Pfizer’s debt load could inhibit the company’s ability to take on acquisitions in the near term.
The anti-obesity drug market could be worth a staggering $100 billion, according to some analysts. That’s a huge growth opportunity, and it’s a reason why many top drugmakers in the world are spending feverishly on new weight loss drugs, as they know it could propel their stocks to record levels. You only need to look as far as Eli Lilly and Novo Nordisk as examples of that. Each company owns some of the most popular weight loss drugs in the market and is also the two most valuable healthcare stocks in the world.
One company that’s lagging behind in that market right now is Pfizer (PFE -2.71%). It doesn’t have a glucagon-like peptide 1 (GLP-1) drug which could generate billions in revenue in the near future. It does have a promising product in development, danuglipron, but that could still take years before it becomes available — and that’s assuming it obtains regulatory approval.
The easier option may be for Pfizer to simply acquire a company that is further along in developing a GLP-1 drug. Pfizer hasn’t been shy about pursuing acquisitions in the past, so many investors could be expecting this scenario. But here’s why it’s not likely to happen.
Pfizer is focusing on paying down its debt
At the JPMorgan Healthcare Conference in San Francisco earlier this year, Pfizer CEO Albert Bourla spoke about the company’s opportunities in the weight loss market. He was clear that Pfizer will focus on this area in the future. “Pfizer’s position is that we believe that obesity is a place that we have the ability to play and win. So we will have to play.”
But at the same time, Bourla ruled out an acquisition for a company that already has a promising GLP-1 drug. And the simple reason is that Pfizer is already coming off a fairly significant acquisition of cancer company Seagen last year. That deal cost the company $43 billion. Pfizer’s debt level has soared due to the acquisition, and that’s a key reason investors have been wary of owning the stock despite its seemingly low valuation — Pfizer trades at just 13 times its estimated future earnings.
PFE Total Long Term Debt (Quarterly) data by YCharts
GLP-1 stocks are rising in value
If valuations were attractive, it’s possible Pfizer could jump on another deal without having to spook investors with its debt load rising even higher. But the hype around GLP-1 drugs has sent valuations of many stocks much higher of late.
Consider Viking Therapeutics, whose stock has shot up more than 250% so far this year. The company doesn’t have an approved drug, and VK2735 is only in phase 2 trials. But because it has been generating encouraging results in clinical trials comparable to already approved weight loss drugs, investors are bullish on its prospects. Its market cap is now at more than $7 billion. For an acquisition to grow, though, Pfizer would likely have to pay a premium on that, which could potentially put the price tag in double digits. Paying that much for essentially one really promising asset would require a lot of confidence in the approval coming through. The potential payoff is alluring, but the risk is also high.
Another example is Zealand Pharma, whose valuation has ballooned to more than $9 billion after rising by 130% this year. It is a deeply unprofitable business, but here again, the optimism surrounding a couple of promising weight loss treatments has investors feeling more bullish than bearish on its long-term prospects.
The hype and excitement surrounding GLP-1 are making it difficult for Pfizer to entertain the prospect of buying a drugmaker in this space, which is why an acquisition for the company is unlikely.
Is Pfizer a good investment if you’re bullish on the GLP-1 market?
Growth investors may be concerned that Pfizer could be too late to enter the GLP-1 weight loss market if it’s relying solely on danuglipron. But the company hasn’t ruled out buying a smaller company with a less advanced drug. And if valuations come down as investors grow concerned about rising stock prices, there’s still a possible scenario where the risk-reward ratio may become more acceptable to Pfizer in the future, and it does end up making an acquisition for a more promising treatment.
For now, however, investors shouldn’t expect a deal to come soon. The good news is that Pfizer’s stock may be a good buy on its own merits. With an increasingly broader business, thanks in large part to its acquisition of Seagen and other companies and a fairly low valuation, this can make for a potentially underrated growth stock to buy and hold for the long run. While Pfizer looks like it’s on the outside looking in when it comes to the GLP-1 market, that doesn’t mean it can’t one day become a big player in it.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
