CEO Insights: What to Expect from the $160 Billion Merger of Pfizer and Allergan

At a recent investors’ conference Ian Read, chairman and CEO of Pfizer, and Brent Saudners, CEO and president of Allergan, discussed the companies’ pending $160 billion merger. DCAT Value Chain Insights (VCI) provides further details on growth strategies, synergies, and pipelines.

The proposed $160 billion merger between Pfizer and Allergan, the largest deal announced in the pharmaceutical industry in 2015 and in the history of the pharmaceutical industry, is on the radar of the industry in 2016. If the deal proceeds as planned, it will close in the second half of 2016. At a recent investors’ conference, Pfizer and Allergan executives provided further insight into the companies’ rationale for the merger, growth strategies, and potential synergies.

Key elements of the deal
The proposed combination of Pfizer and Allergan will create the industry’s largest global pharmaceutical company. Pfizer’s interest in acquiring Allergan is to 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, following Pfizer’s $17 billion acquisition of the specialty pharmaceutical company, Hospira in 2015. 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.

Pfizer’s innovative businesses will be enhanced by the addition of Allergan’s brands in therapeutic areas, such as aesthetics and dermatology, eye care, gastrointestinal, neuroscience, and urology. The companies said that combined company will benefit from a broader innovative portfolio of medicines in key categories and a platform for sustainable growth with diversified payer groups. With the addition of Allergan, Pfizer will enhance its R&D capabilities in both new molecular entities and product-line extensions. A combined pipeline of more than 100 mid-to-late stage programs in development and greater resources to invest in R&D and manufacturing is expected to sustain the growth of the innovative business over the long term.

In addition to enhancing its specialty pharmaceutical portfolio through the acquisition of Allergan, Pfizer would achieve 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 announced in late May 2014 that 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.

In seeking to combine with Allergan, Pfizer is gaining a company that has built is position in specialty pharmaceuticals through a series of large-scale and bolt-on acquisitions over the past several years. For Pfizer, the acquisition of Allergan would add a top 20 pharmaceutical company to Pfizer following 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 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 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.

Further insight

Ian Read
Chairman and CEO

One question before a combined Pfizer and Allergan is whether the company would pursue a split of the combined company into two separate companies, once focused on innovative products and the established products. As a result of the combination with Allergan and subsequent integration of the two companies, Pfizer expects to make a decision about a potential separation of the combined company’s innovative and established businesses by no later than the end of 2018, a point executives emphasized at a recent investors’ conference.

“While we’re doing the integration, clearly we’re thinking about what would the potential two companies look like, and so we’re structuring for that now and creating an infrastructure and creating that ability so that we have that optionality,” said Ian Read, chairman and CEO of Pfizer, at the JP Morgan Healthcare Conference on January 12, 2016. “Because it’s very important that we have not made a decision. We will make a decision, as we’ve said, in 2018. But clearly we have in this structure now I think two very strong businesses with different objectives. So I feel comfortable that with this transaction, we have an extremely strong Established Products business, which has a growth pattern in the future, and we have an Innovative business with a strong present growth and great pipelines coming behind it.”

Read elaborated that if Pfizer were to be pursue a separation of the combined company into separate companies for Innovative Products and Established Products, such a decision would have to meet four key points. “We laid out four criteria,” he said. “We said to do the split you’d have to see the two businesses were functioning well within the company. You’d have to believe they could function on their own strongly; you would have to believe there is trapped value; and you’d have to believe there is a tax-efficient way of unlocking the trapped value. I certainly think this transaction [the merger of Allergan and Pfizer] answers the last question. It certainly answers the size of the two businesses and their profile has strengthened. The question will be: Is there trapped value? And we’ll see. We’ll see as we run the business.”

Another issue a combined Pfizer and Allergan is achieving synergies. When it first announced the deal, Pfizer anticipated the transaction will deliver more than $2 billion in operational synergies over the first three years after closing. “I think there are revenue synergies from taking Allergan’s products globally in a more comprehensive manner,” commented Read at the JP Morgan Healthcare Conference. “I think Allergan has done a good job, but I think when you add the size of Pfizer’s infrastructure globally, we should expect revenue synergies there. I think also in the US, we should expect revenue synergies as we have some overlap on common physician targets and therapeutic areas. We need to make sure that we both get the synergies, the cost synergies, and optimize revenue synergies,” said Read.

For any merger or acquisition, successful integration relies on not only achieving financial targets but assimilating the cultures of the companies, something which Allergan and Pfizer recently addressed. “… I acknowledge that Allergan is a smaller company in terms of its number of colleagues, and that always helps to create a sense of purpose and focus,” said Read at the conference. “But [at] Pfizer, we run Pfizer in business units; each business unit has its own passion, its own focus. I think we are very entrepreneurial. We’re very agile. We’re very focused on creating shareholder value. We have the same values impact on the business, own the business… So I think the cultures are very, very similar in the fact that we want to evolve, we want to be fast, we want to trust each other and we want to create value for shareholders,” said Read.

Brent Saunders
President and CEO

“The thing that I think’s a good indicator, leading indicator of that is, as we started to work on the pre-integration team and a limited number of Allergan and Pfizer colleagues have started to work together, we’re seeing more commonalities than we are differences,” added Brent Saudners, CEO and president of Allergan, who also spoke at the JP Morgan Healthcare Conference in mid-January. “And where there are differences, I think there are some things to learn from one another. So I think we’re approaching it from both sides with a really open mind, with the only goal of creating the strongest and best Pfizer for the future. And so far so good.

The companies also addressed how the combined company will marry their research and development (R&D) organizations. “Pfizer comes from a history of a strong internal R&D that has developed tremendous skills in how you design small molecules, large molecules, and vaccines,” said Mikael Dolsten, president, Pfizer Worldwide Research & Development, who also spoke at the conference. “But around 2010 or so, we started to evolve in creating an organization that would be equally keen to mix internal and external innovation. We built up Centers for Therapeutic Innovation that was a new disruptive model to work with academia. We started to use seed capital to stimulate startup biotech that had unique ideas.”

David Nicholson , executive vice president and president, global brands research & development at Allergan, who also spoke at the conference, pointed to complementary elements in R&D between Allergan and Pfizer. “I’m kind of curious because people seem to suggest that there is a big difference between the way we do R&D at Allergan and the way Pfizer do R&D. I don’t see that. Both organizations are driven by innovation. That’s the lifeblood of our industry. That’s what we’re looking for. We’re looking to fill our pipelines with innovative molecules, not me-too molecules but best-in-class, first-in-class innovative molecules. That’s what drives R&D in both our organizations. And we work in very complementary fashions, not ways that conflict with one another, but complementary ways. Sure, at Allergan we build our pipeline more by open science, by pulling things in from the external world. Mikael just described the mixed model that Pfizer have. There is more than one way to do things. There is more than one model. Both work. We have complementary models.”

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