(Reuters) - Pfizer Inc, the No. 1 U.S. drugmaker, and Botox maker Allergan Plc said they were in friendly talks to create a pharmaceutical colossus but the prospect that the company would seek to avoid U.S. taxes sounded political alarm bells.

Both New York-based Pfizer and Dublin-based Allergan said no agreement has been reached and declined to discuss any terms of the deal, which would potentially set up Pfizer to take advantage of Ireland’s lower tax rates.

Allergan shares rose 6 percent to $304.38 in U.S. trading, while Pfizer closed off 1.9 percent at $34.77.

Pfizer is already facing political pushback at home that is only likely to intensify with the U.S. presidential campaign underway, as candidates take aim at high prescription drug prices and companies looking to avoid paying U.S. taxes.

A spokesman for Democratic front-runner Hillary Clinton said the candidate had not seen details of the proposed merger, but is against tax inversion maneuvers, in which U.S. companies relocate overseas to take advantage of lower tax rates.

“Clinton is committed to cracking down on so-called ‘inversions,’ where a company chooses to leave the U.S. on paper to game the tax system, and believes we should reform our tax code to encourage investment in the U.S., rather than shipping earnings and jobs overseas,” Clinton spokesman Ian Sams said.

Democratic U.S. Senator Charles Schumer of New York said in a statement: “The continued pursuit of inversions, mergers and foreign acquisitions of major U.S. companies for purely tax purposes shows there is a lot more work to be done to stop them.”

From the right, developer and Republican presidential candidate Donald Trump said the deal was a reminder that the U.S. tax code needed an overhaul.

SMOOTHER PATH

“These corporate inversions take capital and, more importantly, jobs offshore,” he said in a statement. “We need leadership in Washington to get the tax code changed so companies will be coming to America, not looking for ways to leave.”

Billionaire investor Carl Icahn, who has endorsed Trump and launched a $150 million political action committee advocating tax reform to eliminate inversions, said a Pfizer-Allergan deal would result in the loss of the country’s 10th largest company to Ireland.

Analysts speculated a deal could be all or primarily done with stock because under new U.S. rules aimed at curtailing tax inversions, shareholders of the overseas company must own at least 40 percent of the combined entity.

Credit Suisse analyst Vamil Divan suggested a price of $390 per Allergan share, funded by equity and debt. Allergan’s U.S.-traded shares soared as high as $316.80 on Thursday.

Earlier Thursday before the companies confirmed the talks, Pfizer Chief Executive Officer Ian Read reiterated his criticism of U.S. corporate taxes.

“Our tax rate highly disadvantages American multinational high-tech businesses,” Read said at a Wall Street Journal event. “I am fighting with one hand tied behind my back.”

Pfizer’s effective tax rate is 25 percent, while Allergan’s is 15 percent.

Given that both sides characterized the talks as “friendly,” Pfizer is likely to have a much smoother path outside of the United States after running into intense political opposition in Britain and from AstraZeneca Plc’s board in its failed, unsolicited bid last year.

Traders gather at the post that trades Allergan stock on the floor of the New York Stock Exchange October 29, 2015. REUTERS/Brendan McDermid

“It’s definitely a far easier target for Pfizer than AstraZeneca,” said Christophe Eggmann, investment director at GAM, who holds shares in both companies. “The hurdle will really be the price.”

Moody’s Investor Service said the deal would have “credit positive implications for both companies.”

A tax inversion is being discussed in the current talks, a person familiar with the matter told Reuters. In its pursuit of AstraZeneca, Pfizer had hoped to employ such a strategy.

Read said Thursday he was open to any moves that produce the best long-term value for the company and shareholders. He said he was looking at various growth strategies, including a deal.

Pfizer is expected to decide by late next year whether to sell or spin off its older, off-patent products unit to pare the business and focus on innovative, patent-protected medicines.

Allergan, the product of a recent merger with generic drugmaker Actavis, is selling a large portfolio of generic medicines to Teva Pharmaceutical Industries Ltd for $40.5 billion.

CASH FROM BOTOX

A purchase of Allergan, with a market value of more than $113 billion, would be the biggest in Pfizer’s long history of huge deals, eclipsing the $90 billion Warner-Lambert acquisition through which it gained control of Lipitor, once the world’s top-selling medicine.

It would also restore the Viagra maker as the world’s largest pharmaceutical company, worth about $330 billion, a position it relinquished after Lipitor went off-patent.

Allergan expects revenue of more than $8 billion in the second half of 2015, not including generic drugs it is selling to Teva.

Pfizer has annual sales of about $48 billion, with about $27 billion from patent-protected drugs, consumer products and vaccines, and about $21 billion from the business it is considering selling.

Since the Warner-Lambert purchase, Pfizer has acquired Pharmacia and Wyeth, each deal under a different CEO.

The deals have led to many thousands of job cuts. It is not known how many cuts would result from a tie-up with Allergan.

Apart from the tax considerations, the deal would give Pfizer access to Allergan’s wrinkle treatment Botox, with $2.4 billion in annual sales, and its $1.3 billion Restasis dry eye treatment.

By Sept. 10, deal-making in all sectors of healthcare this year had reached a record $447.5 billion, according to Thomson Reuters data.

Other large pending tie-ups include pharmacy chain Walgreens Boots Alliance Inc’s planned purchase of smaller rival Rite Aid Corp announced this week, and pending mergers of health insurers Aetna Inc with Humana Inc, and Anthem Inc with Cigna Corp.