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An Allergan-Pfizer Deal Could Be Biggest Merger This Year

LOS ANGELES TIMES
http://www.latimes.com/business/la-fi-allergan-pfizer-20151029-story.html

Drug giant Pfizer Inc. and Botox maker Allergan confirmed Thursday that they're in early talks to merge in a blockbuster deal that, if completed, would cap a remarkable consolidation wave roiling the U.S. healthcare industry.

A deal between the companies — with an expected price tag well above Allergan's current stock market valuation of about $120 billion — would be the largest corporate merger this year. It also would place the firms squarely in a presidential election debate over efforts by U.S. companies to obtain lower tax rates by using mergers to move their headquarters abroad.

A Pfizer-Allergan deal would fuel critics' concerns that consumers would pay even more for drugs as competition declines among manufacturers, insurers and retailers.

“Drug prices are out of control, and allowing a merger like this is like giving Jesse James a much bigger gun,” said David Balto, an antitrust lawyer and former policy director at the Federal Trade Commission.

“There is no evidence whatsoever that these mergers lead to some kind of benefit for consumers and lower prices,” Balto said, adding that he expected the FTC to investigate the deal.

Jamie Court, president of advocate group Consumer Watchdog, said that “given the recent outrageous run-up in generic drug costs, the last thing the pharmaceutical market needs is more consolidation.”

Allergan, which is based in Ireland and has a sizable operation in Irvine, said it was approached by New York-based Pfizer but cautioned there was “no certainty” the “friendly” discussions would lead to a merger. Pfizer confirmed the talks.

Both companies declined to comment on possible terms of a deal. Allergan's total stock market value at Thursday's close was about $120 billion, and a Pfizer acquisition likely would carry a price tag above that figure.

That would cap a merger spree throughout the U.S. healthcare industry this year, which already has seen a record $448 billion in announced deals, according to Dealogic, which tracks the market.

Healthcare companies of all stripes are joining forces to repositio themselves as various market and government forces, notably the Affordable Care Act, have complicated the growth outlook for the firms' revenues and profits.

For instance, two of the nation's three largest drugstore chains, Walgreens Boots Alliance Inc. and Rite Aid Corp., announced a $9.4-billion merger on Tuesday. In July, Anthem Inc. reached a $54-billion deal to buy rival Cigna Corp. to create the largest U.S. health insurance company.

Among other things, the companies believe that by bulking up they can secure better financial terms with healthcare customers, suppliers and providers, and eliminate overlapping costs to keep expenses down.

Whether eliminating those redundant costs includes reducing jobs at Pfizer or Allergan remains to be seen, although such cuts are common after major mergers.

Pfizer makes a long list of drugs including Lipitor for lowering cholesterol, Celebrex for arthritis and Viagra for erectile dysfunction.

Lipitor is among Pfizer's drugs that have lost their patent protection, so a merger with Allergan could help Pfizer respond to lost sales on those drugs in the face of new competitors.

Allergan's anti-wrinkle treatment Botox generates more than $2 billion in annual sales. Allergan also makes the dry-eye treatment Restasis.

“Pfizer desperately needs a large acquisition and the resulting synergies to reinvigorate its tepid earnings growth rate,” Maxim Jacobs, an analyst at Edison Investment Research, said in a statement.

Allergan formerly was called Actavis. But Actavis adopted the new name after buying the former Allergan Inc., which was based in Irvine, for $70 billion in March. The two companies have forecast combined revenues of $23 billion for this year.

Before that, the previous Allergan had spent months fighting a takeover bid by Valeant Pharmaceuticals International Inc.

Allergan still has about 2,100 employees in Irvine and an additional 300 in Corona out of a global workforce totaling 30,000. Pfizer, with revenue of $49.6 billion last year, employs 78,300 worldwide.

At Allergan's Irvine complex Thursday, some employees expressed little surprise at the Pfizer talks.

“For us, it's just other news like the news we've had for the past two years,” including the stressful Valeant episode, said one employee, who declined to be identified because he wasn't authorized to speak to the media.

Still, the employee said he was worried about the Pfizer deal because “when you have an acquisition, people have to go” via job cuts.

An Allergan deal could also help lower Pfizer's corporate tax rate if Pfizer moved its headquarters to Ireland while keeping its U.S. operations, a step known as a tax inversion.

Pfizer Chief Executive Ian Read has said Pfizer is at a competitive disadvantage because of its U.S. tax burden, and the company already made one failed attempt at a tax inversion when it tried to buy British drugmaker AstraZeneca last year.

Allergan had an effective tax rate of 4.8% last year compared with 25.5% for Pfizer, Jonathan Morgan, head of research at the Edge Consulting Group, said in a note to clients Thursday.

But Pfizer and Allergan could face a political backlash. Some presidential candidates, including Democratic candidate Hillary Rodham Clinton, have said they would try to curtail tax inversions.

Republican presidential candidate Marco Rubio said in an interview with CNBC on Thursday that “we can rail all we want about how unpatriotic it is” but that Pfizer and Allergan “have a legal obligation to their shareholders to maximize profits, as long as they can do so legally.”

Pfizer would gain more than Botox and Allergan's other existing products. Allergan in June agreed to pay $2.1 billion for Kythera Biopharmaceuticals Inc., a Westlake Village firm that's rolling out a drug called Kybella that reduces double chins.

Some observers said they worried consumers would see higher prices for the merged company's drugs.

“In all likelihood we will see an acceleration of drug costs due to rising prices of marketed branded drugs as well as the introduction of new specialty products,” said Dr. David Gruber, managing director of the research firm Alvarez & Marsal Healthcare Industry Group.

The possibility of an FTC review is one reason why Jeffrey Loo, an analyst with the securities research firm S&P Capital IQ, said price hikes might not be automatic because the companies are “going to face scrutiny as it is because of the [critical] environment over high drug prices right now.”

Allergan this summer agreed to sell its generic-drug business to Teva Pharmaceutical Industries Ltd. of Israel for more than $40 billion. Pfizer, in turn, has indicated it might want to eventually split the company, with one selling patent-protected branded drugs and another that sells generics.

In response to the Pfizer talks, Allergan's stock surged $17.18 a share, or 6%, to $304.38. Pfizer's stock fell 68 cents to $34.77 a share.

james.peltz@latimes.com

Twitter: @PeltzLATimes

Times staff writer Andrew Khouri contributed to this report.