Pfizer has confirmed that it is in “preliminary friendly discussions with Allergan in relation to a potential transaction”, following intensive media coverage.

In a short statement, the company emphasised that no agreement had been reached and “there can be no certainty that these discussions will lead to a transaction, or as to the terms on which a transaction, if any, might be agreed.”

Media speculation has been rife since contact between Pfizer head Ian Read and his Allergan counterpart, Brent Saunders, was reported in the Wall Street Journal and Financial Times.

A deal between the two companies would create the world’s largest drugmaker with a market capitalisation in excess of $300 billion, exceeding Johnson & Johnson, currently valued at $277 billion.

According to the Financial Times, buying Allergan, best known as the maker of Botox, would allow Pfizer to complete a long-coveted ‘tax inversion’ that would slash its US corporation tax bill. Allergan, based in Ireland, paid an effective tax rate of 4.8 percent last year versus Pfizer’s 25.5 percent.

Barriers to overcome

Amid speculation that such a tax inversion could cost the US Treasury $1 billion, some commentators believe President Obama may move to block any deal. “He has tried to discourage similar tax inversion mergers in the past, but he has largely not succeeded,” writes Charles Tiefer in an article published by Forbes. “I think that the president can block this one by employing his strongest weapons — control over government contractors — and he has the public on his side in doing so.”

Another possible impediment to the deal, reports Bloomberg, are overlaps between the two company’s drug portfolios, with lawyers pointing to any biosimilar drugs and areas such as ophthalmology, cardiovascular diseases and neurology as potential stumbling blocks.

A Pfizer adviser recently told the FT that Mr Read believed a takeover of Allergan — which is still perceived as an American company despite its Irish domicile — would prompt less political opprobrium than an acquisition of GlaxoSmithKline, often touted as a potential target.

Last year, Pfizer attempted a $118 billion takeover of UK-based AstraZeneca, only withdrawing in the face of staunch opposition from the AZ’s management, and British politicians and media.

Earlier in the week, Mr Read said he owed it to the company’s investors and employees to secure a lower tax rate. “The employees of Pfizer want a robust, successful company in the future. Their jobs and their careers depend upon it…_To be successful in the future, we need to have a competitive tax rate. So that is why it’s an important issue for us,” he said.

The FT added that investors and analysts have often touted a Pfizer-Allergan deal, with some large shareholders suggesting that Saunders could replace Read, 62, when he retires. Some analysts believe this is the perfect moment for Pfizer to strike a deal, as valuations of pharma stocks have plunged in recent weeks and following the pledge from Hillary Clinton to crack down on drug prices.