Pharmaceuticals giant Pfizer (NYSE: PFE) is in talks to acquire specialty drugmaker Allergan (NYSE: AGN) in what may be the biggest mergers this year, adding to the consolidation activity in the health care space that has helped pharma sector exchange traded funds outperform over the past few years.

People close to the Pfizer and Allergan negotiations revealed that the companies are in the early stages and may not result in a transaction, Bloomberg reports.

The deal would allow Pfizer to move to a low-tax country abroad – many U.S. companies have been acquiring overseas companies as a way to benefit from tax inversion, or relocating a corporation’s legal domicile to a corporate friendly country with lower taxes. Additionally, Pfizer would acquire many specialty drugs in Allergan’s line up, including Botox anti-wrinkle treatments.

Pfizer has a market capitalization of $218.4 billion and Allergan has a market-cap of $113.1 billion. AGN shares shot up 5.7% Thursday on the news while PFE dipped 2.3%.

The two pharmaceutical companies are major components in pharma sector-related ETFs. For instance, the Market Vectors Pharmaceutical ETF (NYSEArca: PPH), which tracks the largest pharma companies, includes a 5.6% position in PFE and 5.0% in AGN. The iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) holds 9.8% in PFE and 7.0% in AGN. Additionally, the PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP), a smart-beta index-based ETF, includes 5.8% PFE and 6.0% AGN.

Year-to-date, PPH rose 3.6%, IHE gained 5.1% and PJP increased 7.9%. The three pharma ETFs are testing their short-term, 50-day simple moving averages.

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