Don't worry, Pfizer and Allergan. Treasury just did you a favor

Pfizer ($PFE) and Allergan ($AGN) may feel pained by the collapse of their $160 billion merger. But when the U.S. Treasury cracked down on the deal with new tax-inversion rules, it may have done the two companies a favor.

Allergan and CEO Brent Saunders now have the chance to exercise their "growth pharma" ideas set forth early last year: Focus on later-stage drug development, hone a lean marketing machine and roll out pipeline meds the company calls "exciting."

They also have the chance to roll a barrel of new cash--from their $40 billion generics sale to Teva Pharmaceutical ($TEVA), $33 billion of which comes in that form--into the dealmaking arena. Analysts are full of M&A ideas, of course, and we'll bet investment bankers are already working on their pitches.

In fact, to analysts, Allergan's standalone case is as strong as ever, and its M&A firepower will make the company an even stronger bet for growth. Nomura's Shibani Malhotra, for instance, said Monday that the company "offers some of the best, most durable assets in the sector, is run by an operationally strong shareholder-focused management team, and has a solid mid-to-late stage pipeline that could deliver significant upside" now that the deal is dead.

But even Pfizer--whose Plan B seems more tenuous--should really thank Treasury for knocking aside its tax inversion plans. The deal's tax advantages made Pfizer's long-term numbers look good--but not great. It would have given Pfizer a slate of new drugs in new therapeutic areas, but not much opportunity for cost-cutting in the integration, which is a typical motivation for big mergers. It came with some solid pipeline meds and development deals, but no guarantee that Pfizer could avoid the R&D disruption that has plagued previous megamergers--including those in Pfizer's own deal history.

Frankly, megamergers have shown time and again to interfere with the very innovation pharma companies say is first on their minds. Experienced R&D hands, including former Pfizer R&D chief John LaMattina and in-the-trenches chemist Derek Lowe of In the Pipeline fame, have made that case quite convincingly. (Though LaMattina did say Pfizergan might be different.) AstraZeneca ($AZN) used R&D disruption as a defense when fending off Pfizer's previous tax-inversion bid in 2014. Even McKinsey & Co. analysts, typically more than willing to approve of financial engineering and megadeals, pegged Pfizer's Wyeth buyout as a bust.

Just think of what Pfizer might have done with the resources and energy it spent on, first, its failed AstraZeneca bid, and now, the Allergan deal. It could have parlayed that time and money on smaller deals to build up its drug stable and pipeline, stringing a few together to achieve what Allergan might have delivered.

True, analysts point out that Pfizer still has its "tax problem," and smaller deals wouldn't give the company the immediate and large rate cut that it so craves. As such, some market watchers are eager to pair Pfizer up with another "transformational" deal, even another tax inversion that would fit into Treasury's rules; think a rerun at AstraZeneca or GlaxoSmithKline ($GSK).

That would be a distraction. Bernstein analyst Tim Anderson, reading the tea leaves, believes Pfizer recognizes that. Pfizer isn't "desperate" for a transformational deal; its numbers show modest earnings per share growth over the next 5 years without one, he says. And its promise to decide by year's end whether to split into two companies--as it's been discussing for several years now, and had put off after inking its deal with Allergan--might just show that Pfizer has decided to move on.

The new decision timeline "almost seems to suggest they have given up on inversion (of a larger target, like AZN or GSK) … or on doing a more traditional large acquisition for that matter, because if one of those were to happen, the late-2016 timeline would presumably get pushed out once again," Anderson notes.

Yes, Allergan and Pfizer will have to prove over the next few months that they're ready and able to grow separately. Pfizer's investors will be particularly interested to hear just what CEO Ian Read has in mind. But these two companies might just show themselves to be the sort of couple that's better off apart.

-- Tracy Staton (email | Twitter)

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