As The Mylan Perrigo Saga Ends, Pfizer Allergan Begins

What’s next? As the Mylan- Perrigo saga ends, Pfizer-Allergan begins

Over the last two years, the global pharmaceutical industry has been witness to a frenzy of M&A deals. Last week saw the end of Mylan NV’s US $ 26-billion hostile takeover battle for Perrigo. The Dutch registered generic and specialty pharmaceuticals major, failed to find the required Perrigo shareholders who were willing to allow Mylan to gain majority control of Perrigo, the Dublin-headquartered international manufacturer of private label over-the-counter pharmaceuticals.

This hostile bid was part of an engrossing three-way M&A saga that began in April this year when generic giant Teva tried to acquire Mylan. This led to a hostile war, with Mylan rebuffing Teva (read: Why Mylan thinks Teva’s shares are “toilet paper”). And Perrigo staunchly opposing Mylan’s buyout offer in September this year, requesting its shareholders to shoot down Mylan’s proposal.

Perrigo also tried to fend off Mylan’s hostile bid by holding (unsuccessful) talks to acquire Endo International Plc in an all-stock deal, say news reports.

Mylan’s plummeting fortunes

It’s been a rough ride for Mylan since April this year. First, Teva dumped the Mylan acquisition bid in favor of a deal with Allergan. As a result, Mylan’s shares are now trading at about US $ 50 a share, a far cry from the US $ 82 that Teva had offered for Mylan.

In addition, Mylan also has to contend with compliance issues pertaining to its acquisition of Agila Specialties in India (read: Mylan’s great Indian mis-adventure).

As Mylan’s offer for Perrigo was US $ 75 in cash and 2.3 Mylan shares, the value for Perrigo shareholders dropped over the last months from US $ 35.6 billion to US $ 26 billion .

Perrigo CEO Joseph Papa had found Mylan’s offer ‘insulting’ and told Fortune that the “offer isn’t even in the right zip code”.

Pfizer and Allergan’s ‘friendly’ discussions

While Teva’s over US $ 40 billion acquisition of Allergan ’s generic business is the only deal in this three-way M&A saga that saw the light of day, Allergan and Pfizer have announced “preliminary friendly discussions” are underway in a deal that would be valued at well over US $ 100 billion.

Actavis Plc (earlier known as Watson Pharmaceuticals Inc.), which acquired Allergan earlier this year, changed its name to Allergan, Inc. The company has always been fast-footed in identifying ‘synergies’ to aid its transformation from a generics to a brand-focused player.

Since July this year, it has acquired a start-up – Oculeve, sold off its small molecule generic drug business to Teva and announced acquisitions of Naurex and ophthalmic device start-up AqueSys. And in late October, we received news about its preliminary merger talks with Pfizer.

Splitting Pfizer to unlock shareholder value

For some time now, there have been talks about splitting US-headquartered Pfizer into two to three entities over the coming years in order to unlock shareholder value. In 2013, Pfizer took a step in that direction by spinning off its animal business division (known as Zoetis) through an initial public offering.

Analysts feel the pharma behemoth could be split into two stand-alone companies – one that would produce patented drugs with higher margins; and two that would manufacture generics, focusing on established drugs and add to Pfizer’s sales and marketing prowess.

In so far as Pfizer’s generics portfolio is concerned – it looks far from strong as there is a lot of dependence on Pfizer’s patented drugs going off-patent.

While the recent Pfizer acquisition of Hospira will help bolster the generics side of their business, Allergan’s sale of its generics unit to Teva, for US $ 40.5 billion, once again makes the viability of a stand-alone generics spin off questionable.

Allergan has reiterated that the sale to Teva will go through regardless of the Pfizer outcome.

An inverted Pfizer with a low-tax address

The acquisition of Allergan, which is incorporated in Dublin and run from New Jersey, would give Pfizer a low-tax legal address abroad. A tax-inversion abroad is something Pfizer has been trying to achieve since it abandoned its $118 billion takeover of AstraZeneca last year.

Pfizer-Allergan combine would probably split into two companies eventually, with Allergan CEO Brent Saunders taking the helm of the faster-growing business of new brand-name drugs, news reports said , without quoting people who requested anonymity.

M&A frenzy may die down due to the drug price hike debate

It’s been an active season for pharmaceutical M&As. There has been US $ 277 billion worth of drug-company mergers announced world-wide this year, according to Dealogic.

But in our view, even if the Pfizer-Allergan deal goes through, the deal frenzy witnessed over the past two years is unlikely to continue.

Drug pricing has become a serious political conversation in the United States.

Business models – such as that of Valeant Pharmaceuticals – which rely on buying up existing drugs and raising prices aggressively has drawn ire from the public, lawmakers and politicians in the US. According to a Deutsche Bank analysis, this year alone,Valeant raised prices on its brand-name drugs an average of 66 percent .

Our view

Mergers and acquisitions are a key feature of any industry. However, the pharmaceutical industry, of late, has been focusing more on ‘wealth creation’ and ‘wealth-care’ rather than ‘healthcare’. Drug companies need to substantially reduce focus on ‘price gouging’ and increase their focus on developing new, and more affordable drugs.

In fact, even though compliance problems globally have dominated news headlines, drug manufacturing continues to be viewed as a cost center.

If the Pfizer-Allergan deal goes through, it could result in significant plant closures and job losses.

That’s clearly not what the industry needs.

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Image Credit : Book+Boat+Halong Bay = future retirement plan by Jonathan Lin is licensed under CC BY 2.0 // "what's next" was added to the original image

“ The article is based on the information available in public and which the author believes to be true. The author is not disseminating any information, which the author believes or knows, is confidential or in conflict with the privacy of any person. The views expressed or information supplied through this article is mere opinion and observation of the author. The author does not intend to defame, insult or, cause loss or damage to anyone, in any manner, through this article.”

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