As Pfizer-Allergan Marry, Already Planning the Divorce

November 24, 2015
By Mark Terry, BioSpace.com Breaking News Staff

Now that the Pfizer -Allergan merger is official, the company and analysts are looking at details about the merged company splitting into two or more companies.

This isn’t exactly new thinking. All throughout the three weeks of rumors, the idea that the new mega-company might eventually split—sooner than later—has been floated. There was some talk that this might happen as early as 2016, even though the merger won’t be complete until the second half of 2016. The company, prior to yesterday’s announcement, had indicated it wouldn’t happen before 2017. Yesterday’s announcement included the statement, “As a result of the combination with Allergan and subsequent integration of the two companies, Pfizer now expects to make a decision about a potential separation of the combined company’s innovative and established businesses by no later than the end of 2018.”

Analysts have been pushing for Pfizer to split for several years, and it’s not unprecedented. In 2013, Pfizer spun off its animal health division, Zoetis , and has indicated it is likely to do more. The idea of the split is that one company would focus on research-and-development-oriented drug development, which, though volatile, has generally higher growth. The second company would focus on generics, branded drugs that are mature, and drugs that are losing patent protection. They generate revenue, but are not generally blockbusters.

Allergan’s pipeline would help with the innovation aspect. Pfizer provided information about Allergan’s pipeline, which includes more than 70 mid-to-late stage development products in urology, gastrointestinal, anti-infective, eye care, aesthetics and dermatology, women’s health, central nervous system, and “other.”

Analysts with Moody’s wrote, “The Allergan acquisition increases the likelihood that Pfizer will eventually split. While the acquisition likely pushes out the point at which Pfizer will consider splitting its pharmaceutical business, the split remains on the table.”

Although merging, then breaking up shortly afterwards seems counterintuitive, it’s a relatively common theme among some investors and analysts. In July, CNBC Mad Money’s Jim Cramer called for Johnson & Johnson to split into three separate companies, arguing that each would do better financially than the combined company.

In October, Neil Woodford, of London’s Woodford Investment Management, was reported to have met privately with Sir Philip Hampton, the chairman of GlaxoSmithKline , to urge the company to split off some of its business units.

If a Pfizer-Allergan split occurs, it’s likely that Allergan’s products would go—quite possibly with Allergan’s current chief executive officer Brent Saunders—to the growth company. Andy Summers, co-portfolio manager at Janus Capital Group told Reuters several weeks ago, “All of Brent’s growth areas at Allergan would stay at the growth company.”

Erik Holm, writing for The Wall Street Journal’s MoneyBeat blog says, “Growth companies generally trade at higher multiples, as investors give the stock credit for where the company is headed. By splitting, analysts say Pfizer’s patent-protected operation would be treated by investors as more of a growth company, in part because it has the potential to develop new blockbuster offerings.”

One aspect of the potential split is the role of Brent Saunders. After the acquisition, he will be chief operating officer of the merged company with a seat on the board. Noted for his friendly style in business dealings and mergers, there has also been some question about his overall interest in a research-and-development approach. In an earlier interview with Forbes, Saunders said, “The idea that to play in the big leagues you have to do drug discovery is a fallacy.”

And in the weeks leading up to yesterday’s announcements, when discussing the possible merger-demerger of the two companies, there was strong speculation that Saunders would run the merged companies, and after a split run the high-growth spinoff. In a recent interview with EyeWireToday, Saunders peddled back a bit on his earlier statement, saying, “Yes, to be clear, I’ve always embraced innovation. I do believe innovation is the lifeline of our industry and certainly is at the heart of what Allergan is today. That being said, I think as a CEO and as a leader of our business, I’ve always been careful about how we spend our money, and so we always want to make sure that we’re spending our money in a productive manner and where we believe we can add value.”