Although the pharmaceuticals industry faced a sharp downturn at the beginning of 2016, that hasn't stopped merger and acquisition (M&A) activity in the sector. In January alone, biotech M&A deals accounted for $56 billion, more than double the value of acquisitions made the year previous.
But there's one merger on the table now that would dwarf all others, Pfizer's (PFE) combining with Allergan (AGN) . Even before the deal is finalized, Allergan looks like a tasty pharma play. The company just announced the launch of a new blockbuster product, and the company looks primed to rebound after a dip over the past seven months in its stock price.
In November, Pfizer and Allergan announced their reverse buyout merger valued at over $160 billion. Reverse mergers allow U.S. companies to move abroad to take advantage of lower taxes.
Allergan will technically be the acquiring entity, although it is considerably smaller than Pfizer. The new company will be based in Allergan's Dublin headquarters. Under Irish tax law, the company will face an affective tax rate of 17-18%, compared with the 25% Pfizer currently pays in U.S. taxes. The new company created from the deal would enjoy annual revenues of more than $60 billion.
In addition, the deal will create a pharma powerhouse with such household-name products as Botox and Viagra in its portfolio.
When the deal is finalized, all current Pfizer shareholders will receive one share of the new company for every share held, and all existing Allergan shareholders will receive 11.3 shares.
Analysts are already speculating that the merger will result in at least one spin-off of lower-margin businesses. Allergan has already agreed to sell its generic drug division to Israel-based Teva Pharmaceuticals. (That deal has been delayed until probably June.)
To be sure, the mega-merger between Allergan and Pfizer is facing headwinds from Democrats and Republicans who don't want to see a large employer move its headquarters to another country. Earlier this week, presidential candidate Bernie Sanders wrote scathingly of the deal in a letter to the Treasury Department. "Blocking this inversion would not only be sound fiscal policy, it would also act as a strong deterrent to other companies that are contemplating similar tax scams," he said.
Still, this is a particularly good time to be an investor in Allergan.
Yesterday, Allergan and partner Perrigo announced the launch of their own guaifenesin 1,200-mg extended-release tablets, store-branded versions of the blockbuster Mucinex 1,200-mg XR. The brand-name version of the drug produced more than $71 million in sales during the last 12 months alone. The first shipments of the Allergan/Perrigo drug have already been initiated.
Allergan is currently priced around $279, down off its 52-week high of $340.34 in July 2015. The company remains optimistic that the merger will go through, but the markets seem to hold a degree of skepticism, keeping the price at a discount.
While investors sit tight, waiting for word on a merger completion, they can still enjoy benefits from holding a strong healthcare company with an increasingly valuable portfolio of products. Whether or not the Pfizer deal closes, Allergan is worth a look.
You see Jim Cramer on TV. Now, see where he invests his money and why Allergan stock is a core holding of his multimillion-dollar portfolio. Want to be alerted before Jim Cramer buys or sells AGN? Learn more now.
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