Botox maker Allergan Plc and Pfizer Inc on Oct. 29 said they were in early, friendly talks to create the world's largest drugmaker and potentially set up Pfizer to take advantage of Ireland's lower tax rates.
Both New York-based Pfizer and Dublin-based Allergan said no agreement has been reached and declined to discuss any terms.
Allergan shares jumped 8 percent to $309.97 in U.S. trading, while Pfizer was off 2.4 percent at $34.60.
Given that both sides characterized the talks as "friendly," Pfizer is likely to have a much smoother path after running into intense political opposition in Britain and from AstraZeneca Plc's board in its failed, unsolicited bid in 2014.
"It's definitely a far easier target for Pfizer than AstraZeneca," said Christophe Eggmann, investment director at GAM, who holds shares in both companies. "It fits pretty well ... for Pfizer, so the hurdle will really be the price."
Pfizer could still face political pushback at home, particularly during the U.S. presidential campaign as candidates take aim at high prescription drug prices and companies looking to avoid paying U.S. taxes.
"It will make for good theater about evil corporate America, but Pfizer is looking out for the interest of shareholders," said Mike Krensavage, principal at Krensavage Asset Management.
On Oct. 29 before the companies confirmed the talks, Pfizer Chief Executive Officer Ian Read reiterated his criticism of U.S. corporate taxes.
"Our tax rate highly disadvantages American multinational high-tech businesses," Read said, speaking at a Wall Street Journal event. "I am fighting with one hand tied behind my back."
Pfizer's effective tax rate 25 percent, while Allergan's is 15 percent.
A combination with Allergan could allow Pfizer to take advantage of the far lower corporate tax rate in Ireland, a strategy called tax inversion, which it hoped to use in its pursuit of AstraZeneca.
A tax inversion is being discussed in the current talks, a person familiar with the matter told Reuters. The negotiations so far have been led by the CEOs and senior executives, the source said.
Read said on Oct. 29 he was open to any moves that produce the best long-term value for the company. He said he was looking at various growth strategies, including a deal, "if that would add value to shareholders."
"Or we could sit tight or we could do a split. Or we could do a business development deal and then do a split, whatever produces the best long-term value," Read said.
Pfizer is expected to decide by late 2016 whether to sell or spin off its older, off-patent products unit to pare the business and focus on innovative, patent-protected medicines.
Allergan, the product of a recent merger with generic drugmaker Actavis, is in the process of selling a large portfolio of generic medicines to Teva Pharmaceutical Industries Ltd for $40.5 billion. That deal is expected to close in the first quarter of 2016.
CASH FROM BOTOX
A purchase of Allergan, with a market value of more than $113 billion, would be the biggest in Pfizer's long history of huge deals, eclipsing the $90 billion Warner-Lambert acquisition in 2000 to gain control of Lipitor, once the world's top-selling medicine.
It would also restore Pfizer as the world's largest drugmaker, worth about $330 billion, a position it relinquished after Lipitor went off-patent.
Allergan expects revenue of more than $8 billion in the second half of 2015, which would not include revenue from generic drugs it is selling to Teva.
Pfizer has annual sales of about $48 billion, with about $27 billion from patent-protected drugs, consumer products and vaccines, and about $21 billion from the businesses it is considering selling.
Pfizer recently closed a $15 billion purchase of hospital products company Hospira, which is also developing biosimilar versions of leading biotech drugs. In the last 15 years, Pfizer has also acquired Pharmacia and Wyeth.
The deals have led to many thousands of job cuts, typically referred to as cost-saving synergies. It is not known how many cuts would result from a tie-up with Allergan.
Apart from tax considerations, the deal would give Pfizer access to Allergan's dominance in the aesthetics field with Botox, and the lucrative ophthalmology market, led by Allergan's $1.3 billion Restasis dry eye treatment.
The $2.4 billion in annual revenue it gets from wrinkle treatment Botox is an especially attractive asset since it is primarily a cash business that does not require reimbursements from insurers. It is also approved for several medical uses.
Healthcare deal-making hit a record of $392.4 billion in 2014 and has surpassed that so far this year, reaching $447.5 billion by Sept. 10, according to Thomson Reuters data.
(Reporting by Bill Berkrot and Ransdell Pierson; Additional reporting by Gregory Roumeliotis in New York; Vidya L Nathan and Natalie Grover in Bengaluru, Ben Hirschler in London; Editing by Ted Kerr and Jeffrey Benkoe)