Pharmaceutical firms Pfizer and Allergan today announced the biggest healthcare sector merger in history, worth an estimated $150bn (£106bn).
The two companies have been in discussions over the merger for a number of weeks, with analysts suggesting the deal will allow pharma giant Pfizer to move its headquarters from the US to Ireland, where Irish Botox maker Allergan is based.
The relocation would slash the new company’s corporate tax range from 15% to 39% in the US to the Irish rate of 12.5%, and is likely to make political waves in America in the run-up to next year’s presidential election.
This so-called ‘tax inversion’, where corporations appear to be purchased by smaller entities, occurs at a time when the US Treasury Department are attempting to curb the tax benefits of such overseas deals.
Speaking prior to the announcement US Treasury secretary Jack Lew said: “US companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes in the US, without making significant changes in the nature of their overall operations.”
Today’s deal is actually the second inversion involving Allergan this year, as back in March the company moved headquarters from the US to Ireland in a ‘reverse merger’ with the drug maker Actavis.
Despite the potential change of location the merger will see Pfizer’s Chief Executive Ian Read as CEO of the new company and Allergan boss Brent Saunders working with him as Chief Operating Officer.
Reacting to the news Read said: “The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and more therapies to more people around the world”.
The new company will be known as Pfizer, and will create the world’s largest drug manufacturer in terms of sales, with a combined revenue of around $60bn, boasting products as varied as Pfizer’s Viagra to Allergan’s anti-ageing product Botox.
Pfizer made an offer to buy AstraZeneca last year, but saw their offer knocked back as the UK-based drugs group felt that it undervalued the company.
Kevin Phillips, International Tax Partner in the Moore Stephens Business Tax team, commented that the deal followed in a line of a number of previous inversion transactions. “The proposed Pfizer/AstraZeneca deal actually prompted the US Treasury Department to announce that they would be interpreting the existing law more harshly in future to try and act as a barrier”, said Phillips.
“Therefore it’s interesting this is going ahead and being described as an inversion transaction, and the tax benefits are presumably part of the rationale for the deal. This could be seen as an attempt to overcome these stricter interpretations of the rules and they must be reasonably confident that they’re able to achieve it.
“There are huge numbers being talked about: a possible $120bn of offshore earnings that they would be able to shelter from US tax.
“Every time you get a big transaction like this reported”, continued Phillips, “we have clients getting in touch asking ‘how can we do this?’, and we have to point out to them that companies like this have vast resources and what’s open to them isn’t the same as a small or medium-sized UK business.
“However, others may look at this as it sets a new precedent, or it could be the straw that breaks the camel’s back and the Treasury will finally really come down on this.”