Fact is that just about every large pharmaceutical and biotech company made a run at Medivation. The big gain is Medivation’s prostate cancer drug Xtandi, and also a pipeline of cancer fighting drugs that MDVN has acquired over the last few years.
The reason Pfizer shouldn’t have acquired Medivation has less to do with MDVN itself and more to do with PFE.
$14 billion is a lot of PFE stock buybacks
For one, PFE stock has a really good thing going right now, recently surging to multi-year highs. And while its revenue is nowhere near record levels, it’s expected sales of $52.85 billion does represent an 8% increase over last year. Moreover, analysts expect growth of 3.4% next year.
With operating margins over 25%, Pfizer creates big earnings that it then uses for stock buybacks and dividends. At just 13x forward earnings, buybacks have a great effect on PFE stock.
What Pfizer gets in exchange for $14 billion is a drug, Xtandi, that had U.S sales of $330.3 million and growth of 11%; ex-US sales of $265 million, +41% year-over-year. Unfortunately, Astellas reports sales on Xtandi, and Medivation’s share created revenue of only $206.2 million with growth of 17.4%.
In other words, Pfizer is getting a share of Xtandi for $14 billion. Pfizer will be lucky if that share produces revenue of $2 billion ever, seeing as how Xtandi already controls 51% of its very competitive market. Therefore, I can’t understand why Pfizer would use up so much cash on a company that won’t add more than 3% to its top-line. It does not make sense. That’s capital PFE could use for dividends and buybacks.
Will MDVN, Xtandi purchase hurt Pfizer?
That said, MDVN stock cheerleaders will say that Medivation is trying to cure cancer, and has a robust pipeline. Those same people will say that Pfizer needed a stronger presence in oncology. While true, there are also a lot of companies trying to cure cancer and I’m not certain that Medivation gives Pfizer some big edge.
In addition to a share of Xtandi, Pfizer will gain a Phase 3 breast cancer drug called MDV3800 that Medivation bought from BioMarin for $410 million. Pfizer will get another that fights blood cancer called MDV9300; it paid $5 million upfront and still owes $330 million in milestone payments. Based on these valuations, I don’t think either will be the next Herceptin or Revlimid. Usually, the market identifies breakthrough cancer drugs quickly, which are then assigned massive multi-billion dollar valuations (CAR-T developers).
Ultimately, Pfizer is big enough where I don’t think the MDVN buyout will hurt PFE stock. However, it could cost the company 5-6% of upside when you consider the effect that $14 billion in buybacks would have on PFE stock. After failed acquisition attempts, it is quite obvious that Pfizer was desperate to get a deal done, and paid a premium to ensure it won the bidding war. Thankfully, Pfizer is rich in cash, but even with cash, PFE had no reason to reach for MDVN stock at such a big premium, or any premium at all.