New rules force Pfizer, Allergan to kill US$160B tax-inversion merger
The merger would have moved Pfizer's address—but not its operations or headquarters—to Ireland, where it would pay far less in corporate taxes
NEW YORK—The biggest U.S.-based drugmaker, Pfizer Inc., will stay put thanks to aggressive new Treasury Department rules that succeeded in blocking Pfizer from acquiring rival Allergan and moving to Ireland to reduce its tax bill.
As analysts and investors had expected, the two companies called off the record $160 billion merger early Wednesday “by mutual agreement.” Pfizer cited Treasury’s new regulations, issued late April 4, to make such “tax inversions” less lucrative.
The merger would have moved Pfizer’s address—but not its operations or headquarters—to Ireland, where it would pay far less in corporate taxes.
Pfizer Inc., based in New York, has agreed to pay Dublin-based Allergan PLC $150 million for reimbursement of its deal-related expenses.
The two drugmakers are far from dire straits as they contemplate next moves after the inversion’s collapse. Both are profitable, have multiple lucrative franchises and strong pipelines of experimental drugs, and have enough cash to turn around and do another deal.
Pfizer had $23.3 billion in cash, cash equivalents and short-term investments available at the end of 2015, when it posted a profit of $9.1 billion on revenue of $49.6 billion.
Pfizer said in a statement that it will decide by year’s end whether to separate its global established products business, which sells older, mostly off-patent drugs. It accounted for nearly half of Pfizer’s sales and profit last year.
That statement could indicate Pfizer has given up on inversions and is “back to usual business once again,” Bernstein analyst Dr. Timothy Anderson, who has pushed Pfizer for years to break up, wrote to investors Wednesday. He kept his “Buy” recommendation on Pfizer, adding, “We need a clearer vision of what ‘Plan B’ might be.”
Nomura analyst Shibani Malhotra wrote that “current share prices do not represent Allergan’s standalone value and (we) would be buyers here. Allergan offers some of the best, most durable assets in the sector, is run by an operationally strong, shareholder-focused management team, and has a solid mid-to-late stage pipeline that could deliver significant upside to Nomura’s estimates.
Pfizer has endured years of relentless pressure from analysts and others to break up the company so growth and profits could accelerate. That’s easier said than done, given Pfizer’s huge scale, increasing pressure from insurers for bigger discounts and a revenue base that’s been declining over the last several years as multiple blockbusters such as cholesterol drug Lipitor have lost billions in annual sales to much-cheaper generic copycats.
“We remain focused on continuing to enhance the value of our innovative and established businesses,” Pfizer CEO Ian Read said in a statement.
“We believe our late-stage pipeline has several attractive commercial opportunities with high potential across several therapeutic areas,” Read added. “We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder-friendly capital allocation opportunities.”
Allergan’s CEO, Brent Saunders, said in a statement that his company is “disappointed that the Pfizer transaction” won’t happen, adding that “Allergan is poised to deliver strong, sustainable growth.”
“Allergan is focused on delivering growth from an efficient operating structure while also being committed to investing in R&D,” Saunders said.
His company has scheduled a morning conference call to discuss its plans and answer questions.
Meanwhile, Allergan is still in the process of selling its generic drug business for $40 billion to Israel’s Teva Pharmacueticals Industries Ltd., the world’s top generic drugmaker. That deal may be delayed due to scrutiny from antitrust regulators in multiple countries.
The companies’ decision could deter other tax inversions in the works—exactly the impact the Obama administration is seeking by having Treasury issue 300-plus pages of new regulations that remove or reduce key financial benefits of a tax inversion. Pfizer had expected to save hundreds of millions of dollars in U.S. taxes annually under its planned deal with Allergan.
Other health care companies have recently done or are planning inversions, including fellow drugmakers Baxalta Inc. of Bannockburn, Illinois, and ShirePLC of Ireland, which are planning a $32 billion inversion deal. Meanwhile, Medtronic PLC, which relocated from Minnesota to Dublin in January 2015 after buying fellow medical device maker Covidien for $42.9 billion, said in a statement that it had done a preliminary review of the new Treasury rules and concluded they wouldn’t have a material effect on the company.
Read, Pfizer’s CEO for five years, has said the deal was needed because U.S.-based drugmakers are at a major disadvantage to their multinational rivals based in Europe and elsewhere, who face lower corporate tax rates. Other U.S. companies likewise have complained about the top U.S. tax rate of 35 per cent—which few ever pay—and the U.S. taxing them on profits made overseas. As a result, Pfizer and other companies are keeping billions in overseas profits outside the U.S. to avoid a big tax bill if they “repatriate” those profits.
With Pfizer’s planned inversion looking like the start of a dreaded trend, tax inversions became a hot issue in the presidential race, with some candidates calling companies considering such deals “unpatriotic.” And on the heels of the new Treasury rules, President Obama held a news conference Tuesday, saying the rules are meant to prevent “one of the most insidious tax loopholes out there” and make wealthy corporations shoulder their tax responsibility like working class Americans.
In an inversion, a big company buys a smaller one in another country, usually with a lower tax rate, then moves the combined company’s address on paper—but little else—to that country.
Allergan itself is the result of multiple inversions, and despite its Dublin address is operated from offices in Parsippany, New Jersey. That’s not far from Pfizer’s high-rise headquarters near Manhattan landmarks such as the United Nations complex and the theatre district.
The Allergan deal was Pfizer’s third and most expensive attempt at an inversion, including its failed hostile attempt to acquire Britain’s AstraZeneca PLC in 2014.
Pfizer has a history in this century of doing mega-acquisitions that allow it to cut costs and increase sales to boost profits quickly. That has kept Pfizer among the top global drugmakers but hasn’t pleased investors enough, which ultimately led to the ouster of CEO Ian Read’s predecessor late in 2010.