Zero-for-two isn't a great record -- but that's the score Pfizer's (NYSE:PFE) CEO Ian Read has when it comes to big international mergers. Both its attempts to buy AstraZeneca and Allergan imploded in very public ways, leaving some to doubt whether Pfizer is capable of pulling off deals on a large scale.
On the other hand, Read appears more than able to ace much smaller deals at home. In fact, just a month after abandoning its merger with Allergan, Pfizer is spending some of its piles of cash again. Specifically, the deep-pocketed megapharma will pay roughly $5.2 billion to acquire Palo Alto, Calif.-based Anacor Pharmaceuticals, Inc. (NASDAQ: ANAC).
And here's the good news: despite the high premium paid, the acquisition could be a terrific move for Pfizer investors.
Why is Anacor worth $5 billion? You have to look beyond the obvious
Buying Anacor will consume the hefty sum of $99.25 in cash per share, a 55% premium to where the biotech's shares closed pre-offer, but the deal brings several big advantages to Pfizer. To begin with, the company is a nice fit for Pfizer's inflammation and immunology segment with an FDA-approved drug already in that market segment, as well as a lead compound that looks highly promising.
But something much bigger is likely afoot here -- and you have to look beyond the obvious to find it. Anacor offers Pfizer an extremely interesting new drug-development possibility in its use of boron -- a ubiquitous and natural compound -- as a new platform for drug design.
Anacor's boron-based compounds currently include a variety of treatments aimed at dermatology diseases. Already on the market is Anacor's boron-based Kerydin, which is a treatment for onychomycosis, a fungal infection of the nail and nail bed that affects 7% to 10% of the U.S. population. Novartis subsidiary Sandoz primarily markets Kerydin in the U.S., but Anacor holds rights to the drug, with a 50% gross profit split.
Beyond Kerydin, Anacor has an extensive patent portfolio to protect its work in boron chemistry. The patents take advantage of boron's peculiar electronic configuration, a feature that not only stabilizes a drug's interaction with its target, but also allows boron-based drugs to interact with biological targets in novel ways.
Before the approval of Kerydin, the cancer treatment Velcade, which Johnson & Johnson sells in some markets, was the only boron-containing drug on the market. While Anacor has not pursued oncology drugs with its boron-based platform, what investors may not realize is that dermatology is an easy and cheap way to launch new products with a relatively quick approval cycle. Limited by the cost constraints facing any small biotech, Anacor was probably forced to ignore other possibilities and head straight for dermatology to get a product on the market as rapidly as possible.
On the other hand, R&D powerhouse Pfizer, with its keen interest in oncology, has no such limitations. In fact, it's highly likely the megapharma looked beyond dermatology for much wider boron-based drug applications before it ponied up over $5 billion for this deal. Whether or not Pfizer sees potential for a new boron-based cancer drug is something only company insiders know -- but it certainly wouldn't be a big surprise to me.
Meanwhile, Anacor's lead compound could be a blockbuster
While Kerydin is a nifty little drug, it faces a lot of competition in the nail-fungus market. But Anacor has a much more powerful revenue builder in its lead compound: crisaborole. The anti-inflammatory drug is currently under U.S. Food and Drug Administration review for the treatment of mild-to-moderate atopic dermatitis, also known as eczema. The FDA accepted the new drug application in March.
The market opportunity for this drug is huge. Eczema affects 18 million to 25 million people in the United States alone. Addressing it is a significant unmet medical need. The skin condition has a harsh impact on the quality of life, and 85% of the cases present by age 5. Currently, corticosteroids are the most widely used treatment, but these drugs have safety implications, especially in younger patients.
Crisaborole's clinical data is compelling. The drug achieved statistically significant results on all primary and secondary endpoints in two phase 3 pivotal studies. The studies enrolled 750 patients each, including patients aged 2 and older, whose eczema affected more than 5% of their body surface. No patients had serious adverse events. Even more promising, 30% to 50% of patients achieved success, defined as clear to almost clear skin, within a month.
Because the FDA hasn't approved an eczema treatment in more than 15 years, crisaborole could deliver peak annual sales of $2 billion or more, according to Pfizer. Albert Bourla, president of Pfizer's innovative-health division, said the company expects the FDA to greenlight the drug by January, and the launch would follow almost immediately. In addition, the drug is also being studied as a treatment for psoriasis.
Should investors cheer this deal?
Sometimes the most promising acquisitions end up as non-starters. But with Anacor Pharmaceuticals, Pfizer has not only bought itself a potential blockbuster drug, but it may also have netted a novel platform for new drug design in boron-based chemistry.
The acquisition achieves something else. It shows investors that the big pharma isn't frozen by its recent huge M&A failures. Instead, Pfizer appears still fluid enough to go after smaller opportunities. While Anacor's variety of compounds will need a lot of refining and developing, Pfizer has the luxury of taking that time and may eventually find itself with several future drugs that will make $5 billion look like chump change.
There are no guarantees in drug discovery. Anacor could end up being a waste of money. But big pharmas pay heed to that old saying: You miss 100% of the shots you don't take. If they didn't, they wouldn't be big pharmas to begin with.
Pfizer expects to complete the acquisition of Anacor in the third quarter of 2016. The company said the transaction would be slightly dilutive to earnings per share in 2017 and accretive the following year.