November 19, 2015
By Mark Terry, BioSpace.com Breaking News Staff
Apparently the Pfizer Inc. -Allergan, Inc. merger deal has moved from the “should we?” phase to the “how much?” phase. Insiders are indicating the two companies are working on a price and may have an announcement by Monday. Current speculation has the price at about $380 per share, which would have Allergan’s value at around $150 billion.
One particular hitch in the process involves the U.S. Treasury Department. It’s no secret that Pfizer has been after a tax inversion deal which would allow it to shift its tax domicile to a country with a lower tax rate. Last year’s failed attempt by Pfizer to acquire UK-based AstraZeneca PLC for $119 billion was clearly focused on a tax inversion. And recently it was rumored that Pfizer had its gaze set on UK-based GlaxoSmithKline .
In 2014, Pfizer’s tax rate in the U.S. was about 26.5 percent. Allergan, which operates out of New Jersey but has tax headquarters in Dublin, Ireland, reported a tax rate last year of 4.8 percent. However, its tax rate this year is about 15 percent.
But the U.S. Treasury Department has indicated for some time that it wants to make tax inversions harder to happen. Yesterday, news of a letter signed by U.S. Treasury Secretary Jack Lew sent to four lawmakers, Senators Ron Wyden and Orrin Hatch, and Representatives Kevin Brady and Sander Levin, who all serve on the Senate and House tax committees, was reported. The letter stated, in part, “Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions.”
Pfizer was not mentioned in the letter.
Representative Levin made a statement, saying, “The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend.” He went on to point out that Treasury can’t really act on its own and encouraged Congress to “get off the sidelines and take action to change the law to stop these tax-motivated inversions.”
This year has marked an unprecedented level of merger and acquisition activity in the biopharma industry, with 302 mergers and acquisitions reported by Dealogic between January 1 and Sept. 4. A merger between Pfizer and Allergan at around $150 billion would be the largest deal of the year and probably the largest ever. It would create the largest drug company in the world, worth approximately $330 billion, exceeding the current top company, Johnson & Johnson .
It’s unlikely that Congress would act in any significant way, particularly with the Pfizer-Allergan announcement likely next week. Treasury Secretary Lew said in the letter, “Treasury cannot stop inversions without new statutory authority.” The letter didn’t say what actions it might consider taking.
In Sept. 2014, the Treasury Department took some steps to discourage tax inversion deals, which slowed down, but did not stop, and it’s not completely clear if the slowing had anything to do with Treasury’s changed guidelines. Those guidelines were primarily designed to make tax inversions more difficult and less profitable.
One possible approach Treasury might make, according to The Wall Street Journal, focuses on “earnings stripping.” This is a practice in which the U.S. company has their U.S. operations loaded with deductions, while profit-making portions of the company are pushed to low-tax countries. The risk of this is the government doesn’t want to decrease international business or legitimate cross-border transactions. “Companies pursuing inversions often promote the deals based on their ability to move cash around the world in ways they couldn’t if based in the U.S.,” wrote The Wall Street Journal.
