However, the U.S. Treasury Department’s letter on tax inversion deals, released on Wednesday, could delay the final agreement and change the terms of any transaction, another person said.

Pfizer shares sank 1.5 percent to $32.80 and Allergan fell 1.4 percent to $306.37 at 9:57 a.m. in New York on speculation that the deal could be hampered by the Treasury’s letter, which said the department is reviewing ways to address overseas acquisitions and plans to issue guidance later this week.

There have been a flurry of pharma and biotech mergers this year, already surpassing last year’s record of $220 billion in deals, according to data compiled by Bloomberg.

Buying Allergan, which has its legal domicile in Dublin, could let New York-based Pfizer relocate outside the U.S. for tax purposes, a transaction known as an inversion.

“We struggle to see what the Treasury can do to specifically curb” a combination of the two companies, Citigroup Inc. analysts said in a note Wednesday. Still, the “political noise” that would surround Pfizer’s relocation “constitutes the most material hurdle to consummation of a transaction of this nature.”

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Chances of the deal going through hinge more on “what price Allergan’s willing to take and also, we don’t know if there’s pressure from the White House in the background," Umer Raffat, an analyst at Evercore ISI, said by phone.

The Treasury Department doesn’t have power to block an inversion, but it could reduce the economic benefits of such a deal, he said.

A deal at $380 per share would be the largest acquisition this year in any industry and would surpass Pfizer’s $116 billion purchase of Warner-Lambert Co. in 2000 as the biggest- ever transaction between drug companies, the Bloomberg-compiled data show.

Representatives for Allergan and Pfizer declined to comment.

Overseas deals

The transaction would strengthen Pfizer’s brand-name drug business and could pave the way for an eventual split in two. Allergan’s market value of $122 billion could also allow the U.S. drugmaker to transfer its headquarters to Ireland.

The move requires a large foreign target in order to clear U.S. tax rules, and was one of the reasons Pfizer sought to acquire AstraZeneca Plc last year, before eventually withdrawing its proposal.

The Treasury Department is reviewing ways to address these overseas acquisitions and plans to issue guidance later this week to reduce the economic benefits of tax inversions, Secretary Jack Lew said in the letter Wednesday to Senator Ron Wyden, the Oregon Democrat who’s the ranking member on the Finance Committee.

The Treasury Department has attempted to deal with inversions before, issuing a notice in September 2014 to make it harder for U.S. companies to borrow against their foreign cash to finance inversions.

The Treasury proposal last year impacted a handful of pending deals, but not all of them.

By September 2014, Burger King Worldwide Inc., Medtronic Inc. and Mylan Inc. were all in the process of inverting -- and all eventually completed those deals. Others fell apart -- AbbVie Inc. dropped a $52 billion purchase of Shire Plc, in what would have been the largest tax inversion to date, blaming the proposed Treasury rules.

Allergan CEO

Details of the Treasury Department’s latest plans for inversions aren’t known. The department may be considering reducing the threshold of how much interest on inter-company debt is considered tax-deductible, said Evercore ISI’s Raffat.

The Treasury’s guidance could affect deals even if the proposed changes are beyond its authority, Evercore ISI analyst Terry Haines said in a note to clients on Wednesday. The department “never has to go final with the rules to get what it wants, which is stopping more inversions,” Haines wrote.

The companies were moving toward a plan to make Allergan’s Brent Saunders chief executive officer of the combined firm, people with knowledge of the matter said on Nov. 11.

The purchase would also keep Pfizer on track if it decides to go forward with a split into two companies, an option that Chief Executive Officer Ian Read has raised as a possibility. One business would focus on older, soon-to-be-generic drugs, while the other would develop and market new brand-name products.

Brand-name drugs

Allergan’s portfolio, which includes top-selling brands like the anti-wrinkle injection Botox and the Alzheimer’s drug Namenda, would help beef up Pfizer’s brand-name drug business before splitting it off.

Pfizer earlier this year bought Hospira Inc. in a transaction valued at about $17 billion. The acquisition of Hospira, which makes generic injectable drugs and devices to deliver them, was intended to bolster Pfizer’s established drugs business, which includes off-patent medicine with slow growth and strong cash flow.

Allergan is itself the result of an acquisition earlier this year. It was purchased by Actavis Plc, which took on the Allergan name. Pfizer looked at Actavis as a potential acquisition, people familiar with the matter said last year.

Allergan has more than 70 projects in mid- to late-stage development, according to a Nov. 4 conference call. It has acquired a number of companies as it expands its branded-drugs business after agreeing to sell its generics arm to Israeli rival Teva Pharmaceutical Industries Ltd. for about $40.5 billion.

The company has topped earnings estimates for the past eight quarters, positioning it as an attractive addition to Pfizer’s portfolio.

Pfizer has been looking for its next big hit after patents expired for its cholesterol drug Lipitor and arthritis drug Celebrex. The company, which reported $49.6 billion in revenue last year, in September raised its profit forecast for 2015.

--With assistance from Melissa Mittelman, Jeffrey McCracken, Caroline Chen and Matthew Campbell.

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