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Pfizer and Allergan begin merger talks

October 29, 2015
Life sciences

Drug makers Pfizer Inc. and Allergan PLC are considering combining, in what would be a blockbuster merger capping off a torrid stretch for health care and other takeovers.

Pfizer recently approached Allergan about a deal, according to people familiar with the matter, with one of them adding that the process is early and may not yield an agreement. Other details of the talks are unclear.

Allergan currently has a market capitalization of $112.5 billion, meaning that a deal for the company could be the biggest announced takeover in a year that is already on pace to be the busiest ever for mergers and acquisitions.

There are big obstacles to overcome, however. One could be price. Pfizer Chief Executive Ian Read, who has been on an acquisition trail of late, said during an earnings conference call on Tuesday that he had noticed falling share prices for rival drug companies. But, he said, “I’m not sure there has been a readjustment in what the investors and leaders of those companies believe those companies are worth in a transactional situation.”

Other issues could include the extent to which Pfizer would want to lay off employees and close facilities; the fate of Allergan CEO Brent Saunders; and the general makeup of a combined company’s management team, the person said.

If a deal were to be struck, it would add antiwrinkle treatment Botox, dry-eye treatment Restasis and other popular Allergan drugs to Pfizer’s arsenal of patent-protected medicines. Pfizer has been trying to bolster its branded-drug portfolio after recently completing a $16 billion acquisition of Hospira Inc. that boosted its off-patent drug business.

That could pave the way for a step that Pfizer executives have long been contemplating: breaking up the company into one business selling patent-protected drugs and another selling off-patent drugs.

Allergan would also accelerate Pfizer’s growth. On Tuesday, Pfizer reported $12.1 billion in revenue for the second quarter had grown 6% excluding factors like foreign exchange. Allergan, which hasn’t reported its most-recent quarterly earnings yet, said during its second-quarter results presentation it was growing at a 10% clip.

Allergan reported total net revenue of $5.8 billion in the second quarter, and total revenue from branded products of $3.7 billion.

A tie-up with Allergan could also be a way for New York-based Pfizer to lower its corporate tax rate. Allergan is based in Dublin, which has a significantly lower tax rate than the U.S.

Mr. Read has talked about how the company’s comparatively high U.S. tax rate puts it at a competitive disadvantage with overseas rivals.

Last year, Pfizer unsuccessfully pursued AstraZeneca PLC in a deal that would have valued the British pharmaceutical company at about $120 billion. The deal was to be structured as a so-called tax inversion, in which Pfizer would move its headquarters overseas and lower its corporate tax rate. Pfizer aborted its takeover attempt amid resistance from AstraZeneca.

Pfizer made a takeover approach to Actavis PLC, the company Mr. Saunders then ran, a person familiar with the matter said in September of last year. But the talks didn’t result in a deal.

After coping with sales lost when top-selling drug Lipitor lost patent protection, Pfizer has been notching sales gains for new drugs like breast-cancer treatment Ibrance and blood-thinner Eliquis, as well as for the expanded use of the company’s Prevnar pneumonia vaccine.

As of Wednesday’s market close, Pfizer’s market value was about $216 billion. If a deal is struck, it would easily surpass Anheuser-Busch InBev NV’s $104 billion preliminary agreement to buy giant beer rival SABMiller PLC, which currently ranks as the year’s largest announced deal.

Allergan has been one of the most prolific acquirers in the pharmaceuticals industry, though recently Mr. Saunders has tried to emphasize the work of the company’s laboratories developing drugs in-house.

Allergan has had an unconventional rise, starting off as a company called Watson Pharmaceuticals Inc. In 2012, Watson acquired Swiss rival Actavis Group and adopted that name. Later, the company bought Warner Chilcott PLC and Forest Laboratories Inc. in multibillion-dollar deals.

Mr. Saunders was CEO of Forest Labs, and became CEO of Actavis after the deal. Shortly after, Allergan was put into play when Valeant Pharmaceuticals International Inc. made an unsolicited offer to buy the California company.

Actavis then stepped in as a white knight and bought Allergan, taking the company’s name. Then in July, Allergan agreed to sell its generic-drug business to Israel’s Teva Pharmaceutical Industries Ltd. for more than $40 billion.

Source: Wall Street Journal

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