Pfizer’s Pricey Deal for Anacor Is Credit Negative

　　Last Monday, Pfizer Inc. (A1 negative) announced plans to buy Anacor Inc. (unrated), a publicly tradedpharmaceutical company focused on dermatology, for approximately $5.2 billion in cash. Theannouncement comes five weeks after Pfizer terminated its deal with Allergan Plc (subsidiary debt ratedBaa3 stable).

　　The acquisition is credit negative for Pfizer because it is paying a high price – the deal is valued at a 55%premium to Anacor’s closing share price on 13 May – for a company whose key product has not yet beenapproved by the US Food and Drug Administration (FDA). Still, the deal’s size is relatively modest givenPfizer’s revenue of more than $50 billion. Following the transaction’s announcement, we affirmed Pfizer’sratings but changed the outlook to negative from stable, reflecting Pfizer’s reduced ability to makeacquisitions at its current rating level.

　　Pfizer’s debt/EBITDA was 2.1x as of 3 April 2016 and remains unchanged for the Anacor acquisition becausePfizer will fund the deal with existing cash. We expect that any future significant acquisitions would involvedebt funding. Our quantitative leverage guidance for Pfizer’s A1 rating is 1.5x-2.0x.

　　Anacor, which is not yet profitable, makes a toenail fungus treatment called Kerydin and is awaitingapproval for a new dermatology drug that has blockbuster potential. Anacor splits 50% of Kerydin’s grossprofits with Sandoz, a unit of Novartis AG (Aa3 stable), which sells the product in the US. In 2015, Anacorrecognized $60.5 million of gross profit sharing revenue related to Kerydin.

　　But Anacor’s key asset is crisaborole topical ointment 2%, a novel, non-steroidal topical anti-inflammatoryphosphodiesterase-4 inhibitor that it is developing for the potential treatment of mild to moderate atopicdermatitis, a type of eczema. The FDA accepted Anacor’s filing for approval in March and we expect theFDA’s decision in January 2017.

　　Pfizer believes crisabole’s peak sales can reach or exceed $2 billion. Most atopic dermatitis patients arecurrently treated with older drugs that include antibiotics, antihistamines, topical corticosteroids or topicalimmuno-modulators. These have varying degrees of effectiveness, and some have warnings of serious sideeffects. For example, Astellas Pharma Inc.’s (A1 stable) Protopic (tacrolimus) ointment and ValeantPharmaceuticals International Inc.’s (B2 negative) Elidel (pimecrolimus) cream have warnings related to skincancer risk. No new drugs have been approved to treat atopic dermatitis in more than 15 years.

　　Anacor will boost Pfizer’s presence in dermatology, while complementing its immunology drugs Enbrel andXeljanz. But Kerydin and crisabarole are topical dermatology products. Many drugs in this category will faceincreasing pricing pressure from payers, in part related to Valeant’s price hikes in the space and subsequentregulatory scrutiny on pricing. In addition, the deal will leave Pfizer with less cash to spend on otheropportunities and treatment categories in a rapidly consolidating sector. We expect that Pfizer will evaluatea range of acquisition opportunities to bolster its innovative products business, which is increasingly focusedon oncology and other specialized disease areas.