Stock Watch: One Acquisition Does Not Make A Biotech M&A Boom
Another blow-out quarter from Pfizer provided the impetus for an acquisition. But the history of recent commercial-stage biotech transactions and the risky nature of all early-stage companies suggest that the floodgates will not burst open.
Despite being the poster child for pharmaceutical companies addressing the pandemic, Pfizer Inc.* saw its stock price lag the NYSE Arca Pharmaceutical Index (DRG) for the first part of 2021 until its investors could see proof of the sales of its vaccine to prevent COVID-19, Comirnaty. (Also see "Stock Watch: Pfizer Caught Between The Pandemic And The Recovery" - Scrip, 14 Feb, 2022.) Only after its first quarter of 2021 announcement did Pfizer’s stock price start its rise. It then climbed by about 65% over the year as first Comirnaty sales and then those of its antiviral Paxlovid (nirmatrelvir/ritonavir), for the treatment of COVID-19, became incorporated into its investment proposition.
Pfizer’s Déjà Vu
The first quarter of 2022 must have felt like déjà vu as Pfizer’s stock price traded down from the start of the year – aided by research from the analysts at Cantor who cut their first-quarter pandemic-related sales expectations – reaching lows in early March and late April. Other similarities between Pfizer’s 2022 and 2021 first-quarter earnings announcements were the stock price trading down early on the day of its announcements and, ironically, press articles bemoaning Pfizer’s profiteering. With an eye on Pfizer’s success, analyst research in 2021 focused on the comparative weakness of Pfizer’s base business and its redress if only Pfizer acquired their biotech clients. It took until a week after its first-quarter 2022 results for Pfizer to announce the $11.6bn acquisition of Biohaven Pharmaceutical Holding Company Ltd., prompting proclamations of a year of biotech merger and acquisition (M&A).
Pandemic Poster Child
Pfizer’s first-quarter 2022 reported sales grew by 77% on those of the same period of 2021. This beat analysts’ consensus estimates by 6.5% and, just to prove that the pandemic is not over, sales grew by nearly 8% on the final quarter of last year. The 282% year-on-year rise in Comirnaty sales and Paxlovid growing nearly 20-fold on the final quarter of last year must have made the Cantor analysts’ predictions of doom seem embarrassing. (also see (Also see "Pfizer On Paxlovid: "There's Still A Long Way To Go"" - Scrip, 3 May, 2022.))
Within Pfizer’s COVID-19 franchise, analysts’ expectations were all over the place. Comirnaty sales beat consensus estimates by 25% while Paxlovid missed them by 23%. Nevertheless, Pfizer’s conference call and announcement narratives embraced its pandemic poster child status. Most of its commentary and call questions were on Paxlovid and Comirnaty. Only two questions were on business development and there was just the odd reference to its base business. Like Eli Lilly and Company and Merck & Co., Inc., Inc.’s first-quarter results, which were also significantly skewed by products to treat COVID-19, Pfizer’s first-quarter 2022 results announcement incorporating its pandemic-related sales bonus resulted – unlike in May 2021 – in its stock price finishing the day up by 2%, while the DRG closed barely into positive territory.
Most big pharmaceutical companies have reported double-digit first-quarter 2022 branded oncology sales growth as the backlog of patients starts to be addressed. In comparison, Pfizer’s first-quarter oncology sales rose by a lackluster 4% on the same period of 2021 and masked a mixed bag. Three out of four of its oncology biosimilars grew by between 15% and 72% but a weak performance from its largest oncology product Ibrance (palbociclib) – the CD64/6 inhibitor for the treatment of breast cancer – was due to a 32% increase in free patient assistance program prescriptions. First-quarter 2022 sales of Pfizer’s second-largest oncology product, Xtandi (enzalutamide) for prostate cancer, were flat on the same quarter of 2021.
While questions on M&A took a back seat in Pfizer’s conference call, the new SEC direction on including in-process R&D (IPR&D) expenses from acquisitions in non-GAAP operational costs and earnings per share (EPS) have apparently not proved to be a deterrent to M&A. The earnings reports of Merck and Lilly had already been impacted by these same changes and Pfizer’s first-quarter EPS included a 3% dent for IPR&D expense while its full-year 2022 guidance included an additional $0.9bn IPR&D burden. This is likely to rise further when the BioHaven acquisition completes.
For the last six months, biotech investors and analysts have bemoaned the 26% fall in the NASDAQ Biotech Index (NBI) and the just under 4% rise in the DRG, that has not translated into a wholesale acquisition of the biotech sector. The diplomatic narratives of companies like Johnson & Johnson (J&J) and Novartis AG have suggested that biotech stock prices have not yet stopped falling and management teams’ valuation expectations remain stuck back in the peak of the last biotech bubble. But this diplomacy belies other more fundamental issues with smaller capitalization biotechs. So many early-stage biotech companies had come to the market and still have valuations in the billions of dollars, that a big pharmaceutical company could easily start and pass their stage of development more cheaply than acquiring them.
But could the acquisition of larger biotech companies like BioHaven – where the regulatory and commercial risks are largely in the rear-view mirror, and are valued on a sales multiple rather than a frothy technology value – lead to a resurgence in biotech M&A?
The recent history of those transactions may be more of a deterrent. Merck’s $8.4bn acquisition of Cubist Pharmaceuticals, Inc. in 2014 was principally for Cubist’s largest product, the antibiotic Cubicin (daptomycin), which lost exclusivity a year after the acquisition completed. J&J’s $30bn acquisition of Actelion Pharmaceuticals Ltd. in January 2017 bolted on a pulmonary hypertension franchise where first-quarter 2022 sales fell by 1% on the same period of 2021 and no longer merited analysts’ estimates. Bristol Myers Squibb Company’s (BMS’s) $74bn acquisition of Celgene Corporation in March 2019 brought Celgene’s Revlimid (lenalidomide) franchise into the BMS portfolio. The analysts from Bank of America attributed BMS’s stock price weakness after its first quarter of 2022 results announcement to the company’s guidance for faster than expected generic Revlimid erosion. Pfizer’s own $14bn acquisition of Medivation, Inc. in 2016 was largely for Xtandi, which remains under patent protection although its full-year 2021 sales grew by only 1% after competitor product Zytiga (abiraterone) from J&J went generic in 2018.
The acquisition of BioHaven boosted Pfizer’s stock price by just under 2% while the NBI rose by nearly 3% in anticipation of all the transactions still to come. But with the valuation of smaller early-stage biotechs still not reflecting their risks or the cost of their replication, and the past acquisitions of commercial-stage biotechs leaving their acquirers with compressed return expectations, it is probably still too early to herald that biotech M&A boom.
*Andy’s pensions hold Pfizer
Andy Smith gives an analyst and investor's view on life science companies. He joined the independent research house Equity Development in October 2019 having previously been an analyst at Edison group and a Senior Principal in ICON PLC’s Commercialization, Pricing and Market Access consulting practice. Smith has been the lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology and the AXA Framlington Biotech Fund, and was chief investment officer at Mannbio Invest. He was awarded the techMark Technology Fund Manager of the year for 2007 and was a global product manager at SmithKline Beecham Pharmaceuticals until 2000.