Is Pfizer-Allergan Deal The AOL-Time Warner Of Our Time?

The AOL (NYSE:AOL)-Time Warner (NYSE:TWX) deal in early 2000 represented the end of the dot-com bubble. AOL shareholders actually got a majority of Time Warner, but the price represented the peak of what Internet stocks might be worth, and once that peak was seen the air went right out of the balloon.

The Monday agreement by Pfizer (NYSE:PFE) to “buy” Allergan (NYSE:AGN) for $160 billion, including 11.3 shares in the new company stock, plus cash, may represent a similar peak in the health care sector. The word “buy” is in quote marks because technically Allergan, which is based in Ireland, is buying Pfizer, although its shareholders will own only 44% of the combined company.

Drug stocks have been on fire this year, driven by a desire to move from the US, with its 35% corporate tax rate, to jurisdictions like Ireland, which taxes profits at 12.5%. Allergan took advantage of this to acquire several large companies over the last three years, in the process changing its name from Actavis,

The artist behind all this is Brent Saunders, who first sold Bausch + Lomb to Valeant Pharmaceuticals (NYSE:VRX), then began putting together Allergan after investor Carl Icahn urged Forest Labs to hire him in 2013. He sold Forest to Actavis and took over there, then sold Actavis to Allergan and took over there. Now he’s selling Allergan to Pfizer and is presumably going to take over there.

The key to what Saunders calls “growth pharma” is to cut expenses, raise prices, combine many drugs under one sales force, and move the profits around the world for the tax advantages it presents.

Pfizer-Allergan will, assuming the deal closes in the second half of next year as anticipated, be the largest drug company by revenues. There are few other deals anywhere of this magnitude available in the space, and in moving the huge US drug complex overseas, Allergan and its peers risk killing the goose that lays its golden eggs.