In the light of the U.S. government’s pursuit of tax inversion reforms and Republicans pushing for lower corporate tax and repatriation of corporate profits, Pfizer Inc. announced that it will pursue the takeover of Ireland’s Allergan PLC for an expected amount of around $100 billion. This would be one of the largest takeovers in the international pharmaceutical industry and would provide Pfizer a tax domicile in Ireland. High U.S. tax rates have put Pfizer at an operational disadvantage relative to international rivals who are based in countries with lower corporate tax rates. According to FactSet, 17 of the 25 biggest drug companies by market value are non-U.S. and pay a lower average tax rate of 17% versus 24% for the U.S. companies. This in turn allows these rivals to spend a lot more on research and development than Pfizer. R&D is one of the main cost centers in an industry with slow product cycles, multiple drugs simultaneously in the development pipeline and a few patent-protected marquee drugs sustaining companies for years as cash cows. The deal would also allow Pfizer to access cash earned and stored offshore due to tax purposes and it comes after a failed bid for British drug maker AztratZeneca last year. It would also allow Pfizer to make a likely split into two companies strategically domiciled between Ireland and the U.S.; one selling brand name, high growth drugs and the other company focusing on mature drugs. The resulting company from the merger would be worth a colossal $300 billion and become the largest in the pharma industry. To provide more context, Pfizer’s current market capitalization is $214 billion, compared to Allergen’s $120 billion. Shares of Allergan were up 6% on the news and Pfizer shares fell 2%. The deal is exciting as it will likely play a role in dictating the future of corporate tax reform in the U.S. For the deal to go through, Allergan shareholders would need to hold 40% of Pfizer stock due to recent Capitol Hill legislations on the structure of mergers and acquisitions oriented toward tax inversion.
-- Karan Magu New York University