EXCLUSIVE: FBB's Mike Bailey On Pfizer-Allergan Deal, Taxes, Rate Hike And Biotech Picks

Pfizer made a "good choice" in acquiring Allergan, according to FBB Capital Partners' Mike Bailey.

Speaking to Benzinga, Bailey said that Pfizer and Allergan have similar cultures, and if Pfizer perused an acquisition of GlaxoSmithKline plc (ADR) (NYSE: GSK) instead, Pfizer would have faced "tougher integration" risk.

Bailey continued that Allergan's eyecare and "big cash cow" profile are "attractive." The company also has several next-generation drugs in the pipeline, none of which will become "blockbusters," rather it will offer Pfizer "a bunch of singles and doubles adding up."

Related Link: Pfizer Buys Allergan In Largest Healthcare Deal Ever

Bailey also noted that the next big mega-cap deal in the healthcare space may not occur in the near term, but the entire sector is active in scaling up – akin to an "arms race." He added that as large-cap firms merge, mid-cap firms will also feel the need to merge well. In addition, any company with a tax rate above 25 percent may look toward acquisitions to bring down their tax rate to the high-teens.

Political Risk A Potential Reality

Bailey stated that Pfizer is likely facing "political pressure" in terms of taxing. By acquiring Irish-based Allergan, Pfizer could repatriate its business in a country that offers a more favorable tax rate. The analyst suggested that these kinds of deals will continue until "meaningful" measures are passed by the necessary lawmakers. Nevertheless, not all companies will be rushing to find a tax haven across the pond.

"Tax inversion is looked by every biotech corporate CFO, with the caveat that it may affect their reputation," Bailey said. "Some companies may not prefer to do big deals in general."

Bailey also warned investors that politics and drug price inflation could clash next year, resulting in a "separate risk factor" for investors to consider.

Acquisition Targets, Attractive Names And Interest Rates

The analyst speculated that Mylan NV (NASDAQ: MYL) and Perrigo Company plc Ordinary Shares (NYSE: PRGO) are names on his radar that could be bought out.

Bailey also said that Alexion is an attractive name in the space, even if it is not the target of an acquisition. The company has evolved from a "one-trick pony" to become a "multi-faceted" biotech name.

Finally, Bailey pointed out that a Fed rate hike would result in companies finding it more expensive to raise debt to finance acquisitions. However, any incremental negative will be short term in nature and won't be a "deal killer."

Image Credit: "New York City Pfizer World Headquarters 02" by Norbert Nagel, Mörfelden-Walldorf, Germany - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.