Pfizer (NYSE:PFE) is at it again. After a couple of years without any significant merger and acquisition activity, the big drugmaker announced on Monday that it's buying Array BioPharma (NASDAQ:ARRY).
The price tag on the deal was great news for Array shareholders. Pfizer will pay around $48 per share in cash -- 63% above Array's Friday closing price -- for a total of around $11.4 billion. Array stock understandably skyrocketed in early trading on Monday.
But how great is this news for Pfizer shareholders? That's a tougher question to answer. Pfizer's share price slipped a little in the initial hours of trading after the transaction was announced. The problem for investors is that the Array acquisition won't pay off anytime soon.
What Pfizer will get
Make no mistake: Pfizer is getting a couple of promising drugs in this deal. Braftovi and Mektovi are already approved for treating metastatic melanoma. Last month, Array announced that those two drugs combined for $35.1 million in sales during its fiscal third-quarter, well above what Wall Street analysts expected.
But there's an even bigger opportunity for Braftovi and Mektovi in treating colorectal cancer. Array reported positive results a few weeks ago from a late-stage study evaluating the two drugs in combination with Eli Lilly's (NYSE:LLY) Erbitux in treating BRAF-mutant colorectal cancer.
In that study, Braftovi, Mektovi, and Erbitux (Array refers to the combo as the Braftovi triplet) reduced the risk of death for BRAF-mutant colorectal cancer patients by 48% compared to standard chemotherapy. The Braftovi triplet also demonstrated statistically significant improvement in confirmed objective response rate and overall survival compared to chemotherapy.
These results were so impressive that some analysts now predict that Array's Braftovi triplet will become the standard of care in treating colorectal cancer. In light of that, some projections forecast the combo could approach blockbuster sales levels.
Braftovi and Mektovi also appear to be a good fit with Pfizer's current product lineup and pipeline. And the two companies have worked together in the past, collaborating to study combinations of Array's Mektovi and Pfizer's Bavencio and Talzenna in treating various types of cancer.
Patience will be required
But anyone looking for the Array acquisition to make a significant positive difference for Pfizer financially will have a long wait ahead. The buyer stated that the transaction will probably reduce its adjusted diluted earnings per share by $0.04 to $0.05 this year, and have a similar impact in 2020. In 2021, the earnings impact is expected to be neutral. So the first positive financial effects from the Array buyout likely won't arrive until 2022.
Though Braftovi and Mektovi have tremendous potential as treatments for colorectal cancer and melanoma, there's a long way to go before the combo can even make a ripple in Pfizer's top line, which was $53.6 billion in 2018. Cantor Fitzgerald analysts predict sales of $955 million for Array's two drugs -- but they don't expect that sales level to be achieved until 2026.
It's possible, of course, that Braftovi and Mektovi could be highly effective in combination with other drugs in treating additional types of cancer. Array has quite a few clinical trials under way that are evaluating them in combos. However, these studies are all currently in phase 2, so even if some of them bear fruit, it would be years before Pfizer would be able to reap financial gains.
Array also has other pipeline candidates, but most are licensed to other drugmakers. One notable exception is ARRY-797, which Array is currently evaluating in a phase 3 study for treating the rare disease LMNA-related dilated cardiomyopathy. It's fair to say, though, that ARRY-797 stands in the shadow of Braftovi and Mektovi, at least for now.
What is Pfizer's management thinking?
In Pfizer's Q1 conference call in late April, Chief Business Officer John Young stated that the company's business development focus would be "generally on earlier- to mid-stage opportunities." He added that any acquisitions would likely be "bolt-on" deals that were "in the range of a few billion dollars."
Array, thought, doesn't fit into the early-stage or mid-stage categories. And with a purchase price of $11.4 billion, it's arguably a little larger than the usual bolt-on. The good news is that the company can easily absorb a transaction of this size. But what was Pfizer thinking?
The buyout definitely expands Pfizer's oncology lineup into types of cancer where the company isn't very strong right now. It wouldn't be surprising if Pfizer also sees significant potential for combinations of Array's drugs with Bavenvio and Talzenna.
But what Pfizer obviously isn't thinking about is a near-term return on investment. This is a long-term move. Only time will tell if it was a smart one.