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Pfizer & Allergan's abandoned mega-merger: what happens next

Pfizer & Allergan's abandoned mega-merger: what happens next

Pharmaceutical giant Pfizer has abandoned plans to acquire Irish firm Allergan for $160 billion after the US government changed rules regarding tax inversion deals.

The merger would have been the biggest healthcare deal in history and have seen Pfizer re-domicile as an Irish company to save on tax.

The companies first announced takeover plans in November 2015, which was amid a year where the total value of transactions in the industry was close to $1 trillion.

However, in November of last year, the US Treasury announced more stringent measures and Allergan’s shares fell more than 22% on Monday following the announcement that the deal would not go through. Pfizer will now pay a $150 million break fee to cover Allergan's deal-related expenses.

Against this backdrop, Citywire Selector asked leading healthcare managers what was next for the two firms and if M&A in the healthcare sector was ailing.

Several options

Citywire AA-rated Christophe Eggmann thinks both firms have several options now the deal has fallen through. Allergan is the second largest holding in the JB EF Health Innovation fund at 6.77%, while he holds 4.77% in Pfizer.

A merger with Allergan had a lot of merit beyond the inversion benefit for Pfizer. But the setback should not have any impact on management credibility as external factors led to the termination of the deal.

Ian Read has several other options for how to increase shareholder value. He could continue looking for a large acquisition target by either going back after GlaxoSmithKline or AstraZeneca or by buying biotech.

Pfizer could be split into two entities, with one focused on innovation and patented products and another selling off-patent/OTC medication – a step that management has long been contemplating to unleash value. The company can also just focus on developing its own pipeline, while adding products via smaller, tuck-in acquisitions.

Allergan has other attractive strategic options too. It has a portfolio of well-established, long-duration assets and an attractive late-stage pipeline. In addition, Allergan is set to receive $36 billion from Teva for the sale of its generics business.

Capital redeployment, as well as the resumption of its $2.5 billion cost-cutting programme, provide ample flexibility to create additional value for Allergan shareholders, potentially far beyond what Pfizer was offering. M&A is clearly back on the table for both companies, which should buoy the pharmaceuticals and biotech sector as a whole.

The logic is gone

Rudi Van den Eynde, who manages the Candriam Equities B Global Healthcare fund, has around 2.7% of the fund allocated to Allergan and is underweight Pfizer. He thinks M&A activity will continue in the sector.

The financial logic is gone, given the Treasury actions. It was basically a tax dodging deal and a deal about cost-cutting. It also creates an unbelievably big company which is more difficult to grow. It is not a deal we were extremely favourable on, but financially it could make some sense.

Most of the mergers are driven by the desire to increase growth of the company. This was about cost cutting and getting more scale. Most of the M&A activity is to get access to a promising drug in development or a promising franchise, but it is more to increase your growth, your technological acumen. Those kind of deals will continue.

The tax inversion deals will be more difficult, if not impossible. We have seen a lot of tax inversion but it's not only tax inversion, there is a lot of industrial logic behind that deal and most of the deals are not dependent only on the tax rational. We will continue to see big pharma and big biotech buying smaller biotech.

I would be inclined eventually once the dust settles to raise the Allergan position, due to the current price and the sale of their generic division. They have a good balance sheet and it is a pretty decent company, but Pfizer will remain underweight.

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