By Bill Berkrot and Ransdell Pierson
(Reuters) - Botox maker Allergan Plc (N:AGN) and Pfizer Inc (N:PFE) on Thursday said they were in early, friendly talks to create the world's largest drugmaker, a deal that would potentially set up Pfizer to take advantage of Ireland's lower tax rates.
Both New York-based Pfizer and Dublin-based Allergan said no agreement has been reached and declined to discuss any terms.
Allergan shares jumped 6.4 percent to $305.46 in U.S. trading, while Pfizer was off 2.7 percent at $34.51.
Given that both sides characterized the talks as "friendly," Pfizer is likely to have a much smoother path after running into intense political opposition in Britain and from AstraZeneca Plc's (L:AZN) (N:AZL) board in its failed, unsolicited bid last year.
"It's definitely a far easier target for Pfizer than AstraZeneca," said Christophe Eggmann, investment director at GAM, who holds shares in both companies. "The hurdle will really be the price."
Pfizer is likely to still face political pushback at home, particularly during the U.S. presidential campaign as candidates take aim at high prescription drug prices and companies looking to avoid paying U.S. taxes.
"It will make for good theater about evil corporate America, but Pfizer is looking out for the interest of shareholders," said Mike Krensavage, principal at Krensavage Asset Management.
The pushback began almost immediately. U.S. Senator Charles Schumer of New York said in a statement: "The continued pursuit of inversions, mergers and foreign acquisitions of major U.S. companies for purely tax purposes shows there is a lot more work to be done to stop them. It will take legislation to effectively combat this disturbing trend."
Billionaire investor Carl Icahn, who is vehemently against tax inversions, in which a U.S. company relocates overseas to take advantage of lower tax rates, said a Pfizer-Allergan deal would result in the loss of the country's 10th largest company to Ireland.
Analysts speculated a deal could be all or primarily done with stock because under new U.S. rules aimed at curtailing tax inversions, shareholders of the overseas company must own at least 40 percent of the combined entity.
Credit Suisse (VX:CSGN) analyst Vamil Divan suggested a price of $390 per Allergan share, funded by equity and debt. Allergan's U.S.-traded shares soared as high as $316.80 on Thursday.
Earlier Thursday before the companies confirmed the talks, Pfizer Chief Executive Officer Ian Read reiterated his criticism of U.S. corporate taxes.
"Our tax rate highly disadvantages American multinational high-tech businesses," Read said at a Wall Street Journal event. "I am fighting with one hand tied behind my back."
Pfizer's effective tax rate is 25 percent, while Allergan's is 15 percent.
Moody's Investor Service said the deal would have "credit positive implications for both companies."
A tax inversion is being discussed in the current talks, a person familiar with the matter told Reuters. In its pursuit of AstraZeneca, Pfizer had hoped to employ a tax inversion.
Read said Thursday he was open to any moves that produce the best long-term value for the company and shareholders. He said he was looking at various growth strategies, including a deal.
Pfizer is expected to decide by late next year whether to sell or spin off its older, off-patent products unit to pare the business and focus on innovative, patent-protected medicines.
Allergan, the product of a recent merger with generic drugmaker Actavis , is in the process of selling a large portfolio of generic medicines to Teva Pharmaceutical Industries Ltd (TA:TEVA) (N:TEVA) for $40.5 billion. That deal is expected to close in the first quarter of 2016.
CASH FROM BOTOX
A purchase of Allergan, with a market value of more than $113 billion, would be the biggest in Pfizer's long history of huge deals, eclipsing its $90 billion Warner-Lambert acquisition in 2000 to gain control of Lipitor, once the world's top-selling medicine.
It would also restore the Viagra maker as the world's largest pharmaceutical company, worth about $330 billion, a position it relinquished after Lipitor went off-patent.
Allergan expects revenue of more than $8 billion in the second half of 2015, which would not include revenue from generic drugs it is selling to Teva.
Pfizer has annual sales of about $48 billion, with about $27 billion from patent-protected drugs, consumer products and vaccines, and about $21 billion from the business it is considering selling.
Pfizer recently closed a $15 billion purchase of hospital products company Hospira, which is also developing biosimilar versions of leading biotech drugs. Since the Warner-Lambert purchase, Pfizer has acquired Pharmacia and Wyeth, each deal under a different CEO.
The deals have led to many thousands of job cuts, typically referred to as cost-saving synergies. It is not known how many cuts would result from a tie-up with Allergan.
Apart from tax considerations, the deal would give Pfizer access to Allergan's dominance in the aesthetics field with Botox, and the lucrative ophthalmology market, including Allergan's $1.3 billion Restasis dry eye treatment.
Wrinkle treatment Botox, with $2.4 billion in annual sales, is an especially attractive asset since it is primarily a cash business that does not require reimbursements from insurers. It is also approved for several medical uses.
By Sept. 10, deal-making in all sectors of healthcare this year had reached a record $447.5 billion, according to Thomson Reuters data.
Other large pending tie-ups include pharmacy chain Walgreens Boots Alliance Inc's (O:WBA) planned purchase of smaller rival Rite Aid Corp (N:RAD) announced this week, and pending mergers of health insurers Aetna Inc (N:AET) with Humana Inc (N:HUM), and Anthem Inc (N:ANTM) with Cigna Corp (N:CI).