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Pfizer-Allergan

Over the weekend, the Wall Street Journal (citing the sorts of sources that will leak to the Wall Street Journal) reported that the rumored Pfizer-Allergan merger is indeed going through. Brett Saunder’s guest post on Forbes was enough to make me think that, actually, but “people familiar with the matter” said that both companies’ boards voted on the proposal on Sunday. The report has Ian Read as CEO of the new company, with Saunders as chief operating officer, but most of the coverage of this deal is going to be about the complex, multifaceted, transnational tax situation that Pfizer is trying to work its way out of – an accountant’s merger.

This is not a happy event.  But by now, by this point, it’s not a sign of disaster, either. We all know Allergan’s attitudes towards research, but those (I think) can only scale so far. I don’t think that a company the size of the combined Pfizer/Allergan can just decide that y’know, everyone else can go do that R&D stuff, we’ll just sit back and buy them out once the winners become apparent. It’s too expensive. I honestly think that Valeant was coming to the end of the line for that strategy, with all the debt that they’ve taken on, and that’s why we’ve seen all the revelations about dubious sales and accounting over there: they had to do that stuff in order to have a chance of making things work. On the Pfizer scale, I just don’t see it working at all.

So no, I don’t think that the newly merged companies are going to purge the R&D labs. They need them, still, and it’s not like Allergan’s bringing much with them. But that doesn’t mean that things are necessarily going to be great over there, either. But when was the last time that things were? I mean, if you’ve been working as a scientist at Pfizer over the last twenty or twenty-five years (and I wonder how many such people are around), when were the periods when you thought “Yeah, things are actually going pretty well around here”? Pfizer’s longtime merger-merger-merger strategy has sown so much fear and uncertainty over the years that some folks are bound to experience some schadenfreude at seeing the company’s own people experiencing the same worries, but they’ve been feeling those all the way along It’s not like Pfizer never let any of its own people go during all these upheavals. Sure, they hammered the acquired companies even more, but everyone got to experience the fun. This is just going to be more of the same.

And “more of the same” pretty well sums up my feelings about the whole deal.The Journal says that “the combined company is expected to evaluate splitting into two businesses, one focused on patent-protected products and the other on drugs that have lost their patent protection or are close to losing it.” But Pfizer was supposedly thinking about that several years ago. Ian Read now seems to be claiming that he was misquoted and misinterpreted when (back after he took over the CEO job) he seemed to be talking about changing the company’s strategy. But no, here we are in 2015, and another great big Pfizer deal is in the works. Wait a few years, and there will probably be another.

45 comments on “Pfizer-Allergan”

  1. steve says:

    I think this will be coming to an end over the course of time. Cancer, diabetes and the other major disease are all being segmented into smaller and smaller markets based on genotype and, most recently, microbiome (see recently Cell paper on how glucose blood level spikes differ in different individuals after eating various foods according to their micro biome or recent papers showing that responses to immune checkpoint inhibitors like ipilumimab differ according to the microbiome). The days of the mega-blockbusters that are prescribed for everyone are disappearing and with it will be these mega-giants that depend on them. Personalized medicine will consist of more niche markets and be dominated by smaller and more nimble players.

  2. Anon says:

    Consolidation and cost-cutting/asset-stripping: the most natural mechanism to close down an industry that no longer knows how to create value with innovation.

    Please turn off the lights on your way out!

    1. dearieme says:

      I’m afraid that that sounds about right, alas. This morning’s Telegraph tells me that it will be a reverse takeover; the combined company will have its HQ in Dublin.

  3. Jose says:

    “this will be coming to an end over the course of time” indeed it will, by definition as there are essentially no other mega-mergers to contemplate!!

  4. Anchor says:

    The reverse merger herein between Pfizer-Allergan is a very cruel compared to the one between Merck-SP.

  5. bat brows and trout lips says:

    How sweet was the deal made for Saunders to abdicate the throne of Pfizergan? It’s tough being King.

  6. whatever says:

    I don’t get how Pfizer is able to get the inversion to go through when Abbvie was stopped when it tried to do the same with Shire.

    1. anon says:

      They structure it as an Allergan takeover of Pfizer. Accounting for the win!

    2. Tom Womack says:

      Allergan is an Irish company; Shire is a British one. The British financial authorities are rather tougher about this sort of thing.

  7. Jose says:

    “I think this will be coming to an end over the course of time.” indeed it will, by definition as there are no longer any mega-mergers to even contemplate!

  8. John Wayne says:

    “They drove a dump truck full on money up to my house! I’m not made of stone!”

    http://simpsons.wikia.com/wiki/South_of_the_Border

  9. Me says:

    FYI Shire is Irish too

  10. watcher says:

    Considering that so many of Pfizer’s major products were the result of company purchase or merger, I’m surprised they haven’t done more downsizing of their internal R.

    The more they acquire, the less there remains for ongoing mergers and acquisitions. As a former head of R&D in a major company used to say to his troops, the future would have only a 4 to 6 major pharmaceutical companies. That certainly looks to be coming, with winners including the names Pfizer, J&J, Novartis, and Merck.

    1. Mike says:

      Many years ago at J&J there was a company wide goal to grow the company into the top 5 in terms of pharma revenue. The joke among us employees was that we didn’t need to do anything – just wait until all the other pharmas merged into four. Indeed, that seems to be what has happened.

  11. Thomas says:

    The news writes (Google translation from Dutch): The global pharmaceutical industry has lately been changing rapidly as pharmaceutical companies want to grow through acquisitions and mergers, thus gaining access to new drugs.

    Note the ‘new’ in ‘new drugs’. In any case it is not money spent on research, but on accountants. And, fodder for claims that ‘drugs are too expensive’.

  12. PharmaHeretic says:

    Now they can finally fire most of their remaining R& D personnel and generate some more value for their “shareholders”. I wonder which of their products are now going to see a huge price increase,.

  13. Let's get it over with says:

    Merge all pharma companies into one with a tax-inversion into the Bahamas, lay everyone off, pay off a few politicians, ramp up all the drug prices by 5,000%, and sell them online.

    There, all done! 🙂

  14. Anon says:

    “Over the weekend, the Wall Street Journal (citing the sorts of sources that will leak to the Wall Street Journal) reported that the rumored Pfizer-Allergan merger is indeed going through.”

    Isn’t such leak grounds for insider trading, with WSJ guilty of playing its part to manipulate share prices based on insider information? I really don’t understand how such leaks can be left to go unchecked.

    1. Andy II says:

      This type of “leak” is a typical before the official announcement of M&A from both companies. It is totally fine as long as there was no clear source of the news mentioned and no one can buy stocks when it was published because the market was closed.

  15. gambler says:

    Does anyone know whether the math would have worked if an inversion was not part of the package? The expected ‘synergies’ are not huge.

  16. hypnos says:

    Well, even if you just want to buy compounds, you’ll need *some* R&D experience to pick and price the right ones.

    1. Derek Freyberg says:

      You might think so, hypnos – but experience tells us that the people who buy other companies’s compounds are not (contra Enron) “the smartest guys in the room”. You have only to remember the Pfizer purchase of the insulin bong, or Glaxo’s purchase of Sirtris – the list goes on. BusDev folks come from Arthur Andersen, not R&D.

  17. james says:

    If this goes through does Pfizer-Allergan become an Irish company and if so what, if anything, does Pfizer lose from giving up its “US citizenship?” Does it make it more complicated for it to lobby the US government for example?

    1. Simon says:

      Hahahahahahhahaha!!!!! God what a thought. Does it make their money less green? The US government doesn’t give a crap about foreign money. I’m sure they’d love more.

  18. Chrispy says:

    James,
    Good question! Inversions like this one don’t remotely pass the sniff test. Everyone knows it is just a loophole getting gamed.

    It is surprising that it is still legal. No, not surprising: embarrassing!

  19. John Wayne says:

    Another article on the subject, highlighting a hilarious title:
    http://gawker.com/pfizer-and-allergan-will-team-up-to-paralyze-your-face-1744109654

    1. tally ho says:

      brilliant – the title says it all!

  20. Was Adapted to Scale says:

    Will Ian Read have to relocate to Dublin?

  21. Peter says:

    everytime I visit this blog it makes me so happy I got out of organic chemistry and went into analytical chemistry.

  22. Hobbes says:

    The best part is some people holding up the laffer curve as if that’s some kind of solution to the problem. Pro tip – it isn’t. The target tax rate for these corporations would optimally be 0% and they’ll do everything to get as close to that as possible, so the concept of the laffer curve is basically a straw man at that point. Instead there needs to be strong legislation to stop inversions and other associated tax dodges from happening.

    That would need politicians with a spine. Find me one of those and I’ll find you a novel drug worth a few billion to patent.

  23. Anon says:

    Of course the companies are going to try to pay as little tax as possible, that’s their job. The US government needs to harden up and put through some firm legislation so that if a company is going to take US money, it pays US taxes. No company is going to suddenly stop selling to the US consumer base just because their margins are reduced. They have no leverage, it’s still the richest market in the world for pharmaceuticals. Congress holds all the chips but instead they (purposefully and at great disadvantage to average Americans, especially patients) let industry dictate terms to them.

    1. Emjeff says:

      Here’s a crazy thought- maybe the U.S. Government can lower the tax rate to be competitive with other countries.

      1. Chad Brick says:

        And what is to stop our “competitors” from undercutting whatever lower rate we set.

        Pro-tip: You can’t win a race to the bottom.

        1. Anon says:

          Not pissing around in other countries’ affairs (destroying and rebuilding one country after another) is one way to reduce the tax burden without skimping on internal investment. Just a thought. 🙂

  24. Julien says:

    Long live the free market !

  25. pete says:

    Now being..cough..Irish (but still with a large established footprint in the US) is Allergan/Pfizer so different than Roche/Genentech in terms of potential restrictions vis-a-vis US gov’t lobbying, etc. ?? I don’t know but it’d be interesting to hear from someone who does. Anyone ?

  26. Anon says:

    The only way to stop companies and individuals exploiting a free market to avoid paying tax is for all governments to cooperate and form a global tax cartel, with a fixed global tax rate.

    But that will never happen as governments are just as guilty of competitively lowering their tax rates to screw each other.

    Game theory rules, and there is very little control anyone has over the overall dynamics.

  27. dearieme says:

    Rationally rates of corporation tax should be zero because the tax burden falls on employees, customers and shareholders in some unknown proportions. It would be more logical to tax these people at rates the government can choose.

  28. Isidore says:

    A couple of people mentioned drug price increases as a results of mergers. Is there information (links would be appreciated) on the prices of drugs sold by major pharmas that have many drugs on the market (so not Martin Shkreli companies) before and after mergers.

  29. Thomas says:

    @Isidore: the merger does not immediately raise prices. But it reduces competition in the longer term, thus increasing prices.

  30. Placebo says:

    “Pfizer’s greatest challenge in the past two decades has been its laboratories’ lack of productivity.”

    http://www.nytimes.com/2015/11/26/us/politics/drug-lobbyist-discomfort-over-pfizers-leaving-us.html

    It is R & D’s fault. Sounds like a great workplace for scientists.

    1. Kelvin says:

      Actually, it *IS* all R&D’s fault, I don’t see how you can see it any other way…

      You may say that R&D’s diminishing productivity is a result of all the cuts by management, but in fact:

      1. Overall R&D spending has increased exponentially across the industry for 60 years, until it hit a ceiling in 2008. But still, total R&D spending has never gone down in any single year, and every year has set a new record. And yet total NME output has remained flat.

      2. Productivity does not equal output. At least not in absolute terms. Productivity is a ratio – between output and input. So while reducing input (R&D investment) may affect absolute output, it should not affect productivity. But productivity has declined by 50% every 9 years for the past 60 years, while R&D investment has only ever increased.

      3. If R&D productivity was higher, producing as many drugs per $ invested as it has in the past (even as recently as 2000), then the industry wouldn’t be in the mess it is. But currently, R&D burns more cash than the value of incremental benefits it generates, and so any responsible manager or business owner would start to shut it down – even if that means exiting from the industry. Thus, Pharma’s business model is boken and no longer creates value *because* R&D productivity is not high enough.

      Having said all this, I want to make it clear that I’m not blaming the scientists in R&D, either. At least not directly…

      R&D productivity is declining because the standard target-based approach to drug discovery has fulfilled its potential and run out of steam, as new hits get more costly and more difficult to find, while the incremental benefits get smaller as each new drug raises the bar for the next. This is a natural, unavoidable result of the law of diminishing returns. The only way to get out of this vicious cycle is to develop a radical new approach to drug discovery, similar to fracking in the oil industry. And if there’s anyone to blame for not developing such a new approach, then I’m afraid it does indeed come down to R&D.

      We need to stop looking for new drugs by the same old approach, and develop a new approach. We need to innovate the way we innovate.

      1. Placebo says:

        You read the first half of my comment but didn’t get my point.

        My point: When management throws R&D under-the-bus (i.e., “no productivity”), it doesn’t make for a good workplace. Further, it doesn’t make science very attractive as a career for students and graduates. My understanding is that managers should have some people skills and tact. Those types of comments (i.e., “no productivity”) can easily be interpreted as scientists are lazy and worthless. Is that true? If so, who hired the scientists?

        Perhaps the playing field has shifted (as you point out in your final paragraph) and drug discovery is becoming more similar to finding a needle in a haystack, panning for gold, wildcatting oil, etc. I’d be shocked to learn that pharma execs don’t realize this. But if so, why do they continue to discuss their failures as if the scientists are worthless, lazy, don’t-know-what-they-are-doing, etc? Perhaps discussing failure as a type of risk-management or financial hedging would be more useful and ‘productive’.

        1. Kelvin says:

          Very good point, I can’t argue with that. Basically, management either need to get on and fix R&D, or scrap it. But bad-mouthing it while depending on it and not doing anything to fix it, doesn’t help anyone!

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