You can almost hear the sound of keyboards at Pfizer's (NYSE:PFE) headquarters in New York crunching the numbers on potential deals. The giant drugmaker was eerily quiet on the mergers and acquisitions (M&A) front last year. But even before U.S. tax reform legislation passed, Pfizer hinted at the possibility of making a large deal in the not-too-distant future.
If Pfizer chooses to go big, I suspect the most likely acquisition candidate is Bristol-Myers Squibb (NYSE:BMY). But would a deal with BMS be good for Pfizer investors?
Is there a fit?
The most important consideration with a potential acquisition of any company, in my view, is how good of a fit there would be with Pfizer. Bristol-Myers Squibb's primary focus is in oncology. The big pharma company claims three blockbuster cancer drugs -- two of which are immunotherapies and one chemotherapy.
Bristol-Myers Squibb's crown jewel is Opdivo. The PD-1 inhibitor has already won FDA approval for treating 10 indications either as a monotherapy or in combination with another drug. Last year, Opdivo pulled in sales totaling nearly $5 billion. Peak annual sales for Opdivo could be in the ballpark of $10 billion.
Pfizer would no doubt love to have Opdivo. There's one catch, though: The company already has a PD-1 inhibitor, Bavencio, through its partnership with Merck KGaA. However, Bavencio is more of an unproven commodity than Opdivo is.
When asked during Pfizer's third-quarter earnings conference call in November if the company might make a large acquisition to bolster its immuno-oncology (I-O) portfolio, CEO Ian Read replied that Pfizer would wait to see what happens with some key clinical studies evaluating Bavencio in combination with other drugs. Although Read has also maintained that Pfizer is committed to its relationship with Merck KGaA, it doesn't sound like the company has closed the door on looking for another PD-1 inhibitor.
BMS isn't totally focused on oncology, though. The company also markets a successful autoimmune disease drug, Orencia. Pfizer definitely has a strong commercialization team in the inflammation and immunology space, with blockbuster drugs Enbrel and Xeljanz in its lineup. As a biologic, Orencia competes more with Enbrel than it does Xeljanz. But with Pfizer's sales for Enbrel slipping due to losing market share to biosimilar rivals, the addition of Orencia could be viewed as a positive for the drugmaker.
The drug that's the best fit of all between Pfizer and BMS, of course, is Eliquis. The two companies co-market the blockbuster anticoagulant.
Overall, BMS and Pfizer fit together pretty nicely. The only real problem arises with the overlap between Bavencio and Opdivo. It's fair to say, however, that this overlap is a significant one.
Counting the cost
While Pfizer doesn't seem to be afraid to make a large acquisition, how much would a buyout of Bristol-Myers Squibb cost? BMS' market cap currently stands around $110 billion. Pfizer would certainly have to pay a considerable premium above that amount to snag the drugmaker. It wouldn't be surprising for a deal to cost $130 billion to $140 billion.
Let's assume the upper end of this range as the price tag for acquiring Bristol-Myers Squibb. This would mean the company's share price would trade at close to 22 times expected earnings. That's not cheap. And you can't depend on growth to make the valuation look much more attractive.
Opdivo, Orencia, and Eliquis get more attention, but Bristol-Myers Squibb also has several challenges on its hands. Sales for the company's hepatitis C franchise are sinking like a brick in the face of competition from newer drugs. Sales for Bristol-Myers Squibb's older HIV and hepatitis B drugs are also declining. Because of these headwinds, BMS projects revenue growth in 2018 only in the low- to mid-single digit percentages. Buying BMS wouldn't just give Pfizer multiple high-growth products; it would also give the company a few headaches to deal with.
Better options elsewhere?
I don't think buying Bristol-Myers Squibb would be a horrible move for Pfizer. If Bavencio flops in some late-stage studies, a deal could even look brilliant. However, I think Pfizer could find better options elsewhere.
The big pharma company could go with a "string-of-pearls" strategy instead of making a huge acquisition. Pfizer already partners with two gene therapy companies -- Sangamo Therapeutics and Spark Therapeutics. It has a collaboration deal with Array Biopharma to test Array's MEK inhibitor, binimetinib, with talazoparib and Bavencio. Pfizer could buy all three small biotechs for only a fraction of the cost of a BMS deal.
And if Pfizer really wanted to do a big acquisition, my vote would be to go after Celgene. The biotech's market cap of around $70 billion is well below Bristol-Myers Squibb's. Celgene is also a better bargain with better growth prospects than BMS.
If I had to guess, though, I'd say that Pfizer does want a major acquisition and will have Bristol-Myers Squibb in its sights. Would Pfizer investors win with a deal? It depends on how much Pfizer pays, of course, but over the long run, I think a BMS acquisition would pay off. But would it be the best deal for Pfizer shareholders? I don't think so.