Did Pfizer Make A Horrible Business Deal?

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 |  About: Pfizer Inc. (PFE), Includes: PBYI
by: Alexander Maxwell

Summary

Puma Biotechnology licensed neratinib from Pfizer inc. in consideration for a royalty.

Pursuant to the recent amendment, Pfizer will be due a lower royalty rate in exchange for not funding the upcoming trials.

With the recently announced results, Puma investors may be in for an unexpected gain on the amended deal.

Pfizer Inc (NYSE:PFE) has been one of the most successful pharmaceutical companies in history. The company has largely thrived through its ability to get things right, whether that be on deals or in finding the right drugs to develop in its pipeline. However, it is increasingly beginning to look as though Pfizer may have made a huge blunder when selling the rights to neratinib to Puma Biotechnology (NYSE:PBYI).

The Agreement

Pfizer licensed the drug primarily in an effort to "prioritize its oncology portfolio." However, the company may have missed a golden opportunity in neratinib. Under the previous terms of the licensing agreement, Pfizer was to fund the clinical trials of the drug going forward, and in exchange receive a 10-20% royalty on the sales of the drug. This looked like a decent deal for Pfizer initially, as it would largely be able to profit from a drug that did not appear to be headed towards a large amount of sales.

It should also be noted that Pfizer recently amended the agreement in order to remove its obligation to pay for the clinical trials of neratinib. In exchange, the royalty was lowered to the low-to-mid teens. Essentially, Pfizer was trying to limit the amount of money that it was going to have to put in, which was a bearish indicator for Puma investors. However, with the recently announced clinical trial results, it appears as though Pfizer may have gotten the worst end of the deal.

Clinical Trial Results

Puma stunned most of the biotech world when it announced the recently completed results from neratinib. The drug showed impressive efficacy, increasing progression free survival over placebo by a whopping 33%. These results will have to continue to be verified over the next few months, but should they hold true, it could make Puma management look very good. These results would position the drug to potentially be a best-in-class treatment for HER2 positive breast cancer. This would give Puma a compelling slice of a billion dollar industry.

Why the Results Matter

The results have set analysts buzzing, tripping over themselves to up their sales projections for the drug and to increase their price targets. One analyst has the peak sales estimate for neratinib at $4.1 billion. Even if we assume that peak sales are just half of that, Pfizer clearly came out on the wrong side of its amended agreement, by trying to save approximately $30 million now, they may have just cost themselves many times that money down the road.

The results are also very important for Puma investors, as they should help to make investors more confident in the ability of the drug to perform. Having seen the impressive results, it is now very likely that the drug will attain FDA approval, and investors should feel more confident in the timeline of neratinib's potential launch. Also, if the drug is able to translate the already impressive results to other indications, investors could be in for a very nice payday.

Final Thoughts

While Pfizer gets so many of their decisions right, it appears as though they were wrong on this one. Puma investors should be very happy, as the company with its recent surge in price should have no problem raising the required capital to fund the clinical trials that Pfizer backed out of. It should be noted that Puma will now have to pay a lower royalty rate, potentially saving the company a large amount of money down the line. Given all of the variables, it seems as though Puma investors may have the last laugh.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.