Tax-inversion prospects in the would-be merger of Pfizer Inc. and Allergan plc are getting most of the airtime as pundits continue their guesswork, but how to blend cultures, decide on leadership in the firm that would result, and re-shuffle programs to satisfy antitrust scrutiny need attention, too, said Yogesh Bahl, managing partner in life sciences at the advisory firm Alix Partners in New York.
"We've got a bit of chaos theory right now, given the lack of information," Bahl told BioWorld Today, adding that he thinks the possibility of a Pfizer/Glaxosmithkline plc (GSK) tie-up is not off the table, though it was New York-based Pfizer and Allergan, of Dublin, that confirmed yesterday they are in "friendly," long-rumored talks. He conceded that new tax-inversion rules from the Internal Revenue Service, issued in June, "will be important in deciding which way the decision is going to go," and the failed merger of Pfizer and London-based Astrazeneca plc, of London, yielded "a number of lessons." (See BioWorld Today, May 20, 2014.)
"With many of these large acquisitions, whichever way it goes, there's a rationalization of the business and there can be layoffs," Bahl said. "The question will be, where is this going to happen? A significant number of employees and operations have to remain in the new jurisdiction if it's foreign. I do think [Pfizer] would have learned from the Astrazeneca deal, as far as managing expectations."
But there's plenty more to manage. Likely ahead is "a discussion on the research and development pipelines and the products," especially since Allergan sold its generics portfolio to Teva Pharmaceuticals Industries Ltd., of Petah Tikva, Israel, for $40.5 billion. "What will Pfizer do with its generics arm? Will they follow suit and start divesting some of their other businesses? The question will be, whether it's GSK or Allergan, who's going to spin off what, and what does the resulting company look like? That's going to be just as important as understanding the tax consequences," he said. In May 2013, Pfizer gave up its remaining interest in Zoetis Inc., of Madison, N.J., the former animal health unit that had then just completed its IPO. (See BioWorld Today, July 28, 2015.)
If the Pfizer/Allergan deal goes through, it could be worth more than $332 billion, given Pfizer's value ($219 billion) and Allergan's ($113 billion), along with whatever takeover premium might be involved. New Brunswick, N.J.-based Johnson & Johnson's market cap is about $278 billion. A draw for Pfizer, Bahl said, is Allergan's dermatology franchise, including the blockbuster Botox (onabotulinumtoxin type A), "to the extent that pharmaceutical companies are looking for pipelines not dependent on reimbursement," which is a pretty large extent. Dermatology "would be a good, new area for Pfizer," he said. In the device realm, so would Allergan's Liletta, a levonorgestrel-releasing intrauterine system for birth control. "That might play nicely to Pfizer's women's health initiatives," he said. "Globally, there is growth in dermatology diagnostic devices" as well to detect skin cancer and eczema. "Dermatology is a new and growing area that would allow both companies to get into the medical device side, and maybe diversify some of the risks" of the likes of biologics development, he said.
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Sanjay Ramaswamy, also a managing partner at Alix, sounded less certain about GSK's chances with Pfizer. "I would put some questions on the actual synergies," he said. "You might have so many spinoffs to overcome the anticompetitive appearances that at the end of the day you have to look back and say, 'What did we really achieve with this combination?'" Similar questions surround the Pfizer/Allergan pact but to a lesser degree, with an integration process that would be quicker and less complicated. "There was the political noise that started when the Astrazeneca/Pfizer deal was discussed," he said. "I know there's still a lot of noise here, but perhaps there's also a renewed opportunity for pharmaceutical companies to make these deals, because the political outcome in a year or two remains uncertain. Now is a good time for mergers and acquisitions. Before significant policy changes happen, there's a window," he said, and interest rates are "reasonably favorable," though valuations have peaked and the same deals a year or two ago would have fared better.
Credit Suisse analyst Vamil Divan opined that the deal will get done "if political forces allow. Our assessment of the product overlap between the two companies suggests there are no major antitrust reasons as to why a deal would not go through," though he "assume[s] political rhetoric around inversions may flare up again now. It will be interesting to monitor any near-term commentary from the Obama administration, the U.S. Treasury," and presidential candidates, he wrote in a research report. "One way to avoid (or minimize) political backlash around Pfizer trying to do an inversion could be for the companies to structure the deal as Allergan buying Pfizer." If such an arrangement happened at $45 per share, about a 35 percent premium to Wednesday's closing price, "it would be more than 20 percent accretive in the first year," he wrote.
Ramaswamy framed a bigger picture. "You can put the pieces and permutations and combinations together in multiple ways, but we know that overall, the health care industry in the U.S. is not in very good equilibrium," he said. "The costs keep going up, but the actual metrics and what it costs the patients [show that the system] doesn't really deliver significant advantage over developed countries. That is a fact." The scenario is different from, say, high tech, " where you can actually see that, through the actions of the marketplace, you're getting a better value at a lower cost in terms your iPhones, computers, etc.," he said. The "underlying question" behind such deals as Pfizer/Allergan's is whether it's for the greater benefit or "sort of a tactical adjustment that ultimately the marketplace will re-set," after shorter-term gains were made via tax inversion and price upsides, he said, using the banking industry as a similar example. "They combined, split up, spun off, and re-merged," only to "dissolve three or four years down the road, and then you have to re-adjust and spin off again," he said.
Bahl, for his part, said the leadership of the Pfizer/Allergan deal holds particular promise. "I find it fascinating to think of the scenario of [Allergan CEO] Brent Saunders running a company like Pfizer, with [Pfizer CEO] Ian Read being the chairman of the board," Bahl said. "You've got a relatively young guy, who's very dynamic and bent on changing the industry in a good way, combined with Read, who really has a reputation of being a strong pharma business management owner and operator."
Allergan, Bahl pointed out, "has been doing a good number of small acquisitions as well as a number of alliance deals, so that it's teaming with smaller companies that are getting through phase III trials," leaving the firm "in a position to potentially launch these products and do the commercialization with a partner." He nodded to the strategic alliance disclosed earlier this month with Louisville, Ky.-based Humana Inc. to study patients' perspectives on hospital care. "I sense that not only is Allergan looking at products and selling products, but also looking for innovation down at the patients' level and maybe going to work backward" toward personalized medicine, he said, which could also hold strong interest for the big pharma outfit.
Pfizer's stock (NYSE:PFE) closed Thursday at $34.77, down 68 cents. Shares of Allergan (NYSE:AGN) ended the day at $305.03, up $18.07.