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Summary

  • Competitors such as Merck and Bristol-Myers Squibb appear to have more promising immuno-oncology drugs under development, and that could impact Pfizer.
  • It makes sense for Pfizer to enter such collaborations, and perhaps even acquire smaller innovative biotech companies.
  • Acquiring companies rich in oncology drug pipelines or entering research and marketing collaboration also could help Pfizer get back on the growth track.

Pfizer (NYSE:PFE) recently signed a contract with Cellectis, a French biotech company. [1] The deal involves a research collaboration between the two to develop cancer drugs that leverage the body's immune system to fight cancer cells. Under the contract terms, Pfizer will pay Cellectis an initial amount of $80 million and also finance its research and development. [1] In addition, the biotech firm may also receive additional payments on achieving development, regulatory approval and commercialization-related milestones. The deal underscores the importance of immuno-oncology drug development. Competitors such as Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) appear to have more promising immuno-oncology drugs under development, and that could impact Pfizer in the near future. It makes sense for Pfizer to enter such collaborations, and perhaps even acquire smaller innovative biotech companies, given its recent falling out with AstraZeneca. Pfizer had initially tried to acquire AstraZeneca in order to gain access to its promising cancer drug development.

Our price estimate for Pfizer stands at $34, implying a premium of about 15% to the market price.

Immuno-Oncology Drug Research Is Big

The race for immuno-oncology drugs is on. According to some estimates, the market could be as big as $35 billion. There is a huge opportunity to profit from successful drugs given that small-molecule R&D productivity has declined during the last decade. Given its focus on biologics and relatively strong immuno-oncology pipelines, Merck, Britol-Myers Squibb and Roche Diagnostics stand to gain. We expect a strong focus from each of these companies on both in-house research and development, as well as co-development partnerships, to allow each to stay ahead of the curve and try to tap the market as early as possible.

Bristol-Myers Squibb has collaborated with CytomX Therapeutics to develop immuno-oncology drugs. The company will make an upfront payment of $50 million, fund the research and make additional payments of up to $298 million for achieving key milestones. [2] Roche has developed several biologics that induce the immune system to treat cancer. Three of its major biologics - Rituxan/MabThera, Avastin and Herceptin - are used for treating a variety of cancer forms including blood cancer, breast cancer and colorectal cancer. The combined sales from these drugs stood at over CHF 19.28 billion in 2013, or roughly $21.8 billion at the current exchange rate. The company also is testing a new PDL1 inhibitor drug MPDL3280A for the treatment of advanced melanoma, lung cancer and kidney cancer.

MK-3475 (or pembrolizumab) is Merck's investigational PD-1 specific monoclonal antibody for the treatment of advanced malignancy. The drug essentially enables a patient's immune system to detect cancerous cells that are otherwise extremely hard to identify. T cells can then target and kill these exposed tumor cells. In June 2013, Merck reported that 38% of the cancer patients under trial responded positively to this drug. Investors have welcomed the company's decision to investigate the drug's effectiveness in combination with other investigational agents. The drug is currently being studied in 17 clinical trials estimated to enroll over 4,000 patients across more than 30 types of cancer. [3] MK-3475 is a new class of drug and could well be the future of cancer treatment. Bristol-Myers Squibb has a similar drug in clinical trial under the name Nivolumab and could garner as much as $6 billion in peak sales.

Why This Is Important For Pfizer?

Pfizer's revenues have declined from $67.8 billion in 2010 to $51.6 billion in 2013 due to the loss of patent exclusivity of some major drugs, including Lipitor. Last quarter's results were disappointing as well due to the continued impact of generic competition as well as the expiration of certain co-promotion agreements for drugs such as Enbrel. Pfizer had pinned its hopes on some recent drug launches, but the market adoption has been rather slow. For example, its kidney cancer treatment drug Inlyta and lung cancer treatment drug Xalkori have seen less than expected sales over the last three years. Additionally, its rheumatoid arthritis drug Xeljanz and blood thinning medicine Eliquis have not performed as well as many expected. Acquiring companies rich in oncology drug pipelines or entering research and marketing collaboration could help Pfizer get back on the growth track.

Disclosure: No positions.

Source: Pfizer's Plan B In Immuno-Oncology: Collaboration With Smaller Companies