Pfizer, Allergan in deal talks to create drug giant

TRENTON, N.J. — Pfizer and Botox maker Allergan are discussing a potential deal that could be the biggest of 2015, a year marked by a rapid-fire pace of megadeals, particularly in health care.

in a surge of huge tie-ups across nearly every sector, especially health care.

Analysts speculated that Pfizer would have to pay $390 to $400 per share for Allergan, making the deal worth at least $153 billion. If a merger occurred, the combined company would have a market capitalization in excess of $330 billion, including Allergan's present value of about $113 billion.

A merger could enable Viagra maker Pfizer, the world's second-biggest drugmaker by revenue, to surpass Switzerland's Novartis AG and regain the industry's top spot. It would also add Allergan's brand-name medicines for eye conditions, infections and heart disease to Pfizer's extensive portfolio of vaccines and drugs for cancer, pain, erectile dysfunction and other conditions.

In separate statements, both companies on Thursday said they were in "preliminary friendly discussions." Allergan Plc said there's no certainty that the talks with Pfizer Inc. will lead to a deal.

However, Allergan shares jumped 7.1 percent to $307.72 in afternoon trading. Pfizer shares dipped nearly 2 percent to $34.78.

The talks come amid the latest wave of health care consolidation, which includes brand-name and generic drugmakers as well as insurers, pharmacy chains and drug wholesalers — all groups trying to boost bargaining clout. Allergan, based in Dublin, is in the process of selling its generics unit to Israel's Teva Pharmacueticals Industries Ltd., the world's top generic drugmaker.

Pfizer has been hurt by a wave of generic versions of one-time blockbuster drugs like cholesterol fighter Lipitor entering the market, reducing company sales by a total of $28 billion from 2010 through next year. It has a history of making large acquisitions to boost revenue, gain promising drugs in development and cut costs. It's done three sizeable deals since 2000, acquiring Warner-Lambert and Pharmacia before paying a whopping $68 billion for Wyeth in 2009.

Pfizer's $49.6 billion in revenue last year dwarfs Allergan's $4.6 billion, but a deal for Allergan would allow for additional growth and Pfizer might pursue an "inversion." That's a tax-saving maneuver in which a U.S. company reincorporates in a country with a lower corporate tax rate.

Inversions have become a hot political topic, raising the ire of lawmakers in Washington and public interest groups as well.

Pfizer, based in New York, spent months in the spring of last year pursuing another top 10 drugmaker, Britain's AstraZeneca PLC, in an attempted inversion, but those talks eventually collapsed when the two sides couldn't agree on a price. Pfizer was willing to pay $118 billion.

However, with other companies announcing or pursuing inversions, the Obama administration acted.

By the end of the year, the U.S. Treasury Department had initiated new regulations designed to limit the financial benefits of inversions. The rules, among other things, bar certain techniques that companies use to lower their tax bills and they tightened ownership requirements.

Last week, billionaire investor Carl Icahn announced that he was setting up a $150 million super PAC bent on revising U.S. corporate tax law and ending the practice of inversions, ratcheting up political pressure even more.

Pfizer said in its statement that it won't comment "on speculation regarding the terms of a potential transaction.

"Any further announcement will be made if and when appropriate," Pfizer said.

If Pfizer goes forward, given Allergan's market capitalization of about $113 billion before deal talks surfaced, it would be the biggest buyout of the year, more expensive even than Anheuser Busch InBev's $106 billion bid for SABMiller.

And some industry analysts say the price tag for Allergan could be much higher.

Analysts who follow Pfizer were not surprised that deal talks were underway, but warned that an inversion might trigger a more intense pushback from Washington. That could compound public anger over soaring prices for prescription drugs, which have become another big issue in the 2016 presidential race.

Sen. Charles Schumer, D-New York, issued a statement Thursday saying, "The continued pursuit of inversions, mergers and foreign acquisitions of major U.S. companies for purely tax purposes shows there is a lot more work to be done to stop them."

According to SanfordBernstein analyst Dr. Timothy Anderson, an all-stock deal is likely, because Allergan shareholders would own at least 40 percent of the combined company, a level that would allow Pfizer to get full tax relief under Treasury's new ownership thresholds. Pfizer's current tax rate is about 25 percent and Allergan's around 15 percent, he noted.

Beyond any potential tax benefits, Anderson called the deal a good fit.

"Allergan is (mostly) a U.S. company operating mainly in the primary care markets, which Pfizer understands well. The two organizations are geographically close, and the post-merger integration would therefore be easier than a transatlantic deal," Anderson wrote. "Second, Allergan management is unlikely to be an obstacle to a transaction."