Market Overview

Is Pfizer Making a Mistake by Relentlessly Pursuing Icagen?

Pfizer (NYSE: PFE) gave Icagen (NASDAQ: ICGN) its third and final offer, set to explode on September 19. Although Pfizer retains a minority interest of about 11% in the company, it must consider Icagen to be really valuable in some way. Whether Icagen 's operations are robustly growing or if the company maintains an impressive patent portfolio, Pfizer's aggression is interesting to note.

One of the biggest reasons that Pfizer may want to outright own Icagen is for the patent portfolio. While Pfizer's own portfolio is well diversified, it does not focus on every type of drug. Icagen specializes in developing drugs that target ion channels in human cells. This is an extremely specific targeting mechanism, and it makes sense why Pfizer would not personally spend time on developing such drugs: the costs are too high. However, ion channel drugs can be very effective, as electrostatic homeostasis is commonly altered during infection progression.

Icagen has also partnered with Pfizer before to work on a drug to treat pain and epilepsy. The drug has passed Phase 1 trials, and is on track for further testing. The agreement between Icagen and Pfizer is such that Pfizer will get exclusive rights to market and distribute the drug worldwide. However, Pfizer has to provide major research and development funding to Icagen. Pfizer may want to internalize the entire process in order to reduce costs while having ownership of the product. After all, the drug may turn out to be a blockbuster and may be able to mitigate the losses incurred when Viagra and Lipitor's patents run out.

Icagen currently has an asthma drug, Senicapoc, which has been successful in clinical trials. However, the company may not be proceeding with the drug's development. Interestingly, the drug appeared to be safe and tolerable; the company has instead considered licensing the drug or partnering with another company for its development and distribution. Pfizer, on the other hand, has the resources to be able to complete the process. Considering that Icagen did the majority of the legwork, Pfizer would be able to profit significantly if it successfully acquired Icagen.

Lastly, Icagen has compiled what it believes to be the complete human ion channel genome. While this does not provide direct revenue-generating benefits, the selective genome gives its owner a comprehensive library of drug targets. In essence, the company would be able to identify which ion channels are present in cells being affected by any given disease. The owner is able to do this quickly and efficiently, which gives it a definite advantage when time is of the essence. Pfizer may want to capitalize on this library as well.

While impressive intellectual property is always an important factor for a takeover, did Pfizer make the right move? Financial stability is a paramount concern for potential acquirers, and while Pfizer's balance sheet may be able to support potential losses, it is always beneficial for shareholders to experience a smooth transition.

One of the first things to consider is Icagen's capital structure. Over the last several years, the firm's debt-to-equity ratio has been diminishing. As of the beginning of 2011, Icagen maintained a ratio of about 0.1, while competitors averaged a ratio of 1.7. Its liabilities are minimal and are merely comprised of payables and debt financing for equipment. This sort of capital structure allows for clean takeovers by anyone. Icagen's liabilities could easily be paid for by a firm like Pfizer.

A prospective acquirer also needs to determine what its target's profitability is going to be like, going into the future. Interestingly, Icagen's growth has slowed down over the last few quarters. In third quarter 2010, revenues were $5 million; in fourth quarter 2010, revenues declined to $2 million. The last two quarters in 2011 each garnered revenues of $1 million. At the same time, operating costs did not change significantly. To be fair and clarify the company's expenses, research and development fluctuated through the quarters slightly while sales, general, and administrative costs stayed the same. These trends may be important for Pfizer to consider.

While the income statement points to slowing growth, Icagen' cash position appears to be improving. Over the last four quarters, cash flows from operations have improved. In the last two quarters in 2010, cash flow was -$6 million. In the first two quarters of 2011, the cash flow was $3 million. The company has also used equity financing over the last two quarters to raise capital and improve its liquidity. While the company is cash flow positive via financing activities, its operations have been improving over the last few quarters. This sort of behavior is important for acquirers to consider.

Pfizer is a giant company that knows what it wants. It has aggressively been trying to expand into new pharmaceutical markets, and it does not appear to be stopping any time soon. Although it currently has a minority interest in Icagen, Pfizer has shown significant reasons in the firm, for a number of reasons. If successful, Pfizer may be able to capitalize on Icagen's capabilities and alleviate the losses to be realized when it loses patent protection on Viagra and Lipitor. Investors may be able to capitalize on the situation for themselves as well.

Pfizer is currently trading at about $18.30 and is up by about 4.5% for the year.

Icagen is currently trading at $6.00 and is up by about 239% for the year.

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