Spin Class

Pfizer Channels Its Inner Biotech

Four pipeline castoffs should fetch a higher valuation standing alone.
Photographer: Mario Tama/Getty Images
PFIZER INC
+0.52
At Closing, February 23th
36.26 USD

Why let biotech have all the fun? 

In keeping with a trend of smaller firms raising buckets of cash using Big Pharma's cast-off drugs, Pfizer Inc. is adapting the strategy for itself by spinning off four pipeline drugs into a new company called SpringWorks Therapeutics.

It's a non-traditional move, but it's a smart one. 

Post-Peak

It's been a long road back from the financial crisis and some large drug patent losses for Pfizer

Source: Bloomberg

Pfizer has spent $24 billion over the past three years on R&D, more than all but two other pharma firms. If you include the cost of drug-focused acquisitions over that time period, Pfizer has spent an industry-leading $43 billion. The company has more new drugs in development than any U.S.-based pharma firm, according to Bloomberg Intelligence. 

Large Gauge Pipeline

Pfizer has a whole lot of R&D projects to balance at the same time

Source: Bloomberg Intelligence

But that spending hasn't always been productive. A BI analysis of large-pharma R&D returns found that Pfizer's spending has been the least productive in the sector, if you account for the cost of M&A. That suggests Pfizer has more room and incentive than most to prune back and refocus its research efforts.  

On top of that, the market appears to be especially receptive to companies focused on pharma projects that have been shelved or sold off by other firms. Roivant Sciences Ltd. is an umbrella company that has used this strategy to successfully IPO brain-disease-focused Axovant Sciences Ltd. and women's-health-focused Myovant Sciences Ltd., and others have followed in its footsteps.

Investors seem willing to gamble on these efforts, even when they're somewhat shaky. With four medicines, some of which are ready to enter late-stage trials in potentially lucrative rare-disease markets, SpringWorks looks like a solid bet to capitalize on this trend.

The value of these drugs was essentially zilch at Pfizer. But split off and unencumbered by Pfizer's legacy costs and declining older drugs, they are likely to be valued more. 

Bouncy

Smaller biotechs always trade at a big premium to slower-growing large pharma, but that premium is especially large right now

Source: Bloomberg

Pfizer is forgoing up-front cash by not licensing these drugs to an unrelated party, but this is a better option. It's not the best time to get a plum licensing deal; multiple companies are revamping R&D efforts and selling off drugs.

Pfizer will get milestone and royalty payments if the drugs succeed, as it would under a standard licensing agreement. But it gets extra upside through its equity stake in the spinoff.

And given the participation of Bain Capital and other investors, Pfizer's cash outlay probably wasn't significant. And the company has a chance of a return on drugs that may have otherwise just gathered dust. 

High upside and low downside add up to a winning strategy. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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