Two bigs make a giant

The $160-billion deal to combine Pfizer and Allergan would create largest pharma in the world

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NEW YORK & DUBLIN—If you recall the old Reese’s Peanut Butter Cup candy commercials, someone with peanut butter would run into someone with chocolate. First came the complaints that “You got your chocolate in my peanut butter” and “You got your peanut butter on my chocolate.” And then, upon tasting the result, there came the epiphany that these were “two great tastes that taste great together.”
Well, the Viagra is about to get into the Botox. And vice-versa. And it remains to be seen what kind of flavor will result—but it is a huge deal for market-watchers, competitors, consumers, regulators and others to consider.
We’re talking, if the metaphors are getting too confusing, about the culmination of rumors since at least October that American pharma giant Pfizer and Irish powerhouse Allergan planned to merge. On Nov. 23, that ceased to be a rumor when the two parties announced a stock transaction deal currently valued at $363.63 per Allergan share, for a total enterprise value of approximately $160 billion, based on the closing price of Pfizer common stock of $32.18 on Nov. 20. The transaction represents more than a 30-percent premium based on Pfizer’s and Allergan’s unaffected share prices as of Oct. 28. Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares.
Now, it might be unfair to use Viagra and Botox as the avatars for the two companies here—after all, both have a number of therapeutics, marketed and experimental, for serious and sometimes deadly diseases as well—but those are two blockbusters that are closely associated with each entity, and this is a deal that will take two already huge companies to make the biggest pharmaceutical company of them all.
How big? Roughly $63.5 billion in annual sales, $9 billion a year in research spending and around 110,000 employees.
So big that the executives are already thinking of splitting the company up. As the Wall Street Journal noted of the deal, Pfizer executives have long considered splitting the company, but were concerned that its businesses might not be large enough to stand alone. “Now, with Allergan, the company would have strength in both high-cost, high-growth drugs as well as older, lower-cost drugs to make such a split,” WSJ reporter Jonathan D. Rockoff wrote, adding, “On Monday, executives said they would consider splitting the combined company into two by 2018.”
Coming back to the present, though, under the terms of the proposed transaction, the businesses of Pfizer and Allergan will be combined under Allergan plc, which will be renamed Pfizer plc. The companies expect that shares of the combined company will be listed on the New York Stock Exchange and trade under the “PFE” ticker. Upon the closing of the transaction, the combined company is expected to maintain Allergan’s Irish legal domicile. Pfizer plc will have its global operational headquarters in New York and its principal executive offices in Ireland.
The deal comes shortly after changes to U.S. Department of Treasury rules designed to discourage so-called “inversion deals” that move U.S. companies to other nations for tax benefit reasons. Analysts by and large don’t see the new rules as an impediment to this deal, given how it is structured, but the sheer size of the deal will attract scrutiny by government agencies and completion is by no means a sure thing, even with both boards of directors in agreement.
The Mergermarket Group, for one, has said that at least one Washington, D.C.-based regulatory consultant recently noted that the Treasury Department indicated with its new rules that further rulemaking could be forthcoming, and there is some speculation, Mergermarket says, that the Treasury Department “has kept the additional rulemaking holstered as a deterrent to companies that might attempt particularly sensitive inversion schemes.” Whether that might come into play here remains to be seen.
Three of the major U.S. presidential contenders have chimed in loudly on the matter, with Hillary Clinton saying inversion deals like this one “leave U.S. taxpayers holding the bag,” Sen. Bernie Sanders saying the deal would be bad for consumers and let yet another major U.S. company hide profits overseas and Donald Trump calling the plan for Pfizer to leave the United States “disgusting.”
For their part, looking at the broad picture, Allergan and Pfizer said that this deal will create “a new global biopharmaceutical leader with best-in-class innovative and established businesses,” enhance revenue and earnings growth and broaden an innovative pipeline with more than 100 combined mid- to late-stage programs in development and preserve the “opportunity for a potential future separation of innovative and established businesses.”
The transaction is expected to close in the second half of 2016, be neutral to Pfizer’s adjusted diluted earnings per share in 2017, accretive beginning in calendar year 2018 and more than 10-percent accretive in 2019 with high-teens percentage accretion in 2020. The companies expect combined operating cash flow in excess of $25 billion beginning in 2018.
“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” stated Ian Read, chairman and CEO of Pfizer. “Allergan’s businesses align with and enhance Pfizer’s businesses, creating best-in-class, sustainable, innovative and established businesses that are poised for growth. Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry.”
“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” said Brent Saunders, CEO of Allergan. “This bold action is the next chapter in the successful transformation of Allergan, allowing us to operate with greater resources at a much bigger scale. Joining forces with Pfizer matches our leading products in seven high-growth therapeutic areas and our robust R&D pipeline with Pfizer’s leading innovative and established businesses, vast global footprint and strength in discovery and development research to create a new biopharma leader.”
John Colley, professor of practice at Warwick Business School and an expert on large-scale mergers, has his own thoughts on motivations, noting that “Industry valuations increase as industry players become concerned at being left behind in the race for scale. In the instance of Pfizer it is also pursuing greater growth as its own established products are losing patent protection at a greater rate than it can produce innovative products.”
“Allergan’s drug portfolio has greater potential for growth,” he continues. “In addition, the lure of tax advantages from a Dublin head office has been a significant factor in driving this deal. The threat of succumbing to U.S. tax rates has meant that Pfizer has been desperate for a deal outside the U.S. The failure of the AstraZeneca bid in a consolidating industry has driven the substantial price paid for Allergan.”

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