With Pfizer and Allergan set for a $160B megamerger, what becomes of R&D?

Allergan CEO Brent Saunders

Pfizer ($PFE) and Allergan ($AGN) have confirmed what many long suspected, agreeing to merge in a $160 billion deal that gives the former a much-desired tax break and the latter a predictable final resting place. But the combination Pfizer's penchant for postdeal job cuts and Allergan's well-established aversion to early-stage research paints a cloudy picture of how R&D will get done at what would be the world's new largest drugmaker.

Under the terms of the deal, the Irish-domiciled Allergan will absorb Pfizer and then be renamed in its stead, a clever wrinkle designed to get around U.S. Treasury regulations that seek to discourage American companies from buying overseas rivals for a lower tax bill. The merger, expected to close in the second half of next year, will give Allergan shareholders 11.3 shares of the combined company for every share of Allergan and Pfizer shareholders one share of the new entity for each of the Pfizer shares they hold.

Pfizer spent a great deal of Monday's announcement extolling the financial benefits of its proposed deal, including $2 billion in synergies by year three and a tax rate reduction that will see last year's 27% bill drop to around 18%. But management was quieter on how a Pfizer-Allergan merger would affect drug development. On a call with analysts, Pfizer Chief Financial Officer Frank D'Amelio said less than one-third of those $2 billion in cuts would come from R&D, and management stressed that an integration of the two companies would be minimally disruptive to ongoing development. But history suggests such megadeals have an adverse effect on R&D progress.

Writing in Nature, former Pfizer R&D executive John LaMattina noted that the company's three largest buyouts--Warner-Lambert, Pharmacia and Wyeth--resulted in sweeping research cuts and site closures, leaving more than 20,000 scientists out of work. And those who stick around were saddled with major R&D delays, LaMattina wrote, as integrating two large companies involves a painstaking review of assets that can slow development down to a crawl. Even more difficult to quantify is the effect on productivity, he wrote, as word of potential layoffs spreads fast throughout a large company and distracts workers from their projects.

Further complicating matters for the future Pfizer is the impending influence of current Allergan CEO Brent Saunders. Per the merger agreement, Saunders will assume the role of president and chief operating officer at the combined company, with Pfizer chief Ian Read staying on as chairman and CEO at least until he hits mandatory retirement age in 2018.

Saunders has long derided the idea of major drugmakers pouring money into research, telling Forbes last year that "the idea that to play in the big leagues you have to do drug discovery is really a fallacy," adding that early-stage R&D "has not returned its cost of capital." He has since walked backed some of that stridency, telling Reuters this month that his experience among Allergan's discovery-stage products has opened his eyes to the potential value of early development. But his track record of running R&D-light operations speaks louder than any single quote, and his seat at the right hand of Read suggests Pfizer is open to his way of thinking.

On Monday's conference call, Saunders professed his support of the two companies' combined pipeline, which would include more than 100 assets in mid- to late-stage development. "That's the jet fuel that will keep the growth moving forward," he said. Asked to identify the most promising late-stage drugs Allergan brings to the table, Saunders name-checked the depression treatment rapastinel, the macular degeneration DARPin program, a uterine fibroid treatment called Esmya and the gastroparesis drug relamorelin.

Hanging over the whole megamerger discussion is the very real possibility that the future of Pfizer includes a major breakup. Over the past few years, analysts have nudged the company toward a split of its businesses, asking management to take a page from Abbott Laboratories ($ABT) and Baxter International ($BAX) by separating its slow-growing legacy products from its in-development drug operation. In its Allergan announcement Monday, Pfizer promised to make a decision on that idea by no later than the end of 2018, which could coincide with Saunders' coronation as CEO if he stays on that long.

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