Pfizer and Allergan will have to find right mix

Eventually, Pfizer has got the deal it craved. Now the real work begins. Integrating two companies with such wildly differing corporate cultures will be far from straightforward.

Assuming it clears regulatory and investor hurdles, Pfizer and Allergan don't expect to see real financial gains emerging until 2018. Pfizer chief executive Ian Read and his Allergan counterpart Brent Saunders told analysts yesterday that the deal would be earnings neutral by 2018, 10 per cent accretive to EPS by 2019 and "high double digit" by 2020.

But that is some way down the line.

Until now, Actavis as it was known has been growing wildly through acquisition, most recently in its purchase of Allergan, the move that gave it a new name and the Irish domicile that has proved so alluring to Pfizer.

Generic drugs

It is in the process of selling the generic drugs business on which it had focused previously to Teva, a transaction that is scheduled to close in the first quarter of next year.

Allergan CEO Brent Saunders, who becomes chief operating officer of the merged group and leader in waiting behind Read (62), has long held that Big Pharma is ill-equipped to develop the blockbuster therapies on which drug companies thrive and should leave drug development to smaller, more nimble and innovative companies.

For its part, Pfizer has been an assiduous, if not always the most successful, developer of drugs through its own research and development team. Constant acquisition down the years – not least the merger with Wyeth – has turned it into a sometimes unwieldy beast. The more recent Hospira acquisition appears to be less indigestible and it is seeing some renewed success from its pipeline.

But, despite efforts by both executive teams to play down the differences, the two companies are cut from very different cloth.

Pfizer CFO Frank D’Amelio made the point yesterday that there was little crossover between the two companies, meaning that they were “complementary”.

Another reading is that the combined group will compete on too many fronts. The likely outcome is that there will be some fairly dramatic reorganisation down the line – and that means jobs cuts, though it will be some time before it becomes clear where the axe might fall.

For now, the companies are targeting synergies of $2 billion over three years – close to half of it in the first year after the deal closes – at an upfront cost of $1.25-$1.30 for every dollar saved.

That will bring the companies to the end of 2019. By then, it is expected that a decision will also have been made on whether to spin off Pfizer’s “established” drugs business, a possibility first mooted in 2011.

Analysts were underwhelmed on both counts.

Other concerns were the likely direction of dividends – Read insists investors in the merged company should expect a dollar dividend broadly the same as Pfizer investors see now – and share buybacks. The thinking is that excess cashflow will leave it plenty of scope for buybacks considerably more ambitious than the $5 billion exercise already pencilled in by Pfizer ahead of the merger.

The alternative is “business development”, shorthand for more M&A. The market will likely reserve judgment on the wisdom of that pending reassurance that the current proposed deal is being fully bedded down and delivering returns. As of yesterday, the initial market verdict was sceptical.