If the deal, news of which was broken by the Wall Street Journal, goes ahead it will create a massive drugmaker with a R&D budget of around $9bn (€8.2bn) a year. The last time Pfizer and its peers entered into such deals, the resulting reprioritisation of pipelines and restructuring of operations played havoc with bookings at the CROs that worked with the companies involved.
However, while there is precedent from 2008 and 2009 of the near-term harm megamergers can cause to CROs, there are also reasons to think the combination of Pfizer and Allergan would have a more benign effect on the industry than these earlier deals.
Tim Evans, senior analyst at Wells Fargo, laid out some reasons for optimism in a note to investors. Cancellations, a common negative side effect of large client mergers, are unlikely to be as damaging as in the past because Pfizer, Allergan and CROs are different than their equivalents in earlier deals.
Evans is unsure on Allergan’s approach to outsourcing, but given that the current iteration of the company has been created through a flurry of large takeovers, it is reasonable to assume the firm has a patchwork of legacy vendors and in-house teams.
If this is the case, the effect of any post-merger cancellations will be spread across a large number of CROs, meaning no one service provider will be hit particularly hard. In contrast, the 2008-2009 deals involved pharma companies that sent a lot of work to a small number of CROs.
CROs are also better equipped to cope with cancellations than in the past. “The large, public CROs have significantly more scale today than during the last round of large pharma mergers. We believe the disruption from any one cancellation has been significantly diluted by scale,” Evans said.
Long-term optimism
Even if the merger were to cause some near-term disruption for CROs, there is evidence to suggest that some service providers would benefit once the integration is complete. “Vendors of the acquirer tend to fare well over a longer horizon as combinations lead to more outsourcing,” Evans said.
In this scenario, Icon, Parexel and PPD, the three CROs that capture most of Pfizer’s late-stage R&D spending, would benefit. The benefits will be particularly pronounced if, as Evans believes, Allergan currently sends a smaller proportion of its R&D budget to CROs than Pfizer and the merger therefore leads to increased outsourcing penetration.
Whatever the situation today, it is unlikely the combination of Allergan, a company renowned for its lean R&D operation, and Pfizer, with its track record of post-acquisition layoffs, will create a firm that favours in-house teams over CROs.