The 'Pfallergan' fallout: Reactions to—and questions for—the biggest healthcare deal of all time
After weeks of speculation, pharmaceutical giants Pfizer and Allergan officially announced on Monday that they had agreed to a record merger worth $155 billion to $160 billion that would birth the largest drugmaker in the world while shifting Pfizer's tax base to Ireland.
The announcement has already poured gasoline onto a fiery debate over U.S. corporate taxes, inversions, large-scale healthcare consolidation, and drug prices. Here are some of the major reactions to, and questions still remaining for, the largest healthcare M&A in history and one of the biggest deals of all time, period.
Democratic presidential candidates slam the deal—as does Donald Trump
Democratic presidential candidates in the 2016 campaign cycle have been consistently been using pharma as a political pinata ever since Martin Shkreli and Turing Pharma raised a 62-year-old drug's price by 5,000%. So it's not much of a surprise that the three remaining candidates on the Democratic side, Hillary Clinton, Sen. Bernie Sanders, and former Maryland Gov. Martin O'Malley, all railed against the proposed megamerger on Monday.
This merger would be a disaster for Americans who already pay the highest prescription drugs prices in the world. https://t.co/E4DULPq9b0— Bernie Sanders (@BernieSanders) November 23, 2015
Clinton went even further, saying that she would work to stem the bleeding from inversions as president. "This proposed merger, and so-called inversions by other companies, will leave U.S. taxpayers holding the bag," she said in a statement on Monday.
"As president, I will fight to reform our tax system to reward growth, innovation, and job creation here in the United States. We cannot delay in cracking down on inversions that erode our tax base."
"The Pfizer-Allergan merger is fundamentally unfair, and a prime example of how our capitalist economy is not supposed to work,” said O'Malley of the deal. "American small businesses and middle-class taxpayers do not have the ability to game the system and avoid paying the taxes they owe—Pfizer should not be able to either. Recent mergers in the pharmaceutical and healthcare industries will reduce competition, reduce choice, and raise prices for American consumers."
The question is whether or not GOP candidates would also join in the fray, as some (such as Marco Rubio and Jeb Bush) have been willing to take on the industry on the campaign trail. So far, those candidates have remained relatively mum—with one golden skyscraper-sized exception: business mogul Donald Trump, the current front runner in national polls of the Republican presidential race.
"The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting," Trump told Business Insider in a statement. "Our politicians should be ashamed."
The White House is also adamantly opposed to inversion arrangements. But as we covered in our extensive coverage of the issues surrounding the deal on Monday, it's unclear just how much the Treasury Department can do stop a Pfizer-Allergan merger under current tax law, especially since the deal is structured to give Allergan shareholders control of 44% of the combined company while Pfizer shareholders will have control of 56% (beneath the "60-40 split" threshold).
But regulators from all over the world (the companies do business in at least 70 countries) will have their opportunities to poke at the deal. There are also some questions about how, exactly, the mechanisms of the transaction will work as the companies have yet to make their SEC filing for the merger. So far, it appears that it will be structured as a reverse merger in which Allergan is technically the acquiring company, and that the two firms will be merged under a holding entity that keeps the Pfizer name.
Will 'Pfallergan' have a passion for the pipeline?
The tax reasons fueling Pfizer's interest in pursuing this merger are obvious. Pfizer chief Ian Read has stressed ad nauseum that he believes the U.S. corporate tax code puts companies here at a disadvantage and has tried to flee on several occasions, including with Pfizer's pursuit of the UK's AstraZeneca in 2014.
But Read and Allergan CEO Brent Saunders (who will serve as president and COO of the combined company) both stressed that this isn't just about taxes: It's about innovative drugs, too.
The two CEOs addressed drug development and pipelines during an investor call discussing the merger on Monday. Saunders praised Pfizer's rare disease and oncology platforms, while Read insisted there would be minimal disruption to Allergan's ongoing R&D efforts on drugs such as the depression therapy Naurex, ophthalmology medications, and irritable bowel syndrome drugs.
Read and Saunders went onto CNBC soon after the call to reiterate that a merged firm would have access to far more cash for R&D purposes, and that "innovation" would be a core focus of the new Pfizer.
Some industry observers have brought up the point that, if the deal made such strategic sense and wasn't really about tax benefits, why didn't Pfizer make a play for Allergan before the company was based in Ireland?
We just merged. Let's break up?
Investors have practically been begging Pfizer to split up operations since at least 2011. Ironically, it may finally happen—after the creation of the new company.
Read and Saunders stated during Monday's investor call that any split-up could only occur after three years of audited financials, meaning that such a move probably wouldn't be announced till 2018 and implemented until 2019 (the merger itself should clear in between 6 and 8 months if it gets past regulators).
This very split-up, which would put Pfizer's patent-protected products into one firm and those that have lost patent protection and must compete with generics into another, was supposed to occur as soon as 2016, according to Read's previous statements, but is being pushed back due to the deal. And the idea behind a potential split-up is to streamline operations while keeping disparate sectors of the company separated.
But the WSJ's Erik Holm asks (and answers) the question that is on many investors' minds: Why such a massive merger only to break up in several years? "The answer has to do with how investors view growth companies versus established ones," writes Holm.
"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."
Just how many jobs will be cut?
This is one of the biggest concerns facing employees at Pfizer and Allergan. While Read and Saunders touted on Monday that the combined entity would boast well over 100,000 workers around the world (including 46,000 across about half of U.S. states and 5,000 in Ireland), mergers of this magnitude are always the opening salvo for major job cuts.
The biggest questions are: Just how many workers will get the axe? And where will those job cuts come from?
The speculation seems to be that the cuts will be in the thousands, and possibly even more than 10,000. But the sectors from which these cuts will stem depends entirely on exactly how dedicated the mega-company really will be to R&D. Post-merger layoffs tend to come either from R&D or from sales teams. One possible scenario is that the combined company will split up the pain between those two departments.