Why Is Pfizer Paying So Much Money To Merck KGaA?
Earlier this month, Pfizer (NYSE:PFE) and Merck KGaA struck a deal for the development of the latter’s investigational anti-PD1 drug. Under the terms of the deal, Pfizer will make an upfront payment of $850 million, with additional payment of $2 billion contingent on regulatory and commercial milestones. [1] The transaction is certainly very significant for Merck KGaA which has found a partner with deep pockets and a quicker entry in the U.S. oncology market. From Pfizer’s perspective, this is a massive investment considering the drug’s stage. However, the potential reward could also be big as immuno-oncology market is expected to pick up over the next few years.
Our price estimate for Pfizer stands at $35, implying a premium of about 20% to the market price.
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With The Likelihood Of AstraZeneca Acquisition Declining, Pfizer Needs Other Avenues For Growth
The new tax inversion rules in the U.S. have made the potential acquisition of AstraZeneca less attractive for Pfizer. The company is looking for new avenues for growth and considering the current industry situation, investment in Oncology (where AstreZeneca is strong) makes sense. The continued impact of generic competition, as well as the expiration of certain co-promotion agreements for drugs such as Enbrel, have weighed on Pfizer’s revenue growth this year. The company had pinned its hopes on some recent drug launches, but the market adoption has been rather slow.
We note that Pfizer’s revenues related to oncology drugs jumped 16% globally in Q3 2014, sustaining the growth rate observed in the second quarter and representing a growth acceleration compared to the first quarter. [2] For the first nine months, the segment’s revenue growth stood at roughly 13%. The figure is the highest among the company’s primary business segments, with vaccine sales racing past that of oncology drugs only in the third quarter. With AstraZeneca becoming a less attractive target, Pfizer has decided to enter a collaboration with Merck KGaA for development of its anti-PD1 drug. Anti-PD1 is a new class of drugs that has garnered much attention from pharmaceutical firms in recent quarters. Several other companies such as Merck, Bristol-Myers Squibb and Roche have made significant strides in this area.
Immuno-Oncology Is Going To Be A Big Market
Last decade has seen a significant shift in the landscape of cancer treatment. Now immunotherapy is being considered as a key cornerstone in oncology, besides radiation therapy, chemotherapy and surgery. Needless to say, investing in this new emerging area is going to bring incremental growth for many big pharmaceutical companies as clinical results have been positive. According to Citigroup, the market for immuno-oncology drugs could grow up to $35 billion annually over the next decade, and these drugs may account for 60% of overall cancer management. [3] Considering that Merck KGaA’s anti-pd1 drug has shown early positive signs, Pfizer has not hesitated in making a significant upfront payment given that the potential return could be massive.
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Pfizer Gets Drug Approval For Hot Flashes, Targets 33 Million Women In The U.S.
October 8th, 2013 by Trefis Team
The FDA recently granted approval for Pfizer’s (NYSE:PFE) Duavee, which has been developed by its wholly-owned subsidiary Wyeth in collaboration with Ligand Pharmaceuticals Inc. [1] The drug introduces a novel approach to treating hot flashes in menopausal women, and is also approved for the treatment of postmenopausal osteoporosis (common bone disease due to low estrogen levels). Unlike other drugs in the market, Duavee pairs conjugated estrogen (CE) with an estrogen agonist/antagonist (also known as a selective estrogen receptor modulator). The drug has the advantage of protecting uterus lining against hyperplasia, which increases risk of cancer of uterine lining and can happen with estrogen-only treatments. [1]
Given the reduction in cancer risk, we expect the drug to gain traction. There are approximately 33 million women in the U.S. between the ages of 45-59 (menopausal), and most of them experience hot flashes. [1] The quality of life can get significantly affected if this common condition is left untreated. Pfizer’s existing drug Premarin, which primarily consists of conjugated estrogen, earned over $1 billion in revenues in 2012. We expect Duavee to cannibalize some of Premarin’s sales starting from the first quarter of 2014. Furthermore, given that Pfizer is a well diversified company with several other major drugs, Duavee’s success will lead to only a small incremental value add.
- Pfizer, Germany’s Merck to Develop Tumor Treatment, The Wall Street Journal, Nov 17 2014 [↩]
- Pfizer’s SEC Filings [↩]
- Immune system cancer drugs tipped to be a $35 billion market, Reuters, May 22 2013 [↩]