Global pharmaceutical giant Pfizer has agreed to buy biotech company Medivation for $14 billion, in a move which leading healthcare-focused fund managers believe will serve as a strong driver for advancement in the sector.
Through the deal, Pfizer will own prostate cancer drug Xtandi, which is viewed as providing substantial growth, while there are also other medicines Medivation is developing which Pfizer will also benefit from.
The announcement follows an aborted attempt by Pfizer to acquire Irish firm Allergan for $160 billion earlier this year, which was intended to counter a US government rule change regarding tax inversion deals. The merger would have been the biggest healthcare deal in history and have seen Pfizer re-domicile as an Irish company to save on tax.
French pharmaceutical company Sanofi also bid for Medivation, initially offering $52.50 per share, and spent five months pursuing Medivation to reach a deal. With competition seemingly rife in healthcare, what will be the knock on impact for fund managers and investors? Citywire Selector canvassed top sector specialists to find out.
Citywire A-rated Daniel Mahony, who co-runs the Polar Capital Healthcare Opportunities fund with Gareth Powell, holds around 7% of the fund in Pfizer and sold their holding in Medivation around six weeks ago. Mahony said the purchase was a little expensive, but in keeping with Pfizer’s plans.
One of the things we had been seeing from the M&A across healthcare is that it falls into two parts - in one part they are buying innovation, so they are buying a drug for prostate cancer, which is probably where most of the value is. Medivation also has another hot new class of drugs called a PARP inhibitor which is for different types of cancer so I suspect that is where the value is coming from. Pfizer has bought some innovation.
The other thing that you are seeing, is companies beginning to consolidate and focus on various therapeutic areas. If you look at what Pfizer has got at the moment in the oncology or cancer field, they have got a drug called Ibrance for breast cancer, which is in our view a five billion dollar plus drug.
Now they have brought on a drug Xtandy, that will be a four or five billion dollar drug. You can see how they are trying to build their franchise in oncology and that probably creates quite a lot of revenue and cost synergies for them to acquire Medivation.
It is not necessarily a bad deal for Pfizer. I wish they had got it a little bit cheaper, but I see how it makes sense in Pfizer's strategy. If you look at Pfizer historically they have been very good at acquiring companies of this size and getting more than the cost synergies they were initially promised.
Sector specialist Mirjam Heeb, who works with Citywire A-rated Christophe Eggmann on the Julius Baer EF Health Innovation fund, is also invested in Pfizer, which is the third largest holding in the fund at 5.17%.
After the cancellation of Pfizer’s intended merger with Allergan, we anticipated that one possibility would be for Pfizer to acquire growth via a larger biotech purchase. So the announcement of the Medivation deal is fully in line with management communication and strategy.
We believe the transaction is beneficial to Pfizer shareholders for several reasons. Firstly, it provides Pfizer with a rare property: a high quality drug, Xtandi for prostate cancer, that is generating immediate sales and where Pfizer has the potential to drive these sales significantly going forward.
Secondly, it strengthens Pfizer’s market position in the attractive oncology space and thirdly provides the company with two very interesting, late stage pipeline assets. While the price paid is certainly at the high end of expectations, Pfizer’s strong balance sheet allows for an all cash transaction and an immediately accretive deal, we feel making it highly beneficial to existing shareholders. We will not be changing our holding in Pfizer at this time.
In general, we do not expect the merger activity in healthcare to abate anytime soon. Contrarily, we believe the high cash balance sheets of big pharma and big biotech will continue to be put to work via acquisitions to complement internal research and development and drive top-line growth. There continue to be several very attractive late stage acquisition targets available.
Potential in the pipeline
Rudi Van den Eynde, who manages the Candriam Equities B Global Heathcare fund, decreased his holding in Medivation from around 3% at the beginning of the year to 1.6%. He also has a small allocation to Sanofi, which is underweight against the benchmark and a larger holding in Pfizer. He says Pfizer paid a high price, but will reap the benefits from the drugs in development.
The cancer franchise gives them a bigger weighting in oncology and they are trying to reduce prices of drugs. It is important that as an innovator you can go to buyers with a broad area of products. It reinforces your negotiating power. As a Pfizer shareholder I would not say 'wow, this is the deal of the century' but I would not say it is the wrong deal either.
From a Sanofi shareholder point of view I would see this as slightly negative. If as a company you somehow want to seek external growth and you are failing on doing so, it is not good news. Being disciplined on price, it’s something to be applauded, but then failing to buy the assets that you wanted to acquire is not necessarily a positive.
So I would see that slightly negative for Sanofi, because they have to either look for another target or continue in the way they are working now. They have somehow decided that they need an external asset and they don't have it.
It is a strong positive for the Medivation shareholders. Why is Pfizer paying so much? They claim the two major pipeline assets have high standards of success, but Pfizer are mainly buying Medivation for the main approved drug for prostate cancer. The launch is in a reasonably early stage and they can get much more sales over time from this drug so that is what Pfizer is stating. I would think that they would have some hope for the pipeline too.