The $14bn-winning bid by Pfizer for US biotech Medivation, fending off the likes of Gilead, Sanofi, Amgen and Merck, will be welcomed by shareholders who have had to endure several high-profile failed bids – AstraZenca in 2014, Pharmacyclics in 2015 and Allergan in 2016.
While Pfizer management will be pleased to have landed a prize asset, long-term investors in the sector will question the price paid. The deal is a 40 per cent premium to Sanofi’s bid earlier this year, for a company which has one major drug, Xtandi for prostate cancer, and two other oncology assets in the pipeline.
Pfizer has been a habitual offender when it comes to M&A, responsible for nearly 30 per cent of the $900bn the pharma sector has spent since 2000. Pfizer management led the M&A boom at the start of the 2000s, during which mega deals were the norm, buying Warner-Lambert and Pharmacia to create the largest pharma company in the world. Pfizer management have spent $36bn over the past two years on M&A and the total spend by the company since 2000 now exceeds its current market cap by over $50bn.
Long-term investors should question the rationale for this strategy, given that companies like Novo Nordisk have pursued a different path; spending no money on M&A and focusing on internal R&D. Novo shareholders have been rewarded with annualised returns of over 20 per cent since 2000 versus Pfizer’s paltry 4 per cent.
Source: EdenTree Investment Management
The pharma sector is facing several headwinds – pricing pressure in the US, lower returns from R&D and competition from generics and biosimilar players. US companies have the added pressure of no access to inversion deals and a chronic shortage of meaningful domestic M&A candidates. This limits the options for under-pressure CEOs who might not be able to chase mega deals, but will be increasingly forced to chase biotech assets, which are also on the radar of other large pharma companies. The situation is exacerbated by the sector being awash with a large amount of cash and abundant cheap debt which will only bring further temptation to augment the product portfolio.
There is nearly $70bn of biotech assets, including Inoyte, Vertex and Biomarin which will come into the cross hairs for pharma management keen not to miss out on beefing up their anaemic pipelines.
In the case of Pfizer, the question for long-term investors remains on whether management have overpaid for an asset in a highly competitive and fast-moving therapeutic area. In addition, there are concerns over the pricing of Xtandi which is four times more expensive in the US than in Japan and Sweden, despite having had generous grants via US taxpayer dollars.
The upcoming US presidential elections will only bring greater pressure on the pricing of prescription drugs in the most lucrative market in the world. In the meantime, Medivation shareholders will be much happier, given that the company’s share price has doubled over the past six months.
At a sector level, this could be the start of an unwelcomed scramble for biotech assets leading to management paying over the odds and shareholders left footing the final bill.
Ketan Patel is a fund manager at EdenTree Investment Management.