Drug makers Pfizer Inc. and Allergan PLC are considering combining, in what would be a blockbuster merger capping off a torrid stretch for health-care and other takeovers.
Pfizer recently approached Allergan about a deal, according to people familiar with the matter, with one of them adding that the process is early and may not yield an agreement.
Dublin-based Allergan has a market capitalization of $112.5 billion, meaning that a deal for the company could be the biggest announced takeover in a year that is already on pace to be the busiest ever for mergers and acquisitions.
After The Wall Street Journal reported the talks, both companies confirmed under Irish takeover rules that they are in “preliminary friendly discussions.”
Allergan shares climbed 8% early Thursday, while Pfizer ticked up 0.1%.
A tie-up with Allergan could be a way for New York-based Pfizer to lower its corporate tax rate, as Dublin has a significantly lower tax rate than the U.S.
Speaking Thursday at The Wall Street Journal Viewpoints discussion series, Pfizer Chief Executive Ian Read said the company is at a “tremendous disadvantage” under the U.S. corporate tax code and added Pfizer is competing against foreign companies “with one hand tied behind my back.”
He declined to comment on the possible deal.
There are big obstacles for a deal to overcome, however. One could be price. Mr. Read, who has been on an acquisition trail of late, said during an earnings conference call on Tuesday that he had noticed falling share prices for rival drug companies. But, he said, “I’m not sure there has been a readjustment in what the investors and leaders of those companies believe those companies are worth in a transactional situation.”
Other issues could include the extent to which Pfizer would want to lay off employees and close facilities; the fate of Allergan CEO Brent Saunders; and the general makeup of a combined company’s management team, the person said.
If a deal were to be struck, it would add antiwrinkle treatment Botox, dry-eye treatment Restasis and other popular Allergan drugs to Pfizer’s arsenal of patent-protected medicines. Pfizer has been trying to bolster its branded-drug portfolio after recently completing a $16 billion acquisition of Hospira Inc. that boosted its off-patent drug business.
That could pave the way for a step that Pfizer executives have long been contemplating: breaking up the company into one business selling patent-protected drugs and the other selling off-patent drugs.
Allergan reported total net revenue of $5.8 billion in the second quarter, and total revenue from branded products of $3.7 billion.
Last year, Pfizer unsuccessfully pursued AstraZeneca PLC in a deal that would have valued the British pharmaceutical company at about $120 billion. The deal was to be structured as a so-called tax inversion, in which Pfizer would move its headquarters overseas and lower its corporate tax rate. Pfizer aborted its takeover attempt amid resistance from AstraZeneca.
Pfizer made a takeover approach to Actavis PLC, the company Mr. Saunders then ran, a person familiar with the matter said in September of last year. But the talks didn’t result in a deal.
After coping with sales lost when top-selling drug Lipitor lost patent protection, Pfizer has been notching sales gains for new drugs like breast-cancer treatment Ibrance and blood-thinner Eliquis, as well as for the expanded use of the company’s Prevnar pneumonia vaccine.
As of Wednesday’s market close, Pfizer’s market value was about $216 billion. If a deal is struck, it would easily surpass Anheuser-Busch InBev NV’s $104 billion preliminary agreement to buy giant beer rival SABMiller PLC, which currently ranks as the year’s largest announced deal.
Allergan has been one of the most prolific acquirers in the pharmaceuticals industry, though recently Mr. Saunders has tried to emphasize the work of the company’s laboratories developing drugs in-house.
Allergan has had an unconventional rise, starting off as a company called Watson Pharmaceuticals Inc. In 2012, Watson acquired Swiss rival Actavis Group and adopted that name. Later, the company bought Warner Chilcott PLC and Forest Laboratories Inc. in multibillion-dollar deals.
Mr. Saunders was CEO of Forest Labs, and became CEO of Actavis after the deal. Shortly after, Allergan was put into play when Valeant Pharmaceuticals International Inc. made an unsolicited offer to buy the California company.
Actavis then stepped in as a white knight and bought Allergan, taking the company’s name. Then in July, Allergan agreed to sell its generic-drug business to Israel’s Teva Pharmaceutical Industries Ltd. for more than $40 billion.
In Thursday’s interview, Mr. Read also called Valeant’s acquisitive business model a “dead end” for research that has pushed companies to “be more efficient.”
“I don’t see that business model as sustainable,” he added.
Valeant, the Quebec-based drug maker, is well known for its vaunted business model of growing through acquisitions instead of investing in research and development.
Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com, Dana Mattioli at email@example.com and Dana Cimilluca at firstname.lastname@example.org.
By JONATHAN D. ROCKOFF, DANA MATTIOLI and DANA CIMILLUCA
Updated Oct. 29, 2015