UPDATED: Shopping for a tax-friendly megamerger, Pfizer zeroes in on self-styled 'growth pharma' Allergan

Pfizer CEO Ian Read

The merger talks we've all been waiting for are here.

Pfizer--searching for deals in advance of a potential split-up later this decade--has approached Allergan ($AGN) about an acquisition, Allergan said in a statement on Thursday. The drugmakers are in "preliminary friendly discussions," Allergan said, though they won't necessarily amount to a combination. And regardless of what happens with Pfizer, Allergan plans to complete its $40.5 billion generics divestment to Teva ($TEVA), an event it's expecting for the first quarter of 2016.

The Dublin drugmaker has been a rumored Pfizer ($PFE) buyout target for a while now. Since trying--and failing--to buy AstraZeneca ($AZN) last year, Pfizer has repeatedly expressed interest in completing a tax inversion. The list of companies that could realistically help the New York drugmaker accomplish that goal is short--consisting of just Allergan, Shire ($SHPG), AZ and GlaxoSmithKline ($GSK)--and "of these, Allergan has by far made the most sense," Bernstein analyst Tim Anderson wrote in a note to clients on Thursday.

And it's not just a tax break that an Allergan buy would bring. CEO Brent Saunders' company--rebranded as a "growth pharma" when it struck the transformative Actavis-Allergan deal last year--said in its second-quarter earnings presentation that it was expanding at a rate of 10%, faster than the 6% operational growth Pfizer posted in Q3. And Allergan operates mainly in the primary care markets "which Pfizer understands well," Anderson notes.

The way he sees it, a tie-up between the two could help Pfizer pad EPS by a percentage in the low teens within five years. And an all-stock transaction--which he figures is essential to pulling off the inversion, with Allergan shareholders needing to own more than 40% of the post-merger company--"seems rational" in a $375- to $400-per-share range.

Allergan CEO Brent Saunders

Of course, there's no guaranteeing such a transaction would fly with the U.S. government, which cracked down on tax inversions last fall. But earlier this week, Pfizer chief Ian Read said he'd prefer to take his chances sooner rather than later. "You'd rather do it in a Congress where you do know who are setting the rules and what the rules are," he told investors.

There's also no guaranteeing Allergan would like Pfizer's price, as Read acknowledged on Pfizer's Q3 call. While some specialty pharma companies--Allergan included--have seen a recent decline in their share prices, "I'm not so sure there's been an adjustment in their expectations" when it comes to a sale price, he said.

Still, Saunders--who has been making deals right and left since selling his then-company, Bausch + Lomb, to Valeant ($VRX) in 2013--seems more open to a deal than any of the other skippers on Anderson's list of possible Pfizer pickups--provided it meets certain conditions.

"It would have to be a bold offer," Saunders told shareholders on Allergan's Q2 call, noting that if a potential acquirer were "open to thinking about cultural change, and change and balance to leadership and talent and management, I think that would be more helpful for us."

While it's unclear whether Pfizer would be open to leadership changes the way Actavis was when it bought Saunders' Forest Labs--company CEO Paul Bisaro slipped into the chairman's role, handing Saunders the reins--Read certainly seems on board with Saunders' first requirement.

"This management team is not afraid of taking bold steps," he said on Tuesday. "We're looking at opportunities, and when we make our decision as to what is the best way of enhancing value, we will move."

- read Allergan's release

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