The pharmaceutical industry over the last five years has seen unprecedented M&A activity. In the past four quarters alone (Q4 2014-Q3 2015), there has been over $350bn total deal transaction and over 120 transactions in volume in the industry. It is an industry where business strategy appears to stay the same despite the acquisitions and divestitures that have been made in certain geographies and segments. Allergan (f/k/a Actavis and pending name change to Pfizer) was founded in 1983 and develops, manufactures, and distributes generic, branded, biosimilar, and over-the-counter (OTC) pharmaceutical products. The company has completed some of the largest M&A transactions, with many occurring in the last 3-5 years. Its business strategy of growth and pipeline development through M&A has been successfully supported by their operational changes, and shareholders have rewarded them handsomely for the successful execution.
Allergan is one of the largest pharmaceuticals companies with revenue of $20bn and a market value of $125bn. What used to work for large pharmaceutical companies in terms of aligning their business and operations model with large R&D budgets and the race to discover the next Viagra or Lipitor is no longer viable and competitive. “It’s almost impossible to discover a drug and take it through clinical trials on your own – at the very least, you need to partner.” Allergan’s business strategy, and many other pharmaceutical companies, is to be a commercialization and marketing platform fueled by acquisitions for growth.
A Competitive Advantage – M&A Supporting Business Strategy Changes
To give a brief overview of the key M&A deals:
- October 2012: Watson acquires Actavis for $6.0bn, creating the 3rd largest generics manufacturer
- October 2013: Actavis acquires Warner Chilcott for $8.7bn, creating the 3rd largest specialty drug manufacturer; Actavis remains primarily generic
- July 2014: Actavis acquires Forest Laboratories for $26.5bn, which deals primarily with branded specialty drugs
- March 2015: Actavis acquires Allergan for $73bn; changes name to Allergan and adds significantly to branded portfolio
- July 2015: Allergan announces divestiture of generics business to Teva for $40.5bn, which represents ~30% of the entire business and reduces plants from 40 to 12
Within the last three years, Allergan has transitioned its entire business model from a generic pharmaceutical company to a branded pharmaceutical company merely by acquiring and divesting other companies. It was a business decision made in order to reposition the company, and the operational focus of successfully and rapidly integrating acquisitions allowed Allergan to be nimble in a rapidly changing environment.
Structural Reorganization for Ease of M&A
Acquisitions have also led the company to restructure its operating segments to better align with the additional businesses, most recently between the Forest and Allergan acquisitions. This provides clearer alignment of divisions across the parent company and acquired company in order to facilitate integrations. It also helps with the divestiture of certain segments of the business going forward. As an example, the divesture of the generics business to Teva was clearer to investors given the existing generics segment.
Allocating Investments Away from Traditional R&D and the Tax Story
In lieu of traditional R&D for growth and pipeline development, Allergan and its various acquired companies have redirected significant capital to acquisitions. Allergan has averaged 7-8% of revenue to R&D expenses over the last 10 years, a cumulative total of ~$3.3bn. In contrast, it has spent over $115bn in acquisitions over the same time period, not inclusive of the Pfizer acquisition that was just announced worth $191bn. Although Allergan would be acquiring certain R&D capabilities, the biggest drivers of value in the acquisitions and rationale from senior management are operational efficiencies and lower tax rates. By being domiciled in Ireland, Allergan pays 16% in taxes (~$400mm in savings at the time of the Actavis/Allergan merger). The positive impact goes both ways: the business strategy of M&A is supported by the operational decision to direct more capital there and the operation strategy benefits through M&A because the tax savings create a better cost structure.
Though projecting further into the future, one wonders if this is ultimately a sustainable business strategy that will be defensible once the industry has significantly consolidated and capital is not as readily available or cheap. However, Allergan has done an impressive job executing the operations behind the scenes and convinced shareholders of the value creation.
- S&P Capital IQ
- Company filings, press releases and investor presentations