Pfizer, Allergan Said to Discuss Record Pharmaceutical Deal

Possible Allergan Deal Could See Pfizer Split Up
  • Deal for Allergan could see Pfizer split up, move tax address
  • Pfizer said to only be interested in friendly transaction

Pfizer Inc. is getting closer to breaking up and moving out.

The largest U.S. drugmaker is in talks with Allergan Plc about an acquisition, according to people familiar with the matter. A deal for Allergan would give Pfizer a way to move to a low-tax legal address abroad and gain valuable specialty drugs like Allergan’s Botox anti-wrinkle treatment. It would also help Pfizer meet its goal of adding more scale before splitting up into two new companies, one focused on older drugs at the end of their life-cycles, and another, faster-growing business of new brand-name drugs. A deal would likely be the biggest in drug industry history.

The talks are still in early stages and may not result in a deal, according to the people, who weren’t authorized to speak about the matter publicly. Pfizer is only interested in a friendly transaction, said one of the people.

Allergan shares rose 10 percent to $316.50 in early trading. Pfizer shares rose 1.9 percent to $36.13.

Pfizer spokeswoman Joan Campion and Mark Marmur, an Allergan spokesman, declined to comment.

At an appearance Thursday at an event in New York, Pfizer Chief Executive Officer Ian Read said the company could do a merger and then split. He declined to say whether he was talking to Allergan.

Biggest Inversion?

A deal could pave the way for more than just a spinoff. Purchasing Allergan, which has its legal domicile in Dublin and a market cap of $113 billion, may also let Pfizer relocate outside the U.S. for tax purposes through what’s know as a tax inversion. The move requires a large foreign target in order to clear U.S. tax rules, and was one of the reasons Pfizer sought to acquire AstraZeneca Plc last year, before eventually withdrawing its proposal.

It would be by far the biggest tax inversion by a U.S. company, after dozens of smaller businesses -- including many drugmakers -- have used deals abroad to exit the U.S.’s 35 percent corporate tax rate.

Pfizer is at a competitive disadvantage by having its tax domicile in the U.S., Read said at Thursday’s event, which was hosted by the Wall Street Journal. Foreign companies with a lower tax rate can invest more in research, he said.

Pfizer’s Goals

Read has said he is looking for three things in any major takeover. “I expressed a preference for any deal that creates greater shareholder value, which would have to be a combination of, as I said, pipeline, operational synergies, and financial synergies,” he said on a conference call Tuesday.

Allergan is one of the few targets that fit Pfizer’s aspirations, Credit Suisse analysts wrote in a note to investors today. Recent comments from Pfizer’s management on earnings calls have elevated expectations on Pfizer "going bold and trying to complete a tax inversion-based deal," the analysts wrote.

Buying Allergan would give Pfizer drugs to add to its specialty drug unit. Pfizer earlier this year bought Hospira Inc. in a transaction valued at about $17 billion. The acquisition of Hospira, which makes generic injectable drugs and devices to deliver them, was intended to bolster Pfizer’s established drugs business, which includes off-patent medicine with slow growth and strong cash flow. Once that business has been built up into a stand-alone company, Pfizer could spin it off, separating it from the growth-focused unit that contains Pfizer’s brand-name drugs, two people familiar with the matter said at the time of the Hospira acquisition.

It also wouldn’t be the first time for Pfizer and Allergan. In 2014, Pfizer was said to have approached what is now Allergan about a takeover, Bloomberg News reported. At the time the company -- which then went by the name Actavis -- had a market valuation of about $64 billion.

Buy and Split

“There are very few deals in the market -- so Pfizer is trying to fill this need for a deal, and once this behemoth is created, then it will probably carve its business out into specialty pharma and generic pharma," said Jayant Singh, director of the health-care practice at Frost & Sullivan in New Delhi.

Allergan may also be an easier target than it was just a few months ago.

While Allergan’s stock is up about 12 percent this year, its last closing price of $287.20 is well below its July peak of about $340. Shares of drugmakers have fallen in the U.S. as pricing practices by the industry has drawn scrutiny from lawmakers and candidates in the presidential elections.

“I do think there has been an adjustment in the price of some of the specialty companies,” Read said Tuesday. “I’m not so sure there has been an adjustment in their expectations of what they want to sell the company.”

Built by Deals

The argument for Pfizer splitting up will get stronger in 2016, and recent market weakness increases the possibility of an acquisition like Allergan to strengthen its innovative segment, BMO analysts noted.

Allergan is itself the result of an acquisition earlier this year. It was purchased by Actavis, which took Allergan’s name and tax address abroad.

Allergan is also slimming down by selling its generic-drug unit to Teva Pharmaceutical Industries Ltd. for $40.5 billion. Sales at Allergan, which has a market capitalization of about $113 billion, have benefited from sales of specialty drugs including Botox and Namenda for Alzheimer’s disease.

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