Pramod Dibble's Blog


The Slow Death of a Giant

30 Nov 2015 | by Pramod Dibble
Share this:

Another blockbuster merger for the history books; Pfizer and Allergan will combine in the third largest takeover in history, a deal worth ~$160 billion. With combined annual revenue of $64 billion and market leading brands like Botox, Lyrica, and Viagara coming together under the same roof, this seems like a slam dunk. But my advice, to those of you who care about such things, is SELL SELL SELL. Wondering why? Read on.

Pfizer-Allergan (Pfizerergan?... Allerfizer?...) is a terrible long-term investment. We’re likely to see a short term bump as starry eyed hedge fund managers get swept up in the rows of zeroes, but they’ll come back down to Earth with the first earnings report. Give it 9 months.

Pfizer’s growth strategy going back a decade and a half has been to slash its internal R&D efforts and focus on buying already successful competitors. It’s acquisitions tree looks like that family chart at the beginning of A Game of Thrones, scooping up competitors at breakneck speed (Warner-Lambert 2001 $90 billion… Pharmacia 2002 $59 billion… Wyeth 2009 $68 billion… And now this…).

But what’s the end-game here? What does success look like to the Pfizers of the world? Do the executives believe that they are going to continue buying big pharma companies until there’s just the one left standing? And how do they expect to wring compelling growth out of brands which have already reached maturity?

Now, the alleged reason for the deal is to lower Pfizer’s corporate tax rate from 35% to 12.5% by relocating the HQ to Allergan’s native Ireland (technically Allergan is buying Pfizer), and I’ve seen analysis claiming that this will lower Pfizer’s tax burden by 2/3. This is nonsense. Pfizer pays nothing close to the full 35% US tax rate after entitlements; smart tax people have estimated they pay somewhere in the 10%-25% range depending on the year’s activities. In that disappointing earnings report call, in, let’s say, August 2016, these same analysts are going to point to “a variety of metrics contributing to the complexities of resource aggregation leading to…” well, I’m calling it now.

Furthermore, this behavior is indicative of a company that’s dead in the water. Pfizer has some of the most sophisticated pharmaceutical IP in the world, and a war chest that can finance the development of literally world-changing drugs. And they’ve chosen to spend their time and resources moving to Ireland. So they can save some money on taxes. Maybe.

Instead of, I don’t know, curing cancer.

As patent expiration and generics manufacturers eat Pfizer’s lunch they’ll continue to buy competitors, gasping into the cheap plastic tube keeping their hole-riddled life-vest afloat. They can’t go back; the damage to their innovation process is done, it would take a decade and a half to rebuild it.

If you’re looking for pharmaceutical innovation (and profit), look to the biotech start-ups. That’s where zero-to-sixty growth is going to take place. And if you want to invest your retirement income in sideways-sliding growth, then I recommend a Pfizer heavy portfolio.

Comments: