It's The End Of Pfizergan, So Pfizer Will Have To Grow It Alone
This article was originally published in Scrip
Pfizer Inc. was set to reclaim the title of world's top drug maker, dramatically lower its tax rate and access billions in cash held offshore. Only now it's not doing any of that, because the US government got in the way of its plans to merge with Allergan PLC. Instead, investors are wondering what the change in plans mean for Pfizer's future as it moves forward independently.
Pfizer and Allergan ended their $160bn planned merger on April 6 after the US Treasury unveiled new rules on April 4 cracking down on inversion deals that challenged the economics of the acquisition. Pfizer said it would pay Allergan a $150m termination fee to cover expenses, less than the $400m outlined in the merger agreement in the event of a change in tax law.
The US Treasury's eleventh hour move to block the deal and keep Pfizer in the US – and paying US taxes – was a stunner because few industry watchers thought the Obama Administration could wield enough power to influence the advantages of the deal without action from Congress. Whether or not the Treasury really does have the authority to enforce the new proposals isn't clear, but Pfizer apparently isn't looking to fight a drawn-out legal battle in an area of negative public perception.
Without Allergan's $15bn in projected 2016 brand-name sales and attractive 14% corporate tax rate as a safety net, Pfizer will have to win over investors on its own merits. (See related story here.)
It may just be able to, given steady, albeit modest, growth expectations; no big patent cliffs on the horizon; plenty of cash to dedicate to M&A; an interesting emerging immuno-oncology pipeline; and a big carrot to dangle in front of investors – the possibility of an eventual split.
Pfizer's future as Pfizer Inc., not Pfizer PLC, may still be bright.
Decision On Split Returns To 2016
Pfizer has been vowing for years now that it will consider whether or not to break up the company to unlock value. CEO Ian Read had delayed a decision on the matter until 2018 when Pfizer announced the plans to buy Allergan in November. But the company said on April 6 that it will move the decision back to the previous timeline, which was the end of this year.
The addition of Allergan's branded products – not to mention the tax advantage – was viewed by many investors as strengthening the case for an eventual split, even if delayed, giving both the innovative portfolio and established products business the critical mass needed to stand on their own.
Just how much value Pfizer could unlock by splitting up remains a topic of debate. "While splitting up continues to sound enticing, it still may not unlock substantial value from current share price levels," Bernstein Research analyst Tim Anderson said in a same-day note. "That said, an announcement by Pfizer that it is committing to a split-up later in the year (if this ends up being the ultimate decision) would still likely lead to some degree of price/earnings multiple expansion."
Another question beyond a possible business split is what Pfizer might try to buy now that it won't be spending billions on Allergan. Pfizer's press release mentioned that it has the financial strength and flexibility to pursue business development and "other shareholder friendly capital allocation opportunities."
The recent weakness in biotech certainly presents plenty of opportunities for Pfizer to pursue, but another mega-merger may not necessarily be in the cards.
Allergan CEO Brent Saunders, during a same-day conference call, talked openly about his plans to use M&A as a springboard to drive growth as the company moves beyond the failed merger. He expressed enthusiasm for the ophthalmology business Bausch & Lomb Inc., now owned by Valeant Pharmaceuticals International Inc., when pressed by an analyst, but questioned if the business is even for sale and, if so, for how much.
Pfizer hasn't been as vocal about a backup plan if the Allergan deal were to fall through. In public appearances recently, Read has talked about how he was confident the merger would move forward and that there was not, as far as he could see, a way for the government to block it. Nonetheless, the minimal breakup fee the company agreed to pay in the case there was a change in tax law suggests Pfizer understood full well the high risks associated with the deal. Read will likely outline more of his plans for Pfizer's future during the company's first quarter sales and earnings call May 3.
Pfizer's Near-Term Looks Slow And Steady With Upside
Certainly, the company isn't in a bind near-term. Pfizer has the benefit of a commercial hit on its hands with the launch of Ibrance (palbociclib) for breast cancer. The drug was one of the most successful commercial launches in 2015, generating $723m in revenues in 2015 following its launch in February. Drugs like Ibrance, the oral anticoagulant Eliquis (apixaban) and the pneumococcal vaccine Prevnar 13 are expected to drive near-term growth.
The company has a budding immuno-oncology pipeline that is attracting interest from investors, because of the breadth of the assets and the potential for combinations.
And, last year Pfizer completed the acquisition of Hospira Inc., strengthening its established products portfolio. Through the deal, Pfizer gained the rights to market Celltrion Inc.'s biosimilar version of Johnson & Johnson's Remicade (infliximab), which was approved by FDA April 5 under the brand name Inflectra as only the second biosimilar approved in the US.
Plus, mega-mergers are lengthy time-consuming distractions from which the anticipated benefits don't always materialize.
"We like Pfizer, inverted or not," Deutsche Bank analyst Gregg Gilbert declared in a same-day research note. "While somewhat disappointing, we view this development as immaterial to our view on the stock and our valuation." He has a buy rating and $41 price target for Pfizer.
BMO Nesbitt Burns analyst Alex Arfaei wrote, "reasonable growth + underappreciated pipeline + split potential = staying with Pfizer."
Editor's Note: This article also was published in "The Pink Sheet" DAILY. Scrip Intelligence brings selected complementary coverage from our sister publications to our subscribers.