Now that Pfizer’s $160 billion deal to merge with Allergan (AGN) has been called off, the world’s largest drug maker has a decision to face. And early indications are it may go back to the future.
Pfizer (PFE) never articulated a plan B in the event that its deal with Ireland-based Allergan fell through, though that isn’t terribly surprising. Few tax experts anticipated the US Department of Treasury would move as it did to crack down on so-called tax inversions and in a way that appeared to target this particular deal.
So now, Pfizer appears to be returning to a game plan that was first floated five years ago — splitting up the company. In a brief statement Wednesday morning, the company indicated that the notion is, once again, being considered and a decision will be made no later than the end of this year.
The idea is to “unlock,” or bolster, shareholder value by creating two different entities. One of these would be the “established business,” producing older drugs, and the other would be the “innovative business,” focusing on newer and forthcoming products.
Whether Pfizer will pull the proverbial trigger may remain unclear for another month or so, when the drug maker is scheduled to release its next earnings report. Unlike Allergan, Pfizer executives have, so far, not publicly elaborated on their next moves or discussed the aftermath of the failed merger.
But the Pfizer team may have to work harder than it would like to convince investors that splitting up is a good idea.
“I’m not in the split-up camp,” said Les Funtleyder, a health care portfolio manager at E Squared Capital, a fund that owns Pfizer stock. “I’m not sure what it accomplishes. It’s really about more financial engineering, which does not excite people in this environment. I don’t see so much value in their assets that, if they suddenly spilt, that these businesses become great big companies.”
Indeed, if a split made sense, one has to wonder why Pfizer didn’t engineer a split sooner. When the subject was first broached in 2011, Pfizer noted they would be able to pursue a split in 2014 because, by then, the company would have three years of audited financial statements required for such a move. Instead, Pfizer sought to acquire AstraZeneca (AZN).
By acquiring AstraZeneca, which is domiciled in the UK, Pfizer would have had a lower corporate tax rate and used the excess cash to acquire products to bulk up its businesses and maintain its stock dividend. This was an essential reason for pursuing that deal, which is known as a tax inversion. The same plan applied to Allergan.
The AstraZeneca deal was scuttled because of UK takeover rules. But the move underscored Pfizer’s newfound desire to pursue tax inversions. Within a few months, the company appeared to flip-flop again, reportedly spending $150 million to create separate accounting systems and legal entities, seemingly in anticipation of a split.
As a result of its back-and-forth strategy, Sanford Bernstein analyst Tim Anderson believes that Pfizer “remains a company in flux.”
Meanwhile, there is skepticism about Pfizer’s ability to successfully achieve a split by finding a buyer or pursuing a spinoff to shareholders. Although a split would be “novel and unprecedented,” Anderson wrote in an investor note, “one has to wonder about the viability” of the established business as a stand-alone entity, and such a move “may not unlock substantial additional shareholder value.”
Indeed, the established business, if spun off into its own company, would have several weaknesses. The Hospira unit, which sells biosimilars in Europe and generic drugs, was bought for $15 billion last year, but that business has been plagued by manufacturing glitches. Meanwhile, Pfizer’s own biosimilar efforts are nascent and its generic unit faces stiff competition from larger players.
Evercore ISI analyst Mark Schoenebaum wrote in an investor note that Pfizer “probably has critical mass” to transform the established business unit to an independent company, but he suggested the innovative products business “might benefit from additional assets acquired from outside.”