Prediction: This will be Pfizer’s next big move

Despite the impressive results in 2020 and 2021, it is no secret that Pfizer (PFE 3.39%) is in the process of reinventing itself. Without a significant boost in profits from coronavirus products that prop up the top line, it could be years before revenue surpasses its recent peak.

But that just means the company has an incentive to do big things and take big risks to please its shareholders. With that in mind, here’s my prediction for what its next big move will be.

There is currently a great incentive to acquire some type of biotechnology

Pfizer’s big plan now is to lay the foundation for growth through 2030 and beyond. As part of that plan, the company expects to add $20 billion in revenue from new medicines produced using its own research and development (R&D) capabilities and $25 billion from acquisitions of other biopharmaceutical companies and their most promising pharmaceutical assets.

When it recently bought Seagen, an oncology biotech with advanced therapeutic technology, it was willing to take on $31 billion in debt to make the purchase. Cancer will remain one of Pfizer’s new core focuses, according to management. But there’s another area it’s looking at where it hasn’t made as much of a move: weight loss.

Although the drugs produced by Eli Lilly AND New Nordisk have enjoyed huge success, Pfizer’s own weight-loss programs haven’t quite worked out as expected. Some candidates have been canceled entirely, and the most advanced programs are still in Phase 1 clinical trials — years away from launch, assuming they ever launch at all. With a market that could be worth as much as $130 billion by 2030 at stake, laboring and then entering the market long after current candidates have had years to secure market share is simply not an option.

That’s why I predict Pfizer’s next big move will be to acquire a promising biotech with late-stage weight-loss programs, or to acquire such programs outright and complete the development process internally. Here’s why this move is a real possibility.

First, the company has a ton of money. In the first quarter, it had more than $11.9 billion in cash, cash equivalents, and short-term investments. It also has just over $68.7 billion in debt, giving it a debt-to-equity ratio of 0.7. In other words, it has a ton of money, and while it’s starting to look a little indebted, it likely still has more than enough flexibility to borrow significant amounts of cash if necessary.

Pfizer is so well-capitalized that it could afford to buy more than one of the leading biotechs developing anti-obesity drugs. Check out this chart that breaks down the enterprise value (EV) of players like Viking Therapy, Altimmunological, Therapy StructureAND Zealand Pharma:

ALT Enterprise Value data by YCharts.

The actual acquisition price for these businesses may be higher than their EVs suggest. But they are well within the range of what Pfizer can afford today—assuming the company intends to enter the weight-loss drug market sooner.

But buying these biotechs outright or buying their core assets may not be necessary for Pfizer to gain the exposure it wants. Instead, it could easily opt for a development partnership, taking on a lower cost burden in exchange for a lower ceiling on potential profits from future sales. If anything, it’s surprising that Pfizer hasn’t already partnered on the weight-loss front.

Don’t count eggs until they hatch

Pfizer’s stock is likely to see a significant increase in value the day the company announces its acquisition of a weight-loss biotech company, assuming that prediction proves true.

But until that day comes, don’t buy these stocks with the expectation that an announcement is just around the corner. Likewise, remember that sometimes clinical trials fail, even in late-stage programs that are the most attractive acquisition targets. There’s a risk that an acquisition could end with little evidence of spending.

Also, consider that investing in one of these biotech companies may be a better option than Pfizer itself right now. If a larger company makes an offer, you could benefit as well.

Alex Carchidi has no position in any stocks mentioned. The Motley Fool has a position in and recommends Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.