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By Bloomberg

Pfizer Inc. will pay $850 million for rights to a cancer drug being developed by Merck KGaA, giving the U.S. company an experimental treatment of the type that it sought when it made a hostile bid for AstraZeneca Plc.

The agreement also calls for Pfizer to pay as much as $2 billion to Merck if the drug, known as MSB0010718C, meets commercial and regulatory goals, Darmstadt, Germany-based Merck said in a statement today. New York-based Pfizer cut its 2014 earnings forecast to reflect the $850 million upfront payment.

The drug is a so-called immunotherapy, a class of cancer medicines that Citigroup Inc. has said may eventually be a $35 billion market. The medicine targets anti-PD-L1 antibodies, similar to AstraZeneca’s MEDI-4736, prompting speculation that Pfizer is less likely to renew its effort to buy AstraZeneca.

“For me, the takeaway is that Pfizer will not bid for Astra,” Odile Rundquist, an analyst at Baader Helvea in Geneva, said by phone today. Aside from tax benefits that Pfizer would have achieved, “the real attractiveness of Astra is the immuno- oncology assets. But Pfizer has now found another partner.”

Merck rose 3.2 percent to 76.69 euros at 12:54 p.m. in Frankfurt. AstraZeneca declined 2.7 percent to 45.29 pounds in London, while Pfizer was down 2 percent in premarket U.S. trading.

Pfizer and Merck will jointly fund research and commercialization costs for the cancer drug and will share revenue, they said. Analysts predict AstraZeneca’s PD-L1 drug will have sales of $1.6 billion by 2020.

‘Top Priority’

The two companies will study the product as a standalone treatment and in combination with other medicines they produce. Merck said in September it was seeking a partner for the product, which it’s studying in lung and ovarian cancer, among other indications.

“Immuno-oncology is a top priority for Pfizer,” said Albert Bourla, Pfizer’s group president for vaccines, oncology and consumer health-care. “This alliance enables us to significantly accelerate the timeframe of our development programs and move into the first wave of potential immuno- oncology based treatment regimens.”

Pfizer in May gave up on a $117 billion takeover of AstraZeneca after the London-based company rejected the offer as too low, and said it was too politically risky for the U.S. company to seek to move its tax domicile to the U.K. Under U.K. regulatory rules, Pfizer can resume its effort to buy AstraZeneca, if it chooses, after Nov. 26. AstraZeneca will brief analysts and investors tomorrow on its strategy.

Product Collaboration

Pfizer needs more than one drug, so the anti-PD-L1 medicine wasn’t the only reason it was interested in AstraZeneca, said Sam Fazeli, an analyst at Blooomberg Intelligence. Still, “it’s not unreasonable that traders would get spooked” by the Pfizer- Merck KGaA agreement, he said.

Pfizer and Merck also agreed to co-promote Pfizer’s Xalkori lung-cancer medicine in the U.S. and other markets.

“This collaboration will accelerate our work in immuno- oncology, one of the most exciting areas of cancer research,” Merck Chief Executive Officer Karl-Ludwig Kley said on a conference call today.

The agreement will help Merck catch up to companies that are further ahead in cancer immunotherapies, such as Roche Holding AG, AstraZeneca, Bristol-Myers Squibb Co. and Merck & Co., Alistair Campbell, an analyst at Berenberg in London, wrote in a report today. Merck KGaA isn’t related to Merck & Co. of the U.S.

“Merck is some way behind the leading immuno-oncology players and we believe that to gain a foothold will require substantial investment across a wide range of clinical trials in numerous cancer types,” Campbell wrote. “Merck has attracted a deep-pocketed partner in Pfizer.”

Because of the upfront payment, Pfizer now sees 2014 earnings per share of $1.40 to $1.49, compared with $1.50 to $1.59 previously. The company maintained other elements of its 2014 financial guidance.