Commentary

Pfizer Said To Be Ogling Allergan

In a potential deal that may be as much about taxation as it is about brand synergies, Pfizer is said to be talking to Dublin-based Allergan about a merger. It would not only create the biggest company in Big Pharma but also be the biggest deal yet in a year of frenzied activity in the sector.

Potential obstacles to the overture being consummated not only include agreeing on a price but also “the extent to which Pfizer would want to lay off employees and close facilities; the fate of Allergan CEO Brent Saunders; and the general makeup of a combined company’s management team,” according to one of the sources who tipped off the Wall Street Journal’s Jonathan D. Rockoff, Dana Mattioli and Dana Cimilluca to the preliminary discussions yesterday. 

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During an earnings call Tuesday, they point out, Pfizer CEO Ian Read noted that share prices were dropping for the sector. “But, he said, ‘I’m not sure there has been a readjustment in what the investors and leaders of those companies believe those companies are worth in a transactional situation.’”

Read also acknowledged during the call that the company was looking to make deals, “especially one that would bolster the business selling patent-protected drugs,” the WSJ’s Lisa Beilfuss and Jonathan D. Rockoff reported. “Mr. Read said he was targeting a deal that improved this innovative drugs business, not necessarily a deal that would lower Pfizer’s taxes.”

Lowering taxes was a major impetus behind Pfizer’s failed bid for London-based AstraZeneca last year. Despite widespread backlash — President Barack Obama called such maneuvers “unpatriotic” and new tax rules make such deals less attractive — Read told Bloomberg’s Cynthia Koons last fall that he saw “no reason why we wouldn’t be able to do an inversion” in the future if it made sense otherwise.

This one would seem to make a lot of sense tax-wise.

“Allergan … paid an effective tax rate of 4.8% last year versus 25.5% for Pfizer,” write James Fontanella-Khan and David Crow for Financial Times. “An adviser to Pfizer recently told the Financial Times that Mr. Read believed a takeover of Allergan — which is still perceived as an American company despite its Irish domicile — would prompt less political opprobrium than an acquisition of GlaxoSmithKline, a British drugmaker that was often touted as a potential target,” they continue.

Allergan’s main attraction — as far as branded products go — is Botox. Other brands include Restasis, Juvederm, Namenda, Linzess and Lo Loestrin, reports Henry Powderly for Healthcare Finance. The company was actually purchased by Dublin-based Activis in March for $70.5 billion. Activis then adopted Allergan as its new corporate name in June. Allergan had been based in Irvine, Calif. 

“The deal would also add to Pfizer’s line up of biosimilars, or imitations of expensive biologic drugs. That would help Pfizer build on its $17 billion deal for injectable drug maker Hospira Inc. earlier this year,” points out Bloomberg News. 

“Combining Allergan and Pfizer, which is worth $219 billion, would create the world's largest healthcare group with a market value of around $330 billion, ahead of Johnson & Johnson on $278 billion,” according to Reuters’s Natalie Grover and Christian Plumb. “A Pfizer spokesman said it ‘does not comment on market rumor and speculation.’ Allergan also declined to comment.”

Pfizer’s third-quarter earnings “handily beat analysts' expectations and caused the stock to rise by 2.8% a share for the day. It did so even though its net earnings were … down 2% from $12.36 in the same quarter a year ago” Chris Woodyard reports for USA Today

A deal with Allergan would inject a sizable bump into earnings down the line.

“When you’re the size of Pfizer, an acquisition like this may be the only choice you have in order to be able to move the needle for sequential growth … so the question now becomes, if not this, what, and if not now, when?” WBB Securities’ analyst Stephen Brozak tells Reuters.

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