Pfizer and Allergan: The $160 Billion MarriageBy
Pfizer’s pending $160 billion acquisition of Allergan would be the largest deal in pharmaceutical industry history, so what do Pfizer and Allergan gain from the proposed deal? DCAT Value Chain Insights (VCI) examines the product and manufacturing positions of the combined company.
Unlike its unsuccessful effort to acquire AstraZeneca in 2014, Pfizer’s pursuit of Allergan is on friendly terms. The completion of the transaction, which is expected in the second half of 2016, is subject to certain conditions, including receipt of regulatory approval in certain jurisdictions, including the United States and European Union, the receipt of necessary approvals from both Pfizer and Allergan shareholders, and the completion of Allergan’s pending divestiture of its generics business to Teva Pharmaceuticals Ltd., which Allergan expects will close in the first quarter of 2016.
Examining the deal
In the largest merger or acquisition in the history of the pharmaceutical industry, Pfizer and Allergan plc have agreed to merge under which Pfizer will combine with Allergan in a deal valued at approximately $160 billion. The boards of each company have unanimously approved the stock transaction currently valued at $363.63 per Allergan share for a total enterprise value of approximately $160 billion, based on the closing price of Pfizer common stock of $32.18 on November 20, 2015. The transaction represents more than a 30% premium based on Pfizer's and Allergan's unaffected share prices as of October 28, 2015. Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares.Under the terms of the proposed transaction, the businesses of Pfizer and Allergan will be combined under Allergan plc, which will be renamed Pfizer plc. The companies expect that shares of the combined company will be listed on the New York Stock Exchange. Upon the closing of the transaction, the combined company is expected to maintain Allergan's Irish legal domicile. Pfizer plc will have its global operational headquarters in New York and its principal executive offices in Ireland. Allergan is now headquartered in Dublin, Ireland.
“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” stated Ian Read, chairman and chief executive officer (CEO), Pfizer in a company statement. “Allergan's businesses align with and enhance Pfizer's businesses, creating best-in-class, sustainable, innovative and established businesses that are poised for growth. Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry.”
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.
The combination of Pfizer and Allergan will significantly increase the scale of Pfizer's established business. The addition of Allergan's women's health and anti-infectives portfolio will add depth to Pfizer's established business, and Pfizer will expand the reach of Allergan's established portfolio using its existing commercial capabilities, infrastructure, and global scale. In addition, Allergan brings topical formulation, manufacturing and its Anda distribution capabilities to the combined company. As a result of the combination with Allergan and subsequent integration of the two companies, Pfizer now 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.
Pfizer anticipates the transaction will deliver more than $2 billion in operational synergies over the first three years after closing. Pfizer anticipates that the combined company will have a pro forma adjusted effective tax rate of approximately 17%-18% by the first full year after the closing of the transaction. The combined company is expected to generate annual operating cash flow in excess of $25 billion beginning in 2018. Independent of the transaction and consistent with 2015, Pfizer anticipates executing an approximately $5 billion accelerated share repurchase program in the first half of 2016. Pfizer has approximately $5.4 billion remaining under its previously announced repurchase authorization.
The completion of the transaction, which is expected in the second half of 2016, is subject to certain conditions, including receipt of regulatory approval in certain jurisdictions, including the United States and European Union, the receipt of necessary approvals from both Pfizer and Allergan shareholders, and the completion of Allergan's pending divestiture of its generics business to Teva Pharmaceuticals Ltd., which Allergan expects will close in the first quarter of 2016.
Pursuant to the terms of the merger agreement, the Allergan parent company will be the parent company of the combined group. A wholly owned subsidiary of Allergan will be merged with and into Pfizer, and subject to receipt of shareholder approval, the Allergan parent company will be renamed “Pfizer plc” after the closing of the transaction. Immediately prior to the merger, Allergan will effect an 11.3-for-one share split so that each Allergan shareholder will receive 11.3 shares of the combined company for each of their Allergan shares, and the Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares. Pfizer's US stockholders will recognize a taxable gain, but not a loss, for US federal income tax purposes. The transaction is expected to be tax-free for US federal income tax purposes to Allergan shareholders.
Pfizer stockholders will have the opportunity to elect to receive cash instead of stock of the combined company for some or all of their Pfizer shares, provided that the aggregate amount of cash to be paid in the merger will not be less than $6 billion or greater than $12 billion. In the event that the aggregate cash to be paid out in the merger would otherwise be less than $6 billion or greater than $12 billion, then the stock and cash elections will be subject to proration. Following the transaction, and assuming that all $12 billion of cash is paid in the merger, it is expected that former Pfizer stockholders will hold approximately 56% of the combined company and Allergan shareholders will own approximately 44% of the combined company on a fully diluted basis.
Pfizer plc's board is expected to have 15 directors, consisting of all of Pfizer's 11 current directors and four current directors of Allergan. The directors from Allergan will be Paul Bisaro, Allergan's current executive chairman, Brent Saunders, Allergan's current CEO, and two other directors from Allergan to be selected at a later date. Ian Read, Pfizer's chairman and CEO, will serve as chairman and CEO of the combined company. Brent Saunders will serve as president and chief operating officer of the combined company. He will be responsible for the oversight of all Pfizer and Allergan's combined commercial businesses, manufacturing, and strategy functions.
A combined Pfizer and Allergan
In seeking to merge 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 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 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 with a plan that the plant in Iceland will be closed by mid-2017.
Pfizer on the move
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. 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.
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.
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.