The mega-pharma that will be left after Pfizer acquires Allergan for $160bn will be a sprawling mess of a company that sets back any efforts to unlock value through a split-up – if, indeed, those plans even really exist any more.
Pharma’s biggest ever deal will enable Pfizer to move its virtual headquarters and avail itself of more corporate-friendly tax authorities in Ireland, although this is a huge price to pay to knock eight points from its rate, and adds complexity to its long-term strategic vision. Pfizer has been expected to bulk up before it slimmed down, but investors eager for the breakup will be waiting past a mooted 2016 decision deadline.
So long, IRS
The all-equity deal will see Allergan’s investors receive 11.3 shares of the combined company for each of one of Allergan, valuing them at $363.63. That represents a 30% premium on the unaffected price on October 28, the day before Allergan disclosed an approach from Pfizer.
Following a close at the second half of 2016, Pfizer estimates that the transaction will be neutral to earnings in 2017 and begin building value in 2018 – with an “enhanced” share buyback programme, enabled by access to overseas cash, contributing to that accretion. Shares slid 4% to $31.12 in mid-morning trading today.
The deal also assumes $2bn a year in synergies, about one third from R&D and two thirds from operating expenses. This amount was characterised by at least one analyst as “conservative”, but Pfizer's finance chief, Frank D’Amelio, said, “There isn’t a lot of overlap. They’re both well-run companies.”
Ian Read holds onto they prized chairman and chief executive title. Allergan’s Brent Saunders completes his rapid climb through biopharma’s C-suites to become Read’s heir-apparent as president and chief operating officer.
As for taxes, the underlying objective of the transaction, Pfizer estimates that its global rate will drop from 25% to 17-18%. Allergan shareholders will hold 44% of the equity of the new company, which should allow it to escape the tightened inversion rules being imposed by the US Treasury Department (Treasury makes last stand against Pfallergan, November 19, 2015).
Down the road again
Since Pfizer struck out on AstraZeneca last year, another big move has been expected for some time. What is perhaps more unexpected is the acknowledgement that the long-expected decision on whether to split into as many as three new units would now not happen until 2018.
Mr D’Amelio's comment on the analyst call today – “Given the size of this transaction, we’ve really re-prioritised” – rings true.
On top of this being pharma’s biggest-ever M&A deal, Allergan has more than 200 revenue-generating products; classifying each one as an innovative or established product as Pfizer envisions its break-up will be a big task. Given that Allergan brings to the merger far more growth than Pfizer does, the case for an independent innovative products division has been strengthened.
But for those building an investment strategy around the value unlocked by a potential break-up, this will only be seen as disappointing. On today’s conference call some analysts enquired with barely disguised frustration about the delay; Bernstein’s Timothy Anderson noted that it will have been seven years from the break-up idea first emerging to a decision.
Acquisitions is how Pfizer got to be the Pfizer of today. Breaking up is harder to do, and now the group has found a reason to put off the tough decision for a couple more years. Today ought to give investors reason to wonder if the new mega-pharma will ever be comfortable with being something other than Pfizer someday.