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Pfizer Inc. (PFE - Analyst Report) recently announced its intention to acquire privately-owned biopharmaceutical company Excaliard Pharmaceuticals, Inc. With this acquisition, Pfizer will add a mid-stage candidate for the treatment of skin scarring to its pipeline.

Terms of the Agreement

While financial details of the agreement were not disclosed, Pfizer said that it will make an upfront payment to Excaliard. Pfizer will also make contingent payments on the achievement of certain milestones. The acquisition is scheduled to close by year end.

The candidate

EXC 001, the lead candidate at Excaliard, is being developed for the treatment of skin fibrosis or skin scarring. EXC 001 has been developed by Excaliard in collaboration with Isis Pharmaceuticals (ISIS - Analyst Report). EXC 001 works by targeting connective tissue growth factor (CTGF), a growth factor that is over-expressed in damaged skin or tissue following a traumatic event.

Excaliard had presented positive phase II data on EXC 001 earlier this year. In addition to being safe and well-tolerated, EXC 001 significantly reduced scar severity in both hypertrophic and fine line scarring. EXC 001 is currently in a phase IIb study in patients following breast scar revision surgery. With no FDA-approved products for the reduction of scar severity, EXC 001 could have significant opportunity if developed successfully.

Isis Pharma to Gain

Since Isis Pharma is an equity owner of Excaliard and has an exclusive worldwide license agreement for the development and commercialization of certain antisense drugs, including EXC 001, the company is entitled to receive a part of the upfront and milestone payments to Excaliard.

Isis Pharma will receive up to $14 million for its equity ownership of Excaliard.  Once the acquisition closes, Isis Pharma will receive $4.4 million.  The company stands to receive up to $9.6 million on the achievement of development and commercial milestones for EXC 001. Isis Pharma is also eligible to receive milestone and royalty payments under its licensing agreement with Excaliard for EXC 001.

Our Recommendation

We currently have a Neutral recommendation on Pfizer. While near-term earnings growth will come in the form of cost cutting and share repurchases, longer-term growth will depend on the success of drug development. Pfizer will face additional challenges later this year with the loss of US exclusivity on Lipitor on November 30. The company carries a Zacks #2 Rank (Buy rating) in the short run.

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