Drug companies Pfizer and Allergan have confirmed that they were engaged in "friendly" talks about a possible megamerger which would make Ireland home to world's largest drug's business with a market capitalisation in excess of $300 billion.
Allergan, which is already headquartered in Ireland and best known for the wrinkle therapy botox, issued a statement saying that it had entered into “preliminary friendly discussions” with Pfizer following an approach by the US company.
Pfizer later noted the Allergan announcement “regarding a potential transaction between the companies”.
“ Pfizer confirms that it is in preliminary friendly discussions with Allergan in relation to a potential transaction. Pfizer emphasises that no agreement has been reached and there can be no certainty that these discussions will lead to a transaction, or as to the terms on which a transaction, if any, might be agreed,” it said.
Shares in Allergan were up almost 7 per cent in afternoon trading in New York, giving the company a market capitalisation of $120 billion. Shares in Pfizer, which has a market capitalisation of more than $210 billion, were down 2.6 per cent.
The negotiations come after an avalanche of mergers and acquisitions in the healthcare industry, where $850 billion of deals have been announced since the start of the year.
Acquiring Allergan would allow Pfizer to complete a coveted “tax inversion” by moving its domicile from the US to Ireland, in a move that would slash the amount of American corporation tax it pays. Allergan paid an effective tax rate of 4.8 per cent last year versus 25.5 per cent for Pfizer.
The approach follows a failed inversion plan last year, in which Pfizer made an unsolicited $118 billion approach for London-listed AstraZeneca. It withdrew in the face of staunch opposition from the company's management, and from British politicians and local media.
A successful merger would also catapult a combined Pfizer-Allergan past the world’s largest healthcare company, Johnson & Johnson, which has a market capitalisation of $277 billion.
Ian Read, Pfizer chief executive, recently contacted his counterpart at Allergan, Brent Saunders, to initiate discussions, according to two people familiar with the situation.
It is undeerstood that Mr Read believes a takeover of Allergan – which is still perceived as an American company despite its Irish domicile – would prompt less political opprobrium than an acquisition of GlaxoSmithKline, a British drugmaker that was often touted as a potential target.
In a conference call earlier this week to discuss Pfizer’s third-quarter earnings, Mr Read said he owed it to the company’s investors and employees to secure a lower tax rate. Many of its rivals have completed tax inversion deals in recent years, making it harder for Pfizer to compete.
Analysts speculated a deal could be all or primarily done with stock because under new US rules aimed at curtailing tax inversions, shareholders of the overseas company must own at least 40 per cent of the combined entity. Credit Suisse analyst Vamil Divan suggested a price of $390 per Allergan share, funded by equity and debt
Pfizer is likely to still face political pushback at home, particularly during the US presidential campaign as candidates take aim at high prescription drug prices and companies looking to avoid paying US 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.
Between them, Pfizer and Allergan employ around 4,000 people in Ireland.
Additional reporting Reuters / The Financial Times Limited 2015
