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Pfizer Inc's Unspoken Message To Investors: It Was Always About Taxes

By Motley Fool Staff - Apr 12, 2016 at 12:21PM

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Pfizer's decision to walk away from Allergan tells investors that its interest was always tied more to the tax savings than it was to Allergan's products and pipeline.

Pfizer's (PFE -0.15%) decision to walk away from Allergan (AGN) after rules changed that made it unable to move to the low-tax haven of Ireland suggests its interest in Allergan was always tied more to potential tax savings, rather than Allergan's products and pipeline. Despite arguing that Allergan's products and pipeline could spark sales and profit in the future, Pfizer was willing to walk away from the deal over a 8% difference in tax rate.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss Pfizer's decision and what investors should know about it.

A transcript follows the video.

This podcast was recorded on April 6, 2016. 

Kristine Harjes: Pfizer had said that this deal is not about the tax inversion. They were saying that it's more about bolstering up their business, and you hear all this talk about potentially breaking up Pfizer into different business units. Now, all of a sudden, this tax scenario doesn't work, and Pfizer tells Allergan to, "Go your own way," so, now what?

Todd Campbell: Yeah. Is this kind of a case where the lesson that we're going to learn from this is that management sometimes fibs or stretches the truth, or whatever? You're right! When this deal got announced, Pfizer had slide upon slide, upon slide touting how excited it was to get Allergan's Botox, and all of these drugs that are used to treat Alzheimer's, and depression and everything else, and this huge pipeline that Allergan would bring to PfizerGan. Sure enough, when push came to shove, eliminating the chance to go from 25% effective tax rate to 17% tax rate is what killed $160 billion deal.

Harjes: Yeah, and Ian Reid, the CEO of Pfizer, his words actually did say something to the effect of, "While it's not only about the tax rate, if that part of it were to fall through, then the price point might be a little bit different." What do you think? Do you think we're going to see another attempt from Pfizer, just at a different price?

Campbell: You know, I would have thought that those negotiations already happened, and for whatever reason, either Allergan looked at it and said, "No, we're worth more on a stand-alone basis," or Pfizer said, "You know what? We're really, really not that interested."

Harjes: Yeah, that makes sense.

Campbell: Surprise, surprise! We wanted the tax break and now we're not getting it.

Harjes: Yeah, that's what I thought of.

Campbell: We're going to walk away now because we have an opportunity to do it, relatively cheaply. Usually break-up fees are in the billions of dollars. Abbvie paid Shire, I think it was $1.7 billion or $1.8 billion when they called off their tax inversion deal. This one Kristine, was what? A rounding number?

Harjes: It was $150 million.

Campbell: Yeah, here's some walking around money.

Harjes: Yeah, that's pocked change. Maybe not to you and me, but for Pfizer.

Campbell: Yeah, I mean for Pfizer it is; absolutely. You saw numbers being tossed around yesterday. They were going to be, "Oh, they'll get $300 or $400 million. Oh they'll get a billion. Who knows what they'll get."

Harjes: Yeah, I think I saw up to a billion and a half.

Campbell: Yeah, and you know what? It basically said, "Tell you what, we know you racked up a lot of legal fees. We'll pay for your legal fees."

Harjes: Mm-hmm (affirmative). Yeah, and then, that's where you get that $150 million which is really not a whole lot of money. Pfizer has already tried to do a tax inversion deal in the past with AstraZeneca, and that failed, and now you have this Allergan deal, which also has failed. Do you think there's any sense of, "Never mind, I'll find someone like you," and they might look to another acquisition, either for tax reasons, or otherwise?

Campbell: You know, it would have to be a really big company, now, I think, based on these rules. Could they tie up with somebody like a Glaxo? Let's start some rumors, right? Could they tie up with a Glaxo? Could they go back to AstraZeneca again, and say, "Hey, how about us now? How do you like us now?" Sure, anything's possible. Pfizer has, arguably, one of the best balance sheets in pharma. They're sitting on an absolute mountain of cash, and that cash is just getting bigger and bigger every quarter. I don't know. They've got enough things going on where I think that the corner has turned for them and they can continue to grow for the next few years.

They've got new drugs that are coming out. They're selling pretty quickly. The drag and sales from losing Lipitor's patent protection, that's pretty much come to an end. They've cut a lot of costs. You know what? Investors could get a nice big windfall in the form of extra buybacks or a hike in the dividend. Pfizer may decide, "Hey, you know what? You guys have wanted us to split off our generics business, or our existing products business for a while. Maybe we'll spin that out."

Harjes: Yeah, that's definitely the thing to watch next with Pfizer: Is whether they do split into two distinct business units. The one being the one that you just mentioned, which is Global Established Pharmaceuticals, and the other one is Innovative Products. There have definitely been a lot of speculation about Allergan being of use to that split by bolstering both sides of that portfolio. Either way, Pfizer says that it will still make a decision about any potential separation by the end of this year.

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