Many top U.S. executives have argued for years that the country's tax system places them at a competitive disadvantage compared with their overseas competitors. But few have backed up their words with deeds to the extent of Pfizer (PFE) Chief Executive Ian Read.
Read, who began his career at the drugmaker in 1978, made a $114 billion offer for rival U.K.-based AstraZeneca in 2014 for the purposes of reincorporating in its home country thereby lowering Pfizer's tax bill. That process is called an inversion, but the deal fell through.
He also reportedly approached Ireland-based Activis for the same reason. His overtures were rejected there as well. As part of an ongoing wave of mergers in the pharmaceutical sector, Activis eventually acquired Allergan (AGN) and took that company's name.
Undaunted, Read has taken another shot at a merger, and this time he has found a receptive audience.
The New York-based company announced Thursday that it's in preliminary talks to buy Allergan, whose best-known product is the anti-wrinkle treatment Botox, in a deal that would be the largest in the industry's history. Allergan, which has a market capitalization topping $113 billion, confirmed it was in "preliminary friendly discussions" with Pfizer though it didn't say much else. The consequences of a deal, which could involve an inversion, could be profound.
"If they complete this deal and effectively lower their tax rate ... (and) save hundreds of millions of dollars annually which could be funneled into more R&D, their main competitors in the U.S. such as Merck (MRK), Eli Lilly (LLY) and Bristol-Myers (BMY) will probably look at that and say, 'you know they have an advantage over us,'" said Jeffrey Loo, an analyst with S&P Capital IQ. He has a "hold" rating on Pfizer and a "buy" rating on Allergan.
Shares of Allergan, which operates from New Jersey but is based in Ireland for tax purposes, closed 6.2 percent higher on Thursday, or $17.83, to close at $305.03. Pfizer, not surprisingly, fell nearly 2 percent, or 68 cents, to $34.77.
If the deal goes through, Pfizer would have to comply with stringent new standards the Obama administration unveiled earlier this year to crack down on inversions. The announcement of a potential deal, which would create the world's largest drugmaker, came a day after New Jersey Republican Gov. Chris Christie argued during Wednesday night's presidential debate that corporate inversions were popular because the U.S. had the "worst tax rate in the world."
Business groups have made the same argument about the statutory corporate tax rate of 35 percent, which is among the highest in the world, though many major corporations pay far less because of loopholes.
Still, the merger and acquisition wave sweeping through the health care sector shows the entire industry seems to believe bigger is better, including health insurers, drugstore chains and pharmaceutical companies.
Indeed, taxes aren't the only issue that's spurring the pursuit of Allergan. Pfizer also is eager to find new growth opportunities because patent expirations on some of its biggest sellers, such as the anticholesterol treatment Lipitor and anti-inflammatory Celebrex, have hurt its earnings.
In a note distributed to clients, BMO Capital Markets analyst Alex Arfei wrote that the product lines of the two companies compliment one another. He rates Pfizer as a "buy."
"We believe this potential merger could produce one of the best in class growing biopharma companies," he wrote, "with multiple growth drivers in attractive markets, a promising pipeline, and a more efficient tax structure."
Pfizer's product lineup includes Ibrance, which is used to treat advanced cases of breast cancer. It also sells the Prevnar flu vaccine and Eliquis, a therapy for patients at risk for a stroke. Besides Botox, Allergan also makes Restasis eye care treatments and Namenda, a therapy for Alzheimer's. It isn't clear what would happen to Allergan's generics business, much of which is being sold to Teva Pharmaceuticals for $40.5 billion.
A Pfizer-Allergan deal would be just the latest to hit the pharmaceutical industry. PwC estimates that 59 deals closed during the third quarter with a combined value of $67.6 billion. On Wednesday, drugstore chain Walgreens (WBA) announced it agreed to buy rival Rite Aid (RAD) for $17.2 billion.
"It's pretty remarkable," said Ceci Connolly, head of PwC's Health Research Institute, in an interview. "This has been a steadily growing trend in health care for a while. We expect it to continue."
Another big issue when so much M&A is sweeping an industry is how it might affect consumers.
"We are not certain what the impact will be on prices and on consumers," Connolly said, "but there are certainly concerns because in the past when we have seen this kind of consolidation, we have not seen health care prices go down."