AGN Allergan plc

   (FROM THE WALL STREET JOURNAL 11/24/15) 
   By Jonathan D. Rockoff 

The $155 billion agreement to combine Pfizer Inc. with Allergan PLC would create a drug behemoth so big that Pfizer is already thinking of breaking it up.

The deal, which was announced Monday, brings together a diverse stable of drugs, from Pfizer's cancer medicines and vaccines, to Allergan's skin-care treatments and eye drugs.

The companies expect to achieve $2 billion in cost savings as well as significant tax benefits from the deal, under which Pfizer's tax base would shift to Allergan's home base in Ireland in a so-called inversion. As a result of the move, Pfizer expects to cut its tax rate to 17% or 18%, from its roughly 25% rate currently, because corporate taxes in Ireland are lower than in the U.S.

The new drug company would be the world's biggest with $63.5 billion in yearly sales, 110,000 employees and $9 billion in annual research spending.

Pfizer executives have for years considered splitting the company, but they have been deterred by concerns that its businesses may not be large enough to stand alone. Now, with Allergan, the company would have strength in both high-cost, high-growth drugs as well as generic, lower-cost drugs to make such a split.

On Monday, executives said they would consider splitting the combined company into two by 2018.

One business would focus on newer products, such as Pfizer's breast-cancer drug Ibrance and Allergan's blockbuster Botox, and have sales the companies project will grow in the double digits.

The other, with a potentially mid-single-digit growth rate, would consist of older drugs that have lost patent protection or are about to, such as Pfizer's Celebrex arthritis drug and Allergan's Teflaro antibiotic.

The two businesses "may or may not fit" together, Pfizer Chief Executive Ian Read said in an interview.

Shareholders would have preferred more certainty on a split, according to analysts, because a breakup could increase the value of their holdings. They were also disappointed, analysts said, because Pfizer executives pushed back the timeline for making a decision by two years, saying it wanted to first focus on properly digesting Allergan.

The companies didn't want to drop the neutral tone Pfizer has used to describe its deliberations because the drug maker doesn't want to hurt employee morale, according to a person familiar with the matter.

Shares in Pfizer fell 2.7%, while Allergan lost 3.4% Monday.

Another drag on the stocks: concern that the U.S. government could try to thwart a combination that would move one of the top names in corporate America to a foreign country.

However, despite new rules issued by the U.S. Treasury Department last week to deter "inversion" deals, it is unlikely that any significant changes to the corporate tax code are in the offing without action by Congress. Pfizer structured the deal -- under which smaller Allergan is taking it over and Allergan shareholders will control 44% of the combined company -- to help bypass Treasury's efforts.

Mr. Read said the tax-restructuring would free up billions of dollars in cash for use on drug research and other programs. That cash was trapped overseas, because bringing it back to the U.S. would have generated a huge tax tab.

"This just enables us to invest more in the U.S.," he said.

At the end of September, Pfizer had $37.6 billion in cash and equivalents, most of that overseas, Pfizer Chief Financial Officer Frank D'Amelio said.

For its part, the Irish government is sanguine about the deal, since both pharmaceutical companies already employ thousands of people in the country. A spokesman for Finance Minister Michael Noonan said the only "major concern" was that the merger would result in job losses. "We would be hoping that the merger would result in an increase in employment here rather than a decrease," he said.

The deal values each Allergan share at $363.63, more than a 30% premium to the price before The Wall Street Journal reported the deal talks late last month. Allergan shareholders would get 11.3 shares in the combined company for each of their own, and Pfizer stockholders could exchange some of their shares for cash.

Both Pfizer and Allergan have been whipsawed by integrations and restructurings in recent years, a product of the seismic changes that have been rippling through health care as a result of pressure to control spending, the rollout of the Affordable Care Act, and the end of a wave of patent expirations for top-selling drugs like Pfizer's Lipitor cholesterol pills.

"Both companies and both sets of leaders have been transforming their businesses," said Allergan CEO Brent Saunders in an interview. Mr. Saunders will serve as president and chief operating officer of the combined company and join its board.

After taking the helm of Pfizer in late 2010, Mr. Read spearheaded a number of deals to focus the company on human medicines and rebuild its pipeline. Pfizer spun off its animal-health business, for instance, and most recently bought Hospira for $16 billion.

Mr. Read also reorganized Pfizer into segments focusing on patent-protected medicines and older drugs, a move that could pave the way for a potential split.

Allergan has undergone an even bigger remodeling, since Paul Bisaro took over a relatively small generic drug company called Watson Pharmaceuticals in 2007. Watson expanded its portfolio of the knockoff drugs through a series of deals, including one for the European company Actavis, whose name the company took.

Last year, the company moved into patent-protected drugs by buying Forest Laboratories -- whose CEO was Mr. Saunders -- and then scooped up Allergan. Most recently, the company took a big step toward moving on from its heritage, agreeing to sell its generic-drugs business to Teva Pharmaceutical Industries Ltd. for $40.5 billion. Mr. Bisaro, currently the executive chairman of Allergan, will join the board of the new company.

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Denise Roland contributed to this article.

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November 24, 2015 02:47 ET (07:47 GMT)

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