Pfizer Inc. raked in more than $12.4 billion in revenue in both 2007 and 2008 from just one drug, Lipitor. The cholesterol-lowering mega-blockbuster accounted for more than a quarter of the pharmaceutical giant’s total revenue in those years.

But those golden days couldn’t last.

In 2010, patent protections started to erode in various countries, and Lipitor’s revenue stream slowed as generic substitutes took its place on pharmacy shelves. Sales fell to a comparative trickle after the U.S. patent expired in late 2011, bringing in $3.9 billion in 2012. Last year, Lipitor accounted for just 4.2% of Pfizer’s overall sales, though at $2.06 billion, the brand is still a significant revenue source by normal standards.

What is sometimes overlooked is that Lipitor, the best-selling drug in history, came to Pfizer as the result of its 2000 acquisition of Warner Lambert.

Although critics points to some M&A missteps (Pfizer has bought all or part of some 25 companies in the last 15 years) Lipitor was not Pfizer’s only blockbuster-by-acquisition. Arthritis treatment Celebrex, for instance, which brought in more than $2 billion a year for nine years before going off-patent at the end of last year, joined Pfizer’s lineup when it bought Pharmacia in 2003.

And Pfizer continues to add to its drug pipeline by buying other companies. Its $15 billion purchase of Hospira, finalized in September, is expected to boost Pfizer’s generics business with a new class of drugs known as biosimilars, which are essentially knockoffs of expensive, complex drugs known as biologics.

Yet Pfizer’s latest combination, the $160 billion merger with Dublin-based Allergan Plc announced in late November, isn’t expected to be the source of the next multi-billion-dollar drug. Instead, it will ramp up the larger drug maker’s pipeline of specialty drugs and boost its overseas presence — both strengths of the faster-growing Allergan.

It’s clear that the deal’s No. 1 driver is slashing Pfizer’s tax bill. It is structured as an Allergan takeover of the larger Pfizer, though the new company will take Pfizer’s name. Moving its administrative headquarters to Ireland, where the corporate tax rates are lower than in the U.S., won’t win Pfizer any popularity contests in Washington, but it is expected to drop its tax rate to 17% or 18%, from about 26% last year.

“There’s very little overlap in the pipeline for the two companies.”–Jeffrey Loo

Acquiring a Specialist Drug Maker

The second driver behind the deal is the revenue the faster-growing Allergan brings to the table. Allergan last month posted sales of $10.87 billion for the first nine months of the year, helped by acquisitions and coming close to the $13 billion its predecessor company, Actavis, reported for all of 2014. Meanwhile, Pfizer reported a 5% revenue decline in the same January to September period, including the impact of foreign exchange.

Pfizer’s worldwide sales force is expected to jack up Allergan’s growth even faster, especially outside the U.S., which is the latter company’s main market right now. “The positive here is that Pfizer has a great sales force, if they can just find something to sell,” says Mark Pauly, Wharton professor of health care management.

“Pfizer may be trying to stay away from the five- and six-figure cost drugs that are so much in the political cross hairs,” Pauly adds. Instead, it may be aiming to lean more on “quality of life” drugs like Allergan’s Botox, used mainly for cosmetic treatments, and Restasis, part of Allergan’s eye-care line.

New revenue streams will definitely grow in importance in coming years, as Lyrica, Pfizer’s top-selling drug, loses exclusivity in 2018 and Viagra, its No. 3 seller, faces generic competition in 2017.

Pfizer Chairman and CEO Ian Read, who will retain leadership of the new company, said the deal will free up billions in cash. At least some of that cash, not to mention the profits Pfizer has stashed overseas that will become available, will likely get poured back into new drug development.

Credit Suisse analyst Vamil Divan puts any enhancement of Pfizer’s pipeline as third on the list of reasons to merge with Allergan. “It’s such a big company you need multiple products to keep growing and to offset patent losses,” he says.

Yet not long after taking Pfizer’s helm in 2010, Read began slashing Pfizer’s R&D budget. Spending plunged 30% to $6.68 billion in 2013, from $9.48 billion in 2010. Read reversed course somewhat, spending $8.39 billion last year on new drug discovery, but it’s fallen back this year, with the company on track to spend slightly more than $7 billion on research.

Promising Cancer Drugs

Still, even with the reductions, Pfizer has several promising drugs in its pipeline. They include Ibrance, which was recently granted approval from the U.S. Food and Drug Administration to treat breast cancer. The company is hoping to add approvals to treat other forms of cancer, says Jeffrey Loo, a health care equity analyst for S&P CapitalIQ, making Ibrance another potential blockbuster. He expects sales of about $1.8 billion next year, and it could top $3 billion a year by 2020 if Pfizer gets the approvals for use with other forms of cancer.

“The old blockbuster model can’t be the centerpiece of big pharma’s strategy going forward.”–John R. Kimberly

Cancer, in fact, remains one of Pfizer’s main areas of focus for new drugs after all that cost cutting.

But John R. Kimberly, Wharton professor of management, notes that cancer treatment is a competitive market. “The oncology space is very crowded and will get more so,” he says. “There is certainly potential therein, but whether it’s for ‘blockbusters’ in the traditional sense is unclear.”

The two companies said that together, they have more than 100 drugs in mid-to-late stage development. In addition to cancer, Pfizer has been working on treatments for heart disease, diabetes, pain and Alzheimer’s along with vaccines. Allergan has concentrated on women’s health, cosmetics and dermatology and eye care. “There’s very little overlap in the pipeline for the two companies,” Loo says.

Allergan, which was itself formed through multiple mergers and buyouts, says it could bring more than a dozen new drugs to market in the next few years, including new treatments for macular degeneration and depression. Morningstar analyst Damien Conover notes that the firm’s specialty markets have “much higher barriers to entry and lower risk of generics than most drugs.”

Aiming for Smaller Successes

While it may not produce any blockbusters, Divan says companies need to have some “singles and doubles” that can become steady revenue sources.

Aiming for those smaller successes is a path that makes sense, according to Kimberly. “The old blockbuster model can’t be the centerpiece of big pharma’s strategy going forward,” he says. “This doesn’t mean that blockbusters won’t be discovered, but it does mean that if and when that happens, it will be a byproduct of a different approach.”

“Research on mergers in general finds little positive benefit, usually because of problems merging the ‘cultures’ of different companies.”–Mark Pauly

Loo notes that the age of the blockbuster also reflected a “one-size-fits-all” approach to drugs. “The drug industry has been moving away from that, toward more of a personalized approach,” he says.

Any benefits to the pipeline coming from the Allergan deal will first have to overcome the challenges of combining the two companies, a task made that much harder by the fact that they are both still absorbing prior acquisitions. Allergan is the fifth major merger for Pfizer in the past 15 years.

“Research on mergers in general finds little positive benefit,” Pauly notes, “usually because of problems merging the ‘cultures’ of different companies.”

Kimberly says Pfizer’s history of so many acquisitions means “you have to believe that the company has developed deep expertise in integrating them.”

Yet their experience also speaks to the challenges integration poses.

“At what point will the company hit a wall in its ability to integrate effectively?” Kimberly asks. “Every acquisition has its own specific issues, issues that rarely are completely resolved. How much residual unresolved ‘stuff’ will ultimately comprise the performance of the enterprise as a whole is the big question.”