Allergan Deal Could Take Pfizer Closer to Split, Move Abroad

Pfizer Inc. may be getting closer to breaking up and moving out.

The largest U.S. drugmaker and Allergan Plc are considering combining operations, according to the Wall Street Journal. A deal would give Pfizer a way to move to a low-tax legal address abroad and gain valuable specialty drugs like Allergan’s Botox anti-wrinkle treatment. It would also help Pfizer become big enough to split up into two new companies, one focused on older drugs at the end of their life-cycles, and another, faster-growing business of new brand-name drugs. The Journal said the talks are early and could still fall apart.

Allergan shares rose 16 percent to $333 at 5:58 a.m. in New York trading before the market opened. Pfizer shares rose 1.3 percent to $35.90.

The report comes two days after Pfizer Chief Executive Officer Ian Read said he was looking at potential deals, as the company often does, and was ready to be “bold.”

“This management team is not afraid of taking bold steps, and we’re looking at opportunities,” Read said on a conference call Tuesday, before the report of talks with Allergan. “When we make our decision as to what is the best way of enhancing value, we will move.” Read wasn’t being asked specifically about Allergan.

A deal could pave the way for more than just a spinoff. Purchasing Allergan, which has its legal domicile in Dublin and a market cap of $113 billion, may also let Pfizer relocate outside the U.S. for tax purposes through what’s know as a tax inversion. The move requires a large foreign target in order to clear U.S. tax rules, and was one of the reasons Pfizer sought to acquire AstraZeneca Plc last year, before eventually withdrawing its proposal.

Pfizer’s Three Goals

Read has said he is looking for three things in any major deal. “I expressed a preference for any deal that creates greater shareholder value, which would have to be a combination of, as I said, pipeline, operational synergies, and financial synergies,” he said on the call Tuesday.

Allergan is one of the few targets that fit Pfizer’s aspirations, Credit Suisse analysts wrote in a note to investors today. Recent comments from Pfizer’s management on earnings calls have elevated expectations on Pfizer “going bold and trying to complete a tax inversion-based deal,” the analysts wrote.

Spokesmen at Pfizer and Allergan declined to comment on the WSJ’s report.

Buying Allergan would give Pfizer drugs to add to its specialty drug unit. Pfizer earlier this year bought Hospira Inc. in a transaction valued at about $17 billion. The acquisition of Hospira, which makes generic injectable drugs and devices to deliver them, was intended to bolster Pfizer’s established drugs business, which includes off-patent medicine with slow growth and strong cash flow. Once that business has been built up into a stand-alone company, Pfizer could spin it off, separating it from the growth-focused unit that contains Pfizer’s brand-name drugs, two people familiar with the matter said at the time of the Hospira acquisition.

It also wouldn’t be the first time Pfizer has been said to have approached the company. In 2014, Pfizer was said to have approached what is now Allergan about a takeover, Bloomberg News reported. At the time the company — which then went by the name Actavis — had a market valuation of about $64 billion.

Buy and Split

“There are very few deals in the market — so Pfizer is trying to fill this need for a deal, and once this behemoth is created, then it will probably carve its business out into specialty pharma and generic pharma,” said Jayant Singh, director of the health-care practice at Frost & Sullivan in New Delhi.

Allergan may also be an easier target than it was just a few months ago.

While Allergan’s stock is up about 12 percent this year, its last closing price of $287.20 is well below its July peak of about $340. Shares of drugmakers have fallen in the U.S. as pricing practices by the industry has drawn scrutiny from lawmakers and candidates in the presidential elections.

“I do think there has been an adjustment in the price of some of the specialty companies,” Read said Tuesday. “I’m not so sure there has been an adjustment in their expectations of what they want to sell the company.”

Built by Deals

The argument for Pfizer splitting up will get stronger in 2016, and recent market weakness increases the possibility of an acquisition like Allergan to strengthen its innovative segment, BMO analysts noted.

Allergan is itself the result of an acquisition earlier this year. It was purchased by Actavis, which took Allergan’s name and tax address abroad.

Allergan is also slimming down by selling its generic-drug unit to Teva Pharmaceutical Industries Ltd. for $40.5 billion. Sales at Allergan, which has a market capitalization of about $113 billion, have benefited from sales of specialty drugs including Botox and Namenda for Alzheimer’s disease.