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Winner’s curse

22 August 2016 By Robert Cyran

Pfizer seems to know something others don’t about Medivation. It’s betting $14 billion on the biotech, a 120 percent premium to the undisturbed market value. It’s a good fit and Medivation’s cancer blockbuster is a rare gem. But a heated auction and back-of-the-envelope math hint that the buyer is overpaying.

Big drug companies are always on the lookout for new drugs to sell. Among the most appealing are cancer therapies with fat margins. The concentrated market means few salespeople are needed, and drugs with a proven benefit over rival treatments can command sky-high prices. Medivation’s Xtandi for prostate cancer costs well over $100,000 per year.

Worldwide sales of Xtandi were $595 million in the second quarter. Even this gem has flaws, however. Pfizer will have to share rights to the drug with Japanese company Astellas Pharma. Medivation currently receives half of U.S. profits and a royalty from overseas sales.

Despite these limitations, Pfizer is paying more than 11 times Medivation’s estimated sales for 2017. The market values Pfizer at 4.5 times its revenue. There are big caveats to this comparison, but at the very least it suggests that Pfizer expects sales to grow sharply in future years. Yet Xtandi’s U.S. sales are leveling off, with growth running at an 11 percent annual rate in the second quarter. Extending treatment with the drug and expanding into new cancers may boost growth again, but that remains to be proven.

Redemption might come from Medivation’s potential drug for breast and other cancers. The company’s management recently said the new category of cancer treatment concerned could produce sales of $30 billion a year, with its drug capturing a big chunk. That sounds like part of the company’s sales pitch, though. Medivation paid just $410 million for it a year ago, with a promise of up to another $160 million as approvals are achieved. Analysts are mostly projecting annual sales of around $300 million from this drug.

Pfizer may believe in a far more lucrative outcome. But it also had to outbid multiple savvy rivals including Astellas, Medivation’s natural partner, and Sanofi. The most probable explanation for the heady price is that Pfizer has once again paid more than it should have done.


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