It looks like controversial drug maker Allergan is at it again. According to an October 28th article in the Wall Street Journal, pharmaceutical industry giants Pfizer and Allergan are involved in discussions regarding a blockbuster merger in the white hot pharma sector.
Based on information provided by sources close to the talks, Pfizer approached Allergan about a deal, however, the negotiations are still preliminary and no deal may be forthcoming.
As of Wednesday’s close, Allergan had a market cap of around $112.5 billion. That means that a deal for the firm would be the biggest takeover in a year that is almost certain to set records for mergers and acquisitions activity.
Finding Value In Spin-offs
Some of the best trades during the past few years have been spin-offs. Of course, I'm taking about deals like Kraft Foods Group Inc (NASDAQ:KRFT) / Mondelez International Inc (NASDAQ:MDLZ) and ConocoPhillips (NYSE:COP) / Phillips 66 (NYSE:PSX) both of which have continued to achieve record performances year-to-date. What's more, there are a number of spin-offs Read More
Valuewalk outlined Allergan’s aggressive takeover strategy back in July, and the M&A focused pharma has continued to make deal after deal to establish category dominance and pricing control.
Allergan – Pfizer deal has major obstacles to overcome
Pharma industry analysts point out that there are several serious obstacles to be overcome for any kind of deal to come to fruition. Price could very well be a stumbling block right out of the gate. Pfizer Chief Executive Ian Read said during an earnings cc earlier this week that he had noticed falling share prices for rival drug makers. Of note, he also 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.”
One source noted that other potential issues that could scuttle a deal are the extent to which Pfizer would agree to lay offs and closing of facilities, the fate of Allergan CEO Brent Saunders, as well as the makeup of the new firm’s management team.
A deal with Allergan would bring antiwrinkle treatment Botox, eye treatment Restasis and a several other blockbuster drugs to Pfizer’s already impressive array of patent-protected medicines. The pharma major has making efforts to boost its branded-drug portfolio after finalizing a $16 billion acquisition of Hospira early this year that shored up its off-patent drug business.
A merger with Allergan could pave the way for a big move that Pfizer execs have been thinking about for some time. That is, breaking up the company into two firms — one business developing and selling patent-protected drugs and another focused solely on selling off-patent drugs.
With several media outlets (e.g., WSJ, DJ) reporting that Pfizer has approached Allergan regarding a potential deal, we wanted to share our thoughts on such a combination. While a bid has yet to be formally announced, we see a combination with Allergan 1) accelerating Pfizer’s innovative growth profile, 2) generating meaningful operating synergies, 3) likely allowing Pfizer to invert, and 4) potentially driving significant accretion. In addition, we see a combination with Allergan strengthening Pfizer’s innovative business and creating a more compelling case for a break-up of the larger Pfizer organization.
With a Bernstein price target of $385, it would be nice to see on offer in the $400+ range, but PFE may balk at this given Allergan’s current price. We suspect most Allergan investors would be okay with something just under $400.
PFE’s size, there are few targets they could pursue for an inversion. Of the potential targets, we still believe AZN would be the best fit from a strategic and financial perspective, although that may be difficult to execute following last year’s failed pursuit of the company. GSK is another company that is commonly mentioned, but we would not be big fans given the more limited
positive impact that deal would have on both PFE’s innovative and established business, in our opinion. This leaves AGN, which we think would add needed near-term growth and a modest pipeline to PFE innovative business but, ironically, less to PFE’s GEP business given AGN has recently sold off much of the old Actavis business to TEVA.
As a reminder, in the US Treasury Department’s 9/22/2014 update of the tax inversion guidelines the agency proposed that in an inversion deal the former US company shareholders may potentially need to own less than 60% of the combined new entity for a deal to be considered an inversion versus prior guidelines for less than an 80% stake. Given this we highlight
that on the 3Q15 call Pfizer management confirmed its view that a deal in which Pfizer shareholders would own less than 60% of the entity would constitute a full inversion, but also left the option open to engage in a “tweener inversion” in which Pfizer shareholders would own less than 80% but more than 60% of the new entity as such a deal could allow Pfizer to unencumber a portion of its legacy overseas cash and future cash flow.
We also highlight that since the US Treasury’s proposal has not been implemented but is retroactive, Pfizer management expressed a desire to complete any potential tax advantaged deal under the current congress, indicating a deal would need to close by the end of 2016. With a market capitalization in excess of $200bn, targets for Pfizer to execute an inversion are limited and Allergan could allow Pfizer to meet this criteria.
Deal would bring attractive strategic and financial aspects and focus will shift to likelihood of actually getting done and at what price. We expect strength in AGN but this should also serve as a catalyst to push the sector higher on what we continue to see as compelling post sell-off opportunity.
we see a potential PFE acquisition of AGN at a premium (to potentially create a 60%/40% split; at today’s close, the PFE/AGN market cap split was ~65%/35%) as doable, as a premium could be justified by significant cost and tax synergies, and possibly some revenue synergies. Perhaps as important as anything else for PFE, in becoming an Irish-domiciled company, PFE could enjoy enhanced access (i.e. no more “trapped cash”) to its ongoing cash flows going forward.