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Pfizer and Allergan Talk of Forging $330 Billion Drug Giant

Their combination would create the world’s largest health care group

Pharmaceutical giant Pfizer Inc. has held preliminary talks with Allergan PLC to discuss what could be the biggest takeover deal this year, the Wall Street Journal and Financial Times report

Reuters notes that a bid for Allergan, which has a market value of $113 billion, would be Pfizer's second recent attempt to acquire a big rival, following its unsuccessful courtship last year of Anglo-Swedish pharmaceuticals group AstraZeneca PLC.

Combining Allergan and Pfizer, which is worth $219 billion, would create the world's largest health care group with a market value of around $330 billion, ahead of Johnson & Johnson’s $278 billion.

A Pfizer spokesman said the company "does not comment on market rumor and speculation." Allergan also declined to comment.

The potential for lowering Pfizer's tax bill by switching its headquarters from the United States to the United Kingdom was touted by Chief Executive Officer Ian Read as a key reason for the proposed AstraZeneca deal. A takeover of Allergan could offer similar advantages given that the Botox maker is based in lower-tax Dublin, Ireland. A U.S. attempt to crack down on such tax avoidance deals led to the collapse of the bid by AbbVie Inc. to buy Shire PLC, but it is unclear whether those rule changes would preclude potential tax advantages from a Pfizer-Allergan deal.

"When you're the size of Pfizer, an acquisition like this may be the only choice you have in order to be able to move the needle for sequential growth ... so the question now becomes, if not this, what, and if not now, when?" said WBB Securities' analyst Stephen Brozak.

Pfizer, the largest U.S. drug maker, has also been suggested as a possible suitor for GlaxoSmithKline PLC and Shire, and shares in these two companies fell 1.5% and 1.8% when talk of the Allergan deal broke on the morning of October 29 in London.

Allergan would give Pfizer, whose revenues are expected to slide 3.3% this year, a boost in top-line growth. Allergan's revenue is seen increasing 39% this year, according to Thomson Reuters I/B/E/S estimates. Bernstein analyst Tim Anderson said Allergan was a good fit and Pfizer might feel now was the right time to do a deal, given a recent market correction that has made Allergan look cheap. The merger talks are in early stages and may not yield an agreement, while other details are unclear, the Wall Street Journal said. The Financial Times, which reported the talks later, described the talks as preliminary. Reuters was not immediately able to confirm the reports.

Allergan became the third-largest generic drug maker in the United States after combining with Actavis in March. Its chief executive, Brent Saunders, has been eager to make deals, having first orchestrated the sale of Forest Laboratories Inc., where he was initially CEO, to Actavis, then using the latter to seal the $66 billion purchase of Allergan.

Following the Actavis tie-up, Allergan sold its generic drugs business to Israel's Teva Pharmaceutical Industries in July for $40.5 billion in cash and stock. Saunders said afterward that he hoped to use those proceeds to accomplish another large, "transformational" merger.

In its first full quarter after the Actavis deal, Allergan reported second-quarter revenue of $5.76 billion, led by $632 million in sales of Botox. Other top-selling drugs include the dry-eye treatment Restasis and Alzheimer's drug Namenda. Pfizer recently reported third-quarter revenue of $12.1 billion, including $1.58 billion for its Prevnar pneumococcal vaccines and $947 million for pain drug Lyrica.

While Pfizer wanted to buy AstraZeneca in part to boost Pfizer's pipeline of cancer drugs, a deal with Allergan would involve dermatology drugs and generics.

Source: Reuters, October 29, 2015.

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