Here's What Pfizer's Telling Us About Biotech M&A

By Markets Fool.com

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Deep-pocketed megapharmaceutical company Pfizer, Inc. is at it again. Earlier this week, the company announced that it's acquiring cancer-drug maker Anacor Pharmaceuticals . The acquisition lands Pfizer some interesting clinical-stage compounds, but what I find really interesting is what type of biotech companies this deal suggests could also be in play.

What Pfizer bought

Pfizer's acquisition of Anacor Pharmaceuticals gives it crisaborole, a boron-molecule therapy that has successfully shown in phase 3 studies that it can treat eczema. Last summer, Anacor Pharmaceuticals reported that a statistically significant percentage of patients with mild to moderate eczema achieved clear or nearly clear ratings on a commonly used eczema ratings scale, relative to the control arm. The strength of those findings led the company to file for FDA approval of crisaborole in January. A go/no-go decision from the FDA is expected on crisaborole next Jan. 7.

Anacor has a couple of other drugs in its pipeline in early stage trials, but there's nothing that's advanced enough for me to think that Pfizer's acquisition was about anything other than crisaborole. If that's true, then Pfizer has agreed to hand over more than $5 billion in cash for an unapproved yet intriguing drug. That's a pretty handsome price to pay, and it could suggest that other biotech stocks with potential top sellers could land multibillion-dollar bids, too.

Why Pfizer made this deal

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Pfizer estimates that crisaborole's peak sales could eventually hit $2 billion annually. That's a pretty heady number, but it's not ridiculous, given that eczema is common and drugs for other autoimmune indications haul in big money for drugmakers every year.

Humira, for example, is commonly used to treat a variety of autoimmune diseases, including rheumatoid arthtitis and psoriasis, and it hauled in $14 billion in sales last year. Pfizer's Xeljanz is approved for use in rheumatoid arthritis, too, and its sales doubled year over year to $197 million in the first quarter.

Overall, more than 18 million patients are thought to suffer from eczema in the U.S. alone, and most of them suffer from the mild-to-moderate form of the disease that crisaborole targets. Although crisaborole doesn't have Humira-like sales on the horizon, it could certainly provide Pfizer with a sales run-rate that's similar to Xeljanz.

Image Source: Pfizer, Inc.

Other M&A targets that could be in play

Pfizer's acquisition indicates that big pharma thinks there are deals worth doing, especially in companies with de-risked late-stage research programs. If so, then Pfizer and others could be eyeballing companies that have, or will soon have, applications for approval pending with the FDA, such asPortola Pharmaceuticals .

Portola expects the FDA to make a decision on its andexanet alfa on Aug. 17, and if approved, it will become the first reversal agent for factor Xa anticoagulants to hit the market. Because they can be safer than warfarin, require fewer dose adjustments, and have fewer dietary restrictions, factor Xa anticoagulants, such as Pfizer's Eliquis, are quickly capturing share in this $10 billion market. The increasing use of these drugs suggests that if given a green light later this summer, andexanet alfa could quickly become a staple at hospitals eager for better solutions for controlling bleeding in emergency situations.

Earlier this year, Portola Pharamceuticals' shares sank after management reported a mixed bag of results for its own factor Xa drug, betrixaban. That sell-off could mean that Portola Pharmaceuticals has become more interesting to potential suitors; especially since management still plans to file betrixaban for FDA approval.

Another company that could have an interest is Celator Pharmaceuticals , a small-cap biotech that recently reported positive phase 3 results for its treatment for secondary acute myeloid leukemia. In that trial, Celator's Vyxeos significantly improved overall survival while delivering similar safety to standard of care. Management expects to file for FDA approval of Vyxeos by the end of the third quarter.

Because Vyxeos has breakthrough-therapy designation that could accelerate commercialization and the survival rates for secondary AML patients creates a significant unmet need, there's a good shot that Vyxeos becomes the new standard of care. If it does, then Vyxeos sales could total in the hundreds of millions of dollars per year as soon as 2017.

Given that Celator's market cap is just south of $700 million, a company boasting an existing cancer-drug sales force could find this company particularly attractive. Portola and Celator could end up in play, but it'sMedivation that's at the top of most big pharma wish lists.

Medivation has already rejected a $9.3 billion bid to be acquired bySanofi ,and Pfizer, AstraZeneca, and Amgen are all rumored to be making offers, too. These companies are interested in Medivation because of Xtandi, the company's top-selling prostate-cancer drug. Xtandi is widely used in pre- and post-chemotherapy prostate cancer patients, and its annualized sales already clock in at north of $2 billion. Expanding Xtandi earlier into prostate-cancer treatment and studies evaluating it in breast cancer could mean Xtandi's sales head even higher in the coming years.

Suitors may also be interested in buying Medivation to get its hands on drugs in the company's pipeline. Medivation is conducting a phase 3 trial of a PARP inhibitor for use in breast-cancer patients with specific genetic mutations, and it has a potentially pivotal mid-stage study under way for a third drug in relapsed or refractory diffuse large B-cell lymphoma.

Looking ahead

The risk of payer and legislative push-back on drug prices has knocked valuations in biotech to multi-year lows, and that seems to have big pharma most interested in companies with late-stage or commercial-stage drugs. Those wanting to invest in biotech companies that could end up the target of M&A ought to spend most of their time focusing on companies that fit that description. No one knows if Portola Pharmaceuticals, Celator Pharmaceuticals, or Medivation will agree to sell, but each has a good shot at making it on its own if a deal can't be cut. For that reason, they might be worth considering in portfolios.

The article Here's What Pfizer's Telling Us About Biotech M&A originally appeared on Fool.com.

Todd Campbell owns shares of Medivation, Inc. and PORTOLA PHARMACEUTICALS INC COM USD0.001.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.