Pfizer needs Plan C after Allergan fallout

Pfizer's $152-billion merger with Allergan failed after the Obama administration introduced rules that would make the deal much less attractive

Two years ago, Pfizer tried - and failed - to take over the British rival AstraZeneca in a bid to become the world's largest drug company and lower its tax bill in the process. On Wednesday, Pfizer said another big overseas merger had failed, this time a $152-billion merger with Allergan, after the Obama administration introduced rules that would make the deal much less attractive.

Now, Pfizer finds itself at yet another crossroads. The company's stock has been growing steadily, but investors are certain to start agitating again to complete a bold move to push growth higher. The company has basically two choices: get bigger, or break apart.

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If it goes hunting for a new acquisition, its options are far more limited now than they were just last week. On Tuesday, the Obama administration introduced an aggressive and expansive series of rule changes aimed at limiting so-called inversions, which allow an American company to shed its United States corporate citizenship to move income beyond the reach of American tax authorities.

A big part of Allergan's appeal was that the company's tax domicile is in Ireland. But with the changes to the rules, those tax benefits went away - as they most likely would in similar deal between Pfizer and a company in a low-tax country. Still, shares of several foreign pharmaceutical companies were trading higher on Wednesday, including AstraZeneca, GlaxoSmithKline and Shire, perhaps on speculation that Pfizer would still pursue an overseas acquisition.

"Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies," Ian C Read, the Pfizer chairman and chief executive, said in a news release. "We remain focused on continuing to enhance the value of our innovative and established businesses."

Pfizer's brief news release said little about its future plans. But some analysts saw significance in a statement by Read that indicated the company planned to decide whether to break itself up by the end of this year. Some analysts lobbied for such a move because they argued that two smaller and more focused companies would be worth more than one bigger one.

"The fact that the company is talking about the original split-up decision timeline of late 2016 almost seems to suggest they have given up on inversion," said Tim Anderson, a senior analyst for Sanford C Bernstein & Company, in a note to investors. Anderson said Pfizer could have seen the Allergan deal as an opportunity, but once it did not happen, "perhaps it is back to usual business once again."

Anderson, who had previously supported a breakup, noted that the company's statement did not mean Pfizer had settled on splitting. But by raising the issue, he wrote, "this essentially puts the carrot back in front of the stock again."

Pfizer's plans to make itself smaller dates to 2011, when Read, who had recently taken over as chief executive, announced plans to become a more focused company following a series of multibillion-dollar acquisitions. Under Read's direction, the company slashed its research and development budget and, in 2012, sold its infant nutrition business to Nestle. In 2013, it spun off its animal health business into what is now Zoetis.

In 2014, the company divided its business into two segments - one devoted to new brand-name medicines and the other to older medications that had lost patent protection. That was seen as a preliminary step toward breaking the company in two. Those plans receded, however, when Pfizer decided to follow in the footsteps of many of its competitors by performing an inversion, in which an American company acquires an overseas rival and reincorporates overseas.

In 2014, Pfizer tried to acquire AstraZeneca, but it ultimately abandoned the pursuit after AstraZeneca repeatedly snubbed Pfizer's approaches. The proposed takeover also faced stiff political opposition over potential job losses in Britain. Inversions have gained popularity in recent years, particularly in the pharmaceutical industry, as United States companies look to lower their corporate tax rates and more easily use income that has been held in foreign subsidiaries. About 40 companies have struck inversions over the last five years, according to data from Dealogic.

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