Is Pfizer Paying Too Much to Buy Medivation?

The fact that there was a bidding war to buy Medivation (MDVN) isn't surprising, but the $14 billion price tag that Pfizer Inc. (PFE -0.19%) agreed to pay is a bit shocking. It's a massive premium to Medivation's share price earlier this year, and it's more than 14 times Medivation's revenue guidance for 2016. Is Pfizer overpaying for Medivation?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss why Pfizer was willing to pay up to buy the fast-growing cancer company.

A full transcript follows the video.

This podcast was recorded on Aug. 24, 2016.

Kristine Harjes: Let's hear your thoughts on Pfizer and the $14 billion Medivation acquisition, which was announced on Monday.

Todd Campbell: This was probably the most-forecast acquisition in biotech history. You had Sanofi come out and make two different very public offers for the company. You had Medivation's board reject those very publicly, and then say, "We'll accept bids, start your bidding." We've written about it, I've written about it. This is definitely something that was very well-known, that the company was shopping itself around.

However, the price tag that Pfizer's paying, I will admit, that shocked me. 

Harjes: Exactly. Sanofi had previously bid $58 per share for Medivation. Pfizer is paying $81.50 in cash per share.

Campbell: Yeah! Nice to have an extra $14 billion kicking around, right?

Harjes: Yeah, I'd like that in my pocket.

Campbell: I mean, it's a huge premium. About a month ago, I wrote an article on the Fool where I said that a relatively aggressive price might get you to a value of $12.5 billion. Pfizer paid $14 billion for a company that this year thinks it's going to generate a little bit less than $1 billion in revenue.

Harjes: At least it's profitable! That's good!

Campbell: Oh, yeah! And the benefit of being able to do this deal in cash, and one of the reasons Pfizer was able to win this bidding war, was its ability to pay for it in cash, is that there's no financing drag. They were able to do this deal and still say within the first year, "This is going to add $0.05 to investors' earnings per share."

Harjes: Right. And the main catalyst behind why Pfizer is even interested is for this drug called Xtandi, which is a prostate cancer drug that is co-marketed by Medivation and also a company called Astellas. It started of in just post-chemo in 2012, but in 2014, when it was approved for pre-chemo usage, sales took off.

Campbell: Yeah. This is a huge, mammoth indication. Pfizer isn't buying it because of the trailing-12-month sales that Medivation posted. Pfizer is buying it because Xtandi already has 51% of the market in its two approved prostate cancer indications. The addressable market, in earlier treatment for prostate cancer, is absolutely massive. I've seen numbers tossed around for peak sales forecasts for this drug that go anywhere from $6 billion to $9 billion per year. Obviously, in order to get that, you're going to need to be able to expand its use to earlier stages of cancer. But, we've seen, the company is already conducting tasks and trials. We've already seen some of that data come out, and so far, so good. In October, they're expecting the FDA to make a decision on whether or not to include in the labeling trials that showed that it did just as well as Casodex, a very well-used drug among urologists in treating prostate cancer, with 500,000 scripts written every year. The opportunity in prostate cancer is even bigger than it is now, which is pretty amazing, considering that you're talking about a $2-billion-plus-per-year drug already.

Harjes: Right. And it's important to remember, Pfizer doesn't get 100% of this revenue. Medivation splits their U.S. profits on Xtandi in the U.S., and they get double-digit royalties on Xtandi sales overseas. So, they still do have to send a good chunk of that profit back to Astellas.

Campbell: Right, which is why we have trailing-12-month sales, forecasts for this year like $950 [million] to $960 million in revenue for Medivation. The royalty rate -- because people probably want to know that -- I think it's about 15% on ex-U.S. sales that Pfizer will now get.

Harjes: Right. So, Xtandi, clearly a big deal, could be poised to have its label expanded considerably. Definitely a big catalyst in this acquisition. But, also probably important to point out that Medivation does have two other drugs that are in development, one of which is Talazoparib...

Campbell: Sure. (laughs)

Harjes: That's being studied in breast, prostate, lung, and ovarian cancers, could get its first approval, maybe, in 2018. I've seen one estimate for a little under $1 billion in peak sales. Medivation also has another early stage drug in development for brain tumors and lymphoma. There is a little bit more to this pipeline than just Xtandi.

Campbell: Right. You could argue that the purchase price is based not only on expecting a doubling-plus in Xtandi's peak sales over the course of the next coming years, but also an approval of Talazoparib. That drug was formally owned by BioMarin, Medivation bought it. There's a trial ongoing with data expected next year. If those results are solid, yeah, like you said, they could have another $1 billion drug on the market by 2018. So, there's a lot of different reasons to like this deal for what it does to Pfizer as far as reenergizing or fueling its future growth. And Pfizer has not been shy about doing acquisitions, and it's not been shy about saying, "Listen, we're back to picking up year-over-year sales growth."

Harjes: I would also argue that Pfizer hasn't been terrible successful with its acquisitions, at least not lately. They need a good acquisition now, especially with their post-Allergan failure. We talked about that on the show, initially, when the breakup fell through for this merger between Pfizer and Allergan. And I would also argue that their recent acquisition of Anacor for $5.2 billion for this one drug, Crisaborole, I think that was probably too much money that they paid for it. Some say the drug could hit $1 billion in peak sales, but there is a ton of competition in the space that it's working in, including some from Celgene. Honestly, when I look at this, I don't quite like the deal. What do you think? Do you?

Campbell: I like it because it's immediately accretive. I think if they weren't able to say that it was immediately accretive to the bottom line, then I would agree with you. But as long as we're able to have it boost profitability based on its current sales pace, not including any other future approvals, then I think it's fine.