Pfizer Wins Bidding War for Medivation; But Why Bother?

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Pharmaceutical giant Pfizer Inc. (New York City) is paying $14 billion to buy Medivation Inc. (San Francisco), a biotech company that sells a high-priced prostate cancer medication discovered by UCLA, according to the Los Angeles Times.

A year’s worth of the Medivation drug, Xtandi, sells for about $129,000, and the medicine has generated about $2.2 billion in net sales worldwide over the last year, the companies said Monday in announcing the deal.

Pfizer is paying $14 billion to buy Medivation--a deal to get drug Xtandi and revenue Click To Tweet

Analysts say the drug has the potential to more than double that. Pfizer said the deal would add five cents to earnings in the first full year after closing and isn’t expected to affect its 2016 financial guidance. The drug titan said it plans to finance the transaction with its cash holdings.

“We believe that Pfizer is the ideal partner to extend the reach of our blockbuster Xtandi franchise and take our promising, late-stage assets–talazoparib and pidilizumab–to their next stages of development so that they can be made available to patients as quickly as possible,” said Dr. David Hung, Medivation’s founder and CEO.

Pfizer has been seeking to expand its roster of such oncology treatments. Xtandi would give the company a launchpad in the prostate-cancer arena complementing its breast-cancer treatment Ibrance, which analysts expect to be a blockbuster.

Medivation drugs in development could also complement Pfizer’s efforts to develop combinations of cancer treatments with so-called “immunotherapies,” which harness the immune system in the battle against cancer. Talazoparib is a breast-cancer drug that is in phase 3 clinical trials. Pidilizumab is being developed to treat lymphoma and other blood-related diseases.

New York-based Pfizer agreed to pay $81.50 in cash for each share of Medivation, a 21% premium over Friday’s closing price of $67.16. Medivation closed Monday up 19.74% at $80.42, while Pfizer slipped 0.40% to $34.84.

Xtandi, which Medivation sells in partnership with Japan’s Astellas Pharma Inc., was the big attraction for Pfizer, said David Nierengarten, managing director and head of healthcare equity research at Wedbush Securities.

“They get a share of the best prostat-cancer drug on the market,” he said. Medivation also has been looking to expand the use of Xtandi into breast-cancer treatment, which would boost its value, Nierengarten said.

The acquisition would further Pfizer CEO Ian Read’s efforts to augment what he refers to as the “innovative side” of the company’s business. He said that the move, “accelerates our strategy in line with our priorities.”

Read has said Pfizer will decide by the end of the year whether to split into two, with one company selling fast-growing brand-name drugs like Ibrance and another company selling drugs that have lost patent protection–a step that has often been discussed in recent years.

Some analysts have said Pfizer needs to do more deals to add patent-protected drugs if the newly launched unit is to develop the critical mass of revenue needed to make it on its own.

Medivation was put in play after French drug company Sanofi SA (Paris) made an unsolicited proposal of $52.50 a share, or $9.3 billion, in cash, which the biotech rejected in April, saying the offer substantially undervalued the company.

Medivation shares were trading as low as $26.41 in February. Following Sanofi’s proposal, a bidding war ensued. With Pfizer’s deal, Medivation is getting more than double the $6 billion it was valued earlier in the year. With a highly desirable drug already on the market, Medivation was in strong demand.

Xtandi, also known by the generic name enzalutamide, was patented by UCLA in 2005 and licensed to Medivation. The company has about 600 employees and posted a $404-million loss on $206 million in revenue in the second quarter of this year.

Xtandi generated $33.3 million in royalties and other income for the University of California system last year, more than any other UC-developed drug. In March, Royalty Pharma Finance Trust (New York City), a pharmaceutical investment company, paid $1.14 billion to acquire the royalty rights to Xtandi in the largest-ever technology transfer deal involving a UC invention.

UCLA received $520 million of the money for its 43.9% ownership stake in the drug. UCLA put the money in a portfolio that was expected to generate $60 million a year until 2027, when major patents on the drug expire.

UCLA said it would use the money to pay for research, undergraduate scholarships and graduate student fellowships. The university opted for the lump-sum payment on Xtandi rather than annual royalties.

“I’m sure UCLA saw a potential use for that lump-sum payment that is greater than waiting around for that stream of royalty payments,” Nierengarten said.

Steve’s Take: Pfizer may have checked one thing off its shopping list in purchasing Medivation for $14 billion earlier today. But when it comes to an overall growth strategy, the company still seems unable to find the right exit.

As Fortune points out, in the past year, Pfizer has vacillated between bulking itself (acquiring Hospira last year), trying to move overseas (its failed $160 billion inversion deal with Allergan PLC) and considering breaking itself up. Earlier this month, Pfizer CEO Read suggested that, actually, the company might want to stick together after all. So it this the right deal for the flailing pharmaceutical firm?

Medivation gives Pfizer a valuable prostate cancer drug, Xtandi, and a relatively quick earnings boost, but it does nothing to lower Pfizer’s taxes–the primary motivation behind all other major deals Pfizer has pursued in recent years except Hospira.

As for what Pfizer will do next, it’s unclear if the company even knows what it really wants. The company still isn’t sure whether it should split itself up, but it promised again on Monday to decide on that by the end of this year.

At the same time, Pfizer CEO Ian Read has declined to rule out going after even bigger acquisition targets that analysts have put forward, including Bristol-Myers Squibb and even AstraZeneca, the British drugmaker that Pfizer already tried and failed to acquire in 2014.

As Pfizer has laid the groundwork for a potential split, its acquisitions have been primarily focused on bolstering what it calls its “innovative” side of the business–a portfolio of newer drugs with faster-growing sales than Pfizer’s slow-and-steady “established” unit.

With Medivation, though, Pfizer might have reached a point of equilibrium. “As for priorities, I think we’re moving to a more balanced view now,” Read said, responding to an analyst’s question about whether the company might seek further deals on the innovative side. “We’ve put a lot of money into both businesses.”

Certainly, Pfizer was willing to pay up to win the competitive bidding process for Medivation. Still, that might not be enough to satisfy investors.

“We continue to believe that [Pfizer] still needs to pursue either a large, transformative acquisition or a string of several additional acquisitions to firm up its Innovation Core before the company can be broken up,” SunTrust analyst John Boris wrote in a research note Monday. “The most important catalyst” for Pfizer’s stock this year, he added, “will be what management decides to do on the M&A front.”

Pfizer shares traded down slightly Monday afternoon. For a company of Pfizer’s size, a Medivation deal is barely a needle-mover. At a purchase price of $81.50 per share, Pfizer’s estimated earnings accretion is only about 2% on average over the next five years. So make no mistake; this is a hefty price. Medivation shares were trading in the $30?s just a few months ago (meaning the potential take out price would be about 272% above these levels).

So why would Pfizer really want Medivation in the first place? I, of course, have a theory. I call it the “Big Pharma Death-Cheat” strategy. Perhaps a bit whimsical, but give me a chance.

Steve's Take: Pfizer employing “Big Pharma Death-Cheat” strategy-old drugs out, new drugs in Click To Tweet

One of my favorite newspapers, The Economist, recently ran an article entitled, “Cheating Death.” It depicts a world in which getting fitted with a new heart, liver or set of kidney–all grown from your own body cells—-is as commonplace as knee and hip replacements are now. We are asked to imagine, in other words, a world in which aging has been abolished.

The article points out that senescence, the ultimately irrefutable dwindling of prowess experienced by all as time takes its toll, is coming under scrutiny, especially from doctors and biologists. A new increase in average life spans would be brought about by specific anti-senescence drugs, some of which may already exist.

The gist of the Economist article is that in the next phase, not just for average lifespans, but maximum lifespans, will rise. If a body part wears out, it will be repaired or replaced altogether. DNA will be optimized for long life. Add in anti-aging drugs, and centenarians will become commonplace.

Some optimists want to upgrade worn-out tissues using stem cells (precursors to other sorts of cell). Such bio-renovation is the basis of an unproven, almost vampiric, treatment in some circles: transfusion into the old of the blood of the young.

The most immediate challenge will be access to anti—senescence treatment. If longer life is expensive, who gets it first? Already, income is one of the best predictors of life span. Simply put, though, the richer you are, the longer you’re likely to live.

So, for all those wondering what Pfizer is doing with the Medivation buy, I say it’s simply practicing corporate senescence avoidance, i.e., replacing worn-out drugs whose patents have expired with fresh, young, expensive, patent-protected (for many years) medicines like Xtandi. They (Big Pharma) have the cash to go “organ-hunting” and can out-spend the Celgene’s for blockbuster new medicines to stay young.

Don’t buy my analogy of cheating death applied to Pfizer, a corporation? Are corporations people? The U.S. Supreme Court says they are, at least for some purposes. And in the past six years, the high court has dramatically expanded corporate rights.

Suspending senescence is not yet in the cards, whether for us humanoids or Big Pharma. But slowing it probably is. Perhaps corporations are smarter than we think. Might they also read The Economist?