Pfizer Inc.'s planned acquisition of cancer drugmaker Array BioPharma Inc. ends a quiet period on the M&A front for the pharmaceutical giant, and will add two approved melanoma drugs and an extensive pipeline in oncology for about $11.4 billion.
Valued at $48 per share, the deal will see Pfizer take the reins on the Boulder, Colo.-based company's two drugs Mektovi and Braftovi, which target specific mutations in the BRAF gene to treat the skin cancer. A combination of the drugs has been approved in the U.S. and EU.
The acquisition is the first for Pfizer valued in the billions of dollars since August 2016, when the company bought Medivation, Inc. for $14 billion and AstraZeneca PLC's antibiotics business for $1.6 billion. The Array deal is the first total acquisition over $1 billion since CEO Albert Bourla stepped into the role at the beginning of 2019, taking over from Ian Read.
Bourla said on Pfizer's first-quarter earnings call in January that, because he expected the company's growth trajectory to be robust post-2020, the company would be looking to enhance its pipeline through business development. Pfizer's Chief Business Officer John Young reiterated that focus and said that the company would be looking at "earlier- to mid-stage opportunities where clinical risk may be higher ... but we believe that the opportunity for value creation is greater."
Young said at the time that Pfizer would consider bolt-on deals "in the range of a few billion dollars."
"The deal is a little larger than what we were expecting next from Pfizer, but the price paid appears reasonable when compared to recent deals in the space and it fits well with Pfizer's overall strategic priorities," Credit Suisse analyst Vamil Divan said.
With support from both companies' boards, the deal is expected to close in the second half of 2019.
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A partnership
The deal is a culmination of a previous collaboration between Pfizer and Array. The two companies have worked together since 2017 to develop combinations of their cancer drugs. Pfizer plans to continue research activities for Array's pipeline prospects, many of which are cancer-related and approaching the market.
Array welcomed late-stage trial results in May showing that its Mektovi-Braftovi combination along with Eli Lilly and Co.'s Erbitux shrank colorectal tumors and prolonged patients' lives by nine months. The company had planned to file for approval
Also in cancer, Array has collaborated with Loxo Oncology Inc. since 2013 to develop the already approved Vitrakvi, as well as cancer drugs LOXO-292 and LOXO-195. Lilly bought Loxo for $8 billion in February, but the licensing agreement between Array and Loxo remains in effect.
Stifel analyst Stephen Willey said the Pfizer-Array pairing is a strategic fit and that the New York company avoided a bidding war as Array's valuation dropped along with that of other biotech companies. He noted that two of the companies with financial leverage to threaten the deal, Lilly and AstraZeneca, would not be as strategic a fit for Array.
Despite the upside for Pfizer, the deal also comes with some risk, particularly in its decision to finance the deal primarily with debt. S&P Global Ratings said in a June 17 note that Pfizer has been placed on CreditWatch negative and the company's rating is expected to be lowered to AA- when the deal closes, down from AA.
S&P said that it expected Pfizer's adjusted leverage for 2019 to rise by about 2.5 times as a result of the transaction combined with about $8.9 billion in share repurchases in 2019's first quarter.
Moody's Senior Vice President Michael Levesque also noted the risk of picking up so many pipeline prospects for which the future is uncertain.
"Array BioPharma provides Pfizer with an approved melanoma drug regimen, with significant upside in other types of cancer with high unmet need," Levesque said. "But the deal will be substantially debt-funded and brings ongoing product development risks. These include the risk of unsuccessful clinical trials in other potential indications or lower-than-expected commercial sales."
Pfizer's acquisition comes amid analyst expectations of higher rates of M&A in 2019 than in the year prior due to interest rate hikes and less-than-stellar sales forecasts, as well as generic competition on top products.
"Moody's analysts continue to expect more M&A across the global pharmaceutical industry, as companies use acquisitions to bring new growth drivers into the product portfolio or the pipeline and to diversify away from blockbuster drugs that face patent expirations," Levesque said, citing a June 13 Moody's report. "Areas like oncology and gene therapy will remain a focus for the pharmaceutical industry, mirroring trends in recent acquisitions."
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