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Allergan Still Undervalued as Likelihood of Pfizer Deal Fades

New rules from the U.S. Treasury may put a damper on the Pfizer merger, but Allergan remains an attractively priced wide-moat company nonetheless.

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The U.S. Department of Treasury's updated framework for tax inversions reduces the likelihood of

The updated framework both limits the ability for Pfizer to invert with Allergan and likely hurts the tax benefit from inverting if still possible. The new guidance limits Allergan's market value by only allowing previously acquired U.S. firms from over three years ago to be counted in the Allergan valuation for inversion thresholds, which cuts off the July 2014 Forest acquisition (23% of Allergan's market capitalization) and the March 2015 Allergan acquisition by Actavis (renamed Allergan, 32% of Allergan's market capitalization). As a result, Pfizer would now not meet the threshold of owning less than 60% of the merged Pfizer-Allergan. Also, the updated guidance reduces the ability of intercompany loans from high-tax jurisdictions to low-tax areas, which probably reduces the ability of Pfizer to gain the expected 700-800 basis points of tax reduction expected from the merger.

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About the Authors

Damien Conover

Sector Director
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Damien Conover, CFA, is the director of healthcare equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is also director of equity strategy, responsible for helping to shape, package, and surface research based on Morningstar’s investment philosophy by working closely with the firm’s sector strategists and directors.

Before joining Morningstar in 2007, Conover was an equity research analyst covering the healthcare sector for Raymond James, Bank of Montreal, and Tucker Anthony.

Conover holds bachelor’s and master’s degrees in finance from the University of Wisconsin and was a member of its Applied Security Analysis Program. He also holds the Chartered Financial Analyst® designation.

Damien Conover, CFA, is the director of healthcare equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is also director of equity strategy, responsible for helping to shape, package, and surface research based on Morningstar’s investment philosophy by working closely with the firm’s sector strategists and directors.

Before joining Morningstar in 2007, Conover was an equity research analyst covering the healthcare sector for Raymond James, Bank of Montreal, and Tucker Anthony.

Conover holds bachelor’s and master’s degrees in finance from the University of Wisconsin and was a member of its Applied Security Analysis Program. He also holds the Chartered Financial Analyst® designation.

Michael Waterhouse

Sector Strategist
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Michael Waterhouse is a healthcare strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers specialty pharmaceutical and life science and diagnostic companies.

Before joining Morningstar in 2010, Waterhouse was a research biologist for the Centers for Disease Control and Prevention. He was also a volunteer in the Peace Corps.

Waterhouse holds a bachelor’s degree in biology from the University of Georgia. He also holds a master’s degree in business administration from the University of Minnesota, where he participated in the Carlson Funds Enterprise, a student managed investment fund.

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