The biotech industry has a reputation for being a breeding ground for high-value mergers and acquisitions, which does not come as a surprise given the aggressive push by leading biotech companies to consolidate their market position. Seagen Inc. (SGEN, Financial), a biotech company that develops therapies for cancer treatment, has been the target of several large players in the industry. Pfizer Inc. (PFE, Financial) is the latest in line to acknowledge the company's appeal. According to a report published by the Wall Street Journal, Pfizer is in early talks with Seagen to acquire the company at a premium to its current market value of around $30 billion.
Before Pfizer, Merck & Co. (MRK, Financial) was in talks with Seagen to acquire the company for approximately $40 billion, or $200 per share. According to Bloomberg, the negotiations were paused last August as the two companies could not agree on a price. Monday's WSJ report noted Pfizer’s interest in Seagen has already boosted its stock price by over 13% to $183 in pre-market trading as investors expect the company to pay more than $200 per share if a deal is to be reached.
The business
Seagen is one of the leading cancer treatment developers in the world, with four of its products already in the commercialization phase. Most of the company’s products are covered by patents through 2036, which leaves ample room for it to monetize these products without much of a threat from competitors. The U.S. and Europe currently account for the bulk of revenue generated by Seagen, but the company is planning to expand into other international markets this year, which should open new doors for the company to grow.
Source: Earnings presentation.
This year, Seagen is expecting to secure approvals from several regulatory agencies to expand the use cases of its commercialized drugs, while obtaining the approval to move certain drug candidates from clinical studies to the commercialization phase.
In 2022, revenue grew 25% to $1.96 billion, with net product sales growing 23% year over year to $1.7 billion. The company’s revenue has grown exponentially, from just $270 million in 2013 to almost $2 billion today, aided by regulatory approvals for its leading drugs. Seagen reported a loss of $610 million last year, but the company’s financial performance came in ahead of analysts' expectations in the fourth quarter. Seagen’s losses can be attributed to weak gross profit margins, but, as with every biotech company, they will eventually expand as the business scales.
A perfect match for Pfizer
Pfizer crossed $100 billion in revenue in 2022, setting a record high for the company. From $40.9 billion in 2019, Pfizer’s revenue has more than doubled over the span of a few years due the sale of its Covid-19 vaccine, which brought in more than $56 billion in revenue last year. With pandemic fears diminishing and the world returning to normalcy, the company expects to see a massive drop in revenue to a range of $67 billion to $71 billion this year.
As a result of the vaccine sales, Pfizer is flush with cash and looking for value-accretive merger and acquisition opportunities. In 2022, the company acquired Biohaven Pharmaceuticals for $11.6 billion and Global Blood Therapeutics for $5.4 billion. Pfizer ended 2022 with more than $22 billion in cash and short-term investments, and this massive liquidity will likely be used to fund additional acquisitions in the future. The company generated close to $30 billion in operating cash last year, which was more than sufficient to cover debt repayments, dividend distributions and capital expenditures. Pfizer, therefore, is likely to utilize its massive cash pile to enhance its scale, and the field of oncology appears to be a good bet given this niche market segment is expected to grow in leaps and bounds over the next decade, with many global pharmaceutical giants nearing the commercialization stage of their cancer treatments.
Pfizer’s patents covering cancer drugs Ibrance, Xtandi and Inlyta will expire between 2025 and 2028, which should deal a massive blow to the performance of its cancer treatments segment. One way to soften this blow is to commercialize new drugs, which require years of research and development investments and regulatory approval after passing several clinical trials. Acquiring a biotech company with an existing portfolio of cancer treatments, therefore, is the ideal solution for a company of Pfizer’s scale, and Seagen fits this description perfectly. Although Pfizer has yet to make a formal announcement, a business combination with Seagen makes a lot of sense as it can add value to long-term shareholders if purchased at the right price.
Takeaway
Pfizer, on the back of pandemic tailwinds, is valued cheaply at a forward price-earnings ratio of just 15. As earnings normalize in the next couple of years, the company’s net income will deteriorate substantially. To avoid this, Pfizer is aggressively investing in research and development projects while keeping an eye on inorganic growth opportunities through acquisitions. Seagen appears to be a perfect fit for Pfizer at the right price, but investors will have to wait for an official confirmation from either of these companies to conclude whether a deal is on the cards and whether the proposed pricing is value accretive to shareholders of both companies.
