Drugmakers Pfizer, Allergan to combine in $160 billion deal

The drugmaker Pfizer Inc. said Monday that it had agreed to take control of Allergan plc, the manufacturer of Botox, in a $160 billion transaction that would be the largest pharmaceutical deal in history.

The deal is largely prompted by Pfizer's desire to move its company registration to Ireland so it will pay lower corporate taxes than it does in the United States. If completed, it would combine Pfizer's well-known drugs Viagra and Lipitor with Allergan's famous wrinkle remover.

Pfizer would pay Allergan shareholders to absorb their company and take its Irish registration, which was achieved through an earlier acquisition. Most Allergan employees are in the United States, and 85 percent of its revenue is derived domestically.

Pfizer, which has a facility in Collegeville, is headquartered in Manhattan; its leadership would continue to operate from there even after the deal's closure, targeted for late 2016.

"We are not doing this simply as a tax transaction," Pfizer CEO Ian Read said in a conference call with financial analysts.

But Read, an accountant by background, has been highly critical of U.S. tax policy and has been searching for a way to officially register his company in a country with lower taxes. By shifting Pfizer's registration to Dublin, where Allergan is based, Pfizer's projected tax rate would be 17 percent or 18 percent vs. the 25.5 percent U.S. rate.

Almost as important to Pfizer is that it would be able to use billions of dollars parked in overseas banks without paying taxes on the money even if it is invested in the United States.

President Obama has called these so-called corporate tax inversions "unpatriotic" because companies largely stay in America but avoid paying for the services they continue to use.

The Pfizer-Allergan deal is structured so that the smaller Allergan would acquire the larger Pfizer, with Allergan shareholders owning 44 percent of the combined company. That makes it technically different than past deals that were called tax inversions, but the effect is the same - and the criticism just as sharp.

Democratic presidential candidate Hillary Rodham Clinton said Monday the transaction "will leave U.S. taxpayers holding the bag." Vermont Sen. Bernie Sanders, who fought drug companies over pricing before he joined the Democratic presidential race, said the deal was a "disaster" for American consumers.

"It also would allow another major American corporation to hide its profits overseas," Sanders said in a statement, while urging the Obama administration to scuttle the deal.

A Federal Trade Commission spokeswoman said Monday that the agency does not comment on specific deals unless it sues to block them. The FTC has blocked acquisitions on the ground that a deal harms competition, or has forced the divestiture of certain products or business lines before giving approval.

Pfizer and Allergan officials said the companies have little overlap in products, which made the deal appealing to them and a reason it should pass muster with the FTC and European regulators.

A U.S. Treasury spokesman declined to comment on Monday, but Secretary Jacob Lew has issued guidelines to discourage tax inversions twice in the last 14 months, including last week. Those moves have deterred some deals.

"There is only so much the Treasury Department can do to prevent these tax avoidance transactions," Lew said last week. "Only legislation can decisively stop inversions."

Congress has shown no indication of reaching a compromise to reform corporate taxes generally or inversions specifically.

"Congress doesn't have time to consider complex laws during an election year," said University of Michigan business professor Erik Gordon, who follows the pharmaceutical industry. "The tax issue will be good for candidates who want their campaign to have a populist flavor. Politicians would rather have an issue to pound than do the hard work to solve it, especially in an election year."

Dermatologist Christine Stanko, in a way, sits at the intersection of the Pfizer-Allergan deal. About three years ago, she expanded her Bryn Mawr Dermatology business to a second location in Collegeville. The office in the Main Line Health Center is just across Arcola Road from Pfizer.

About 30 percent to 40 percent of patients in the Collegeville location pay cash, $300 to $500 on average, for Botox skin treatments, which are not covered by insurance. Some of Stanko's patients are Pfizer employees. Some of Stanko's staff have spouses who work at Pfizer.

She was hopeful Monday that any cutbacks would not affect her people - or the Allergan Botox sales representatives she buys from.

"I spoke with the Allergan rep today and they are not worried," Stanko said. "They have a conference call to talk about it [Tuesday]. It sounds like a tax move."

According to the Pfizer statement, Allergan shareholders would receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders would receive one share of the combined company for each of their Pfizer shares. The price to be paid for each Allergan share is $363.63. Shares of both companies closed down in trading on Monday. Pfizer closed at $31.33 a share, down 85 cents, while Allergan dropped $10.74 to close at $301.72 a share.

Bernstein Research analyst Ronny Gal wrote in a report to clients that "it is conceivable that some portion" of Allergan shareholders may not "be inclined to tender their shares," given the sale price.

Under the deal, the combined company name would change to Pfizer Plc. It still would trade on the New York Stock Exchange under the ticker symbol "PFE."

Allergan's previously announced deal to sell its generic drug division to Teva Pharmaceutical Industries Ltd. still is expected to be completed in the first quarter of 2016. Teva's Americas headquarters is in North Wales; it has other operations in Pennsylvania and New Jersey.

Last year, the British-based drugmaker AstraZeneca rebuffed Pfizer's takeover attempt with help from politicians in the United Kingdom, who feared job losses.

Pfizer said Monday it would cut $2 billion in expenses through this transaction, which often translates to job cuts.

"Every Pfizer merger has resulted in large job losses, including the Wyeth acquisition," Gordon said. Pfizer bought Wyeth in 2009.

Allergan had 21,600 employees at the end of 2014, according to a filing with the Securities and Exchange Commission. The company's operational headquarters is in Parsippany, N.J., though much of its Botox operation remains in California from an earlier acquisition.

Pfizer had 78,300 employees as of Dec. 31, 2014, according to an SEC filing. A Pfizer spokeswoman declined to say how many people work in Collegeville, but the number has declined since Pfizer acquired the facility when it bought Wyeth.

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