Allergan, headquartered in County Mayo, Ireland, is the producer of a number of medical products, primarily in the ophthalmic and medical aesthetics space. The company also produces products in the neurological, medical dermatology, urology, and breast aesthetics lines. It is perhaps best known for Botox, an injectable cosmetic treatment used to relax facial wrinkles.
Eye care products represent almost half of Allergan’s revenues, and neuromodulators (like Botox) account for nearly one-third of the company’s revenues. Allergan also makes numerous cosmetic products, silicone and saline breast implants, and surgical scaffolding, which is used for soft tissue support during plastic and reconstructive surgery.
US-based Pfizer is one of the biggest pharmaceutical companies in the world, and it is most famous as the company that makes erectile dysfunction drug Viagra. The company is divided into two segments: the Established Segment and the Innovative Segment. The Established Segment handles products that have lost patent exclusivity, while the Innovative Segment takes care of products that are currently on-patent.
Pfizer also has a Global Innovative Pharmaceutical Segment consisting of products for treating inflammatory, cardiovascular, metabolic, neurologic, and pain conditions, as well as rare diseases and vaccines. This segment also includes vitamins, personal care products, and over-the-counter medications like Robitussin and Chapstick.
Overview of the Pfizer Allergan Merger
In November, Pfizer and Allergan announced that they would merge, creating the world’s biggest pharmaceutical company, and representing one of the largest mergers in history. The merger doesn’t yet have full regulatory approval, but such approval is expected. The result will be a company that places a number of blockbuster drugs, like Lyrica, Viagra, Botox, and Restasis under a single corporate umbrella. Worth approximately $160 billion, the merger would be the second largest ever, behind only the 1999 AOL-Time Warner merger, which was worth $164 billion.
Though much has been made of extreme price hikes for specialty pharmaceutical products in recent months, consumers probably don’t have to worry too much about price hikes for the drugs the new merged company will produce. History indicates that prices for blockbuster drugs (like Viagra and Lipitor) don’t go up that much under pharmaceutical mergers. The merger is expected to be completed by the end of 2016 and would create a company larger than current industry leaders Johnson & Johnson and Novartis in terms of market value and sales.
Several factors, including an aging population, the Affordable Care Act, and an ever-changing business landscape have combined to nudge healthcare companies including pharmaceutical companies, hospitals, pharmacies, and insurers to beef up through consolidation. In addition, however, the Pfizer-Allergan deal is raising controversy due to the merger’s tax implications.
What’s a Tax Inversion Deal?
A so-called tax inversion deal involves a big US-company purchasing a smaller, overseas company, and then moving the merged company’s headquarters to the overseas site. This has the effect of drastically reducing the US company’s federal corporate tax responsibility. Pfizer hasn’t tried to hide its displeasure with the US corporate tax rate, and a year ago the company tried unsuccessfully to acquire British pharmaceutical company AstraZeneca based on projected tax savings.
Another example of a tax inversion merger would be last year’s deal where Burger King bought out Canadian donut titan Tim Hortons and then moved the company HQ to Canada. Tax inversion deals are heavily criticized in political circles for their ability to relieve US companies of their tax responsibilities. In fact, the Treasury Department has issued new rules to make such deals more difficult, but they come too late to do anything about the Pfizer-Allergan merger.
That the merger is taking place during a presidential election year is expected to keep it in the news, where it could become a flash point both for those who criticize high US corporate tax rates and for those who chastise companies for moving headquarters abroad to dodge US tax obligations. Over the last few years, the US has lost billions of dollars in corporate tax revenue from tax inversion deals.
Why Some Are Angry About the Merger
Pfizer-Allergan will be the biggest tax inversion deal to date, and some people consider that a disgrace. Pfizer, it is noted, has long benefited from research funded by US taxpayers and carried out under the direction of organizations like the National Science Foundation and the National Institutes of Health. Now Pfizer is trying to avoid paying taxes due on its profits. Some consider this an example of socialization of risk followed by privatization of benefit.
It was during World War II that Pfizer made its name by developing a new method for making penicillin, which was considered a miracle drug at the time. Pfizer went on to become a global leader in antibiotics. Thirty to 40 years ago, the company invested heavily in research and development and the results included big-name drugs like Procardia for angina, Glucotrol for diabetes, Zoloft for depression, and perhaps most famously Viagra for erectile dysfunction. By the end of the 20th century, Pfizer was the world’s leading drug company.
The pace of discovery of blockbuster drugs has slowed in recent years, and big pharma companies like Pfizer have trimmed research budgets and tried to pursue more effective methods of product development, like partnering with innovative startup companies. There is nothing in Pfizer’s financials to indicate that it is facing such an enormous threat that moving its operations to Ireland is the only solution. Instead, to many it appears that the company is merely executing a greedy tax dodge that will disproportionately benefit Pfizer senior managers who are mainly compensated in equity.
Supporters of the Merger Cite US Corporate Tax Rate
An opposing view is that US corporate tax rates are too high (up to 35%), which is higher than rates in many other Organization for Economic Cooperation and Development (OECD) nations. Moreover, the US is one of few countries that taxes global income by its companies. The result has been US companies with enormous sums of cash in foreign subsidiaries that likely won’t be repatriated because they would be subject to US taxes, which are higher than those of other nations.
Medtronic merged with Irish company Covidien earlier this year in a tax inversion worth nearly $50 billion. The problem was, Medtronic’s shareholders were stuck with a big capital gains tax bill due to how the merger was structured. Pfizer’s proposed merger is now drawing the ire of a range of political pundits, both toward the left (with Hillary Clinton accusing Pfizer of leaving the US taxpayers holding the bag) and the right (with Donald Trump calling the tax inversion deal “disgusting.”)
Corporate executives could argue that it doesn’t matter much if taxpayers suffer from the loss of corporate tax revenue, because some of those taxpayers are investors also, and will benefit from the merger as shareholders. However, half of Americans don’t invest in stocks at all, even via 401K and other retirement plans – often because they contend they can’t afford to do so. So far, Wall Street’s reaction to Pfizer’s announcement hasn’t been terribly positive, in fact. Pfizer shares dropped immediately after the announcement, as did Allergan’s.
How Might the Merger Affect Consumers?
So how might the Pfizer-Allergan merger affect ordinary consumers in their day-to-day lives? Elevated prices are a possibility, and potential loss of choice is also another risk of big corporate mergers. Some analysts disagree, however, saying they don’t expect higher prices or reduced choices as a result of the Pfizer-Allergan merger. Because Pfizer’s and Allergan’s products don’t overlap that much, competition shouldn’t change appreciably, nor should there be fewer products to choose from due to the merger.
Conclusion
So far, it looks like the Pfizer-Allergan merger will take place by the end of 2016. This is well before Pfizer faces any generic competition in the US for one of its biggest name brands, Viagra, so it’s unlikely that Viagra prices will change much, if at all due to the merger. At eDrugstore.com, we sell name brand lifestyle medications like Viagra at competitive prices, and with the greatest possible convenience. We invite you to check out some of our extensive resources about Viagra and erectile dysfunction.
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