Congrats, Pfizer-Allergan, Now Get Divorced

A breakup is a no-brainer, and the market shouldn't be left in limbo.
At Closing, March 16th
36.78 USD
At Closing, March 16th
63.18 USD

The long-awaited, $160 billion Pfizer-Allergan mega-merger is finally here (for details, see the aspirationally named website The deal won't officially close until some time next year, but it's not too soon to think about the mega-company's next deal: splitting into two smaller companies.

One of the new companies would focus on older products, the other on developing and selling new and innovative ones. A decision on such a breakup might not happen until the end of 2018, Pfizer CEO Ian Read said on an analyst call on Monday, because he wants to make sure the businesses perform well in the new structure before deciding to spin them off.

Pre-Deal Pain

That's an irksome delay for analysts and investors, who had hoped for a decision by the end of 2016. They may not need to worry; the announcement could happen sooner than Read suggested. Pfizer, as commitment-phobic as a fictional millennial, has been mulling a breakup since 2011. The Allergan merger might be what gets it to finally pull the trigger.

Pfizer suggested on its call that a split may not be legally possible until 2019 due to accounting requirements. But it shouldn't wait until midway through the next U.S. presidential term to announce such a split, leaving investors in limbo for years. The decision isn't particularly difficult. 

Health-care spinoffs of the sort Pfizer is contemplating have a good market track record. These deals are designed to separate older, profitable, but inevitably declining businesses from new ones that are much more volatile, but have more future potential and the multiples that come with. "Trapped value" is set free, and everyone's happy. 

One encouraging example is Abbott Laboratories' spinoff of AbbVie in 2013. AbbVie's total return since the spinoff has been 99 percent, compared to 55.28 percent at Abbott. While Abbott has remained a strong, steady business, AbbVie has grown into one of the most valuable biopharmaceutical companies in the world -- even though it failed to get its own proposed tax inversion with Shire to the finish line. On the back of bestseller Humira and a promising pipeline, it has added nearly $50 billion to its market cap since the spinoff.   

Happy Divorce

Market value has risen for both AbbVie and Abbott Laboratories since their split.

Source: Bloomberg

A more recent example, Baxalta's split from Baxter this July, has left Baxalta a takeover target, busy fending off advances from Shire. Pfizer's spinoffs would be a substantially larger mouthful for would-be acquirers. 

Pfizer may be more ripe for a breakup after the Allergan deal. Its sheer size and reach make the logic normally used to justify these breakups even stronger. For one thing, people (including regulators) don’t much like conglomerates, and this one is huge. And Pfizer-Allergan was always mostly about the taxes, not any particularly obvious product or operational fit between the companies. Spinoffs would create more-focused businesses that would each benefit from low Irish tax rates.

Adding Botox and other Allergan treatments will add enough scale to both of Pfizer's business lines -- one for patent-protected, "established" drugs, and the other for newer, "innovative" drugs -- to make each of them more attractive as standalone firms.

Old And New

Quarterly sales for Pfizer's two product lines

Source: Bloomberg

The Pfizer/Allergan combination will create an absolute behemoth of an established-products company. Such drugs generated more than $25 billion in sales for Pfizer alone last year. The new-drug-focused spinoff will likely be the more interesting one. Reportedly, Allergan CEO Brent Saunders would take control of this "innovative" part of the business. He talked it up on the call with analysts, mentioning that there would be 100 combined late-stage programs at the new conglomerate, which he called "jet fuel" for growth.

Saunders will be COO and president of the combined firm, and a powerful one at that, set to be in charge of sales, strategy, and manufacturing. He would be Ian Read's heir apparent -- quite an achievement for a 45-year-old who was mostly unknown in the industry just a few years ago.

This will be the biggest-ever stage for Saunders to try out his particular vision for how a pharmaceutical company should grow. His terms of art for it are "growth pharma" and "open science." His companies have focused on buying late-stage drug candidates and shepherding them to market, rather than internally developing drugs from the start. Given how successful Saunders has been with this model, it's easy to see investors getting excited. 

Saunders is likely as antsy as analysts and investors are to see the spin-off happen. That 2018 deadline may prove to just be overly cautious merger day talk. Even if the actual spinoff is a few years off, the company should commit to it and start planning way before 2018. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Max Nisen in New York at

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    Mark Gongloff at

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