News Coverage

Pfizer and Allergan announce $160bn 'inversion' merger

11/23/2015
Larry Harding or Radius discusses the Pfizer and Allergen deal

Pfizer and Allergan are to combine in the largest healthcare deal in history.

The mega merger between US-listed Pfizer and Dublin-domiciled Allergan values Botox-maker Allergan at $160bn (£105.7bn) and will create a pharmaceuticals giant potentially worth more than $320bn, dwarfing industry leader Johnson & Johnson's $284bn valuation.

It would be the largest deal so far this year in any industry and would surpass Pfizer’s $116bn purchase of Warner-Lambert in 2000 as the biggest-ever transaction between drug companies. The combination will also rank as the second-largest M&A transaction on record, behind Vodafone Airtouch’s $202.8bn acquisition of Mannesmann in 1999.

Under the terms of the deal, Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, while Pfizer shareholders will get one share of the combined company for each of their Pfizer shares.

That means that former Pfizer shareholders will hold 56pc of the combined company and Allergan shareholders will own roughly 44pc.

The deal, which received unanimous approval from both boards and is expected to complete in the second half of 2016, comes nearly two years after Pfizer's failed acquisition of Anglo-Swedish drugs company AstraZeneca.

“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,” said Pfizer boss Ian Read.

"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.”

However, the merger is likely to come under fire from US politicians because Pfizer intends to redomicile in Ireland, where Allergan is registered and corporation taxes are much lower, in a so-called "inversion" deal.

US Senator and Democratic presidential candidate Bernie Sanders has already attacked the deal, calling it a 'disaster' for US consumers who already pay high prices for prescription drugs.

Under the terms of the proposed transaction, Allergan will be made the parent company of the combined group. Then, a wholly owned subsidiary of Allergan will be merged into Pfizer under the umbrella of parent company Allergan plc. At this point, Allergan plc will be renamed “Pfizer plc".

Shares of the combined company will be listed on the New York Stock Exchange, but when the deal is completed, the combined company is expected to maintain Allergan’s Irish legal domicile.

Pfizer will still, however, have its global operational headquarters in New York, with its principal executive offices in Ireland.

The inversion deal will allow Pfizer to assume a much lower rate of corporation tax. Corporation tax in Ireland is just 12.5pc, compared with 35pc in the US.

But it will come as a blow to the US Treasury, which is clamping down on these sorts of tax inversion deals.

The government announced new rules last week, which it claimed would make it more difficult and less lucrative for US companies to invert.

Treasury Secretary Jacob Lew warned the government would take further action in the coming months to stymie inversion deals.

But while the Treasury can reduce the economic benefits of such a deal, it doesn't have power to block an inversion.

Moreover, Larry Harding, an international tax expert at Radius, says the new rules are unlikely to apply to this deal because it is, in fact, going to be structured much more like a traditional acquisition of the US company by the Irish company.

"The inversion rules can only apply where the intent is that the acquiring company is the US business, and it “re-domiciles” to the non-US location," he said. "If Pfizer were buying Allergan and re-domiciling to Ireland, then the inversion rules would apply.

"The more you clamp down on inversions, the stronger the impetus is to make it a more straightforward acquisition by the overseas company. Presumably, in the straight acquisition, not only do you lose the same tax base as you would with the inversion deal, but you probably also lose more US-based jobs as well."

Mr Read has previously voiced the need for the company to create shareholder value by reducing its tax burden.

Earlier this year he said Pfizer needed an “innovative” deal that strengthened shareholder value and that to be successful Pfizer needed to have a competitive tax rate.

The new Pfizer board is expected to have 15 directors, including all of Pfizer’s 11 directors and four directors of Allergan: executive chairman Paul Bisaro, chief executive Brent Saunders and two other directors to be decided at a later date.

Mr Read, Pfizer’s chairman and CEO, will take on the same role for the combined group.

Mr Saunders will serve as president and chief operating officer.

The merger isn't just about reducing Pfizer's tax bill.

The US company will gain exposure to Allergan's high-growth flagship brands in areas like dermatology and aesthetics, eye care, gastrointestinal, neuroscience and urology.

Crucially, it will also gain access to Allergan's product pipeline and R&D.

The combined company's pipeline will contain more than 100 mid-to-late stage drugs and the merger will result in $2bn of cost savings over the first three years.

Importantly, it will allow Pfizer to expand the reach of Allergan’s established portfolio through its massive commercial capabilities, infrastructure and global presence.

"This bold action is the next chapter in the successful transformation of Allergan allowing us to operate with greater resources at a much bigger scale," Mr Saunders said.

"Joining forces with Pfizer matches our leading products in seven high-growth therapeutic areas and our robust R&D pipeline with Pfizer’s leading innovative and established businesses, vast global footprint and strength in discovery and development research to create a new biopharma leader.”

The combined company will have a tax rate of 17pc to 18pc in the first full year and will boost Pfizer's profit by more than 10pc by 2019.

The merger will delay by two years Pfizer's decision on whether to split itself into two by selling off its lower-margin unit of products facing generic competition. The decision had been expected by the end of next year.

The transaction between the two drugmakers caps a busy year for deals in the pharmaceutical industry, with more than $200bn in transactions announced.

The merger also pushes worldwide M&A announced so far this year to $4.2 trillion, surpassing the all-time annual record for global deal making set in 2007 of $4.1 trillion, according to data from Thomson Reuters.
It has also set a record for global Healthcare M&A, pushing the total value to $649.4bn, more than the previous two full years combined.

Viagra-maker Pfizer is the second-biggest US drugmaker and has a market value of $200bn. Allergan was worth nearly $123bn at yesterday's close.