How Much Is Pfizer Overpaying For Array Bio?

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Array BioPharma Inc. (NASDAQ: ARRY) shares shot up on Monday after the firm announced that it would be acquired by Pfizer Inc. (NYSE: PFE) in an all cash transaction. The boards of directors of both companies have approved the merger and it is expected to close in the second half of 2019.

Under the terms of the agreement, Pfizer will acquire Array for $48 per share in cash for a total enterprise value of approximately $11.4 billion.

Pfizer expects to finance the majority of the transaction with debt and the balance with existing cash. The transaction is expected to be dilutive to Pfizer’s earnings per share (EPS) by $0.04 to $0.05 in 2019, $0.04 to $0.05 in 2020, neutral in 2021, and accretive beginning in 2022, with additional accretion and growth anticipated thereafter. Pfizer will provide any appropriate updates to its current 2019 guidance in conjunction with its third quarter 2019 earnings release.

Biotech mergers often come at a big premium. The question is whether the big premium is versus a share price or to the company’s underlying metrics. Pfizer wants investors to look out to 2022, but Refinitiv has consensus revenue estimates of $275 million for 2019 and $366 million for 2020. It gets hard to start valuing companies out too many years at a time when politicians on both sides of the aisle want lower drug prices and want more transparency in pricing in general.

Array’s portfolio includes treatments for metastatic melanoma, metastatic colorectal cancer (mCRC), as well as a broad pipeline of targeted cancer medicines which are expected to generate significant royalties over time. Admittedly, any of those candidates could become blockbuster drugs with $1 billion or more in sales. The flip side of the coin is that any of the indications could also fall short of high hopes.

Array is not exactly the most widely followed biotech out there with a market cap of its size. The Refinitiv consensus analyst target price was $32.40 before the merger, and the street-high target price was $38 before the deal was announced. And Leerink issued a new Outperform rating and $28 target back in January. Shortly before that, Cantor Fitzgerald issued an Overweight rating and assigned a $30 target at the time.

Albert Bourla, CEO of Pfizer, commented:

Today’s announcement reinforces our commitment to deploy our capital to bring breakthroughs that change patients’ lives while creating shareholder value. The proposed acquisition of Array strengthens our innovative biopharmaceutical business, is expected to enhance its long-term growth trajectory, and sets the stage to create a potentially industry-leading franchise for colorectal cancer alongside Pfizer’s existing expertise in breast and prostate cancers.

Shares of Array were last seen up about 55% at $46.00, with a 52-week range of $12.56 to $47.05. This buyout premium also represents an all-time high for the stock price going back to the year 2000.

Shares of Pfizer were last seen down nearly 1% at $42.42, with a 52-week range of $35.73 to $46.47.

While a buyout of $10 billion may seem aggressive in the world of speculative biotech stocks, one thing Pfizer can always fall back on for defense is that its market cap is above $230 billion. And maybe this is just the price of acquiring more growth in an industry where growth rates just don’t compare to a decade earlier.

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