Fitch: Pfizer/Allergan Merger Atypical of US Branded Pharma M&A

NEW YORK--()--The potential combination of Allergan and Pfizer is not characteristic of expectations for business development by the U.S. branded pharmaceutical industry as a whole, according to Fitch. Instead, the rationale behind an Allergan acquisition would be driven by issues unique to Pfizer, including a need to augment growth drivers on the innovative side of the business ahead of a potential separation of the established products business, as well as offering the potential for tax savings by re-domiciling overseas.

In contrast to Pfizer's strategy, we expect industry peers will continue to focus on smaller, targeted transactions. The need for large acquisitions as a driver of organic growth is lessened by the recently positive trends in drug development pipelines, new product commercialization and moderating patent expiry risks. As a result, transactions will focus on innovative treatment platforms through acquisitions or joint ventures. The targets will likely be individual products or smaller- to mid-size firms that develop these types of drugs.

Allergan Thursday confirmed it had been approached by Pfizer and is in preliminary discussions regarding a potential combination, but that no agreement has been reached. A combination of the two would in effect create the world's largest drug maker, and could also serve as the largest corporate takeover of the year. Whether a deal will materialize is still highly uncertain, since under "Irish Takeover Rules" applicable to Allergan, investors are privy to early disclosure of potential M&A transactions.

Allergan's portfolio would offer Pfizer a durable cash flow stream via its number one seller, Botox. The drug maker also offers a growing portfolio of smaller products that have varying degrees of market exclusivity and are mostly focused on specialized needs. This is in contrast to Pfizer, which has a highly innovative segment and a big R&D presence in treatment areas with large addressable patient populations, for example working on drugs that treat cancer and diabetes.

We believe a deal, if realized, would add little clarity to what Pfizer will strategically look like within five years - be it purely innovative, or a mix of innovative and established generic practices. Pfizer has prior experience in completing large, transformational transactions, but we believe another large transaction is necessary to move the needle on growth and to complete a tax inversion, a desire that is still in play.

Companies with global ambitions continue to seek foreign acquisitions despite recent political and legislative opposition to tax inversions, given the financial benefits of re-domiciling in overseas jurisdictions. Inversion brings three principal benefits: it reduces taxable profits in the US business; it unlocks unremitted foreign earnings (UFEs) in foreign subsidiaries; and it allows access to future foreign earnings outside the U.S. tax net and the avoidance of the accumulation of UFEs. It is unclear whether there will be political pushback for a potential acquisition of Allergen as was the case in Pfizer's failed attempt to acquire AstraZeneca in 2014, but the risk is perhaps heightened by the timing coincident to the 2016 presidential race and recent negative attention to certain pricing practices by the pharmaceutical industry.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Robert Kirby
Director
Corporate Finance
+1 312-368-3147
or
Megan Neuburger
Managing Director
Corporate Finance
+1 212-908-0501
or
Jacob Bostwick
Director
Corporate Finance
+1 312-368-3169
or
Kellie Geressy Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com