Back To Basics After The Death Of Pfallergan

| About: Pfizer Inc. (PFE)

It must have taken an age to hammer out pharma’s biggest-ever takeover deal to create Pfallergan, but it took barely 24 hours to scupper it. Then again, adverse tax reform was clearly already on Pfizer (NYSE:PFE) and Allergan’s (NYSE:AGN) minds: witness the ludicrously low termination fee they had envisaged specifically for this eventuality.

Now that the $160bn deal is formally off attention turns to what Allergan and Pfizer will do as standalone entities. Given the circumstances of the deal’s collapse the answer in this case is less dramatic than might be expected: go back to business as usual.

Fortunately, for investment bankers anyway, in both companies’ cases this involves seeking out new acquisition targets. Allergan, for instance, will soon be fortified with $34bn of cash from the $40bn sale of its generics business to Teva (NASDAQ:TEVA), and surely only some of this will be used to settle debt.

Not normal

For Pfizer the collapse of not just one but two big takeovers – it had tried and failed to buy AstraZeneca (NYSE:AZN) in 2014 – would under normal circumstances have left it vulnerable and its chief executive out of a job.

But these are not normal circumstances. A US move to curb serial tax inversions – as is now planned by implementing a three-year look back to tighten the ownership share calculation of the combined company – was always a risk (US plays break-up artist as panic envelops Pfallergan, April 5, 2016).

November’s takeover agreement between Pfizer and Allergan specified a termination fee of up to $3.5bn, but said only up to $400m would be paid in the event of an adverse US tax law change. The companies today agreed on only $150m, to cover expenses.

Allergan and Pfizer therefore revert to being serial acquirers on a standalone basis, and an eventual split of Pfizer goes back on the agenda at some vague point in the future.

It would be gratifying to think that some of the most R&D-intensive big biotechs – think Celgene (NASDAQ:CELG) or Biogen (NASDAQ:BIIB) – have now become acquisition targets. The truth might be more mundane, as neither Pfizer nor Allergan have a history of this type of transaction; Allergan is more focused on the specialty field, and Adam Feuerstein at The Street.com has already compiled a list of possible targets.

Umer Raffat, an analyst at Evercore ISI, said attention should also turn to three organic binary events at Allergan: the depression project NRX-1074, its DARPins programme, and the group’s attempts to raise the price of Botox.

Death of the inversion?

Meanwhile Pfizer basically still needs to make use of offshore cash. Indeed, it is telling that some of the strongest risers on the London stock exchange today were GlaxoSmithKline (NYSE:GSK), AstraZeneca and Shire (NASDAQ:SHPG).

That said, any potential takeover of a UK “national champion” will surely feel the wrath of politicians on the other side of the Atlantic – as Pfizer found out when it tried to buy Astra. Then again, Pfizer’s chief executive, Ian Read, might think that after two botched takeover attempts he has little face to lose.

US tax changes – if they ever materialize – only appear to aim to curb serial tax inversion, not tax inversion per se, although it would surely be madness to attempt anything as bold again until after the new US president is inaugurated in January 2017, and perhaps even after US tax reform is passed potentially in late 2017/early 2018.

In the meantime some might hope for a bit more of what pharma should do best – funding drug R&D – and a little less focus on financial engineering, though this still looks like a pipe dream.