Proposed Pfizer-Allergan merger could be the biggest ever, at $160 billion

Plans for splitting Pfizer itself are put on hold

With the $160-billion Pfizer-Allergan merger announcement last week, Pfizer’s chairman and CEO, Ian Read, can breathe at least one sigh of relief for getting the tax-inversion opportunity he was seeking—and was denied—when AstraZeneca rejected Pfizer’s bid last year. Even absent the expected political scrum, in a US election year, over the propriety of shifting a key US pharma company to overseas headquarters (Allergan is based in Dublin, Ireland), the acquisition is expected to take more than six months to finalize. Allergan itself is in the final stages of a $40.5-billion divestiture of much of its generic assets to Teva Pharma—and that is expected to close in Q1 2016.

Pfizer and Allergan noted that there will be a pipeline of “more than 100 mid-to-late stage” drugs in development at the combined company. That pipeline has been and will be a focus of the investor community looking at the combination, but it’s worth noting that Allergan styles itself as a “Growth Pharma” business model that includes an outlicensing entity, Medis, and a distribution company, Anda, the fourth-largest generics distributor in the US.

Broadly speaking, Pfizer has had a history of cutting down employment and locations at companies it acquires; Allergan is perhaps too new to have a distinct identity, although its heritage is as a generics company that grew primarily through acquisition. Over the past 10 years or so, Pfizer’s major acquisitions have been Warner-Lambert, Pharmacia and Wyeth; earlier this year it acquired Hospira, a generics and biosimilars maker, for $17 billion. Today’s Allergan has a convoluted history, starting with the generics maker Watson, which then acquired Actavis and took its name, and then Allergan and took its name.

There’s a frisson of chest-thumping and ego to all this, if press commentary is to be believed. The merger allows Pfizer to reclaim its title as the No. 1 pharma company in the world by sales (it’s currently No. 2 behind Novartis), with an estimanted turnover of $63 billion. The deal is supposed to be chairman Read’s legacy (in line with the major acquisitions that occurred under his most recent predecessors), and he is due to retire in 2018—possibly leaving Allergan chairman Brent Saunders, who will become the president and COO of the combination, a clear shot at the chairman’s slot.

Unusual for corporate mergers, both companies’ share prices declined slightly after the announcement (usually the buyer is down, and the seller is up). According to press reports, investors were disappointed that Pfizer is delaying decisions on spinning out its own generic and mature products to 2018 (it has been talking about doing so for a couple years now); another disappointment was the prediction that synergy savings would only be $4 billion in the third year after merger. Arguably, the generics spinout would have been more feasible prior to Allergan’s selling its generics business, while Pfizer’s acquisition of Hospira looks like a doubling-down on generics and biosimilars. (While the Botox brand is usually mentioned whenever Allergan’s name pops up, it’s interesting to note that in 2015, Pfizer’s off-patent Lipitor is still a bigger franchise.) One thing’s for sure: all the back and forth on acquisitions, mergers and spinouts is generating healthy fees for the financial advisors involved.