After an unexpected breakup in April that saw the pending megamerger between Pfizer (PFE 1.35%) and Allergan fall by the wayside, Pfizer has found its new target.

It's no secret that Pfizer has been looking to complement its roughly half-dozen therapeutic areas of focus with acquisitions in order to boost its late-stage pipeline and provide earnings accretion relatively quickly for its shareholders. In fact, during Pfizer's quarterly conference call, CEO Ian Read stated that the company was actively looking at ways to boost its innovative business with late-stage and/or commercial products. Pretty much everyone on Wall Street knew an acquisition was probably coming soon, the only question we had was how big it would be.

We now have our answer.

Close-up of two men in suits shaking hands

Image source: Getty Images.

A complimentary fit

On May 16, Pfizer announced that it was acquiring Anacor Pharmaceuticals (NASDAQ: ANAC) for the hefty sum of $99.25 in cash per share, or a 55% premium to where Anacor shares closed on Friday. The crown jewel of the $5.2 billion acquisition is crisaborole, a non-steroidal topical anti-inflammatory PDE-4 inhibitor that's been submitted for regulatory review in the U.S. for mild-to-moderate atopic dermatitis (a type of eczema). Crisaborole is also being studied as a treatment for psoriasis. Pfizer believes that Anacor's lead compound could generate up to $2 billion in peak annual sales.

"Crisaborole is a differentiated asset with compelling clinical data that, if approved, has the potential to be an important first-line treatment option for these patients and the physicians who treat them," said Albert Bourla, Group President of Pfizer's Global Innovative Pharma and Global Vaccines, Oncology, and Consumer Health Businesses.

That "compelling clinical data" Bourla speaks of comes from the AD-301 and AD-302 phase 3 studies released in mid-July 2015 that showed a statistically significant advantage in clearing the chronic rashes that occur with atopic dermatitis compared to the placebo. In terms of primary endpoint, the percentage of patients experiencing an Investigator's Static Global Assessment (ISGA) score of 0 (clear) or 1 (almost clear) with a minimum two-grade drop at day 29 was 32.8% in AD-301 and 31.4% in AD-302 compared to the placebo's 25.4% and 18% respective effectiveness.

The secondary endpoint, which examined which patients achieved an ISGA of 0 or 1 regardless of whether or not they had a minimum two-grade drop, also demonstrated success for crisaborole. In AD-301 and AD-302, 51.7% and 48.5% of patients experience full or almost-full clearing, which compares to 40.6% and 29.7% full or almost-full clearing, respectively, for the placebo. 

As icing on the cake, Pfizer also gains access to topical toenail fungal treatment Kerydin, which was approved by the Food and Drug Administration in July 2014.

Pfizer believes the deal will not materially affect its outlook in 2016, that it'll be slightly dilutive to full-year EPS in 2017, and be accretive to its bottom-line in 2018 and each year thereafter.

Sounds like a great deal, right? I'm not so sure.

Pfizer may have vastly overpaid for Anacor

While I'm all for having Pfizer use its cash flow to boost the inorganic growth side of the equation, I'd contend that it vastly overpaid for Anacor when it offered $5.2 billion for the drug developer.

Taking this step by step, Pfizer really is getting two assets: kerydin and cirsaborole. Anacor does have other topical anti-inflammatory products in development, but they're all in the discovery or preclinical stages of development. Aside from these two therapies, the only other drug in clinical studies is AN3365 for infections caused by Gram-negative bacteria, and it's far too early to tell if this clinical therapeutic is effective.

Kerydin is, to be blunt, an afterthought in this acquisition. Anacor forged an agreement with Sandoz to help market Kerydin back in 2014, and last year total distribution and commercialization segment revenue was $69.7 million. With peak sales estimates of $400 million, it's not going to move the needle much for Pfizer.

The bigger concern would be for crisaborole. On one hand, there's probably a better than 50-50 shot at FDA approval come its PDUFA date in January 2017 thanks to the drug's meeting its primary and secondary endpoints in both studies and its being generally well tolerated by patients. With few options in treating atopic dermatitis, crisaborole could gobble up market share quickly. But, it's what happens one or two years from now when crisaborole is facing a bounty of potential new competitors that worries me.

Celgene's (CELG) oral PDE-4 inhibitor Otezla is already approved to treat psoriatic arthritis and plaque psoriasis, but Celgene has hopes of eventually gaining a label expansion for atopic dermatitis as well. In a previously conducted, though small, study involving Otezla that defined treatment benefit as a 50% (or higher) decrease in the Eczema Area and Severity Index (EASI), Otezla delivered a 62% success rate. Keep in mind that EASI and ISGA aren't comparable measurements, so we can't simply say one drug is better than the other. But it does suggest that Otezla could be on track to become the first oral eczema treatment for those with moderate-to-severe forms of the disease.

In addition, Regeneron Pharmaceuticals (REGN 0.01%) and Sanofi (SNY 1.85%) are expected to file for regulatory approval of injectable dupilumab for the treatment of moderate-to-severe atopic dermatitis in the third quarter. In the LIBERTY AD SOLO1 and SOLO2 trials 37% and 36% of patients who an IGA score of 0 or 1 (clear or nearly clear) compared to just 10% and 8.5% for the placebo. EASI improvement from baseline was also a healthy 72% and 69% for dupilumab compared to just 38% and 31%, respectively, for the placebo. Regeneron and Sanofi's injection was also well-tolerated.

Roche, AstraZeneca, and Chugai in Japan are also working on midstage atopic dermatitis therapies. This is an increasingly crowded space, and $2 billion seems like a longshot with other successful therapies making their way down the pipeline. 

Even with the assumption that crisaborole becomes a blockbuster ($1 billion in annual sales), it could be a very long time before Pfizer realizes a "gain" on its investment. Assuming a healthy margin on crisaborole of say 70%, and taking into account added revenue from Kerydin, the dilutive effect this acquisition could have on 2017 EPS, and the likelihood that crisaborole would take a few years to ramp up sales, it might be 2024 or 2025 before Pfizer finds its $5.2 billion "investment" in Anacor yielding positive results.

The good news here is Pfizer is generating more than enough cash flow to facilitate additional deals, and its oncology segment is on fire with an immuno-oncology offering (avelumab) waiting on the wings. The bad news is I don't believe its acquisition of Anacor was a particularly good move, and I don't see any immediate benefits to this deal for shareholders.