What Arena Acquisition Means for Pfizer

Pfizer’s PFE $6.7 billion acquisition of Arena Pharmaceuticals ARNA at a largely fair value provides new assets to drive long-term growth, but we don’t expect any change to our Pfizer fair value estimate based on the deal. With Pfizer gaining a windfall of cash from its COVID-19 vaccine (and from the likely upcoming launch of COVID-19 treatment Paxlovid) combined with some major patent losses after 2025 (cardiovascular drug Eliquis and cancer drug Ibrance), we view this deal as just one of several more likely tuck-in acquisitions Pfizer will target. Pfizer’s ability to acquire mid- to late-stage assets and develop the pipeline assets into blockbusters reflects a core strategy that helps create innovative drugs to support the firm’s wide moat.

We believe the most important asset in the Arena acquisition is immunology drug etrasimod. Phase 2 data in ulcerative colitis showed potentially leading efficacy. While not statistically a direct comparison, in a cross-trial comparison to the similar mechanism of action drug Zeposia from Bristol BMY (in the phase 3 study True North), the high dose (2mg) of etrasimod showed a better clinical remission score (25.6 relative outperformance to placebo versus 12.4 for Zeposia) and endoscopic improvement score (24.4 relative outperformance to placebo versus 15.7 for Zeposia). We expect phase 3 data for etrasimod in early 2022, setting up a likely approval in 2023. With over $5 billion in estimated annual sales from drugs targeting ulcerative colitis, we expect etrasimod to gain close to 20% of the market and help grow the overall market due to the strong efficacy of the drug. Additionally, we expect the drug could expand labeling into atopic dermatitis and other immunology indications by 2026 and later. Beyond etrasimod, the acquisition also brings early-stage cardiovascular pipeline drugs temanogrel and APD418, but we don’t explicitly model these drugs into our valuation model due to the limited data available.

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