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December 2, 2015
July 1, 2022

The pharmaceuticals industry continues to shrink as companies buy each other out.  The latest blockbuster merger involves Pfizer and Allergan, both worth more than $100 billion. Although Pfizer is the larger company with a market valuation at almost $200 billion, the deal actually has Allergan as the buyer. This type of merger is known as a corporate inversion and enables Pfizer to obtain tax benefits through Allergan's Dublin, Ireland headquarters, although operational headquarters would be in New York. The new company would become the world's largest pharmaceutical company.

Pfizer was already one of America's most successful drug makers with a slew of profitable products. Among the most recognized are the erectile dysfunction medication Viagra, Alzheimer's drug Namenda and the anti-inflammatory drug Celebrex.  The company reported almost $49.6 billion in revenue in 2014. Pfizer is currently headquartered in Groton, Connecticut and employs almost 78,000 employees.

The Dublin-based Allergan is most widely associated with the anti-wrinkle cosmetic drug Botox, but the company has developed a considerable array of medications including Doryx (antimicrobial), Bystolic (hypertension) and Gelnique (overactive bladder). In the first quarter of 2015, Allergan had operations in over 100 counties with revenue of $4.2 billion.

The planned merger would create significant economic consequences. The new company would likely shed many jobs as the two companies integrate commercial operations and shift headquarters to Dublin. The U.S. Treasury would also lose millions in potential taxes as the company moves offshore.

The tax and job implications have also drawn responses from the presidential candidates. Republican candidate Donald Trump vilified Pfizer for abandoning the U.S. and leaving countless employees jobless. Democratic frontrunners Hilary Clinton and Bernie Sanders also criticized the merger as well as the practice of corporate inversions.

Corporate inversions have come under fire from the media as well as governmental entities.  The U.S. Treasury Department has just unveiled new rules that would make such relocations more difficult. Current laws prevent inversions if U.S. company shareholders own more than 80 percent of the emerging company's stock. This may be the primary reason why Pfizer plans to buy up more than $5 billion of its own shares in early 2016. In the past, the U.S. Treasury Department was able to apply enough pressure to implode deals including the buyout of AbbVie Inc. by Irish Shire Plc. Much of the impetus to relocate overseas is related to the 35 percent tax rates applied to most corporate earnings.

This is only the latest merger in a year of many blockbuster health care consolidations. Dealogic reports that almost $448 billion in mergers have taken place this year, a record mark.  The Affordable Care Act and other governmental initiatives have fueled this hunger for consolidation. As the health care market shrinks and profits slim, more companies are looking to pad their ledger by swallowing up their competitors. Major takeovers this year include the Walgreens and Rite Aid merger, as well as the $54 billion Anthem and Cigna deal which will produce the largest health insurer in the nation. 

Article written by:

Robert Moghim, M.D.

CEO, Health Carousel Locum Tenens