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Five benefits and challenges of the Pfizer/Allergan mega-merger

Published on 07/12/15 at 10:26am
Pfizer CEO Ian Read
Pfizer chief executive Ian Read will remain at the helm of the new company - for now

Pfizer was extremely keen to get the $160 billion deal done, but what is it getting out of the acquisition, and what are the risks?

Positives

Tax inversion

Controversial or not, moving its tax domicile from the US to Ireland is expected to allow Pfizer to cut its tax bill from around 26% to 17 or 18%. This should free up significant funds for investment into the business.

Growth boost

The quick and easy route of growing by acquisition is very much in vogue in 2015, and Pfizer will look forward to boosting flagging sales. While Pfizer’s revenues fell 5% in the first nine months of 2015, Allergan’s grew to $10.87 billion. Over the last five years, the Ireland-based company has grown revenues at a rate of more than 40% per year.

Portfolio growth

Allergan’s portfolio of specialty pharmaceutical products is a well-performing and growing division, and Pfizer has bolstered its range of products with the addition of Linzess, Juvederm and Namenda to name but three, in addition to Allergan’s growing generics business, not to mention…

…Botox

The $2 billion a year beauty drug deserves a mention in its own right. An ageing population is likely to keep sales of this blockbuster steady at the very least for a while to come.

Brent Saunders

While Pfizer’s Ian Read will remain as chief executive of the combined Pfizer company, his age – at 62 years old –means retirement in the near future is likely. In fact, it is company policy for the chief executive to step down at 65. Brent Saunders, now chief operating officer and president, looks a decent bet for the future, having successfully steered Allergan’s growth in his short tenure, and fended off less lucrative interest from other suitors in recent times before the huge Pfizer buyout. Time will tell if he takes the top job in the next few years.

Negatives

Image problems

Many senior US politicians, the most prominent of which are the current President and three who could be the next president, have spoken out criticising Pfizer’s plan to slash its tax bill by relocating to Ireland. The deal has been structured in such a way that smaller Allergan actually – technically – purchased its larger rival, allowing exploitation of this tax loophole. While the benefits of the huge savings would surely outweigh the negative publicity in its home nation, Pfizer would prefer not to be demonised in the eyes of its most important customer base at a time when pharma companies are facing increased scrutiny and pressure over drug pricing and access issues.

Restructuring pains

Both of the newly-merged companies were already in the process of restructuring recent acquisitions into their respective business before this record-breaking transaction. However, it could be argued that having swallowed five major companies in the last 15 years, Pfizer has the experience to make this a relatively painless process. Time will tell two what extent the different business cultures of the companies are compatible.

Minimal pipeline overlap

Analysts have struggled to find a great deal of overlap in the two companies’ therapeutic areas, with Pfizer concentrating its efforts on oncology, diabetes and heart disease medications and Allergan focusing on women’s health products, cosmetics, dermatology and ophthalmology. It could be said that there is minimal potential for R&D benefits and combination products, but on the other hand, the combined companies certainly have a broad mid-to-late stage portfolio.

Job losses

Despite Ian Read’s assertion that a reduced tax bill will afford Pfizer more money to invest in the US and add jobs in the short term, the reverse is likely to be true. The synergies created by the Allergan tie-up are likely to lead to redundancies in the US. On the other side of the pond, the effects are already being felt; Pfizer announced this month that as part of its evolving’ R&D strategy, it is to close a UK R&D facility, with the loss of 120 jobs. This is despite the company’s statement at the time the merger was announced that it would give it “greater resources to invest in R&D.” 

Delayed divestment

Before the deal was successfully struck, Pfizer was in the midst of planning for a split in the company into two high and low-margin business units, potentially followed by a sale of the lower-margin section. But to the disappointment of some investors, the company has now delayed the decision to 2018.

Joel Levy

For more in-depth analysis of Pfizer's deals and alliances profile, purchase the Global Data market report. Pfizer - Pharmaceuticals & Healthcare - Deals and Alliances Profile provides you comprehensive data and trend analysis of the company's Mergers and Acquisitions (M&As), partnerships and financings. For more information, and to purchase the report, go to: http://www.pharmafile.com/content/pfizer-inc-deals-and-alliances-profile.

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