Did Pfizer Recoup the Pass on AstraZeneca with Allergan Merger?

The recent agreement between Pfizer and Allergan to merge for $155 billion has brought up controversy and questions about Pfizer’s overall strategy.  The deal would invert Pfizer from a US-based enterprise to an Irish based conglomerate (in order to avoid paying US taxes), and some question whether the Allergan acquisition was worth it, and whether Pfizer missed out on acquiring AstraZeneca for $118 Billion ^[2]. 

Albeit many seem to be discussing the immediate impact of Allergan on Pfizer’s top line performance, such as revenue growth from Botox, few are paying attention to the future impact this merger will have on Pfizer’s R&D portfolio, and overall revenue growth.  This article will evaluate the impact of Allergan’s acquisition on Pfizer’s R&D Portfolio and the long term impact the acquisition will have on Pfizer’s revenue and earnings.

Pfizer & Allergan: How Do the R&D Portfolios Merge?

In a previous article, we evaluated the impact AstraZeneca’s portfolio would have on Pfizer; the AstraZeneca merger would have increased Pfizer’s oncology portfolio allocation by more than 10%, and added more clinical trials towards existing disease indications, such as cardiovascular.

Incorporating Allergan into Pfizer’s portfolio provides a different result.  Figure 1 illustrates Pfizer’s current R&D portfolio allocation, and Figure 2 demonstrates Pfizer’s portfolio allocation after incorporating Allergan’s R&D portfolio (courtesy of Karmadata).

Figures 1 & 2 delineate that Allergan’s R&D portfolio will further diversify Pfizer’s portfolio by including a notable allocation in urogenital disease therapies (cumulating to 9% of Pfizer’s total clinical trial portfolio), and adding towards existing therapeutic areas, such as musculoskeletal diseases (from 12% to 13%), nervous system diseases (from 10% to 12%), and cardiovascular diseases (from 4% to 6%).   Alternatively, the Allergan acquisition will result in reducing Pfizer’s largest therapeutic investment allocation in oncology (from 28% to 22%).

Pfizer’s CEO, Ian Read said, “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.”  Read added, “Allergan’s businesses align with and enhance Pfizer’s businesses, creating best-in-class, sustainable, innovative and established businesses that are poised for growth” ^[4].

It is clear that the Allergan acquisition will spread Pfizer’s R&D risk through further diversification.  Alternatively, the AstraZeneca merger would have bolstered Pfizer’s existing R&D portfolio. 

Was Allergan the Right Target for Pfizer?

As we’ve demonstrated earlier, the Allergan merger would further diversify Pfizer’s portfolio, however, it is important to evaluate the financial impact the Allergan acquisition will have on Pfizer.  Allergan (which was acquired by Actavis for $70 bn) has engaged in M&A activities that have resulted in immense annual revenue growth ^[7], averaging 39% annually since 2010, whereas AstraZeneca exhibited negative growth rates.  Figure 3 demonstrates Allergan’s revenue growth rates compared to AstraZeneca.

Pfizer’s Lipitor patent (which expired in 2011) significantly impacted revenues in subsequent years (Figure 4), nonetheless, Pfizer managed to overcome revenue declines through efficiently implementing cost-cutting initiatives and organizational restructuring, which resulted in improved earnings (Figure 4).  Figure 4 then shows that incorporating Allergan’s expected revenue growth into Pfizer should bolster Pfizer’s overall future revenue and earnings before interest and taxes.  While these figures suggest that the Allergan acquisition might have been the boost that Pfizer needed to sustain growth, Ian Read suggested, “the two businesses ‘may or may not fit’ together” ^[1].

Are Tax Savings The Real Reason Behind the Allergan Merger?

It is natural for one to assume that Pfizer acquired Allergan because of the reduced tax rates in Ireland (at 17-18%) compared to the US (at 25% ^[6]).  According to the company’s press release, “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” ^[4]. 

Figure 5 confirms Pfizer’s estimates, in that they can be saving approximately $1 billion/year after the Allergan merger, which is quite significant, as the amount bolsters profitability by approximately 11% annually, which bodes well for Pfizer’s bottom line.

Allergan Merger: Numerous Benefits for Pfizer

The analysis in this article suggests that the Allergan merger might have been a good move for Pfizer in the long run compared to AstraZeneca; firstly, Allergan further diversifies Pfizer’s R&D portfolio (particularly in the urogenital disease indication), secondly, Allergan is expected to bolster Pfizer’s revenue growth, and lastly, the tax-saving inversion to Ireland will enhance Pfizer’s earnings.

References

[1] http://www.wsj.com/articles/pfizer-and-allergan-to-merge-in-huge-inversion-deal-1448280652

[2] http://www.reuters.com/article/us-astrazeneca-pfizer-idUSBREA3R0H520140526

[3] http://www.businessinsider.com/pfizer-and-allergan-are-combining-to-form-a-150-billion-drug-company-2015-11

[4] http://www.businesswire.com/news/home/20151123005580/en/Pfizer-Allergan-Combine

[5] http://www.pfizer.com/system/files/presentation/2014_Pfizer_Financial_Report.pdf

[6] http://fortune.com/2015/11/20/why-new-tax-inversion-rules-wont-stop-pfizer-allergan-deal/

[7] http://marketrealist.com/2015/03/actavis-emerged-mergers-and-acquisitions/