Why Mass Retrenchment Could Hit Pfizer Inc. (NYSE:PFE)’s R&D If Deal With Allergan (AGN) Succeeds

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Motivated by the desire to cut its corporate tax burden, Pfizer Inc. (NYSE:PFE) is looking at a nearly $112 billion deal with Allergan PLC (NYSE:AGN) that would see it shift its corporate headquarters to Ireland. However, aside from the tax politics, there are fears about mass layoffs at Pfizer’s research and development arm if the merger deal being worked out with Allergan succeeds. It is not overlapping R&D organizations that is expected to give way to mass firing at Pfizer’s research unit, but who becomes the leader of the company after 2018.

Pfizer Inc. (NYSE:PFE)’s buyout of Allergan is expected to continue the so-called tax inversion by U.S. companies looking to escape steep corporate taxes at home. It certainly won’t be easy for Pfizer to relocate its tax base to Ireland given how the U.S. government has recently sought to handle inversion transactions. Nevertheless, inversion is doable for Pfizer and if and when it happens, internal disruptions are inevitable.

Impact on product pipeline

Acquiring Allergan is expected to not only help Pfizer lower its tax burden, but also boost its drug portfolio and pipeline. Allergan has about 642 studies underway. Pfizer has 4,276 ongoing studies.

Tying up with Allergan could also see Pfizer return to some therapeutic areas that it had exited such as Ophthalmology and Dermatology.

Impact on R&D organization

For the most part, Pfizer Inc. (NYSE:PFE)’s and Allergan’s research organizations don’t overlap, thus making their merger a bolt-on deal. On that basis, there seems to be no worry about mass retrenchment at Pfizer’s R&D division post the merger. However, that is only true to some extent.

A change of leadership is looming at Pfizer as CEO, Ian Read, will reach the mandatory retirement age of 65 in 2018. Pfizer possibly already has a succession plan, but the merger with Allergan could complicate the succession narrative as it puts Allergan’s CEO, Brent Saunders, an outsider, in the succession equation.

It is not that Saunders would not make a great CEO for Pfizer Inc. (NYSE:PFE), but the problem is his approach to drug research. Saunders prefers to buy drug technologies from outside. That is the exact opposite of Read who prefers internal research investments. Consequently, selection of Saunders as the next leader of Pfizer after Read could see a major cut in R&D jobs in favor of outsourced research projects.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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