Hurrah! was my first response when learning that the proposed Pfizer/Allegan merger deal had been cancelled. Of course, there were fewer cheers in Wall Street, where advisers to the deal will lose more than $200m of potential fees. And Pfizer itself stands to lose up to $400m to Allergan in break-up fees. But overall, the end of the deal is excellent news for anyone concerned with the long-term health of Pfizer itself, and of course for everyone who works in the pharma industry.
The very size of these fees confirms the flawed logic of the deal. Think how much real value could have been created if the Pfizer board had chosen to invest these sums in building its own business. The fact that around $600m was at play in a deal that was solely about tax savings, tells its own story. And politically, the deal was clearly most unwise, given that it was unanimously denounced by those across the political spectrum. It succeeded in uniting Donald Trump, Hillary Clinton and Bernie Sanders in opposition, creating a rare moment of bi-partisan harmony in the otherwise bitter primary campaign.
But why was it left to the U.S. Treasury Department to step in and stop the deal, in order to protect the public purse? In my post last November, I had hoped that the eminent scientists on Pfizer’s board would have been the ones to veto it. After all, as John LaMattina, Pfizer’s former head of R&D, had warned, the company’s current research activity would almost certainly have been targeted for major cost savings, given that Allergan’s CEO seemed set to take charge of new drug research and development:
“It is hard to believe that Pfizer, a company with a long history of discovering many of its own products, would put someone in charge with an avowed distaste for the challenges of drug research,” LaMattina said.
The question now, of course, is: what will the deal’s termination mean for Pfizer employees and for the future of its research activity? The good news is that the redundancies that were inevitable if the merger had gone ahead will not now happen. But worryingly, it seems that financial engineering is still the main focus for Pfizer’s CEO, Ian Read. Now that the merger with Allergan has failed, he has already indicated that he intends to break-up the company by selling off those businesses focused on low-cost drugs. It seems he wants to continue to pursue a high-margin strategy, as described by Forbes magazine, which reported last year that “34% of Pfizer’s revenue growth over the past 3 years has come from increasing prices on existing drugs.”
Surely, it is obvious that this strategy is taking Pfizer in entirely the wrong direction?
The tax-inversion deal itself was an oxymoron. It makes no sense at all for a company like Pfizer to spend so much effort on trying to artificially reduce its tax bill, when it depends on public funding for much of its revenue? “Don’t bite the hand that feeds you” is surely the sensible positioning in this area?
The strategy of aiming to grow profit by raising prices – for no additional public benefit - is similarly misconceived. Surely, Pfizer’s board members have realised that the goose which has laid the golden egg for this type of approach is nearing the end of its useful life? U.S. tax revenues, like those of most developed countries, are already coming under major pressure from population ageing. As we have discussed in my ‘Chemistry & the Economy’ webinars, which run every six months, U.S. and other state-funded medical systems face a major cash crunch in coming years.
The Trustees of the Medicare program have already warned that funding for hospital benefits will run out in just 15 years’ time. And their latest report says they are now assuming “a substantial reduction in per capita health expenditure growth rates relative to historical experience.” Other wealthy countries are equally cash-strapped. The U.K.’s National Institute for Health and Care Excellence (NICE), already requires physicians to offer treatment based on cost effectiveness.
The failure of the Allergan deal needs to be a wake-up call for Pfizer’s top management. Any approach that is effectively based on milking the tax-payer is doomed to failure in today’s marketplace. Instead, affordability and value-for-money will be the critical success factors for the future.
Pfizer needs to bring in new strategy advisers, immediately, who are more attuned to this real world. The company needs advisers who will tell the board that selling off the lower-margin generics business is exactly the wrong move to make. The current focus on high-priced niche markets is never likely to prove a recipe for success, given Pfizer’s position as the world’s largest pharma company. Rather, it risks confirming the old adage - namely that the easiest way of creating a small company, is to start with a large one.
Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.