Medivation Acquisition Will Be A Positive For Pfizer Stock

• US Pharma major Pfizer is about to close a deal to acquire Medivation for $14 billion.
• Pfizer’s previous deal to acquire Allergen pharma didn’t go through.
• The impending acquisition will give Pfizer access to Xtandi, a blockbuster prostate cancer treating drug.

US pharma major Pfizer (NYSE:PFE) is all set to acquire prostate-cancer drug maker Medivation (NSDQ:MDVN). According to reports, Pfizer has agreed to pay $80 per share, a 20% premium over Medivation’s last close price (August 19) of $67.12 per share, valuing Medivation at $14 billion, $3.9 billion higher than Medivation’s market cap of $11.1 billion. The deal will bolster Pfizer’s presence in the fast-growing and lucrative oncology drug market.

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Medivation is a fast growing biotech company which reported 17% YoY revenue growth in its latest quarter. Its 5-year revenue CAGR (Compounded Annual Growth Rate) stands at 72%. However, the company is not profitable. In the latest quarter, Medivation reported an operating loss of $625 million (as compared to a profit of $50 million a year ago) on a revenue of $206 million. But the company has a huge potential.

This is the second major M&A attempt by Pfizer this year. Earlier in the year, Pfizer had attempted a merger with Allergan (NYSE:AGN). The deal would have allowed Pfizer to shift its headquarters to Ireland, in the process saving millions of dollars in taxes for the company. The deal fell apart after the Obama administration clarified the tax rules, making inversion deals much tougher.

The Medivation deal is the conclusion of a long process which started in April when Sanofi (NYSE:SNY) made a bid to acquire Medivation. Sanofi had offered $58 per share in cash and $3 per share in contingent rights, which was rejected by the Medivation board. Sanofi then upped the ante by taking the offer directly to Medivation’s investors. All this resulted in Medivation putting itself on the block. Pfizer has pipped many of its rivals including Merck, Gilead and Celgene to acquire the company.

The Medivation deal will give Pfizer access to the fast growing and lucrative prostate cancer drug market. The cancer drug industry size was at $100 billion in 2015 and is forecasted to grow by 50% in next five years to $150 billion dollars by 2019. Pfizer already has made entry into cancer drug market with its breast cancer drug Ibrance. In Q2 2016, Ibrance’s sales came in at $514 million, a growth of 370% over the last year. Medivation already has a blockbuster drug which is netting around a billion dollars in annual revenue and there are few more in the pipeline.

Xtandi sales will continue to grow at a rapid pace

Xtandi is an advanced prostate cancer drug developed by Medivation in collaboration with Astellas Pharma. Xtandi is projected to be the sixth most popular oncology drug with $2.8 billion estimated sales in 2016 and the drug has potential to double its sales. In Q1 2016 Xtandi’s sales rose by 53% to $547 million and 22% in Q2 to $595 million. This blockbuster drug is likely to continue its growth trajectory in next few years. According to the agreement with Astella, Medivation splits the revenues with Astella. The Non-GAAP collaboration revenue booked by Medivation was $220 million in Q2.

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There are two more major drugs in the pipeline. One is a blood cancer drug called Pidilizumab and the other is Talazoparib, a breast cancer treatment, which is in an advanced testing phase. Medivation estimates Talazoparib potential market to be around $20 billion, more than twice the market for Xtandi.

All cash deal should not prove to be a major drain on Pfizer’s resources. Pfizer had around $20 billion in cash and cash equivalents on its books in the latest quarter. And to top that Pfizer produces billions of dollars from operations every year. Last Year Pfizer’s cash flow from operations was more than $14 billion while free cash flow was more than $13 billion dollars.

Conclusion

Pfizer has seen some of its major drugs including Lipitor going off patent in the last few years, which has impacted its revenue growth. With resources in hand Pfizer was looking to acquire drug makers with products about to hit the market. Medivation fits that bill closely. All in all the Medivation deal, if it goes through, will be a positive for Pfizer stock.