Pfizer and Allergan on Monday morning announced they would merge in a $160 billion deal that will create the world's largest drugmaker, producing treatments as varied as Lipitor and Botox.
The agreement would be the biggest deal in what has been a banner year for mergers, driven in part by consolidation in the health care and pharmaceutical sectors. Merger and acquisition activity worldwide surpassed $4 trillion as of Thursday, for only the second time since Thomson Reuters began keeping records in 1980.
The deal is also the latest -- and the largest -- to be aimed at helping a U.S. company lower its taxes by reincorporating overseas, a practice known as a corporate inversion.
The transaction requires shareholder and regulatory approval and could face stiff opposition from U.S. lawmakers.
Inversions have long been attacked by some politicians as a tax dodge, and Hillary Rodham Clinton and Bernie Sanders, the leading Democratic presidential contenders, criticized the deal.
Clinton said it will leave "U.S. taxpayers holding the bag," while Sanders said it will be a "disaster" for Americans already paying high prescription drug costs.
Pfizer, which makes the cholesterol fighter Lipitor, will keep its global operational headquarters in New York. The combined company will be called Pfizer PLC. That company would have its legal domicile and principal executive offices in Ireland.
The combination will essentially be Pfizer "but with a lower tax rate," wrote Bernstein analyst Dr. Tim Anderson. He said he expects a tax rate of about 18 percent after the deal, which compares to Pfizer's current rate of 25 percent.
Several U.S. drugmakers have performed inversions through acquisitions in the past several years, in part to escape higher U.S. corporate tax rates. The list of companies includes Allergan, which still runs much of its operation out of New Jersey, and the generic drugmaker Mylan.
Last year, Pfizer unsuccessfully tried to buy British drugmaker AstraZeneca Plc in a roughly $118 billion deal that would have involved an inversion. Those talks collapsed when the two sides couldn't agree on a price.
U.S. efforts to limit inversions have so far proven ineffectual.
Last year, the U.S. Treasury Department initiated new regulations designed to curb the financial benefits of inversions. The rules bar certain techniques that companies use to lower their tax bills and tighten ownership requirements.
The issue has become political heading into the presidential election.
Billionaire investor Carl Icahn recently announced that he was setting up a $150 million political action committee bent on revising U.S. corporate tax law and ending the practice, ratcheting up political pressure even more.
Aside from a lower tax bill, the Allergan acquisition would give Pfizer brand-name medicines for eye conditions, infections and heart disease. They would join Pfizer's extensive portfolio of vaccines and drugs for cancer, pain, erectile dysfunction and other conditions.
The deal would enable Pfizer, the world's second-biggest drugmaker by revenue, to surpass Switzerland's Novartis AG and regain the industry's top spot.
Pfizer has done three sizable deals since 2000 to increase revenue, and the Allergan offer comes as generic competition to blockbuster drugs such as Lipitor is expected to cut Pfizer's sales by $28 billion from 2010 through next year.
Allergan shareholders will receive 11.3 shares of the combined company for each of their shares, while Pfizer stockholders will get one share of the combined company. The deal is valued at $363.63 per Allergan share.
The Allergan deal is expected to close in the second half of 2016. Pfizer stock owners will hold an approximately 56 percent stake in the combined company, while Allergan shareholders will own the remaining 44 percent.
Pfizer Inc. Chairman and Chief Executive Officer Ian Read will serve in the same roles with the combined company while Allergan Plc. leader Brent Saunders will become president and chief operating officer. All 11 of Pfizer's directors will serve on the board of the combined business, along with four Allergan directors.
In a call with analysts Monday, Read said that Pfizer appreciates the attention to inversions from politicians, presidential candidates, and Treasury but decided to proceed.
"On the political risk, we've assessed this deal looking at the present regulations, the new notices, and all the information we can glean, and we believe this deal is a great deal for shareholders, both of Allergan and Pfizer," Read said.
As measured by annual revenue, Pfizer is more than twice the size of Allergan -- Pfizer reported $49.6 billion in revenues in 2014, while Allergan, which recently merged with Actavis, projected a combined $23 billion in revenues for 2015. The deal is expected to create a combined company with an operating cash flow of more than $25 billion by 2018. Current Allergan shareholders will own 44 percent of the combined company, while Pfizer shareholders will own 56 percent.
Gustav Ando, research director for IHS Life Sciences, a business information and consulting company, said that he thought the deal was carefully structured and likely to be approved, but said that it may receive even more scrutiny because of the concerns about high drug prices.
"This merger isn't meant to benefit patients; it isn't meant to innovate in any kind of way. It's basically a tax inversion strategy, and certainly the benefits won't be passed on to consumers," Ando said. "It's pretty easy at the moment to paint the pharmaceutical industry in a negative light and this certainly doesn't do anything to help the cause. It definitely increases the reputational risks to the industry."
The deal could be a precursor to Pfizer's eventually being split in two.
Pfizer executives have discussed whether to become two companies, one dedicated to higher-growth, brand-name treatments and one focused on slower-growing mature drugs that face pressure from generic counterparts.
On Monday, the company announced said it would make a decision on the potential separation by the end of 2018.
Information for this article was contributed by Linda A. Johnson and Tom Murphy of The Associated Press, Chad Bray and Michael J. de la Merced of The New York Times and Carolyn Y. Johnson of The Washington Post.
Business on 11/24/2015