Pfizer and Allergan on Monday morning announced they would merge in a massive, $160 billion deal that will create the world's largest drugmaker, producing treatments as varied as Lipitor and Botox.
The deal is structured as a reverse merger, with smaller Dublin-based Allergan buying New York-based Pfizer, and it is likely to renew concerns over "inversions," where U.S. companies are bought by or merge with foreign firms in order to reduce U.S. corporate tax burdens. In a press release, Pfizer said the combined company would generate more than $2 billion in savings over the first three years and would enjoy a tax rate of 17 to 18 percent -- far less than Pfizer's current corporate tax rate of 25 percent.
Last year, several such inversion deals fell apart and sparked scrutiny of corporate tax loopholes. In October 2014, Chicago-based AbbVie and Dublin-based Shire called off a $54 billion inversion deal after the Treasury issued new rules. That same month, Raleigh, N.C.-based Salix Pharmaceuticals and the Italian firm, Cosmo Pharmaceuticals SpA terminated a reverse merger, citing changes in the political environment.
In a call with analysts, Pfizer chief executive Ian Read said that Pfizer appreciates the attention to inversions from politicians, presidential candidates, and Treasury but decided to proceed.
"On the political risk, we've assessed this deal looking at the present regulations, the new notices, and all the information we can glean, and we believe this deal is a great deal for shareholders, both of Allergan and Pfizer," Read said.
As measured by annual revenue, Pfizer is more than twice the size of Allergan -- Pfizer reported $49.6 billion in revenues in 2014, while Allergan, which recently merged with Actavis, projected a combined $23 billion in revenues for 2015. The deal is expected to close in the second half of 2016 and create a combined company with an operating cash flow of more than $25 billion by 2018. Current Allergan shareholders will own 44 percent of the combined company, while Pfizer shareholders will own 56 percent -- a careful division of ownership that is structured to avoid triggering additional taxes. Federal rules subject inverted companies to more taxes if the shareholders of the U.S. company own at least 60 percent of the shares.
Gustav Ando, research director for IHS Life Sciences, a business information and consulting company, said that he thought the deal was carefully structured and likely to be approved, but added that it may receive even more scrutiny due to the current public and political outrage over high drug prices for the pharmaceutical industry.
"This merger isn’t meant to benefit patients; it isn’t meant to innovate in any kind of way. It’s basically a tax inversion strategy, and certainly the benefits won’t be passed on to consumers," Ando said. "It's pretty easy at the moment to paint the pharmaceutical industry in a negative light and this certainly doesn’t do anything to help the cause. It definitely increases the reputational risks to the industry."
The combined company, which will be called Pfizer plc, will bring together a huge U.S. pharmaceutical company best known for iconic drugs like the cholesterol-fighting Lipitor and erectile dysfunction medication Viagra with Allergan, which is best known for making wrinkle-smoothing Botox.
Allergan is technically buying Pfizer due to the structure of the deal. Before the merger, Allergan shareholders will receive 11.3 shares of the combined company for each share they own. Pfizer stockholders will receive one share for each share they own. The new company will be combined under Allergan plc, which will then rename itself Pfizer plc. The company will maintain its global headquarters in New York, but its key executive offices will be in Ireland, the statement said.
In a letter to Sen. Mitch McConnell, Pfizer's chief executive, Read, reiterated the combined company's deep commitment to the U.S., noting that when the deal is expected to close there will be 40,000 employees spread across 25 states.
"We believe this will be good for patients and for U.S. competitiveness," Read wrote to McConnell.
Democratic presidential candidates Hillary Rodham Clinton and Bernie Sanders both put out statements denouncing the deal.
"This proposed merger, and so-called ‘inversions’ by other companies, will leave U.S. taxpayers holding the bag," Clinton said. "As President, I will fight to reform our tax system to reward growth, innovation, and job creation here in the United States. "
Sanders said the merger would be punishing for consumers in America who already pay higher prices for prescription drugs than the rest of the world.
"The Obama administration has the authority to stop this merger, and it should exercise that authority," Sanders said.
While the merger will create a behemoth pharmaceutical company, most industry watchers expect the growth to precede a major split in which Pfizer will spin off its business into two separate companies. One company is expected to focus on research and development of new, innovative drugs, and the other will focus on the pipeline of generic products.
"Probably, the company will now be splitting itself up. That’s the part of the strategy," said Benjamin Gomes-Casseres, a professor at Brandeis International Business School. "They’re pretty clear about it -- it’s bulking up in order to slim down."
Ando noted that follows a larger trend in the pharmaceutical industry, in which pharmaceutical companies that have grown or acquired different lines of business spin off companies, too. For example, Baxter International Inc. this year spun off its biopharmaceutical drug business into a separate company, Baxalta.
Dimitri Drone, a partner with PricewaterhouseCoopers, said that buying and selling has become the "new normal" in the pharmaceutical industry, with companies buying up others and also splitting off specific parts of the business.
"Joining forces with Pfizer matches our leading products in seven high growth therapeutic areas and our robust R&D pipeline with Pfizer’s leading innovative and established businesses, vast global footprint and strength in discovery and development research to create a new biopharma leader," Allergan chief executive Brent Saunders said in a statement.
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