Pharmaceutical giant Pfizer (PFE -0.19%) is no stranger to blockbuster mergers and acquisitions, as a party in a few of Wall Street's largest-ever deals. It has another in the works: a $43 billion pending deal to acquire oncology company Seagen (SGEN).
However, Pfizer's stock is still suffering a bit of a post-pandemic hangover. The stock is down 22% over the past year as revenue fades from its COVID-19 vaccine, a lucrative business over these past couple of years.
But don't sleep on this longtime pharmaceutical stock: Shares are attractive today, and the addition of Seagen will upgrade them to strong-buy status. Here's what makes Pfizer so attractive in light of this potential deal.
Leveling up Pfizer's oncology business
Cancer stinks -- it's one of the worst diseases known to humankind. The massive effort to research and treat cancer helped make oncology an industry worth as much as $280 billion globally, which could grow to nearly $500 billion by 2030. Chemotherapy has long been a standard weapon in the fight against cancer, but it has a range of adverse side effects because it can harm both cancerous and healthy cells in the body.
Companies like Seagen are bringing a new technology to market called antibody-drug conjugates (ADCs); they're designed to differentiate between cancerous and healthy cells. Seagen has four cancer treatments already approved, and three are ADCs. The company's pipeline features more than 10 other clinical programs in progress, so there's growth potential through expanding the labels of existing drugs and launching new products.
Strategically, Pfizer is getting a foot in the door on a new method of treating cancer, which adds to its current opportunities with mRNA vaccine technology. Deep pockets are a competitive advantage in research-driven sectors like pharmaceuticals, and Pfizer is a heavyweight both before and after the Seagen deal.
Cash terms attractive for shareholders
There's a lot to like about this deal from an investment standpoint. For starters, Pfizer is paying cash for Seagen, which means the company won't issue a bunch of new shares to Seagen's shareholders (they'll get $229 per share). When a company issues new shares, they make existing shares worth a smaller percentage of the company -- that's called dilution. Pfizer's shareholders don't have to worry about that here, which is a big win.
Additionally, Pfizer can afford this acquisition. Management will borrow about $31 billion and pay the rest with cash. Pfizer has paid off a ton of debt in recent years and sits at a leverage ratio of debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) of just 0.9 today (I like seeing this stay under 3). So investors shouldn't panic despite the deal's massive size.
PFE Cash and Short Term Investments (Quarterly) data by YCharts.
Yes, Pfizer will be a bit bloated after the deal, but the company's mRNA vaccine revenue from COVID-19 could stick around for a while, giving it time to pay down more debt.
The future looks bright
Seagen won't contribute to Pfizer's financials right away (management believes it will take three to four years), which could explain the market's muted reaction to the acquisition news. But long-term investors could be looking at a very bright future.
Before the acquisition, analysts believed Seagen's earnings per share (EPS) could hit $6 in 2026. Based on the current number of outstanding shares (187 million), that translates to $1.1 billion in net income. Pfizer earned $31 billion in net income over the past year, so an extra billion dollars won't move the needle too much. However, Pfizer could leverage Seagen's patents and pipeline over time, so don't dismiss the long-term opportunity too quickly.
Meanwhile, the stock trades at a price-to-earnings ratio (P/E) of 12 based on 2023 EPS estimates. Yes, management must work to backfill any drop in COVID-19 vaccine profits, but the company's being proactive. Time will tell how successful Pfizer is, but the stock's valuation could make it worth taking that chance. If the market's unsure about the Seagen deal, it might be a great buying opportunity: The evidence points to a lot more positives than negatives.
