Drug maker Pfizer and the Ireland-based Allergan confirmed reports Monday that they were merging, creating the world’s largest pharmaceutical company with an estimated value of $160 billion.
The move would allow the new combined company’s corporate headquarters to be placed abroad and therefore avoid paying U.S. corporate taxes, making it the largest-ever example of a “corporate inversion.”
“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 therapies to more people around the world,” stated Ian Read, Pfizer’s chairman and chief executive officer. “Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders and continued investment in the United States, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry.”
The deal is expected to be completed in first quarter of 2016 and will allow Pfizer to reduce its corporate tax rate from 25 percent to 17 or 18 percent. The global operational headquarters will be in New York, but its executive offices, and therefore its legal domicile for tax purposes, will be in Ireland.
The new company will retain the name “Pfizer” and Read will serve as chairman and chief executive officer of the new entity. It is also expected to retain its New York Stock Exchange ticker symbol PFE.
The U.S. has laws preventing companies from avoiding corporate taxes through moves such as getting a post office box in a tax haven and claiming that as their headquarters. But the prohibitions do not apply to multinationals that combine with an existing company of a similar size in a low-tax jurisdiction and then placing the headquarters of the combined entity there.
Such deals have become increasingly popular for U.S.-based companies, which face some of the highest corporate taxes in the world. Allergan, which is headquartered in Dublin, currently pays a 12.5 percent tax rate, half of what Pfizer pays.
The White House and lawmakers have sought to prevent such mergers. Last week, Treasury Secretary Jack Lew announced new administrative rules to limit corporate inversions by restricting the circumstances under which they are allowed. For example, the rules would prohibit ones that resulted in a U.S. company and foreign one from merging and then locating in a third even lower-tax country.
“These actions further reduce the benefits of an inversion and make these transactions even more difficult to achieve. This is an important step, but it is not the end of our work. We continue to explore additional ways to address inversions — including potential guidance on earnings stripping — and we intend to take further action in the coming months,” Lew said in the announcement. The rules were widely seen as a reaction to the planned merger, which was first announced last year.
Republicans, in contrast, have said the U.S. should not be focused on rules to prohibit inversions, and instead should reform the tax code so that’s it’s more attractive for companies to stay.
Pfizer said the merger would allow it to invest more in research in and development. “A combined pipeline of more than 100 mid-to-late stage programs in development and greater resources to invest in R&D and manufacturing is expected to sustain the growth of the innovative business over the long term. Through product approvals, launches and inline performance the combined company aspires to be a leader in growth,” it said in the announcement.
