• Español
  • English


  • 741101Total visitors:

(English) Pfizer Chief Defends Merger With Allergan as Good for U.S


Published November 23,2015

The New York Times

In phone calls to Washington lawmakers and Obama administration officials, the chief executive of the largest drug maker in the nation had a surprising message: A deal that would allow the company to move its headquarters to Ireland was actually good for the United States.

The Scottish-born chief executive of Pfizer, Ian C. 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. He made the calls in recent days as the two companies were hammering out a $152 billion deal.

Monday’s announcement of the deal — the biggest merger in 15 years — has revived a fierce public debate over whether mergers that allow a company in the United States to relocate to a lower-tax country are, in fact, good for America.

Pfizer, founded by German immigrants in Brooklyn in 1849, is becoming the biggest company yet to shed its American citizenship to lower its taxes. While not structured as what is known as an inversion, it achieves the same goal of a lower tax rate abroad.

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.

The latest merger announcement has stirred a similar outcry across the political spectrum.

Hillary Rodham Clinton, a Democratic candidate for president, said, “We cannot delay in cracking down on inversions that erode our tax base.”

Donald J. Trump, a Republican candidate for president, said in a statement: “The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting. Our politicians should be ashamed.”

Yet the two companies and their advisers are betting that the Treasury Department will not be able to come up with new rules to block the union, and that Congress will fail to revamp the tax code before the merger’s expected close late next year.

And as Mr. 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. Read said on Monday on a call with analysts. “That is our obligation.”

Mr. Read and those close to him have noted that Pfizer, based in New York, has been upfront about its intentions. Even after its takeover campaign for AstraZeneca collapsed, the Pfizer chief made no secret of his desire to try again, while criticizing a tax code that he said leaves his company fighting with one hand tied behind its back.

The drug maker, which manufactured penicillin during World War II, has complained that its tax rate last year was 26 percent, compared with the approximately 5 percent that Allergan’s predecessor company paid during that same time.

Bigger international rivals, from GlaxoSmithKline and AstraZeneca of Britain to Novartis of Switzerland, also pay substantially less in taxes, potentially letting them win takeover contests with higher bids.

Perhaps more important, Pfizer kept overseas $74 billion in profits that were earned abroad last year, because bringing them home would have racked up billions of dollars in taxes.

Since the AstraZeneca bid, the Obama administration has introduced new rules that have made it harder for companies to do inversion deals, scuttling efforts by companies like AbbVie, a large drug maker based in Illinois, to relocate abroad.

From the beginning of their deal discussions nearly three months ago, Pfizer and Allergan agreed that the best way forward was to forgo an inversion altogether, according to people with direct knowledge of the matter. Instead, Allergan would serve as the buyer despite being substantially smaller.

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.

While Mr. Cantor will not lobby lawmakers, people with direct knowledge of the matter said, he has advised the company on political aspects of the deal and maintains friendly contact with his former colleagues.

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.

A spokesman for the Treasury Department said on Monday that it did not comment on specific transactions. Still, the department has clearly signaled its distaste for deals that move a company’s tax home.

The particular design of Monday’s transaction, however, effectively shields Pfizer and Allergan from the administration’s efforts to curb such deals.

When the Treasury Department announced its latest rule changes on Thursday, advisers to both companies sat down to review the changes — and quickly went back to work on their negotiations, the people with direct knowledge of the matter said.

“Treasury’s proposals don’t touch them,” said Robert Willens, an independent tax consultant who examined the deal.

Presidential candidates offered swift condemnation of the transaction all the same.

Such transactions, Mrs. Clinton said, “take advantage of loopholes that litter our tax code, distort incentives for investment and disadvantage small businesses and domestic firms that cannot game the international tax system.”

Senator Bernie Sanders of Vermont, a Democratic candidate for president, said, “The Obama administration has the authority to stop this merger, and it should exercise that authority.”

Yet others said a broader tax overhaul was needed.

Senator Orrin G. Hatch of Utah, the Republican chairman of the Senate Finance Committee, said the news of the merger “only further underscores the arcane, anticompetitive nature of the U.S. tax code.”

Executives at both Pfizer and Allergan are betting that Congress will continue to be conflicted about how to deal with inversions. 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. It’s not like this is a surprise.”

At the same time, both Mr. Read and his counterpart at Allergan, Brenton L. Saunders, have emphasized that the deal isn’t being done just to cut taxes.

Both executives contend the deal gives Pfizer access to fast-growing treatments in the eye care and dermatology space, as well as brands like Botox and the cosmetic treatment Juvéderm.

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. The company said on Monday that it would decide in late 2018 whether to proceed with a split.

Buying Allergan will bring more fast-growing treatments to Pfizer’s portfolio. 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.

Under the terms of the deal, Pfizer would essentially pay $363.63 for each Allergan share, representing a nearly 30 percent premium to Allergan’s share price in late October before news emerged that they were in talks. That values the acquisition at $152 billion. Including debt and subtracting cash, the deal is worth $160 billion.

After the transaction, Pfizer shareholders are expected to own about 56 percent of the combined company, with the remaining 44 percent owned by Allergan shareholders. Mr. Read will be chief executive of the new Pfizer P.L.C., to be based in Dublin, while Mr. Saunders will become president, and will be in line to take over one of the company’s businesses if and when it decides to break itself up.

Investors appeared unimpressed. Shares of Allergan fell 3.4 percent, while Pfizer’s ended down 2.6 percent.

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. And the $5 billion in planned stock buybacks that also were announced on Monday were in line with Pfizer’s previous efforts.

Some analysts still regarded the deal positively, so far as it ties into Pfizer’s goals.

“Allergan was easier to get done as a friendly deal in terms of getting a structure done and management roles done,” said Jeffrey Holford, an analyst with Jefferies.

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. Read’s thinking said.

Leave a Reply