19- Another consultant on the project has looked at the summary of profits in Table 1 (above). They argue that since Medivation's profits will be significantly higher once acquired, it definitely makes sense to acquire them. You point out that it depends on the actions of the other firms. Apply game theory, describe different potential outcomes, and find the Nash Equilibrium outcome.(The descriptions of the different outcomes should include which choices Pfizer's competitors made, and what Pfizer's profits would be if their competitors make the decisions you've described).
Mini-case: “Pfizer to Buy Medivation for $14 Billion,” Wall Street Journal, 22 Aug 2016. Text has been edited for length and clarity. Pfizer Inc. said Monday that it had agreed to buy biotech Medivation Inc. for about $14 billion, in a move that adds one of the crown jewels of the multibillion-dollar market for cancer drugs to Pfizer’s portfolio. The agreement ends months of bidding for San Francisco’s Medivation, one of the most desired independent biotechs because it sells a leading prostate-cancer drug. Pfizer will pay $81.50 a share, a 21% premium to Medivation’s closing stock price Friday. Medivation shares moved up nearly 20% to $80.41 in trading on Monday in New York, as Pfizer shares fell 5 cents to $34.86. Pfizer said the deal would add 5 cents to earnings in the first full year after closing and isn’t expected to affect its 2016 financial guidance. Pfizer said it plans to finance the transaction with its cash holdings. If the acquisition isn’t completed, Medivation could pay Pfizer a $510 million termination fee, according to a regulatory filing. Pfizer has been seeking to expand its lineup of such oncology treatments. Xtandi would give the New York drug company a beachhead in prostate cancer complementing its breast-cancer treatment Ibrance, which is on track to be a blockbuster. Medivation’s drugs in development also could complement Pfizer’s efforts to develop combinations of cancer agents with so-called immunotherapies, which deploy the immune system in the fight against cancer. The acquisition would further Pfizer CEO Ian Read’s efforts to bolster what he refers to as the innovative side of the company’s business. The move “accelerates our strategy in line with our priorities,” he said on a call with analysts Monday. Pfizer agreed to take over Allergan PLC late last year in a $150 billion deal, but the two companies parted ways in April after the Obama administration targeted the proposed combination with new rules. Cancer is one of the pharmaceutical industry’s biggest markets, with world-wide sales amounting to roughly $80 billion a year. Despite charging high prices, often surpassing $100,000 a year per patient, companies haven’t faced the challenges securing reimbursement that have limited sales of new drugs for other diseases. Medivation is one of the few independent biotechs left with a cancer treatment that already is approved and selling well. CEO David Hung says he decided to found the company in 2003 after watching a 28-year-old breast-cancer patient die during his oncology fellowship. Medivation was put in play after French drug company Sanofi SA made an unsolicited proposal of $52.50 a share in cash, which the biotech rejected in April, saying the offer substantially undervalued the company. Medivation shares were trading as low as $26.41 in February. Following Sanofi’s proposal, a bidding war ensued. With Pfizer’s deal, Medivation is fetching more than double the $6 billion it was valued at earlier this year. Xtandi has held its own against a rival prostate-cancer treatment from Johnson & (Links to an external site.)Johnson called Zytiga. But J&J is developing a new prostate-cancer drug that could pose a threat to Xtandi, according to analysts. On Monday, Sanofi said that while it saw benefits to a potential deal with Medication, “we are first and foremost a disciplined acquirer and remain committed to acting in the best interests of Sanofi shareholders.” Given the imminent threat of a new prostate cancer drug from J&J, Pfizer has hired you as a consultant to evaluate this acquisition. In addition to the information reported in the popular press (above), your research into the company has revealed the following: if Pfizer withdraws its bid and does not acquire Medivation, Sanofi will have the opportunity to either acquire the firm for $12 billion (their final bid), or pass. The patents of both Xtandi and Zytiga expire in 10 years—once that happens, generics will enter the market and prices will fall so much that profits will be negligible. For the next 10 years, the total profits (before acquisition costs) will stay the same at $3 billion annually, but who gets what will depend on how many competitors there are in the market: Table 1: Summary of Profits Medivation Aquired Medivation Not Acquired J&J launches new product Medivation profts* $1.5 b $0.7 b J&J profits $1.5 b $2.3 b J&J doesn’t launch Medivation profts* $2.55 b $0.4 b J&J profits $0.45 b $2.6 b * Medivation’s profits go to its acquirer if either Pfizer or Sanofi acquires it. All profits annual, and do not account for fixed costs such as acquisition, clinical trials, fines, etc. In order for J&J to launch this new drug, however, they’ll still need to spend $5 billion for safety testing, final rounds of clinical trials, and marketing to launch the drug, so they’re waiting to see whether Medivation gets acquired or not. Pfizer wants you to use game theory to determine whether they should go through with the deal or back out. Question: Question 19 Question 19 Another consultant on the project has looked at the summary of profits in Table 1 (above). They argue that since Medivation's profits will be significantly higher once acquired, it definitely makes sense to acquire them. You point out that it depends on the actions of the other firms. Apply game theory, describe different potential outcomes, and find the Nash Equilibrium outcome. (The descriptions of the different outcomes should include which choices Pfizer's competitors made, and what Pfizer's profits would be if their competitors make the decisions you've described).