Pfizer Inc. and Allergan plc called it quits on their $160 billion deal two days after the U.S. Treasury Department said it was taking actions, effective this week, to curb U.S. corporate tax inversions.

The decision unwinds months of work and millions in expenses to combine the companies – a move that was expected to reduce Pfizer's tax rate from approximately 25.5 percent to 17 percent to 18 percent for the combined company. The transaction would have been the largest in the history of the pharmaceutical industry. (See BioWorld Today, Nov. 24, 2015.)

New York-based Pfizer confirmed that it agreed to pay Allergan $150 million to reimburse expenses associated with the transaction but was mum on its next steps.

In a brief statement, Ian Read, the company's chairman and CEO, said Pfizer had approached the transaction "from a position of strength and viewed the potential combination as an accelerator of existing strategies. We remain focused on continuing to enhance the value of our innovative and established businesses."

Read cited the strength of recent product launches and said Pfizer's late-stage pipeline offers "several attractive commercial opportunities with high potential across several therapeutic areas."

Pfizer will decide by year-end whether to separate its "innovative and established" businesses, Read added. The company gave itself nearly a month to answer additional questions, pledging to provide more details on its first quarter conference call, scheduled for May 3.

Allergan, in contrast, took to the airwaves, as Brent Saunders, the company's president and CEO, spoke directly to media outlets before hosting an hour-long conference call that included most of the company's top management. The Dublin-based company maintained that it remains well-positioned as a high-growth biopharma company and will focus on continuing that trajectory.

"The Blue Chip names in our industry were built in part by M&A and in part by R&D," Saunders said on the call, adding that a combination of the two is required "to create great, premier companies." Companies focused on M&A at the expense of R&D are finding "that's proving to be a non-sustainable model."

Allergan is effectively managing the balance, he added, pointing to a pipeline with 70 mid- to late-stage programs, including 16 expected regulatory submissions in 2016.

And Saunders reiterated that the company's $40.5 billion deal with Teva Pharmaceuticals Industries Ltd. is moving forward and expected to close by midyear. That transaction, in which Allergan plans to divest its global generics business in return for a combination of approximately $33.75 billion in cash and the remainder in Teva stock, was awaiting the close of the Pfizer-Allergan deal, but "we haven't been disadvantaged by time in any way," Saunders said. (See BioWorld Today, July 28, 2015.)

He said Allergan and Teva started to work on the agreement long before Pfizer came into the picture and remain committed to executing the transaction.

"I'm very comfortable that we, as a team, know exactly what we need to do and we will do exactly what we have to do," Saunders said.

Teva has done most of the heavy lifting, he added. The Jerusalem-based company has begun to restructure internally and has disclosed that some 200 members of Allergan management will transition to Teva as part of the arrangement.

Questioned about walkaway rights, Saunders maintained that neither company is seeking to break the deal, though it still must pass muster with regulators in the U.S. and other countries.

Going forward, the Treasury ruling "really does not impair our ability to do anything," he said, noting that Allergan "has done a lot of the math" about its options.

"We have tremendous flexibility to use equity in a deal if we decided that was the appropriate thing to do for shareholders," Saunders said. "We could use stock directly, almost without restriction, but we could also sell equity and raise cash, so there are lots of alternatives."

With Treasury focused on current and future deals, Allergan fully escapes any impact following its 2014 acquisition by Actavis plc, of Dublin, for $66 billion, he added. (See BioWorld Today, Nov. 18, 2014.)

Based on a preliminary review, Allergan officials also said they expect the new U.S. Treasury regulations to have no material impact on the company's standalone tax rate or its ability to entertain future deals.

The company plans to report its first quarter earnings by May 10, and Saunders said that discussion will include an update on Allergan's plans to simplify its operations after the Teva deal closes.

As investors sorted through the implications, trading in both companies was brisk. Shares of Pfizer (NYSE:PFE) gained $1.55, Wednesday to close at $32.93, while Allergan (NYSE:AGN) closed at $244.62 for a gain of $8.07, a day after falling 18 percent on the Treasury news to a one-year low of $226.43.

'BACK TO SQUARE ONE'

In the wake of the big biopharma tax inversion break-up, analysts had a field day sorting through potential scenarios for each company and prognosticating on the larger corporate landscape. Although timing of the decision by Treasury and its Internal Revenue Service unit was clearly aimed at the Pfizer-Allergan deal, the restrictions put into place loom large across corporate America.

In an email following the call, RBC Capital Markets analyst Randall Stanicky called a standalone Allergan "best in class in specialty," maintaining that the company's goal of 10 percent top-line and 15 percent bottom-line growth was "realistic" and predicting the stock "has a path towards $300."

He pointed to Allergan's stance on capital deployment as the biggest takeaway from the company's call, noting the Teva proceeds "can be deployed across M&A, debt reduction and/or share repurchases, as well as other ways of creating shareholder return with 'everything on the table.'" He added, "We think the focus on M&A is going to remain high with no preference toward a big deal [vs.] a 'string of pearls.'"

Leerink Partners LLC analyst Jason Gerberry was similarly optimistic, citing a strong core, healthy balance sheet and solid management as key factors propelling the independent Allergan reboot. Proceeds from the Teva deal give Allergan "a broad range of capital deployment options, including debt pay down, share buyback and M&A," he wrote. "In our view, AGN will likely put the TEVA proceeds to work through a mix of these options."

He cited the potential repayment of $6 billion in Allergan debt that is maturing over the next two years as well as "a few small to mid-size M&A targets." Allergan's insistence that it was not limited in evaluating additional deals that would add value to the company "suggests to us smaller bolt-on transactions aren't gated by the completion of TEVA deal," Gerberry added.

And Piper Jaffray analyst David Amsellem concluded the post-Pfizer Allergan had "ample room" to create value, also with an eye to its "enviable cash war chest" following the generics divestiture to Teva.

Despite some anxiety over challenges to the exclusivity of Restasis (cyclosporine ophthalmic emulsion) and costs associated with its direct-to-consumer advertising, Amsellem predicted recent launches will provide a boost to Allergan's otherwise strong organic growth, including what Saunders called its "pipeline in a product," Botox (onabotulinumtoxinA). Among the promising new products, he mentioned Viberzi (eluxadoline), approved last year to treat diarrhea-predominant irritable bowel syndrome, Kybella (deoxycholic acid) – gained from the $2.1 billion acquisition of Kythera Biopharma Inc. – to treat submental fat, hospital anti-infective Avycaz ceftazidime/avibactam) and atypical antipsychotic Vraylar. (See BioWorld Today, Feb. 27, 2015, April 30, 2015, May 29, 2015, and June 18, 2015.)

Amsellem also liked Allergan's late-stage pipeline assets, including antidepressant rapastinel and oral CGRP antagonist ubrogepant for migraine, both expected to head into phase III studies this year. "We would also key an eye on phase IIb data for relamorelin in diabetic gastroparesis," he added.

Prospects for the Treasury-jilted Pfizer were muddier, perhaps captured by the simple "What now?" posed in a note by Credit Suisse analyst Vamil Divan. He ticked off four key questions for management, addressing the areas of business development, the potential operational split, capital allocation and management structure.

In terms of M&A, for instance, Divan speculated whether Pfizer will place greater emphasis on deals to boost the innovative side of the business, the established side or both. Will Pfizer show a preference to ex-U.S. deals to leverage its large ex-U.S. cash position, he asked. And are future attempts at inversions off the table?

"Beyond business development, we also wonder if the inability to complete the AGN transaction will impact PFE's ability to continue to aggressively repurchase shares and grow its dividend in the foreseeable future," Divan observed.

Meanwhile, Evercore ISI analyst Mark Schoenebaum wrote in an email that "we still like PFE," despite the merger's demise. He called the $150 million termination fee "relatively small," noting that the adverse change in tax laws was specifically carved out in the merger agreement.

Going "back to square one looking at Pfizer as a standalone company," Schoenebaum cited the biopharma's solid portfolio of commercial products "and perhaps underappreciated pipeline with many interesting drug candidates, including a broad (although early) portfolio in immunoncology, a collection of biosimilar candidates (developed internally and bought through the Hospira acquisition), vaccines for hospital-acquired infections, etc." He called the potential split of Pfizer's business units "the ultimate event that could un-lock the value" of the company.

After last year's $17 billion acquisition of Hospira Inc., Schoenebaum suggested that Pfizer "probably has critical mass to transform its Global Established Products business unit to an independent company," although its innovative products business units might benefit from additional acquisitions. He predicted the company might combine share buybacks with "active business development" to position the innovative products portfolio prior to a potential split.

Reaction to demise of the Pfizer-Allergan marriage was mixed across the business and political landscape.

Democratic presidential hopefuls Hillary Clinton and Bernie Sanders took to Twitter to applaud the biopharma bust-up. Last month, Saunders fired off a letter to Treasury Secretary Jack Lew asking the government to halt the proposed nuptials, which he called a tax scam that would make Pfizer an Irish company in name only. (See BioWorld Today, March 22, 2016.)

But Tom Saunders, president of the U.S. Chamber of Commerce, publicly questioned the scope of Treasury's authority and raised the possibility of suing the Obama administration over the regulations.

Reuters reported that a Treasury Department spokeswoman said its staff had taken steps to ensure the plan had a strong basis in law and believed their authority to act was clear.

In response to a question during Allergan's conference call, even CEO Saunders called Treasury's attempt to build a wall around U.S.-based companies "incredibly misguided and unproductive policy for the United States." But after a pause, he added, "we'll take the advantage for Allergan and Allergan shareholders."

Questions also swirled around Shire plc's impending $32 billion takeover of Baxalta Inc. The companies shook hands on the deal in January, five months after Shire lobbed its initial, unsolicited salvo. (See BioWorld Today, Aug. 5, 2015, and Jan. 12, 2016.)

That transaction does not involve a tax inversion, per se, since Shire, of Dublin, would not change its tax domicile to absorb Bannockburn, Ill.-based Baxalta. Perhaps sensing the unease following the Treasury notice, Shire issued a brief statement late Wednesday acknowledging the rules and confirming the Baxalta transaction is expected to proceed as planned and to close midyear.

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