Pfizer-Allergan deal a prelude to splitting company

(Reuters) — A Pfizer (NYSE:PFE) merger with Ireland-based Allergan (NYSE: AGN), in addition to providing tax benefits, would bolster the U.S. drugmaker’s growth prospects should it decide to sell or spin off its portfolio of products that have gone off patent.

Many Wall Street analysts believe Pfizer will decide to split late next year, after compiling 3 years of financial data treating its “established products” division, which sells generic medicines, and its “innovative” patent-protected medicines unit, as if they were separate companies.

Such a split would dramatically boost the company’s profitability, because in-patents drugs command much higher prices that rise every year, as opposed to off-patent medicines, that become commoditized and their prices decline.

“This would be the creation of 2 companies really, not 1 huge $350 billion Pfizer,” Andy Summers, co-portfolio manager at Janus Capital Group, said of the likely Pfizer split post merger. Janus is the 11th-largest Allergan shareholder with about 6.5 million shares, according to Thomson Reuters data.

Pfizer’s $15 billion purchase earlier this year of hospital products maker Hospira, which sells generic injectable drugs and is developing biosimilar versions of top-selling biotech medicines, was widely seen as a move to make the established products business more attractive ahead of a sale.

A combination with Allergan would add lucrative product lines to Pfizer’s core innovative business, including aesthetics such as anti-wrinkle treatment Botox and facial fillers, and opthalmology and neurology brands.

At a business review Nov. 4, Allergan highlighted some of its more promising new medicines, including Viberzi for irritable bowel syndrome, which the company believes will be a $1 billion drug.

Allergan could also contribute somewhat to established products as well, notably the Alzheimer’s treatment Namenda, which was not included in the $40.5 billion agreement to sell Allergan’s huge portfolio of generic drugs to Teva Pharmaceutical Industries. That deal is expected to close early next year.

Oliver Pursche, CEO of Bruderman Asset Management, which holds Pfizer shares in client portfolios, said a combination with Allergan “certainly gives Pfizer more flexibility in terms of how it wants to execute that strategy” of splitting the company.

“It makes it more of a growth company.”

Vaccines a growth driver

Pfizer has annual sales of about $48 billion, with about $27 billion from patent-protected drugs, vaccines and consumer products. It gets about $21 billion from the established products, which consist of older medicines that now face competition from cheap generics, including the cholesterol fighter Lipitor, once the world’s top-selling prescription medicine.

Allergan, which was created in its current form in March following its merger with Actavis, expects revenue of more than $8 billion in the second half of 2015, not including the generic drugs it is selling to Teva.

“All of Brent’s growth areas at Allergan would stay at the growth company,” said Janus’s Summers, referring to Allergan CEO Brent Saunders.

Revenue from Pfizer’s established products fell 9% in 2014, creating a drag on overall growth. That has only worsened this year with the impact of the strong dollar on overseas sales. The unit’s sales were down 16% in the 3rd quarter.

In contrast, businesses Pfizer would keep were up 13% for the quarter, with vaccines the biggest growth driver led by its current top seller, Prevnar 13, used to prevent pneumonia.

Pfizer’s new breast cancer drug Ibrance will also be a big driver of future growth, with some analysts forecasting eventual annual sales in excess of $5 billion.

With its huge name recognition, Botox would be a crown jewel addition to the innovative drug lineup, which includes Viagra and nerve pain treatment Lyrica.

Botox has about $2.4 billion a year in sales, much of it a cash business that does not require reimbursements from payers. It also has approvals for medical uses, such as for overactive bladder and chronic migraine.

Allergan said Nov. 4 that the drug has a lot of room to grow, as it undergoes tests for a dozen new uses, including as a treatment for atrial fibrillation, a potentially dangerous irregular heart rhythm.

“Botox is a growing market, so that is a benefit,” Pursche said.

Allergan currently has some 30,000 employees, but it is too early to know how many would lose their jobs if the deal goes through.

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