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Pfizer Buys Immuno-Inflammatory Specialist for $6.7bn

Updated: Oct 30, 2023

Acquisition Overview

On December 13th, Pfizer Inc. (NYSE: PFE) announced that they have entered into a definitive agreement to acquire Arena Pharmaceuticals, Inc. (NASDAQ: ARNA). This deal will expand Pfizer’s clinical stage catalogue to include a range of treatment options for immune-inflammatory diseases. Pfizer hopes that this expansion of their pipeline will create the potential for enhanced growth through 2025.

Deal Structure

The transaction values Arena Pharmaceuticals at $100 per share in an all-cash offering, for a total equity value of $6.7bn. This is nearly a 100% premium to Arena’s pre-announcement valuation. Pfizer will use cash on hand to fund the acquisition, made possible by the recent windfall from their successful COVID-19 vaccine and treatment. The deal is expected to close in the first half of 2022.

BofA Securities and Centerview Partners LLC advised Pfizer. Guggenheim Securities. LLC and Evercore Group LLC advised Arena Pharmaceuticals.

Pfizer Overview

Founded in 1849 and incorporated in Delaware, U.S., Pfizer is a research-based biopharmaceutical company that engages in the discovery, development, manufacture, marketing, sales and distribution of biopharmaceutical products worldwide. The company’s business includes 6 key therapeutic areas: Internal Medicine, Oncology, Hospital, Vaccines, Inflammation & Immunology, and Rare Disease. It utilizes a range of collaboration and co-promotion arrangements to enhance the development, research, sales, and distribution of certain products. Notable among these was its 2020 agreement with BioNTech SE to develop, manufacture, and commercialize a COVID vaccine.

Arena Pharmaceuticals Overview

Founded in 1997, Arena Pharmaceuticals is focused on delivering novel medicine with optimized pharmacology and pharmacokinetics to patients globally. They have 6 products currently in their pipeline at various trial phases for a range of gastrointestinal diseases, dermatologic conditions, and cardiovascular conditions, all of which are immune-mediated inflammatory diseases. These products are all in stage 1 through stage 3 trials, while additional research is also being conducted into other preclinical assets.

Industry Insight

Acquisition of a (relatively) small research-oriented company like Arena is an incredibly common way for a large pharmaceutical company to expand its portfolio and ensure continued revenues in the future. This is more common than significant in-house research into early-stage candidates of the kind that has allowed Arena to develop its clinical stage portfolio. The failure rates of early-stage trials are relatively high, with only a handful of pre-clinical stage candidates even approaching clinical stage trials. As such, the return on capital that such trials create is much more stochastic, with either significant returns from a candidate making it all the way through pre-clinical and clinical stage trials or simply the loss of invested funds if a trial is failed. So early-stage research is attractive to small, entrepreneurial company’s hoping to obtain much higher returns but at a lower risk profile.

Pfizer, as a mature company with billions in revenue, has a much different risk profile. While mature pharmaceutical company’s do still conduct research, even in early stages, they are much better positioned to conduct later stage research and development and to support the roll-out of successful candidates onto the market. Rather than committing funds to high-risk, high-return efforts with inconsistent results, it is more efficient to focus on lower-risk, more moderate return efforts where Pfizer’s scale and expertise as a producer of approved drugs has more bearing on the company’s success and returns. Especially given Pfizer’s cash position resulting from their COVID success, they are incredibly well suited to acquire high-value portfolios of late-stage candidates and to further finance late-stage research, development, and the eventual roll-out of those candidates which eventually gain approval. This will diversify their existing in-house and previously acquired portfolio of pre-clinical and clinical stage candidates, reducing the overall risk profile of their portfolio.

This is further augmented by the return profile of a successfully approved treatment option. Due to intellectual property (IP) laws, there is a limited period – possibly as short as 20 years – where the holder of a patent has the exclusive right to produce and sell a drug. After that point, it is possible for other pharmaceutical companies to begin producing ‘generic’ versions of the product, which often pushes the revenue in selling the product much closer to the cost of production. So a treatment has significant upfront cost to production, large returns until the end of the IP protection, and then much lower returns nearing cost of production. As such, a pharmaceutical company primarily focused on producing non-generic treatments which it holds a patent on will have to continuously identify new sources of revenue as it loses exclusivity over parts of its existing portfolio. Whenever a company like Pfizer has excess cash, it is incentivized to refresh and expand its portfolio – acquisitions like its purchase of Arena are often the best way to do so.

Strategic Rationale

Pfizer expects to utilize their extensive research and development capabilities to accelerate the clinical development of the portfolio they will acquire. This means that they are better positioned to maximize the potential benefit from the clinical and pre-clinical stage candidates they will be acquiring. This helps to explain the premium they have agreed to pay for Arena’s stock; Arena itself is not positioned to support the same global-scale roll-out of the pipeline as it completes later-stage trials.

Moreover, Pfizer’s balance sheet leaves them exceptionally well positioned to make acquisitions of this type. Early-stage research has incredibly high failure rates, making in-house research less attractive, especially outside of a company’s existing areas of expertise. However, with the number of late-stage candidates that Pfizer is set to acquire the returns on their capital are more certain, making it more attractive for a developed global firm like Pfizer. They made a similar acquisition of Trillium Therapeutics in 2021 and are likely to make further acquisitions over the coming years as they look to further reduce the amount of cash on their balance sheet and shore up their portfolio of candidates and approved drugs.

Long-Term Prospects

This acquisition and others like it are a core part of Pfizer’s strategy over the next few years. This is the most efficient way for Pfizer to convert their cash into return generating assets while staying within the acceptable risk profile of a mature company. Pfizer’s projected revenue for 2021 is estimated to have grown over 95% on its 2020 revenue, with further growth expected in 2022. However, as so much of that revenue is resulting from COVID vaccination and treatment, revenue is likely to decline in 2023 and following years. This acquisition, and others like it, will be key to ensuring improved long-term top line performance from Pfizer and capitalizing on its recent growth.

However, the hit or miss nature of pharmaceuticals will play a key role here: while the pipeline Pfizer will acquire in this deal is both attractive and likely to perform well, it will be unclear for a few more years whether and how much the company will benefit from this acquisition. If too many of the later stage treatments face challenges or fail to obtain approval this acquisition could be a significant waste of money. Moreover, the advancement of any other forms of treatment for the diseases being targeted by Arena Pharmaceuticals could significantly limit the potential revenue and profit that this portfolio will generate.

Ultimately, however, this acquisition is an effective way for Pfizer to generate long-term returns for shareholders and to avoid significant drops in their revenue post-COVID. Given the alternative of simply handing cash back to shareholders, this acquisition does seem to be the more attractive option. This acquisition is key to ensuring that Pfizer will continue to see new products enter the market.

Written by William Greve (St Hilda's College, University of Oxford)

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