$160B deal to combine Pfizer and Allergan raises outcry

24 Nov 2015 | Author: | No comments yet »

Fixing America’s ‘inversion’ problem rests at home.

The blockbuster business news Monday was Pfizer Inc.’s $155 billion takeover of Allergan PLC, a deal that would create the world’s largest drug company.Finance Minister Michael Noonan has rejected suggestions that a $160bn (€150.3bn) mega tie-up between US rivals Pfizer and Allergan will throw Ireland’s low corporate tax back into the world’s spotlight.A $160 billion megamerger announced on Monday would turn U.S. pharmaceutical behemoth Pfizer Inc. into an Irish drug company, using a controversial tactic that allows companies to dodge billions of dollars in corporate taxes by renouncing their U.S. citizenship.

Although New York-based Pfizer is the larger company, the deal is structured so that Allergan technically is the purchaser — a twist on the tax-avoidance tactic known as inversion. While the trans-Atlantic transaction says much about the fixation of big pharmaceutical companies with scale and costs, a small deal disclosed around the same time highlighted what makes the Massachusetts biotech industry tick: cutting-edge science that is increasingly driving the development of treatments. This should be the response to any political criticism directed Ireland’s way as multinationals swap American head-office addresses for Irish ones in tax-saving mergers. Idera Pharmaceuticals Inc. of Cambridge, which conducts cancer and rare disease research, struck a collaboration and licensing agreement with GlaxoSmithKline PLC. Read, told them that a merger with Allergan, the maker of Botox that is based in Dublin, would significantly cut Pfizer’s tax bill and give it more cash that it could invest in the United States and ultimately add jobs, according to people briefed on the calls.

They slammed the tax loophole called an “inversion,” in which a U.S.-based company buys or merges with a foreign company and moves its headquarters to the country with a lower tax rate. “By nominally moving overseas while continuing to take all the benefits of a U.S. company, Pfizer is gaming the system and will avoid paying its fair share of U.S. tax dollars,” Senate Minority Leader Harry Reid, D-Nev., said in a statement. “It’s time for Congress to get serious, close the loopholes, and prevent these kind of inversions from happening in the future.” Republicans also denounced the deal, which would slash Pfizer’s corporate tax rate to 17 percent or 18 percent, according to company leaders, compared to its effective 25 percent rate. But some were reluctant to place the blame on companies. “Other nations have restructured their tax code to make themselves more attractive to multinational corporations and we must do the same so American businesses can compete on a level playing field,” said Rep. The move allows the new firm — which would take Pfizer’s name and be headed by its current chief executive, Ian Read — to be headquartered for tax purposes in Dublin, Ireland, home of Allergan, to take advantage of the nation’s lower corporate-tax rate. In the absence of a divided Congress passing legislation that would overhaul a straggling tax system, US multinationals are bypassing the lawmakers and agreeing deals to shave billions off their tax bills.

Pfizer complained last month that America’s high taxes had left the company competing with “one hand tied behind our back,” and that it had unsuccessfully tried to lobby Congress on tax reform. Taken together, they underscore a trend that is likely to accelerate with industry consolidation: Big Pharma ceding research to smaller and more nimble biotechs, acquiring experimental drugs through partnerships with biotechs, and focusing on shepherding drug candidates through clinical trials and filings with regulators. Republicans and Democrats alike recognise they have a problem and lay blame in part at their own door for failing to resolve it with comprehensive legislation, though it doesn’t reflect well on Ireland that it is the destination of choice for unpopular US corporate match-making.

An aborted bid by Pfizer to acquire AstraZeneca of Britain in an inversion last year set off a public uproar — leading President Obama to call such deals “unpatriotic” — and prompted moves by the Treasury to curb them. President Obama and members of Congress from both political parties have complained about companies using the maneuver to lower how much they pay in U.S. taxes. Speaking to reporters in Brussels yesterday, Mr Noonan, noting that both companies have large operations here, said the mega deal would not put Ireland’s tax regime into a bad light. “We are not pushing for inversion, the IDA never promotes inversion — it’s a decision by the two companies. Allergan, which is about half the size of Pfizer as measured by annual revenues, is technically buying Pfizer – even though the new company will be named Pfizer, it will be led by Pfizer’s chief executive, and 11 of the 15 board members will come from Pfizer.

Jamie Court, president of advocacy group Consumer Watchdog, said the consolidation of two pharmaceutical giants could lead to higher drug prices because of decreased competition. Allergan’s current shareholders will ultimately own 44 percent of the combined company, while Pfizer shareholders will own 56 percent, a division of ownership that is structured to avoid triggering additional taxes. They’ll be going through internal reorganizations that could put a pause to that.” Previous rounds of biopharma consolidation did just that, including Pfizer’s acquisition of Wyeth in 2009 after Wyeth earlier purchased the Cambridge-based Genetics Institute. Read has made clear publicly and privately, his main priority is doing well by his shareholders — and that means finding a way to compete with huge foreign rivals that enjoy much lower tax rates. “We’ve assessed the legal, regulatory and political landscape and are moving forward with our strategy to combine these two great companies for the benefit of the patients and to bring value to shareholders,” Mr. With a little more than five weeks left in 2015, the Pfizer-Allergan deal brings the value of M&A announced this year to $3.42 trillion, compared with the $3.4tn in 2007, according to Bloomberg data.

Republicans have argued that curtailing tax inversions should be part of comprehensive tax reform, but Democrats have pushed for immediate action while a broader overhaul of the corporate tax code is worked out. He has gone further too, circumventing a dysfunctional Congress by imposing restrictions through the US Treasury Department that make it more difficult for US companies to execute inversions. It makes more sense for them to sit on the sidelines and watch what we’re doing and then swoop in and write a check.” Many large US and overseas drug companies have set up shop in Massachusetts specifically to work with and monitor the research of local biotechs as well as university and hospital labs that work in the life sciences.

Novartis AG of Switzerland, Merck & Co. of New Jersey, Merck KGaA of Germany, Sanofi SA of France, Shire PLC of Ireland, Takeda Pharmaceuticals Co. of Japan, AstraZeneca PLC of England, Amgen Inc. of California, and Baxalta Inc. of Illinois all have bought companies or opened research labs here. The proximity of Big Pharma to early-stage research companies has sparked an environment of almost nonstop deal-making in recent years, ranging from partnerships like that struck by GSK and Idera to outright acquisitions such as Merck & Co.’s $9.5 billion purchase of Lexington’s Cubist Pharmaceuticals Inc. in January. Bernie Sanders of Vermont called on the Obama administration to block the deal, but Democrats weren’t the only ones worried about companies taking advantage of inversions to avoid taxes. The real way to address the problem is through legislation and that is not going to happen any time before the country picks its next president and he or she takes over in January 2017. President Barack Obama has called inversions “unpatriotic,” and his adminstration has made a major effort to crack down on such transactions by making them less profitable.

The political noise around the tax implications of these deals means other aspects of the match-up, particularly as far as Ireland is concerned, are lost. Pfizer has said it has invested $7 billion in its Irish operations, including Grange Castle in Dublin and Little Island and Ringaskiddy in Cork, since 1969. Mindful of the sensitivity in Washington, Pfizer included in its advisory team the boutique investment bank Moelis & Company, whose vice chairman is Eric Cantor, the former House majority leader. Raleigh, North Carolina-based Salix Pharmaceuticals and the Italian firm, Cosmo Pharmaceuticals terminated a reverse merger, citing changes in the political environment. The one location that counts to the US politicians is the head office and the loss of another corporation to a Dublin address hurts American patriotic pride, and its purse.

Despite the political uproar, the merger is not expected to encounter significant resistance from the American regulator that will review the transaction, the Federal Trade Commission, according to the people with direct knowledge of the deal. In a conference call last week, Treasury Secretary Jacob Lew acknowledged the agency’s limitation in ending inversions. “Our actions can only slow the pace of these transactions.

Only legislation can decisively stop them,” Lew said in the conference call. “There is only so much Treasury can do to prevent these tax-avoidance transactions.” Edward Kleinbard, former chief of staff of the Joint Committee on Taxation, agreed that the Treasury Department has limited power to stop corporate tax dodging. “Treasury is trying to hold back the tide with a broom, but that is an unfair position into which to put Treasury. Congress owns the tax code,” he said. “What is going on here is a dereliction of duty by Congress, and Treasury is doing the best it can in an impossible situation.” Allergan is best known for making the wrinkle-smoothing treatment, Botox, while Pfizer is well known for making a wide variety of iconic drugs, including cholesterol-lowering Lipitor, the antidepressant Zoloft and the erectile dysfunction drug, Viagra.

The deal may be additionally risky because it comes at a time when the pharmaceutical industry broadly is under intense scrutiny because of public and political outrage over high drug prices. Republicans, who control the House and the Senate, have called for a comprehensive regulatory overhaul and have shown reluctance to focus on particular companies. “It’s not clear what Washington’s wishes are,” said one person close to the transaction. “We tried to tell them to fix our tax system. Moreover, it will give Pfizer enough size and product diversity to break itself up in three years’ time, dividing itself into a company focused on faster-growing innovative drugs and another built on more mature treatments that face competition from generic competitors. That would complement Pfizer’s $17 billion acquisition of the generic drug maker Hospira earlier this year, meant to bulk up its so-called established treatments division. The expected cost savings of about $2 billion over the first three years announced after the deal was made were well below most analysts’ projections.

To some involved in the deal, the tax savings are all that matters. “If the tax stuff went away entirely, the deal would be off,” a person briefed on Mr.

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