Taxing times for pharma M&A

It seems we’re never far from a merger or acquisition in the pharmaceutical sector

At the end of 2015 we learned that US-based Pfizer and Irish firm Allergan will join forces under Allergan plc, which will be renamed ‘Pfizer plc’ and will create the biggest drugmaker on the globe.

According to reports the joint company is expected to be based out of Allergan’s Irish legal domicile whilst Pfizer will have its global operational headquarters in New York and its principal executive offices in Ireland.

This will be in biggest transaction done this year in any industry – £106bn ($160bn) – and beats Pfizer’s previous £7.3bn ($116bn) purchase of Warner-Lambert in 2000 which was the largest ever deal carried out between drug companies.

Writing in Forbes, Matthew Herper outlines just how M&A activity has been key to this particular deal:  “Allergan, the Dublin, Ireland-based company that Pfizer just announced plans to purchase, is not the same company that made the Allergan name famous by turning Botox into a household name. Instead, it’s the descendant of a small, New Jersey-based generic drug maker, Watson Pharmaceuticals, that decided to grow through mergers and acquisitions — and in doing so moved its own tax domicile to Ireland, cutting its tax rate. Last year, the company, re-dubbed Actavis, snatched Allergan from the jaws of Valeant Pharmaceuticals, which had been pursuing the Botox maker. Later on, it changed its name to Allergan.”

According to Herper, this set of deals that “increased Actavis’ market capitalisation, lead to the Allergan deal”. Unlike previous M&A deals, this one won’t create that much in synergies – a mere £1.3bn ($2bn) annually – he says. Apparently there’s not much to cut because those cuts were announced as part of these other deals.

If this £1.3bn ($2bn) a year isn’t much to write home about, what’s the big deal about this big deal? Due to the fact that Pfizer plans redomicile in Ireland, where corporation tax is lower than the US, this is what’s known as an ‘inversion’ deal bringing huge tax savings to the business.

Such moves aren’t popular in any industry. In the US, president Obama has referred to these type of companies as ‘corporate deserters’, calling them ‘unpatriotic’ by upping sticks to lands with lower tax rates  - thereby reducing their contribution to the US economy – rather than for any strategic business goal. Only a few days before the deal was announced, the US treasury announced its intention to clamp down on these type of transactions but clearly this did little to stop this particular one from going ahead.

In recent years society has upon the business ethics of companies such as Amazon, Google and Starbucks setting up base in low taxation centres such as Dublin, the Cayman Islands and Luxembourg – should we expect this Pfizer / Allergan deal to receive the same attention? Is there a difference between the selling of coffee, books and life-enhancing drugs? Is profit profit and all companies should endeavour to pay their dues in their home country and contribute to the economic growth of that land whatever the wares they are selling? Or do we feel that where medicine and drugs are concerned, we can overlook big business gains in support of R&D investment, new drug development and cheaper, more widely available medicines? As the details of this deal pan out over the next few weeks only time will tell.