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Pfizer (PFE +5%) seems to be in the news daily for developments relating to its vaccine. A WSJ report just this weekend detailed a study from Israel that showed that a booster shot of the company's COVID-19 vaccine, developed with BioNTech (BNTX), is effective against the Omicron variant. However, Pfizer has also been emphasizing its status as more than a vaccine maker through recent activity on the M&A front.

Today, Pfizer announced that it will acquire Arena Pharmaceuticals (ARNA) for $100 per share in cash, for a total value of $6.7 bln. For ARNA, which closed Friday at $49.94, the deal represents a 100% premium. Both companies' boards of directors have approved the merger. Arena is focused on developing therapies for several immuno-inflammatory diseases, with drug candidates in gastroenterology, dermatology, and cardiology.

What inspired this deal?

• While Arena is a long way away from profitability, it has passed several programs through the pre-clinical stage and into later stage clinical development, with various studies in Phase 2 and 3. Its lead candidate is etrasimod, an oral S1P receptor modulator that is in development for a range of immuno-inflammatory diseases, including gastrointestinal and dermatological diseases.
• Pfizer's massive R&D capabilities are expected to be able accelerate the clinical development of etrasimod, which has been shown to be hold promising potential for a wide range of therapies. Arena's program for etrasimod includes two Phase 3 studies in ulcerative colitis (UC), a Phase 2/3 program in Crohn's Disease, a planned Phase 3 program in atopic dermatitis, and ongoing Phase 2 studies in eosinophilic esophagitis and alopecia areata.
• An interesting aspect to the deal is that Pfizer has already been developing a treatment for UC. So why buy Arena? For one, Arena's UC development is further along at Phase 3 while Pfizer's program is at mid-stages. Also, the acquisition allows Pfizer to take more bites at the UC apple, making it more likely that Pfizer will secure FDA approval through at least one option. Should etrasimod be found to be more effective than Bristol Myers Squibb's (BMY) recently-approved Zeposia while presenting fewer side effects, then its inclusion in Pfizer's portfolio would be especially noteworthy.

Bottom line, it's clear that Pfizer wants to bulk up its drug pipeline. Pfizer only last month closed on its acquisition of Trillium Therapeutics, which focuses on cancer therapies. Both acquisitions are at the clinical stage; companies with programs at that stage carry less risk than pre-clinical companies, but they are also cheaper than commercial stage companies. What stands out to us is the massive, all-cash premium that Pfizer will pay in the deal. We view this as Pfizer's way of telling others not to come in with competing bids. And the stock reaction shows investors like this deal.