Pfizer Inc.‘s (NYSE:PFE) $14 billion acquisition of star cancer biotech Medivation Inc (NASDAQ:MDVN) bolsters the long-term bull case on Pfizer stock.
True, PFE is picking up MDVN at a 25% premium to its Friday closing price. It’s also paying a substantially more than Sanofi SA (ADR)‘s (NYSE:SNY) April bid that essentially put MDVN in play. That’s how it goes when a company as big as Pfizer seeks to move needle on top-line results.
As much as the market’s initial reaction to Pfizer stock was short of a celebration, PFE’s strategy with this acquisition makes a lot of sense. The pharmaceutical giant is building up its oncology portfolio in a big way. It already has a hit with Ibrance, a breast cancer drug on the cusp of becoming a blockbuster, and MDVN complements that nicely.
The San Francisco biotech’s Xtandi is a best-selling drug to treat prostate cancer and it’s growing at a tremendous clip. The therapy already generates about $2 billion in annual sales, a figure that’s expected to double. years, PFE pulled off a whopper that gives it a major footprint in a fast-growing market.
In addition to Xtandi, Medivation has a promising treatment for breast cancer called Talazoparib.
In a hits-driven business, this double-barreled pipeline in oncology treatments goes a long way toward keeping PFE’s portfolio stocked at a time when an aging population will see an increase in a number of cancers.
PFE Heading for a Split?
The deal for MDVN also suggests that Pfizer might be serious about cleaving itself in two. The company has promised to decide by the end of the year whether it will split off the faster growth part of the business from the slow one.
If it does want to go through with a split, it would want to have a stable of patent-protected drugs to make up for support provided by a steady stream of generics.
Either way, after being thwarted in a couple of major deals over the last couple of years, the MDVN acquisition builds PFE’s footprint in an increasingly important segment. After all, as the baby boomers start to hit their golden years, the prevalence of cancer will rise.
Pfizer has until the end of the year to decide on its strategic future, but the MDVN deal appears to tip the balance in favor of a split. Even before this latest deal, PFE’s pipeline was looking pretty fresh. The pharma company currently has about 30 Phase 3 projects underway.
Pfizer stock is up about 9% for the year-to-date to beat the broader market by 2 percentage points. Now that it’s adding the MDVN jewel to its crown, PFE should be good for continued outperformance whether it splits up or not.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
