What Does The Successful Killing Of The Pfizer Allergan Deal Mean?

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

When I wrote the opinion piece on the U.S. government’s successful killing of the planned Pfizer Allergan merger, it was on the heels of a March Editor’s Note on the current state of U.S. corporate taxes. There are those who argue that U.S. companies aren’t seeking to invert due to high U.S. tax rates. And while we can dispute the rationale behind why companies have been seeking to relocate outside the United States, what can’t be debated is that prior to the recent move by the U.S. Department of Treasury to block the practice, inversions were on the rise. Since 1982, 51 U.S. companies have reincorporated in low-tax countries. But more telling is that of these, 20 (inversions) happened in just the past three years, despite 2004 legislation intended to abolish the practice.

While presidential candidate Donald Trump argues for the controversial building of a wall to keep Mexican immigrants out, the Obama administration has effectively, and in my opinion illegally, built a wall to keep American companies in — much to the delight of Democratic White House hopefuls. The result of this "Katie bar the door" mentality may have prevented the loss of an American institution older than Major League Baseball, but at what cost? According to Pfizer CEO Ian Read, the changing of “rules” arbitrarily and their retroactive application puts U.S. companies at a competitive disadvantage. “In Cambridge, MA, where Pfizer has a state-of-the-art research lab, we are surrounded by foreign-owned competitors’ facilities,” Read writes. “When those companies invest in their facilities, it is often as much as 25 percent to 30 percent cheaper than every dollar we put into research and jobs. Why? Because our competitors don’t have to pay the penalty imposed on U.S. corporations bringing earnings back to America. We can invest less — because of a broken tax system.” 

One Certainty Remains Beyond Death Of Inversions

Though it was Benjamin Franklin who once said there were only two things certain in life (i.e., death and taxes), for the U.S. biopharmaceutical industry there seems to be only one — its continued vilification. Prior to this recent controversy that pilloried Pfizer as U.S. “deserters,” it was drug companies shouldering the blame for the high cost of drugs. It seems readers of Life Science Leader have just about had it with the sustained bullying of biopharma. What follows are reader comments shared anonymously.

• “Your comment about our corporate tax rate made me Google the info to see who are 1 and 2 (Chad and United Arab Emirates). That on top of all the other costs of “doing business,” it’s easy to see why drug development costs are so high. Also interesting to be reminded how long Pfizer had been an American company. I just hope MLB doesn’t follow suit!”  
• “Medicines and vaccines save lives and make people's lives better. That should be in every headline. The money made by industry drives innovation. No return on investment equals no investment in innovation.”
• “The constitutionality of these rules should certainly be vigorously challenged, not to save this deal, but for the principals involved and to prevent a similar costly scenario from unfolding in the future.”
• “I actually learned from what you wrote, since this field of inversions is outside of my comfort zone.  It complements what our CEO has written in the WSJ and his memo to us.  Though the deal is off, there was a lot of learning which I captured, being involved during the integration process.  There’s always a silver lining to every tragedy that I look for, and I may have found it.”
• “We live in interesting times, no? I doubt these editorials will make waves against the volume of political rhetoric.”
• “It’s a great footnote that we have just solidified the value of foreign companies acquiring US companies.”
• “When I first heard what the US Treasury did I asked the same question: How can they make a ‘rule,’ as they did, effective immediately and make it retroactive. That can’t happen legally. But I guess I was wrong since they got exactly what they wanted, without legislation.  This shows government can do whatever they want and our constitution is just an old document that is displayed in the National Archives but is no longer part of our political system.  And as far as bringing it to the Supreme Court, maybe I’m a pessimist, but I think it’s too late for that since they’ve been handpicked to make decisions that aren’t based off the constitution.  My father was right. Before he died over 10 years ago he said we will not recognize America in 50 years.  Where he was incorrect is that it didn’t take 50 years.”
• “What’s next for Pfizer since Treasury just took $10B out of their profits for next year? Seems to me they go back to their pre-inversion mode of mega mergers with synergies to follow. [Since 2010] 44 companies have collapsed to eight. How much further can the industry collapse before the public pays the price of oligopoly thinking? When Detroit collapsed to the big three, Japan stepped in and drove that industry to near bankruptcy and government bailout. Will China, Japan, or some other country suddenly take the lead on innovation in our realm?”
• “I’d suggest Ockham's razor has to cut more precisely: this isn’t about taxes. If we just say that, it gets translated to tax avoidance. We have to be clear and specific: this is all about high taxes. How high? So comparatively high they injure U.S.-based companies enough where they would go through all this trouble, time and money, to get out from under them. I don’t think this is nor can be said enough.”
• “Perhaps obvious but just not said clearly enough (we have to say it over and over) is that the best policy the government could take to get rid of their problem with inversions: lower those (state and federal) taxes. Now that would be constitutional, fair … and many of us think bring in more tax revenues.”

We hope you will continue to share your feedback. For if life science leaders don’t hang together, it seems assured that we will continue to be “hung out to dry.”