By Tracy Staton
The deal of the year could be arranged by Thanksgiving, or so goes the story. Despite opposition from politicians, despite the tricky nature of pulling off a tax inversion that size, Pfizer ($PFE) and Allergan ($AGN) may well be engaged before the month is out, giving Pfizer its long-sought tax reduction and its answer to the who-will-you-buy question that’s popped up on every earnings call since AstraZeneca’s ($AZN) final rejection last year.
And if Pfizer and Allergan do merge, that changes another question CEO Ian Read has faced since 2014, when he announced the company would consider a breakup. Would a megadeal delay that breakup decision past 2017? Or speed it up considerably?
Points to ponder as one wades through the deluge of coverage, from media and analysts alike, about the potential deal–price TBA–which would create a pharma leviathan with $66 billion in sales and a $330 billion market cap. Here’s our collection.
- Bloomberg sources close to the deal say deal talks are “progressing,” and aiming toward an agreement by Thanksgiving. Bernstein analysts figure those insider sources were leaking the info as a sort of “trial balloon” to gauge reactions from U.S. lawmakers, because talks were known to be “reasonably advanced.”
- Pfizer’s megamerger history may well have workers there and at Allergan worried about their jobs; when the Big Pharma bought Wyeth in 2009, it announced 20,000 job cuts, and many thousands more since. John LaMattina, former Pfizer R&D chief and now a Forbes contributor, lived through more than one Pfizer megamerger, and he says this one could be different, at least for the R&D organizations. Previous buys Warner Lambert, Pharmacia and Wyeth all had sizable research operations of their own, so integrating them came with painful job losses and discontinued R&D programs. Allergan invests comparatively little in R&D, with just $1.7 billion in spending, LaMattina points out. And it has just 642 studies listed on clinicaltrials.gov, compared with Pfizer’s 4,276.
- Allergan CEO Brent Saunders could be one of the biggest beneficiaries of merging with Pfizer. It could set him up to run the biggest drug company in the world, a big leap from his post as CEO of the ophthalmology specialist Bausch + Lomb just a few years ago. Saunders could run one of Pfizer’s three internal divisions, some analysts suggest, and get in line for the CEO job later. Others figure Pfizer might split the CEO-and-Chairman role into two jobs, with Read taking the higher post, just as Allergan (née Actavis) did when it bought Forest Laboratories in 2013 and made Saunders CEO.
- Worked for them, Allergan Chairman Paul Bisaro says. “Our working relationship is very collaborative and constructive,” Bisaro told Bloomberg. “It has been a bit unique to have an executive chairman and CEO working this closely together, but it has worked very well for us and I believe for the our company and our shareholders.”
- But Bernstein’s analysts have a good point: Pfizer has never before moved a deal target’s exec into its top slot–and besides, Saunders would be flush with deal-related gains, which would give him a lot of freedom to choose what’s next. “We think a better question is this: if Saunders makes $100M+ on the transaction, would he even want to run a big, messy global drug company, with all of the headaches it entails? Or, would he rather move onto something a little leaner and meaner?”
- Speaking of leaner and meaner, what about Pfizer’s ongoing assessment of whether to split up? Recall that the company internally divided itself into three divisions at the beginning of 2014, its established products business being one of them. On recent earnings calls, Pfizer execs have said that a megamerger could complicate matters, delaying a split; they’ve also suggested that the right deal could actually speed their decision to go ahead. According to Bloomberg, Pfizer sees the Allergan deal as the latter sort, and the company might even pursue a generics unit sale concurrent with the Allergan buy.
- A host of analysts have out their two cents on the deal, totting up the reasons why Allergan could be a good fit with Pfizer. Deutsche Bank notes that the combo would fit with Read’s recently stated preference for M&A that would beef up Pfizer’s “innovative” business, rather than established products, as its Hospira buy did. Evercore ISI analyst Mark Schoenebaum points out (among other things) that moving its domicile overseas would give Pfizer access to a lot of “trapped cash” that it could use for buybacks. In fact, Bernstein analysts figure such buybacks are “essential to make the math work.” Nomura says Pfizer could maximize the earnings boost from the deal if it used some of that cash to quickly pre-pay debt.
- Meanwhile, politicians are already decrying Pfizer’s tax-inversion plans, with Democratic presidential candidates Hillary Clinton and Sen. Bernie Sanders particularly vocal. Sanders said he thinks the deal “stinks,” and Clinton’s campaign promised she’s “committed to cracking down” on inversion deals. Republican candidate Donald Trump said the merger talks are a reminder that the U.S. tax code needs an overhaul.
- Can the U.S. government do anything to stop a Pfizer-Allergan tie-up and tax inversion? Read said during last week’s earnings call that he’d rather take his chances with this Congress, in a sort of devil-you-know approach. Bernstein analyst Tim Anderson points out that the U.S. Treasury Department threatened to follow up, if necessary, on the inversion restrictions it instituted among a rash of such deals last year. “Will it come back with more, or was this bluster?” Anderson asks. In any case, coupled with the drug pricing brouhaha, “It seems likely that there could be near-immediate political backlash” to a Pfizer inversion, the analyst says.