3 Questions About a Big Pharma Megamerger

It's been hard to miss the action in Big Pharma this week, as some of the most established drug makers engaged in a series of acquisition, merger, and asset swap rumors. A buyout of English company AstraZeneca (NYSE: AZN  ) by American powerhouse Pfizer (NYSE: PFE  ) was the first rumor to surface, though discussions of the deal have given way to more concrete news of other deals. Nonetheless, a buyout is still on the table, raising a few questions that could have implications for the broader industry.

The Crestor question
The biotech meltdown in the first quarter of 2014 was precipitated by a combination of sky high valuation, and questions surrounding the sustainability of drug pricing. That debate took shape in the media surrounding Gilead's $1,000 hepatitis C pill, Sovaldi, but with mounting pressure from Congress and payers alike an industrywide shift in drug pricing trends could be on the horizon.

While the argument that regulation of drug prices could stifle innovation is valid, that argument holds less weight when a drug makes only incremental clinical benefits beyond cheaper generics. That's the case for Crestor, AstraZeneca's $5.6 billion cholesterol-lowering statin, as it competes with generic forms of Pfizer's Lipitor. While slightly more effective at reducing bad cholesterol, there was no significant difference in arterial plaque reduction between Crestor and Lipitor in a 2011 study conducted by AstraZeneca.

As payers like Express Scripts continue their assault on drug pricing, drugs like Crestor will be vulnerable to competition from comparable generics at a fraction of the cost. Not to mention, Crestor's patent is set to expire in 2016. That could leave AstraZeneca, and Pfizer in the event of a buyout, at risk of losing its biggest cash cow.

The immuno-oncology question
Pfizer's most interesting oncology asset at the moment is small molecule palbociclib for the treatment of ER+ breast cancer. That drug improved progression free survival, but it's still too early to see whether the drug improved overall survival in a Phase 2 trial. Pfizer will continue with Phase 3 studies to try and tease out the clinical benefit of this exciting drug.

In the meantime, though, Pfizer really has no exposure to the booming immuno-oncology market. In acquiring AstraZeneca, Pfizer would declare its entry into a space that has been dominated by Bristol-Myers Squibb (NYSE: BMY  ) , Merck, and Roche. Bristol-Myers had widely been considered the leader in immuno-oncology, with its approved melanoma therapy Yervoy, and promising PD-1 inhibitor nivolumab. In just its second year on the market, Yervoy sales grew by 23% to $260 million in 2013.

The potential for combination with more specific tumor fighters leaves the door open for these drugs to battle multiple cancers, a point which hasn't escaped Bristol-Myers and Merck. Both have undertaken deals with one another and third parties to tackle melanoma, lung cancer, and other hard to treat cancers. Excitement surrounding those products drove Bristol-Myer's stock up nearly 60% in 2013, and may well continue into this year's ASCO conference in May. 

AstraZeneca boasts a robust pipeline of early stage candidates, including tremelimumab and MEDI4736 poised to compete with Yervoy and nivolumab. Though significantly behind in development, AstraZeneca's pipeline is stocked with potential combination therapies. The question is, can management filter those internal opportunities for combination therapies in a meaningful way to compete with established players? Pfizer likely thinks so, and is willing to pay to join the ranks.

The biotech rebound question
With the value of biotech stocks falling precipitously, its natural to ask where and when the rebound will kick in. Often times Big Pharma spending on a development stage company can spur speculation that other buyouts are likely. The question here is, does a proposed Pfizer buyout of AstraZeneca provide the foundation for that kind of optimism?

I'm not so sure it does. The onslaught of moves within Big Pharma suggests that they, like the broader market, see more opportunity investing in value than in growth with current valuations where they are. Additionally, the motivation behind Pfizer's bid for AstraZeneca seems largely about employing its offshore cash to unlock value in operational synergies, and less about purchasing truly innovative growth prospects.

In any event, both drug makers are worth watching through the next few weeks. With hoards of cash, I think it's likely that one or both will make significant moves to improve their prospects.

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