- Pfizer Q4 2015 earnings matter less than its merger with Allergan.
- Allergan made billions for shareholders with mergers, higher prices, and less research.
- Did Pfizer just hit the fast lane?
Pfizer (NYSE:PFE) was a slow-moving, and slow-growing, maker of branded medicines that hit it big on the cholesterol-lowering drug Lipitor, the anti-depressant Zoloft, and became the poster child for the “patent cliff,” the collapse of brand-name drug companies that was threatened by the expiration of patents.
Lipitor and Zoloft are now off patent, and while Pfizer benefited from the new drug boom of the decade’s first half, its gains were relatively modest, the Pfizer stock price going from about $20/share to a little over $30.
All was quiet until November 23, when Pfizer announced it would do a $160 billion merger with Allergan (NYSE:AGN) that would give the combined companies a new home in Ireland, for tax reasons. The resulting company will be the industry’s biggest, by sales, when the merger closes later this year.
Such “tax inversions” are highly controversial, and the U.S. Treasury Department tried to stop them during 2015 with new rules. But Pfizer decided the rules didn’t go far enough for it to forego the opportunity, and now many people expect the combined outfit to become just a larger version of Allergan, directed by its hard-charging CEO, Brent Saunders.
Saunders helped start this decade’s merger mania at Bausch & Lomb, flipping and re-flipping drug companies into one another to create $25 billion in extra value for investors, without actually creating new drugs. A lot of his deals were done with the controversial CEO of Valeant Pharmaceuticals (NYSE:VRX), Michael Pearson.
“The idea that to play in the big leagues you have to do drug discovery is really a fallacy,” Saunders has said.
The plan instead is to push prices higher, move the profits offshore, and do more deals. With one transaction, due to close later this year, Pfizer has transformed itself from tortoise to hare.
For the quarter to be announced on February 2 analysts are hoping for earnings of 53 cents per share (and expecting 51 cents) on revenue of $13.53 billion. The numbers would be a modest improvement on last year’s earnings of 42 cents/share on revenue of $13.1 billion, but they won’t move the Pfizer stock price.
What will move it will be the fate of Allergan, which is getting 11.3 shares of the new Pfizer PLC in the deal, worth about $341 per share based on Pfizer’s closing price on January 28, but announced at the time of the merger as being worth $360.
Pfizer shares have lost 6% of their value since the merger was announced. To make this a tax-free transaction, Pfizer shareholders need to have a majority of the deal, and they will have roughly 56% of it. All of that fall has occurred since January 1, however, meaning the street’s verdict on the deal has not changed. They like it.
Avoid taxes, slow down the research, raise prices? It is, as Dire Straits front-man Mark Knopfler sang a generation ago, like "money for nothing and your chicks for free." And that’s the new Pfizer.
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