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Pfizer, Allergan To Combine

Pharmaceuticals: Tax-advantaged deal will create the world’s largest drug company

by Lisa M. Jarvis
November 23, 2015

Credit: Shutterstoc
Pfizer’s operational headquarters, shown here, will stay in New York City, but its executive offices will move to Ireland.
Pfizer’s headquarters in New York City.
Credit: Shutterstoc
Pfizer’s operational headquarters, shown here, will stay in New York City, but its executive offices will move to Ireland.

In a $160 billion deal that will create a pharmaceuticals behemoth, Pfizer has struck a deal to combine with the specialty pharmaceuticals firm Allergan. To take advantage of lower overseas taxes, Pfizer will move its executive offices from New York City to Ireland, where Allergan is based.

The announcement comes less than a month after the companies confirmed they were in merger talks. If successful, the deal will be the largest-ever “inversion,” a transaction in which a U.S. company purchases a smaller overseas firm and shifts its headquarters abroad to ease its tax burden.

Pfizer CEO Ian Read, who will remain chairman and CEO of the combined firm, has been hunting for a partnership that could lower the company’s taxes, which he has said puts it at a disadvantage against foreign rivals. Last year, Pfizer made a bid for the British drugmaker AstraZeneca but was rebuffed.

In September 2014, the U.S. Treasury Department changed its rules on inversions, requiring the foreign company to account for at least 40% of the combined entity, up from 20% previously. Last week, the government again furthered toughened its requirements for inversions, but Read is confident that the deal with Allergan will pass muster.

To bolster Allergan’s share of the combined firm, the deal is being made tax-free for Allergan shareholders. Allergan shares will undergo an 11.3-for-1 split just before the merger closes, earning them 11.3 shares of the combined company for each Allergan share they own. Pfizer shareholders will receive just one share of the combined company and will be responsible for a taxable gain on their U.S. federal income taxes.

“As we read the current law, with Allergan owning approximately 44% of the new company and Pfizer shareholders owning approximately 56%, we think we will be able to realize the full benefits of that type of transaction,” Read said on a Nov. 23 call with analysts.

Pfizer’s tax rate will shrink to 17 to 18% by the first full year after the deal closes, compared with the 25% rate it currently pays. Pfizer and Allergan also think they can squeeze more than $2 billion in costs out of the business within three years after the deal closes. With little overlap between the companies’ research activities, less than a third of the savings will come from R&D.

Present-day Allergan is an amalgamation of several different firms that have been combined since 2012. Last year, Actavis bought Allergan, which was under threat of a hostile takeover by Valeant Pharmaceuticals, for $66 billion and adopted the Allergan name. Prior to that deal, Actavis had grown through mergers with Watson Pharmaceuticals, Warner Chilcott, and, most recently, Forest Laboratories, where Allergan chief Brent Saunders was CEO.

Pfizer has its own history of evolution through acquisition. In the past 15 years, the company has done three other mega-mergers, buying Warner-Lambert in 2000, Pharmacia in 2003, and Wyeth in 2009. Each deal has brought sweeping job cuts, plus criticisms that integrating two large firms can derail productivity.

The Allergan deal will create the world’s largest drug firm, with combined annual sales totaling roughly $64 billion and about 110,000 employees. On the call this morning, Read claimed the integration with Allergan can be completed “with very minimal disruption to current R&D work.”

Saunders, who will become president and chief operating officer of the combined firm, pointed out the lack of business overlap between the two companies and the opportunity Pfizer’s global infrastructure offers for marketing his firm’s product line. Today, more than 85% of Allergan’s sales are in North America.

“Our ability to leverage over 70 markets that we don’t have a presence in today and probably another 30 where we just have distributors today and not a presence is a huge opportunity for growth,” Saunders said.

The combination also puts Pfizer in a better position to act on a long-considered plan to break into separate companies—one focused on innovative products and the other on older branded drugs and generics. Pfizer started contemplating such a split in 2011, and its purchase of specialty drug firm Hospira earlier this year brought it closer to that goal. Buying Allergan adds heft to Pfizer’s branded drugs side but will also delay a decision on the separation until 2018.



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