Pfizer, one of the world’s largest pharmaceutical companies (and the maker of Viagra), has recently announced it is merging with Allergan, best known for being the maker of Botox.

The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs. 

 

Despite being called a merger, the implications of what is effectively Pfizer acquiring Allergan for US$160 billion go well beyond their two most famous products. We think if this transaction proceeds it will create a great outcome for investors. Here are our key reasons why you should consider investing in Pfizer now.

1. Relatively cheap valuation versus ASX listed healthcare shares

Putting aside the Allergan transaction for a moment, Pfizer is trading at a relatively cheap valuation. Most recently, it was trading at a FY2016 price earnings ratio of 14x based on market earnings estimates. Compare this to the ASX listed healthcare shares in Australia which on average trade at around 20x FY2016 price earnings ratio.

Pfizer with a portfolio of over 200 branded medicines and healthcare products is arguably a much more diversified company than any ASX listed healthcare company. Many of the company’s products are widely known and used. For example, there is the blockbuster drug Lipitor which treats high cholesterol and Celebrex which treats arthritis pain and inflammation.

In addition, Pfizer has one of the largest pipeline of new products with 84 currently undergoing research and development. The company spends approximately US$7 billion per year on research and development to provide the most effective medicines for customers. Despite this large research and development spend, Pfizer still made over US$9 billion in net income during FY2014.

2. Allergan acquisition

The combination of Pfizer and Allergan will create a global pharmaceutical giant generating US$63 billion of revenue worldwide and employing approximately 110,000 people. From a financial perspective, Pfizer expects the acquisition to increase earnings per share by over 10% from 2019 onwards. Importantly, Allergan also provides Pfizer with a broader range of high growth products.

There is also a major tax benefit that is driving this transaction. In short, Pfizer will be able to move its tax base from the US to Ireland and pay billions of dollars less tax by merging with Allergan. Naturally this so called “tax inversion” transaction is a political hot potato in the US which stands to keep losing tax dollars to other countries. However, the way that the transaction is structured means there is not a lot US tax regulators can do to prevent it from going ahead.

From our perspective, we think the combination of Pfizer and Allergan makes good business sense by itself. The tax benefits are the cherry on top.

3. Blockbuster medicines

If you have high cholesterol or know someone who does then you’ve probably come across Pfizer’s Lipitor pills. It is often quoted as the posterchild blockbuster drug being the bestselling drug in the history of the pharmaceutical industry. At its peak, Lipitor generated US$13 billion in sales per year for Pfizer.

Successful blockbuster drugs can provide substantial multi-year earnings boost to any pharmaceutical company. However, it costs tremendous amounts of money and time to develop and market these drugs together with an element of luck.

As a result, the more financial and research firepower a pharmaceutical company has, the greater the chances of developing the next blockbuster drug. Right now it is hard to find another company with more of these characteristics than a combined Pfizer & Allergan. Who knows what the brains behind Viagra and Botox might come up with next?

 

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