthcare sector, and has written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson is the editor of Kratisto Investing, a website devoted to financial analysis and personal commentary.

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