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The Pfizer–Allergan Deal: 4Q15 Brings the Biggest Pharma Merger

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Jan. 7 2016, Updated 10:06 a.m. ET

The Pfizer–Allergan deal   

On November 23, 2015, two large pharmaceutical companies, Pfizer (PFE) and Allergan (AGN), announced the biggest merger transaction in the pharmaceutical industry. Pfizer announced the unanimous approval of the merger by the board of directors in its press release. It further added that the companies have entered into a definitive merger agreement, where Pfizer would combine with Allergan in an all-stock transaction. For the valuations, the stock transaction is valued at $363.63 per Allergan share, resulting in a total enterprise value of ~$160 billion.

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What the Pfizer–Allergan deal brings

The Pfizer–Allergan deal could be beneficial to the combined entity in the following ways:

  • the combined entity has strong innovative and established product portfolios
  • greater resources could raise production capacity, resulting in the higher production of medicines and benefit a larger number of people
  • the combined entity will have more resources for research and development, thereby increasing the pipeline and strengthening its position in innovative pharmaceuticals
  • for established products, the companies will have benefits of economies of scales as well as certain complementary products
  • all the above could enhance the revenues and profitability for both innovative and established business

In terms of numbers, the combined entity will have:

  • over 40 research and development (or R&D) centers worldwide
  • a pipeline of over 100 innovative mid-to-late stage programs in the clinical development
  • over 75 manufacturing sites worldwide, excluding the sites to be transferred to Teva Pharmaceuticals (TEVA) for Allergan’s generic business
  • around 110,000 employees worldwide

The financial benefits, as stated in the press release, are as follows:

  • Pfizer expects over $2 billion in operational synergies over the first three years after the transaction is completed
  • the expected performance-adjusted effective tax rate will be ~17% to 18% by the end of the first full year after completing the transaction
  • the adjusted EPS (earnings-per-share) are expected to be neutral for 2017, modestly accretive in 2018, over 10% accretive in 2019, and over 15% accretive in 2020
  • The companies expect annual operating cash flows to exceed $25 billion beginning in 2018
  • The dividend is expected to remain the same at the existing level, and the company is targeting a payout ratio of ~50% of adjusted EPS

Pfizer has clarified in its press release that “Independent of the transaction and consistent with 2015, Pfizer anticipates executing an approximately $5 billion accelerated share repurchase program in the first half of 2016. Pfizer has approximately $5.4 billion remaining under its previously announced repurchase authorization.”

Investors can consider ETFs like the Vanguard Health Care ETF (VHT). VHT holds ~6.3% of its total assets in Pfizer, ~3.9% in Allergan (AGN), ~8.7% in Johnson & Johnson (JNJ), ~3.5% in Bristol Myers Squibb (BMY), and ~4.6% in Merck (MRK). Investors can also consider the iShares US Healthcare ETF (IHE) or the Health Care Select Sector SPDR ETF (XLV).

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