November 6, 2015
By Mark Terry, BioSpace.com Breaking News Staff
Now that it appears reasonably certain that Pfizer Inc. and Allergan are in talks for an acquisition, analysts are speculating on if such an acquisition would lead to a Pfizer split.
Ever since Pfizer’s failed attempt to acquire UK-based AstraZeneca PLC in 2014 for $119 billion, analysts have speculated on the company’s alternate target, with GlaxoSmithKline , Dublin-based Actavis PLC and Allergan PLC all at the top of the shopping list. Now that it appears that real talks are on between Allergan and Pfizer, analysts are looking at more than just the tax benefits Pfizer would gain by shifting its domicile to tax-friendly Ireland.
There is some speculation that after a merger, Pfizer would split the company sometime in 2016, spinning off its established products division that sells generics, and its “innovative” patented medicine division, creating two separate companies. Reuters notes that such a split would increase the company’s profitability, primarily because in-patent drugs have higher prices, while off-patent, i.e., generics, have lower prices.
“This would be the creation of two companies really, not one huge $350 billion Pfizer,” Andy Summers, co-portfolio manager at Janus Capital Group told Reuters.
If it did occur, it wouldn’t be the only big company investors would like to see busted up. In July, CNBC Mad Money’s Jim Cramer called for Johnson & Johnson to split into three separate companies. Cramer argued that each company could do better financially than the combined company, that has pharmaceuticals, consumer healthcare products and medical devices all under one roof was confusing to manage.
In late October, Neil Woodford, of London’s Woodford Investment Management, was reported to have met privately with Sir Philip Hampton, the chairman of GlaxoSmithKline, to encourage the company to split off some of its business units. Woodford apparently argued that GSK’s stock is underperforming and investors are becoming impatient waiting for the company’s new pipeline to show results.
Others argue against it, particularly because the complex deal with Novartis and the restructuring of GSK’s vaccines business isn’t completed yet.
Earlier in the year Pfizer acquired Hospira, Inc. for $15 billion, which bolstered the company’s generic injectable drugs and medical products, as well as biosimilars. Biosimilars are drugs that behave like branded drugs, but don’t have to wait for the end of patent protection like generics do. This acquisition was seen by some analysts as a way to make the established products business look more attractive before any sale.
Allergan’s acquisition would add aesthetics such as Botox and facial fillers to Pfizer’s innovations business units, as well as branded products in ophthalmology and neurology. Allergan recently discussed some of its new medications, including Fiberzi for irritable bowel syndrome, which the company projects could earn $1 billion.
Allergan also offers established products such as Namenda, for Alzheimer’s, which was not part of its generic drugs sale to Teva Pharmaceutical Industries Ltd. , which will close early in 2016.
Allergan’s current structure came about most recently in March 2016 after a merger with Actavis. The company’s chief executive officer, Brent Saunders, is noted for his friendly business mergers and relationships. There is some speculation that a merger would groom Saunders to eventually head the newly created company, which would be the largest pharmaceutical company in the world. However, if the merged company would quickly split into two, the dynamic would be different and Saunders could potentially end up running one of them, with Pfizer’s Ian Read running the other, or some other combination yet speculated upon.
Janus’s Summers, however, told Reuters, “All of Brent’s growth areas at Allergan would stay at the growth company.”
Oliver Pursche, chief executive of Bruderman Asset Managemenet, which holds Pfizer shares, told Reuters that an Allergan merger “certainly gives Pfizer more flexibility in terms of how it wants to execute that strategy,” of a potential split. “It makes it more of a growth company.”
There is irony that in a year marked by a record number of mergers and acquisition in the biopharma market, well exceeding $235 billion, that analysts are pushing for some of the larger companies—usually the result of mergers and acquisitions—into breaking up into smaller companies.
