The $3.5-Billion Pharmaceutical Prenup

November 24, 2015

Text from a merger prospectus reveals the termination fee for the proposed Pfizer-Allergan deal would change if any new tax regulations were passed prior to the closing of the transaction.

The deal to acquire Allergan will cost Pfizer $160 billion, and if the merger does not go through, CNBC reports the break-up fee would be $3.5 billion. The amount of the termination fee was calculated in advance of any further restrictions on tax inversion deals, however. Evercore ISI's Mark Schoenebaum points out that according to the Pfizer-Allergan merger agreement, the termination fee is lower ($400 million) if the deal is canceled by either party as a result of changes to federal tax laws that restrict or eliminate the benefits of corporate tax inversion.

The move to acquire Allergan would reduce Pfizer's tax rate from 25% to approximately 18%, according to Pfizer officials, and could allow the company to use the billions of dollars it has in foreign capital to buy back its own shares. This capital has been trapped overseas, limiting Pfizer's purchasing power. To use this capital in the United States, the company would be taxed at the US rate. The executives of Allergan and Pfizer touted the synergies of the deal in an interview with Meg Tirrell of CNBC-saying the deal is about more than tax benefits-and attested that in the absence of the tax benefits, the deal would still have value, although it would probably be priced differently.

The Treasury tried to deter further inversion deals by introducing legislation in September 2014 to reduce the desirability of these transactions. The rules attempted to curb inversion by restricting companies from borrowing against overseas profits to fund acquisitions and by limiting the level of ownership US owners can have in an inverted company. The inversion rules caused AbbVie to stop pursuing Shire in 2014, but M&A activity in the pharma sector remained strong throughout 2014 despite the new guidelines. The Treasury can't technically block inversion deals, but it can impose laws that make the deals less profitable for companies. According to Bloomberg, the Treasury is reviewing ways to address the use of foreign tax havens and will present further guidance on the topic later this week.

Divestments Imminent
Because of overlapping capabilities-particularly in the biosimilar space-Pfizer may have to divest some assets in its pipeline for the Allergan deal to close. Many of the biosimilars in Pfizer's pipeline it acquired when it bought Hospira. Many of these products overlap with Allergan's pipeline, which includes four biosimilar oncology products that are being developed in collaboration with Amgen, including biosimilars to Herceptin (trastuzumab), Avastin (bevacizumab), Rituxan/MabThera (rituximab), and Erbitux (cetuximab). Pfizer has biosimilars in development for three of these four: Rituxan/MabThera, Herception, and Avastin. Pfizer may be able to retain ownership of its biosimilars to Humira (adalimumab), Remicade (infliximab), and Allergan's biosimilar for Erbitux.

The deal is historic as it is the biggest deal in pharma ever, as well as the biggest deal in any industry in 2015. The deal is structured to give Allergan shareholders control of 44% of the combined company while Pfizer shareholders will have control of 56%-just shy of the required 60%/40% split threshold. It is rumored that the transaction will actually be a reverse merger, in which Allergan is technically the acquirer.

Sources: CNBC, Bloomberg, Forbes, Evercore ISI