In an announcement on Monday morning, Pfizer, the big drug company, headquartered on East 42nd Street, in Manhattan, said that it is merging with one of its competitors, Allergan PLC. Ian Read, a Scottish-born accountant who is Pfizer’s chairman and chief executive, said that the proposed deal, which is valued at a hundred and sixty billion dollars, would “create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world.”
On Wall Street and in the world of big pharma, that statement will raise chuckles. It is widely acknowledged that the primary impetus for the deal is a financial one. In merging with Allergan, which is based in Dublin, Pfizer intends to move its corporate residency to Ireland, where the corporate tax rate is just 12.5 per cent, compared to thirty-five per cent for a company of its size in the United States. Over the next few years, the merger could save Pfizer tens of billions of dollars in taxes and deprive the U.S. Treasury of the same amount.
Tax-driven deals of this nature are known as “inversions,” and they are becoming increasingly common. Burger King, Liberty Global, and Medtronic are among the U.S. corporations to have carried out mergers that moved their headquarters abroad. Last year, Treasury Secretary Jacob Lew said that inversions were “wrong,” and that he would try and restrict them. Only last week, the Treasury Department issued some new administrative guidelines in this area. Without actual legislation, though, there isn’t very much the Obama Administration can do to prevent these exercises in corporate tax-dodging, and Republicans on Capitol Hill have displayed little eagerness to coöperate in a crackdown.
The Pfizer–Allergan deal will be the biggest inversion yet, and it is nothing short of a disgrace. Drug companies like Pfizer have long benefitted from taxpayer-funded research carried out under the auspices of organizations like the National Institutes of Health and the National Science Foundation. Now, Pfizer is seeking to avoid paying the taxes that are due on its profits, particularly profits generated by its overseas subsidiaries. Even though the Obama Administration doesn’t have the legal powers to block the Allergan transaction, it should seek to shame Pfizer and its board of directors into calling it off.
Founded in 1849, in Williamsburg, Brooklyn, by two German cousins, Charles Pfizer and Charles Erhart, Pfizer has a long history of researching and developing new drugs and chemicals. Its first commercial product was an anti-parasitic pill designed to fight intestinal worms, which were a common affliction at the time. In the late nineteenth century, it became a leading manufacturer of citric acid, ascorbic acid, and vitamin pills. During the Second World War, it developed a new way of making penicillin, which was then seen as a miracle drug. After the war, the company established itself as a global leader in antibiotics and other areas of medicine. During the nineteen-seventies and eighties, it investing heavily in R. & D., boosting its research budget to about twenty per cent of its sales. These investments produced a number of blockbuster drugs, including Procardia (angina and hypertension), Glucotrol (diabetes), Feldene (inflammation), Zoloft (depression), and Viagra (erectile dysfunction). In 1999, when Pfizer celebrated its hundred and fiftieth anniversary, it was widely seen as the leading drug company in the world.
Pfizer continues to employ thousands of dedicated scientists and to invest heavily in medical research. Since 2010, though, when Read took over as chief executive, it has cut its R. & D. budget significantly and raised its spending on stock buybacks. Under Read’s leadership, cost-cutting and financial engineering have sometimes seemed to be driving the company’s strategy. To some extent, these kinds of changes were unavoidable. As the pace of discovery for blockbuster new drugs has slowed in recent decades, all of the big pharmaceutical companies have come under pressure to trim their research budgets and pursue more effective ways of developing products, such as teaming up with innovative startups.
So, like many other big American corporations, Pfizer is facing challenges adapting to a changed world. But nothing in its financials or its strategic position suggests that it is facing the sort of threat that might justify the radical and potentially self-destructive move that giving up its U.S. domicile entails. A venerable member of the Fortune 500 now looks for all the world like a greedy tax exile, skipping off to a dodgy foreign locale. (Viewed in terms of its corporate tax policies and the assist it provides to big multinationals seeking to avoid paying taxes in their homelands, Ireland is distinctly dodgy.)
Read, in his statement explaining the proposal to merge with Allergen, said that it would help put Pfizer “on a more competitive footing within our industry.” This was a reference to the fact that other big pharma companies, such as AstraZeneca, GlaxoSmithKline, and Novartis, are headquartered in countries with lower corporate tax rates than the United States. However, there is scant evidence that being based in the United States has handicapped Pfizer or made it more difficult for the company to raise capital.
To the contrary, being based in the United States enables Pfizer to exploit the vast reservoirs of technical expertise that reside here, and to access federal support for scientific research. For example, according to the company’s Web site, it has dozens of collaborative projects with the National Institutes for Health. And being headquartered in the United States certainly hasn’t prevented Pfizer from making a lot of money. Over the past two years, the company has generated almost nineteen billion dollars in net profits.
All things considered, it’s hard to avoid seeing the merger proposal as a cynical move designed to boost Pfizer’s stock price and generate a windfall for the company’s senior managers, who are compensated mainly in equity. If the Obama Administration can’t block the deal, the best hope may be to put some public pressure on Pfizer’s non-executive directors, whose approval is necessary for the merger to go through. Its lead independent director is Dennis Ausiello, an eminent physician who, for many years, was chief of medicine at Massachusetts General Hospital. Other non-executives on the Pfizer board include Frances Fergusson, a former president of Vassar College; Helen Hobbs, a professor of medicine at the University of Texas Southwestern Medical Center; W. Don Cornwell, a former chief executive of Granite Broadcasting; and James Kilts, a founding partner at the private equity firm Centerview Capital. These directors are all experienced, worldly individuals. Last year, according to Pfizer’s 2015 proxy statement, they were each paid more than three hundred thousand dollars to carry out their duties, which include overseeing the company’s full-time management and protecting the long-term interests of all of its stakeholders: employees, shareholders, and customers.
One of those key interests, surely, is safeguarding Pfizer’s reputation, which has already suffered in recent years, following a big marketing scandal over the since-discontinued painkiller Bextra and other missteps. Read has for years been telling shareholders in his annual letter to them that “earning greater respect from society” is one of Pfizer’s strategic imperatives. One of the ways the company could do this, he said, was through “acting as a respectable corporate citizen.” So here is a question for the independent directors: Do you really think that traducing Pfizer’s proud history by moving to Dublin and shafting American taxpayers would be the act of a “respectable corporate citizen”?
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