Pfizer Inc. and Allergan Plc said today that the companies are merging, resulting in a deal valued at about $160 million. The takeover would result in the largest inversion recorded to date, as Pfizer moves its headquarters to Ireland. According to terms of the agreement, the businesses of Pfizer and Allergan will be combined under Allergan Plc, which will be renamed Pfizer Plc. The deal is expected to close in the second half of 2016.

The U.S. Treasury has been concerned about losing tax revenue from so-called inversion deals, where companies relocate for favorable tax reasons. The highest U.S. tax rate for businesses is 35%, while Ireland’s highest rate is 12%.

The companies said that Pfizer chief Ian Read will be CEO of the combined company and Allergan’s CEO Brent Saunders will be Chief Operating Officer.

The deal between Pfizer and Allergan has been rumored for over a month and several outlets reported that a deal was imminent at the end of last week. 

Our Take: Pfizer has been seeking an inversion deal for some time; last year it failed in its attempt to acquire U.K.-based Astra Zeneca Plc. It appears that Allergan was a deal too rich to pass up. Allergan itself is a result of a string of mergers, which became Allergan Plc following the acquisition of the American-based maker of Botox by Dublin-based Activis Plc.

It has been suggested that Pfizer was seeking this last piece of the puzzle before, counterintuitively it seems, splitting the company into a research-based, innovator drug company and a separate generics business. As previously reported, Allergan is a remarkable example of the meteoric rise of what was once a small generic drug maker:

  • Watson Pharmaceuticals started in suburban Chicago in 1983; a decade later it went public.
  • In 2000 Watson reached the $1 billion mark after it acquired Schein Pharmaceutical Inc., another generics manufacturer. Over the next decade it acquired Andrx Corp., the Arrow Group, Eden Biodesign, Specifar Pharmaceuticals, Ascent Pharmahealth and finally, the Swiss generics company Actavis Group. Following the acquisition of Actavis in November 2012, it adopted the Actavis name.
  • In October 2013 it acquired Warner Chilcott plc and relocated its corporate headquarters to Ireland, while keeping a US presence in Parsippany, NJ.
  • Several more acquisitions led Actavis to become a hybrid generic and innovator pharmaceutical company: Forest Laboratories in July 2014 for $25 million in cash and stock, Rhythm Health in October 2014, and Durata Therapeutics in November 2014. In the same month it acquired Allergan in a cash and stock deal valued at $70.5 billion.
  • In June, Allergan entered into a definitive agreement to acquire KYTHERA biopharmaceuticals for $2.1 billion.
  • Also in June, Allergan acquired Merck’s migraine development program for $250 million.

Earlier this year, the company said it would change its name from Actavis plc to Allergan plc, but will retain the Actavis name for certain regions and markets. Today, its market capitalization is $121 billion.

At the time, we noted that the flurry of activity from Allergan suggested that it is moving to shed its generic roots and concentrate on discovery and the branded side of the business, particularly in elective dermatology, antiinfectives and CNS disorders.

In retrospect, those moves smartly positioned Allergan for acquisition by a company like Pfizer, which publicly had said it was interested in splitting its generics and innovator businesses. Mr. Read is known for his focus on research, while Saunders is a dealmaker. Look for a split in late 2016, with Read leading the innovator company and Saunders spearheading a generics business.

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