A Proposed Combined Allergan and Pfizer: The Implications

Pfizer and Allergan have confirmed that the companies are in preliminary friendly discussions in relation to a potential transaction. So if further deal-making proceeds, what would a combined Allergan and Pfizer mean? DCAT Value Chain Insights (VCI) examines the product and manufacturing positions of the combined company.

While both companies have stated that their discussions are only preliminary, the possibility of a combined Allergan and Pfizer makes for an interesting deal. Allergan has been active in deal-making with large-scale acquisitions, including its $28 billion acquisition of Forest Laboratories in 2014 and the approximate $70 billion merger of Allergan and Actavis to form the newly combined Allergan. Pfizer has been active, too, with its $17 billion acquisition of Hospira earlier this year following a decision to terminate a mega-merger with AstraZeneca last year.

Examining the potential
Pfizer and Allergan both confirmed that the companies are in preliminary friendly discussions in relation to a potential transaction. Neither company added further details. In a statement, Allergan confirmed that it has been approached by Pfizer Inc. and is in preliminary friendly discussions regarding a potential business combination transaction. Allergan stated that no agreement has been reached and that there can be no certainty that these discussions will lead to a transaction, or as to the terms on which a transaction, if any, might be agreed. The company added that it will not comment on speculation regarding the terms of a potential transaction.

Allergan added that under any potential scenario with Pfizer, it will proceed with the divestiture of its generics business to Teva as previously announced. “Allergan remains strongly committed to complete the proposed divestment of its global generics business to Teva Pharmaceutical Industries Ltd and expects the generics divestiture transaction to close in the first quarter of 2016.” In July 2015, Teva Pharmaceutical Industries dropped its pursuit of Mylan N.V. and made an approximate $40.5 billion offer to acquire the global generics business of Allergan (the new corporate name of the combined Actavis and Allergan) in a friendly acquisition proposal. The deal, approved by the boards of both companies, would cement Teva's position as the number one global generics company and position Allergan as an almost nearly pure-play specialty pharma company.

Pfizer also emphasized that no agreement has been reached and added that “there can be no certainty that these discussions will lead to a transaction, or as to the terms on which a transaction, if any, might be agreed.” The company added that “Pfizer will not comment on speculation regarding the terms of a potential transaction. Any further announcement will be made if and when appropriate.”

Pfizer’s possible pursuit of Allergan comes after the recent closing of its $17 billion acquisition of the specialty pharmaceutical Hospira, in a deal that closed in September 2015. The move added to Pfizer’s sterile injectables and biosimilars portfolios. It followed a protracted effort in 2014 to acquire AstraZeneca, in a mega deal that was rejected by AstraZeneca and which Pfizer eventually decided not to pursue.

Allergan: a company on the move
For Pfizer, the acquisition of Allergan would add a top 20 pharmaceutical company to Pfizer following a two large-scale acquisitions by Allergan. The transformational deal for Allergan was Actavis’ $70.5 billion acquisition of Allergan, which closed in March 2015. The move followed Actavis' $28 billion acquisition of Forest Laboratories in 2014. The Allergan and Actavis combination created a top 10 or near top 10 pharmaceutical company by sales revenue, with combined annual pro forma revenues of more than $23 billion anticipated in 2015. The combined company has six blockbuster franchises with combined pro forma 2015 revenues of approximately $15 billion expected, including franchises with annual revenues in excess of $3 billion in eye care, neurosciences/central nervous system, and medical aesthetics/dermatology/plastic surgery. The new Allergan has an expanded commercial presence, which includes approximately 100 countries, with an enhanced presence across Canada, Europe, Southeast Asia, and Latin America and a footprint in China and India. It has R&D funding of approximately $1.7 billion expected in 2015, focused within brands, generics, biologics and over-the-counter (OTC) drugs. The combined entity has more than 20 innovative products in near- or mid-term development.

That deal was followed by another mega deal, the announcement by Allergan of its decision to sell its generics business to Teva for $40.5 billion, a move Teva made following its now terminated efforts to acquire Mylan. In July 2015, Teva agreed to acquire Allergan Generics, the generics business of Allergan (formerly the generics business of Actavis) for $40.5 billion ($33.75 billion in cash and $6.75 billion in shares of Teva), which would give Allergan an approximate 10% stake in Teva. The transaction was unanimously approved by the boards of directors of Teva and Allergan and is expected to close in the first quarter of 2016. The move positions Allergan as innovator-based specialty pharmaceutical company with 2015 pro forma sales of approximately $15.5 billion with a focus in seven therapeutic areas, including eye care, gastroenterology, aesthetics, women’s health, central nervous system, urology, and anti-infectives. Following the close of the deal, Allergan will have a manufacturing network of 12 plants globally and a mid-to-late-stage R&D pipeline with 70 projects and a 2015 pro forma investment in R&D of approximately $1.4 billion. The transaction would result in after-tax net cash and equity proceeds for Allergan of approximately $36 billion.

In addition to these large-scale acquisitions, Allergan has made a series of acquisitions to add to its portfolio. In October 2015, Allergan completed its $2.1 billion acquisition of Kythera Biopharmaceuticals, Inc., a company focused on the discovery, development, and commercialization of prescription products for the medical aesthetics market. With the acquisition, Allergan gained Kybella (deoxycholic acid) injection, the first FDA approved non-surgical injection for improvement in the appearance of moderate to severe submental fullness, commonly referred to as double-chin, in adults. Allergan also gained Kythera’s development product, setipiprant (KYTH-105), a compound for the prevention of androgenetic alopecia (AGA), or male pattern hair loss, as well as additional early-stage development candidates. Kythera submitted an investigational new drug application to the US Food and Drug Administration (FDA) for setipiprant for the treatment of AGA. Allergan plans to conduct a human proof-of-concept study to evaluate the efficacy and safety of setipiprant in male subjects with AGA.

Also in October, Allergan completed the acquisition of AqueSys, Inc. a clinical-stage medical device company focused on developing ocular implants that reduce intraocular pressure (IOP) associated with glaucoma. Allergan acquired AqueSys in an all-cash transaction, including a $300 million up-front payment and potential regulatory approval and commercialization milestone payments related to AqueSys’ lead development product, XEN45, a soft shunt used in minimally invasive glaucoma surgeries. XEN45 adds to Allergan’s late-stage eye care pipeline, with therapies in development to treat glaucoma, dry eye disease, age-related macular degeneration, and diabetic macular edema.

Also earlier this year, Allergan acquired Naurex, a clinical-stage biopharmaceutical company developing treatments to treat major depressive disorders for $560 million ($460 upfront and $100 million contingent on milestones). Naurex’s lead development product is rapastinel, a once-weekly intravenous drug in Phase II in various clinical studies to treat depression, and NRX-1074, a Phase II IV antidepressant.

Other recent acquisitions by Allergan are: Merck’s small-molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists for migraine and Oculeve, which has complementary dry-eye development programs to Allergan’s current eye care research and development programs. As a collateral deal, earlier this year, AstraZeneca acquired the rights to Actavis' branded respiratory business in the US and Canada for an initial consideration of $600 million on completion and low single-digit royalties above a certain revenue threshold. In 2014, then Actavis acquired the specialty pharmaceutical company, Durata Therapeutics. Durata’s key product is Dalvance, an antibiotic for treating acute bacterial skin and skin structure infections. Dalvance was approved by the US Food and Drug Administration (FDA) in May 2014 and was the first drug approved as a Qualified Infectious Disease Product (QIDP), a recent designation by the FDA to encourage development of new antibiotics.

Allergan’s transformation to a pure-play specialty pharmaceutical company has occurred in a relatively short period of time from its recent position as primarily a generics company in the formation of Actavis as a company. In October 2012, the generic-drug company Watson Pharmaceuticals Inc. completed its acquisition of Actavis Group; Watson then changed its corporate name to Actavis in January 2013. The combination of Watson and Actavis created at the time the third largest generic-drug company on a global basis and strengthened the company's position in modified release, solid oral dosage, and transdermal products and broadened its portfolio to include semi-solids, liquids, and injectables. In October 2013, Actavis completed its acquisition of Warner Chilcott plc, which capitalized on the complementary specialty pharmaceuticals strengths and market positions of the two organizations, particularly in women's health and urology, as well as in gastroenterology and dermatology. These deals were followed by Actavis' acquisition of Forest Laboratories. Actavis announced the agreement to acquire Forest Laboratories in February 2014 and completed the deal on July 1, 2014 with Forest becoming a subsidiary of Actavis.

Following the close of its deal with Teva, Allergan will have a manufacturing network of 12 plants globally. Allergan had already begun the review of its global manufacturing network as part of its integration of Actavis and Allergan. In July 2015, Allergan announced that it decided to move production of its pharmaceutical plant in Iceland to other production units of the company. No changes are planned in the operation of the Icelandic plant in the near future, and the company said that decision will not affect jobs currently, but the first changes will be felt at the end of 2016 when the first phase of the transfer of production begins. It is expected that the activities of the plant in Iceland will be closed by mid-2017. Other activities in Iceland will be unchanged. Approximately 300 employees are in the production unit in Iceland, and about 400 employees are in other units of the company in Iceland. The company recently underwent a review of its production units globally and said in a statement that this audit showed that other facilities in the company were flexible to assume the production that will be transferred.

Pfizer on the move
In addition to enhancing its specialty pharmaceutical portfolio through a potential acquisition of Allergan, Pfizer's interest in potentially acquiring Allergan also entails the possibility of achieving a preferred corporate tax position by acquiring the Dublin, Ireland-headquartered Allergan, a stated goal as part of Pfizer's unsuccessful efforts to acquire the UK-headquartered AstraZeneca in 2014. Pfizer's public pursuit of AstraZeneca began in late April 2014 when Pfizer reported it was interested in acquiring AstraZeneca. Pfizer announced in late May 2014t hat it would not make a formal offer to acquire AstraZeneca following AstraZeneca's decision to reject Pfizer's non-binding $119-billion proposal. Pfizer's interest in acquiring AstraZeneca was to build its pipeline and commercial portfolio, but it also had a financial component in establishing a new UK-incorporated holding company of the combined company. The proposal for the deal brought to the fore the issue of corporate inversion, a practice by which a US-based multinational company restructures so that the US parent is replaced by a foreign corporation as a means to achieve a lower tax rate.

Pfizer's most recent notable acquisition is its $17 billion acquisition of Hospira, a deal that was announced in February 2015 and closed in September 2015. The move added to Pfizer's position in sterile injectables and biosimilars. The combination of the two companies provides a growing revenue stream and a platform for growth for Pfizer's Global Established Pharmaceutical (GEP) business. The expanded portfolio of sterile injectable pharmaceuticals, composed of Hospira's broad generic sterile injectables product line, including acute care and oncology injectables, with a number of differentiated presentations, as well as its biosimilars portfolio, combined with GEP's branded sterile injectables, including anti-infectives, anti-inflammatories and cytotoxics, gives Pfizer a more enhanced global sterile injectables business. At that time of the announced acquisition, Hospira’s generic sterile injectables had more than 200 products in different presentations (i.e., vials, prefilled syringes, bags, and lyophilized products). Pfizer's sterile injectable business consisted of 73 products, primarily gained from acquisitions, and focused on anesthetics, anti-infectives, and oncology. The acquisition of Hospira complements Pfizer’s 2014 acquisition of InnoPharma, a specialty pharmaceutical company based in Piscataway, New Jersey. Pfizer acquired InnoPharma for an upfront cash payment of $225 million with up to $135 million of contingent milestone payments. At the time of the announced acquisition in July 2014, InnoPharma's portfolio included 10 generic products approved by the US Food and Drug Administration (FDA), a pipeline of 19 products filed with the FDA, and more than 30 injectable and ophthalmic products under development. InnoPharma is focused on developing novel formulations of existing drugs, including hard-to-make products, such as those that require complex manufacturing capabilities or delivery forms, such as pens and depot injectables. Pffizer offered some market information for sterile injectables and biosimilars, providing market estimates for generic sterile injectables at $70 billion by 2020 and for biosimilars at $20 billion by 2020. Pfizer expects the acquisition of Hospira will deliver $800 million in annual cost synergies by 2018.

Pfizer’s interest in potentially acquiring Allergan would add to its Innovator Products business. Pfizer manages its commercial operations through two distinct businesses: an Innovative Products business and an Established Products business. The Innovative Products business is composed of two operating segments: the Global Innovative Pharmaceutical segment (GIP) and the Global Vaccines, Oncology and Consumer Healthcare segment (VOC). The Established Products business consists of the Global Established Pharmaceutical segment (GEP), which includes all legacy Hospira commercial operations. For the first nine months of 2015, Pfizer reported total revenues of $34.8 billion, a 5% decline year over year. Revenues of its Innovative Products business increased 10% to $19.1 billion in the first nine months of 2015 compared to the same time period last year, and revenues from its Established Products business (including the Hospira acquisition) decreased 18% to $15.3 billion.

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