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Pfizer and Allergan to Combine With Joint Value of $160 Billion

The company formed in the biggest drug merger ever would be Irish for tax purposes

Pfizer Inc. and Allergan Plc have agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from sildenafil (Viagra, Pfizer) to onabotulinum toxin A injection (Botox, Allergan) and a low-cost tax base.

According to Bloomberg, Pfizer will exchange 11.3 shares for each Allergan share, valuing the smaller drugmaker at $363.63 a share, according to a statement. That’s a premium of about 27% above Allergan’s stock price on October 28, before news of the companies’ discussions became public. Pfizer investors will be able to opt for cash instead of stock in the combined company in exchange for their shares, with as much as $12 billion to be paid out.

The transaction is structured so that Dublin-based Allergan is technically buying its much larger partner, a move that makes it easier for the company to locate its tax address in Ireland for tax purposes, though the drugmaker’s operational headquarters will be in New York. Pfizer Chief Executive Officer Ian Read will be chairman and CEO of the new company, with Allergan CEO Brent Saunders as president and chief operating officer, overseeing sales, manufacturing, and strategy.

The deal will begin adding to Pfizer’s adjusted earnings starting in 2018 and will boost profit by 10% the following year, the companies said. Pfizer’s 11 board members will join four from Allergan, including Saunders and Executive Chairman Paul Bisaro. Pfizer dropped 1.7% to $31.65 in early trading November 23, while Allergan fell 2.1% to $306.05. Pfizer said it will start a $5 billion accelerated share buyback program in the first half of 2016. The deal is expected to be completed by the end of next year.

Pfizer, based in New York, makes medications including sildenafil, pain drug pregabalin (Lyrica), and the pneumococcal 13-valent conjugate vaccine (Prevnar 13);  Allergan produces onabotulinum toxin A and the Alzheimer’s drug memantine hydrochloride (Namenda). Together, barring any divestitures, the companies will be the biggest pharmaceutical company by annual sales, which will be about $60 billion.

The deal will be unprecedented on many levels. It’s the largest acquisition so far this year. It’s the largest ever in the pharmaceutical world, eclipsing Pfizer’s purchase of Warner-Lambert Company in 2000 for $116 billion. And if the new company is able to establish itself abroad for a lower tax rate, a controversial process called an inversion, it will be the largest such move in history.

The U.S. Treasury Department has increasingly targeted such strategies, most recently announcing new guidance on how it will value assets owned by U.S. companies that undertake inversions. The U.S. has the highest tax rate for businesses in the world, at 35%, and is one of the only countries to tax corporate profits wherever they are earned. Previous moves by the U.S. Treasury have derailed other proposed inversions, including AbbVie Inc.’s plan to buy Ireland’s Shire Plc for an estimated $52 billion. Pfizer and Allergan’s deal appears structured to avoid the tax inversion rules.

Read has already reached out to lawmakers in both houses of Congress, including Senate Majority Leader Mitch McConnell, and is calling the White House, according to a person with knowledge of the matter. His pitch is that the deal will help the companies invest in more innovative drugs and that Pfizer Plc would have 40,000 U.S. employees at the close of the transaction. An agreement may also facilitate the widely discussed potential for Pfizer to reconfigure itself by splitting the newly enlarged company into two: one focused on new drug development, the other on selling older medications. Pfizer said it will decide on a potential separation by the end of 2018.

Pfizer earlier this year bought Hospira Inc., the maker of generic drugs often administered in hospitals, in a transaction valued at about $17 billion. The deal bolstered Pfizer’s established-drugs business, which combines strong cash flow and slow growth.

Allergan itself has been recently transformed, created through an acquisition by Actavis Plc that kept the Allergan name. The company agreed to sell its generics business to Israel’s Teva Pharmaceutical Industries Ltd. for about $40.5 billion and has been on a buying binge of its own. It now has more than 70 compounds in mid-to-late-stage development.

Source: Bloomberg, November 23, 2015.

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