Allergan represents growth, not just tax benefit
Now that Pfizer (PFE) and Allergan (AGN) are officially tying the knot in a record $160 billion deal, commentary has focused on the tax advantages of being based in Ireland -- and immediately rekindled the fight over tax inversions. This comes after Pfizer’s failed attempt to acquire AstraZeneca (AZN) last year.
In acquiring Allergan, Pfizer plans to complete a tax inversion by switching to a European address, and slashing its taxes significantly in the process. Allergan paid an effective tax rate of 5% last year, compared with around 25% for Pfizer.
The merger has provoked anger from politicians and individuals alike, as tax inversions have become a growing focus of political debate in the last year. While Abbvie (ABBV) dropped its attempted bid for Ireland-based Shire last year after the U.S. Treasury Department tightened regulations to make inversions less financially beneficial, Pfizer structured the current deal to avoid the tougher rules.
And while this remains an important issue, overlooked is another key reason Allergan has been a golden stock in recent years and represents such an attractive target for Pfizer: Growth. Pfizer Chairman and CEO Ian Read said in an interview with CNBC that the deal is not just about tax benefits but also about driving greater growth. (Legacy Allergan was up 91% last year, and Actavis -- which changed its name to Allergan this year after the acquisition -- was up 53% last year.)
Some may be skeptical of that argument, but there have been few pharma companies sporting the kind of growth Allergan has achieved -- growth that would help New York-based Pfizer prepare for a much-discussed spinoff of its units.
Yes, financial engineering has been important for Allergan. The company, formerly known as Actavis, acquired Warner Chilcott in 2013 for $8.5 billion, allowing the company to relocate to Dublin, which has a much lower tax rate, paving the way for lucrative future acquisitions.
With the opportunity to grab more growth, Allergan's stock surged higher following its $25 billion acquisition of Forest Labs in 2014, expanding the company’s scale by giving it a portfolio of psychiatric and gastrointestinal drugs.
But the biggest growth driver of all was last year's acquisition of Allergan by then-named Actavis for $66 billion. The purchase also ended Bill Ackman-backed Valeant’s (VRX) hostile takeover attempt of the company. Actavis took on its target's name after the deal closed, and the newly combined Allergan became the fastest-growing pharma company, with competitive franchises in central nervous system disorders, aesthetics, dermatology, plastic surgery, eye care, neurology, women’s health and gastroenterology.
'Pipeline-in-a-product'
Legacy Allergan brought to the new company unmatched growth from its pipeline-in-a-product strategy pioneered by former CEO David Pyott and continued by current CEO Brent Saunders. Its Botox franchise has seen strong growth -- 13% last quarter -- not only for cosmetic uses but also for therapeutic indications, including migraines and overactive bladder. Botox has also shown to be useful in treating muscular spasms, paving the way for more indiciations going forward. The company’s ophthalmology franchise has shrugged off generic competitors by continuing to develop improved versions of its products, with Restasis for dry eyes and DARPin, an experimental treatment for wet age-related macular degeneration, being important drivers.
Importantly, Actavis didn't abandon its quest to boost growth when it acquired Allergan; instead it committed $1.7 billion, or 7% of sales, to R&D, “ensuring the appropriate resource allocation to continue driving exceptional organic growth,” a contrast to Valeant’s R&D spend of just 3%, a now much-maligned strategy of extreme cost cutting. The move makes sense given Allergan CEO Brent Saunders' background in pharma R&D coming from Bausch & Lomb and Forest Labs. And this summer Allergan announced a plan to sell its generic drug business to Teva Pharmaceutical (TEVA) for $40.5 billion so it can focus on other growth areas.
Allergan, now gobbled up by Pfizer, has represented an important new area of “growth pharma” that contrasts with slow-growing pharma behemoths: AstraZeneca, GlaxoSmithKline (GSK), and Eli Lilly (LLY) have been hamstrung by patent expirations. Meanwhile, Bristol-Myers (BMY) is striving to position itself more as a biotech company with a focus on immuno-oncology, and AbbVie paid up big for Pharmacyclics (PCYC), even though Johnson & Johnson (JNJ) owned 50% of its main drug.
The big pharma names have not been able to keep up with the growth of large-cap biotechs that focus on specific disease categories. Big biotechs that have been winning include $90 billion Celgene (CELG) with cancer, $65 billion Biogen (BIIB) with multiple sclerosis, and $150 billion Gilead (GILD) with HIV and Hepatitis C, courtesy of its Pharmasset acquisition.
Longer term? A breakup of the merged Pfizer-Allergan into two separate companies once again—one innovative and one established—which could occur in the next few years. Split-ups have been a positive value driver in the healthcare space, which includes the 2013 spinoff of Pfizer's animal-health business Zoetis (ZTS), a split of Abbvie and Abbott Labs (ABT), and Mallinckrodt (MNK) splitting off from Covidien, which was later acquired by Medtronic (MDT). A big part of the value thesis for Johnson & Johnson has also been a split of its business into its pharmaceutical, consumer, and medical device units.
The bottom line: Taxes remain the hot-button issue when it comes to the Pfizer-Allergan merger, but overlooked is the growth Allergan represents to the pharmaceutical industry that has struggled to find it in recent years.
