The deal announced yesterday, if it goes through, will create the world’s largest pharmaceutical company worth around $160bn (€150bn) with an annual R&D budget of around $9bn.
With rumours of the proposed merger circulating for weeks, contract research organisations (CROs) have already had time to speculate on how reprioritized pipelines and restructured operations could play havoc with current outsourcing agreements.
But according to Evercore ISI analyst Ross Muken, there was not any market fall-out during the negotiations period and historically third parties have prospered from such mega-deals in the long-term.
“Given Pfizer’s presence as the world’s largest Pharma company and outsourcer, we are surprised that CRO shares have outperformed during the lead up to the transaction,” he said in a note.
However, “while R&D synergies are not a significant factor for the transaction, we would expect some level of elevated cancellations and a possible delay in backlog burn.”
Historical bounce back
“That being said, based on historical evidence, it does not appear as if this transaction will have any material impact on relative valuation for the sub-group.”
William Blair’s John Kreger agreed: “Historically, the impact has been negative in the near term as the integration effort causes a prolonged decision-making process regarding new contracted projects…we would expect near-term new business to be reduced and cancelations to potentially increase.
“However, over the long term, the purpose of these mergers is to drive efficiency in the cost structure of the combined company and that often results in higher outsourced penetration rates of the remaining R&D budget and more aggressive development timelines.”
Icon, Parexel and PPD
Both analysts noted if any CROs were to feel an impact in the short-term it would be Pfizer’s long-standing partners Icon and Parexel, along with PPD, which the Pharma Giant announced to be its third strategic partner earlier this year.
“It is difficult to quantify what cancelations might be or what percentage of new business will be delayed, we believe the current multiples, particularly for Icon, already reflect very cautious scenarios for the future of the Pfizer business,” said Kreger.
The CRO impact from the Allergan side is less predictable, but Jefferies' analyst David Windley was positive that "adding Allergan's R&D increases Pfizer's development spend, reducing the risk that PPDI will dilute revenue to the existing Strategic Partners. Assuming Pfizer's outsourcing strategy is implemented into Allergan's portfolio, we believe the merger is a net positive."
Meanwhile, Kreger said that while Allergan “outsources, the extent to which it does so and how many partners it uses is unclear,” and “our sense is that the company’s CRO relationships are less concentrated than is the case for Pfizer, since it has been built through the acquisition of many smaller companies with limited internal development capabilities.”