By Dalia Deak
Last week, Pfizer and Allergan announced a $155B merger that has the health care and policy world talking. The contours of the deal—in particular, where the new company will be based and the implications it has for the company’s tax rate— have raised important questions.
Pfizer is a company with a long history in the United States that dates back to the mid-1800s when it sold antiparisitics and then painkillers during the Civil War. In the modern era, Pfizer is perhaps best known for blockbusters drugs like Viagra and Lipitor. Yet, expiring exclusivities and patent protections have threatened to knock the drugmaker from its No.1 spot. In January of this year, revenues were higher than expected but still down 3% year-over-year, with a forecasted decline in sales from $49.6B in 2014 to between $44.5B and $46.5B expected in 2015. Without blockbusters to replace Lipitor and Celebrex in particular (which fell 6% and 31% respectively), the company has been looking for a deal, even trying to push through a $118B acquisition of UK-based Astrazeneca in 2013, though that deal ultimately failed.
In this new deal, Pfizer hopes to acquire Allergan, plc, a Dublin-based company with an administrative headquarters in New Jersey. Allergan is itself the product of a number of mergers, most notable of which was its acquisition by Actavis in March of this year. Allergan is perhaps most famous as the maker of Botox, which had ~$2B in sales by 2013, though it has a much wider portfolio of brand name and generic drugs.
The deal is said to deliver close to $2B in savings over the first three years, with the combined company tax rate dropping to 17-18% from Pfizer’s current tax rate of around 26%. The expected drop is due to the combined company’s move to Ireland as their base, which has the second lowest corporate income-tax rate in the world. This practice, more generally called “corporate inversion,” is becoming more and more common. In the health care world, the Pfizer/Allergan deal comes on the heels of another health care giant making an almost identical move: Medtronic. In January of this year, Medtronic completed the purchase of Covidien, Plc for $49.4B, moving its headquarters to Ireland and reducing its taxes.
These types of deals have not gone without discussion. President Obama has called them “unpatriotic,” and presidential candidates have sharply criticized these deals as well. The Treasury, which will likely lose billions of dollars a year in tax revenue, has tried to issue rules to limit the practice, but without major changes advanced by Congress, remains very limited in its abilities.
Importantly, the Pfizer/Allergan deal falls just below the threshold put forth by the Treasury Department, and is likely be approved. Regardless of the outcome, this deal has certainly gotten politicians, policymakers, and the public talking about corporate inversions and what, if anything, should be done about them. It will be interesting to watch the conversation develop in the coming months.
