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Pfizer and Allergan: Here We Go Again

Last night the Wall Street Journal broke the news that Pfizer and Allergan are considering merging. I’m not a fan of huge pharma mergers, never have been, but this one at least isn’t as offensive as some of them. That’s partly because, in the words of FierceBiotech‘s John Carroll (on Twitter) that Allergan at least doesn’t have as huge an R&D effort for Pfizer to demolish. And since Allergan is incorporated in Ireland, this is a way for Pfizer to do what it really seems to need to do most – deal with its tax situation, which was the driving force behind their attempt to take over AstraZeneca. Pfizer has gigantic amounts of money piling up in its non-US-based operations, and if they repatriate it, they’ll expose themselves to some of the highest corporate tax rates in the industrialized world. (As an aside, does Bernie Sanders want to cut corporate taxes all the way down to Scandanavian levels? Just a thought.)

As the story has it (here’s a non-gated summary from Reuters), Pfizer approached Allergan with the idea, who’s apparently taking it seriously and not fleeing in terror like AZ did. Earlier rumors has Pfizer going after GSK or Shire (for the same tax reasons), and their shares are actually dropping a bit now that their investors are perhaps missing out on a big Pfizer payday. Allergan’s revenues are at least increasing strongly, which is a lot more than you can say for Pfizer’s, but this deal would create the biggest behemoth yet in the drug business. And as someone in that Reuters piece says, when you’re as big as Pfizer, a deal like this is one of the only things that can really add to the growth of your company – so what situation would they be in afterwards? This whole idea just continues the Pfizer strategy of the last twenty-odd years. It means, I think, that Ian Read may have come into his job as CEO talking about doing things differently, but that now that he’s experienced Pfizer’s situation from every angle, he’s decided that all he can do is more of what got them to this state in the first place. Won’t his eventual successor have fun, though!

At any rate, these talks are said to be preliminary. But Pfizer is going to buy someone, and it’s going to be someone large and in another country. That much seems clear (as it has been for a while now). It might well be Allergan, but if not, then hey, there are always other drug companies to buy. Gotta buy someone. Can’t just sit there. Nothing else left to do.

16 comments on “Pfizer and Allergan: Here We Go Again”

  1. Hap says:

    Not really sympathetic. Pfizer wants the bread (the infrastructure, educated workers, and the economic benefits they wrought without the restrictions on labor that other places with those characteristics have) but they don’t want to help bake it. If they didn’t like the tax structure, why play here?

    I also have to wonder where Pfizer’s shareholders think this is going to end up. They keep eating other companies, hoping that something will sustain them, but the same people run them, with the same lack of ideas on how to do them better, and the same things keep happening. Why do they think this time will be different? This seems like someone spinning gold into straw repeatedly, hoping the next time they spin adamantium is going to come out.

    At least Allergan has lots of generics – maybe they’ll give more consistent revenues, though it seems like growth is what they want, and buying more slowly growing drugs (and getting bigger) won’t help.

  2. johnnyboy says:

    As an aside, I find it fascinating that the US, which presumably views itself as a heaven for private enterprise, would have corporate taxes so much higher than Ireland, the UK or even a bastion of borderline ‘socialism’ as Canada.

    In any case, spending 120 billions for a company, plus all the restructuring costs post-merger, in order to save a few millions of extra corporate tax ? Only an accountant (or his banker) would think that a great idea. And think of the brand image – Pfizer would now be the Viagra and Botox company…

  3. Pft says:

    Why invest in developing new drugs that improve patients’ lives when tax evasion/avoidance and asset stripping are so much easier?

    Pfizer (and pharma in general) is pf***ed!

  4. Rule (of 5) Breaker says:

    I don’t blame Pfizer for doing deals like this. After all, look how much value got created from all the past ones. . .oh, right. Ok well, just because Pfizer spent more money on its acquisitions in the last 15 years than the combined market value of it and Zoetis, does that mean this will fail to yield value? Yes. The answer is yes.

  5. SP123 says:

    Just to respond to the Bernie snark- the US has a higher statutory tax rate, but a lower effective tax rate after deductions. Just like no one actually drives 55 even though that’s the statutory limit on most highways, almost no large companies (especially ones with large R&D components) pays anywhere near 35%, average is 27% which is right around OECD average. If you cut the statutory rate to 15-25% as business lobbyist have proposed, unless you also trim deductions (good luck with that) the US would be well under the world average.
    http://www.americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-corporate-tax-rates/

  6. Morten G says:

    @Hap they sold the generics to Teva so they have lots of cash, not so much income.

    How much would Pfizer save on their taxes? 75%?

  7. John Wayne says:

    On one level, I’m not too interested in the whining coming from corporate America. On the other hand, almost every large company is holding huge amount of money overseas. This suggests that there isn’t sufficient financial incentives to bring it home. It sounds like we need to add a deduction; if you repatriate money and spend it domestically on things we can all agree are good for America (ex: infrastructure, employee training, basic research, etc) you get a tax break.

  8. Derek Lowe says:

    SP123 – if US corporate taxes are in line with everyone else’s, no one seems to have told Pfizer. They seem to believe that they will spend far less money on taxes by doing this deal (or by doing the now-abandoned AstraZeneca one). They don’t seem to be looking at merging with any large US-based company at all – everything’s being driven by going overseas. The US Treasury, for its part, has been trying to do something about the tax benefits of these inversion deals (http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx). So studies aside, there seems to be some non-illusory financial benefit to fleeing US tax jurisdiction for Ireland, the UK, et al.

  9. Anonymous says:

    Ireland has been a bizarre tax haven to companies around the world for some time now. It’s not just issues with the US tax code. There’s probably some financial niche Ireland inhabits that the US can’t follow into. Also 6 billion in profits you have to pay taxes on is a lot of money.

  10. Hap says:

    It seems like 1) the things they could do here with that cash (R+D?) don’t seem attractive to them, and 2) merging helps management and (at least) some stockholders (merging is supposed to increase compensation for the top people, in the absence of other changes). There may also be tax issues in giving it back to shareholders (besides corporate tax). It’s possible, then, that it is not just tax issues driving this, though I can’t say they’re not.

    You’d also be counting on management’s sensibility and commitment to their shareholders, neither of which I would be certain of.

  11. Flem says:

    I live in the US and pay taxes base on my worldwide income get the benefit of the US standard of living. Why shouldn’t US corporation be obligated to do the same for the same reason? If Pharma companies don’t want to pay US corp taxes then maybe they shouldn’t benefit as much as those that do. I’m all for Medicare/Medicaid taxing drugs they buy from non-US based companies to a minimum US rates. Much like tax treaties, individuals pay US taxes but receive credit for taxes paid outside of US. This will get rid of incentive to seek tax shelters.

  12. new anon says:

    Um, am I the only one with the party hats and whistles? Isn’t the T-Vec approval by the FDA worth a blog or a comment? Are oncolytic viruses approved every day to treat cancer?

  13. Guest says:

    Reimburse drug companies for their products at the price that the country they are incorporated in reimburses them at. Problem solved.

  14. Fred says:

    “Isn’t the T-Vec approval by the FDA worth a blog or a comment?”

    I read the wiki on T-Vec and found it terrifyingly. Injecting people with an engineered herpes virus? The FDA is off its rocker; they let antibody therapeutics and now, apparently, engineered viruses sail through approval with barely a glance while scrutinizing oral small molecules with a fine toothed comb? I understand weakened virus drugs have a long history– this would describe a number of very safe vaccines (polio, flu, etc)– but this technology goes way beyond that, with respect to how much the virus is modified. It puts one in mind of Marathon Man, or the real-life cancer spreading virus decimating the Tasmanian Devil. Am I being a bit too cautionary here?

  15. New anon says:

    Um,Hi again. There are some seriously smart people on this blog, so I would be very interested to hear any comments of the possible implications of the TVec approval.

    For instance, could the FDA at some point declare the entire TVec platform to be GRAS? The idea being that switching the immune enhancing gene insertion (GM-CSF) for perhaps Il-2 would probably not change substantially the behavior of the virus. If this could all be established formally, with a replication off switch etc. , then would this not result in a product that could provirally introduce any desired genes into the human genome? Might a few people out there be interested in silencing one of their APOE epsilon 4s and having it replaced with epsilon 2?

    Is this possible?

    Would not this create a massive financial windfall for the companies that could create such a platform? In such a circumstance, almost any medical problem could be genetically treated with a virus.

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