Kristine Harjes: Todd, do you want to pick an M&A story from 2015,
and we'll walk through it?
Todd Campbell: Yeah. There were a ton.
Michael Douglass: We're in kind of a target-rich environment.
Campbell: Very much so! Record year for M&A deals in the healthcare space this past year.
You had touched on this, these aren't mutually exclusive. When you look at these deals, there
may be multiple reasons for doing a deal. And I thought one place to start so we can
talk about some of these issues was with the grandaddy deal of them all for 2015: Pfizer's
proposed acquisition of Allergan in $160B combination.
Harjes: Yeah. This would create the largest pharma on the planet, looking at the potentially
generating $25B in cashflow beginning in 2018. The two companies together would have 100+
mid- to late-stage programs. It's just a mammoth, colossal deal, and I think you are right on
the money in starting in talking about this one.
Campbell: Yeah, you're talking about Pfizer combining $48B in sales with Allergan's $16B
in sales to create a company that's doing $64B! With a B! In the sale of medicines that
are widely used throughout the globe. Michael, we were talking about the different reasons
behind some of these deals. You look at it and you say, "There are some things that Pfizer's
getting in this deal, multiple things. They're getting new drugs. Botox, obviously, and some
eye care drugs that are also important. But, they're also going to benefit from some potential
tax savings that are associated with this deal."
Harjes: Yeah. When you look at intent on this deal, to me, that's what stands out, the tax
savings. It's interesting, because when you listen to the two companies talk about it,
they're kind of saying, "Oh, no, it's not really the tax, it's because of ... other
strategic importances." And that's actually a phrase that I'm stealing from the conference
calls, "strategic importance of the franchises."
Douglass: Yeah. Pfizer's Ian Read was actually quoted saying, "Once again, I want to stress
that we're not doing this transaction simply as a tax transaction. We're doing this because
of the strategic importance of the franchises, the revenue growth we believe we can get both
in the U.S. and internationally, and the importance of this to combine the research approaches."
Which to me really highlights the fact that, yes, tax is definitely part of it, but there's
also this additional growth in areas that Pfizer hasn't been that involved in. So, to
me, this is an opportunity to breach into some of these new markets.
Harjes: Just to back up a little bit and give the background about my tax is even coming
into play here: Pfizer is a U.S.-based company. So, technically, the way the deal is arranged
is that Allergan, which is based in Ireland, would be buying Pfizer. So, the company would
be able to re-land its headquarters over in a country that has a much, much lower corporate
tax rate.
Douglass: That's the hope.
Campbell: Right. The U.S. corporate tax rate is currently 35%, which is the highest in
the industrial world. Obviously, we employ a lot of people in our corporations to help
lower those tax rates, so the effective tax rate for Pfizer is in the low-to-mid-20s.
So, we'll say, 23.4%, I think, through the first nine months of the year. By moving their
headquarters overseas, they think that they can reduce the to 17-18% over the first couple
years, and maybe get it as low as 15% further out. If they were to do that, estimates peg
the savings at about $2B per year, which is about what, by the way, the company says that
they'll save in quote-unquote "synergies."
Harjes: So, having covered intent, and we've talked a little bit on mechanism--
Douglass: It's a purchase.
Harjes: Yeah, clearly. To be specific, Allergan shareholders will be receiving 11.3 shares
of Pfizer's stock for each share they have of Allergan, which is kind of interesting,
because if you look at the two share prices right now, they don't reflect that multiple.
Right now, right before the show, I pulled some numbers. Pfizer is trading for $32, Allergan's
at $306. That's a multiple of 9.6. You would think that, if this deal were done and set,
Allergan should be trading for a multiple of 11.3, which would bring you to $359, which
is almost an 18% premium over what it's actually trading for. So, clearly, there's some suspicion
here about whether or not this deal will actually go through.
Douglass: Yeah. Or, there's a number of possible outcomes there. The U.S. has really push back
against the whole tax inversion thing in general, so there's probably concerns about that. There
are probably concerns about whether it'll actually go through. A number of possible
things there. So, yeah, that’s mechanism there. Thinking about risk appetite, this
is a commercial-stage company buying another commercial-stage company. So, I would say
that your risk of things totally imploding with this deal, if it were to go through,
is fairly low, just because, when you compare this to a biotech in phase 1, your chance
of success, essentially, with these drugs continuing to be marketed and continuing to
do well is very high in comparison.
Harjes: Yeah. You know what you're getting with Allergan, it's a mature company.
Campbell: They're looking at it, saying, "This is a great cashflow deal. Yeah, we're paying
a lot in multiple to sales to do the deal, but at the same time, this is going to kick
out a tremendous amount of cashflow that we can use to either do additional deals down
the road, or to continue to return money to shareholders via dividends and buybacks.