New fed­eral rules will blunt ben­e­fits of Pfizer, Al­ler­gan deal

Modern Healthcare - - THE WEEK AHEAD - —Beth Kutscher

Phar­ma­ceu­ti­cal gi­ants Pfizer and Al­ler­gan are re­port­edly near­ing a block­buster deal that could be an­nounced as soon as this week.

But the eco­nomics of the deal, val­ued at up to $150 bil­lion, could be less lu­cra­tive un­der new U.S. Trea­sury Depart­ment rules de­signed to di­min­ish the fi­nan­cial ben­e­fits of cross­bor­der trans­ac­tions.

Pfizer has been search­ing since last year for a takeover that would al­low it to shift its head­quar­ters from New York to a tax-friendly ju­ris­dic­tion. Its record­set­ting $101 bil­lion bid to ac­quire Lon­don-based As­traZeneca ul­ti­mately failed, but set off a wave of copy­cat trans­ac­tions across the phar­ma­ceu­ti­cal sec­tor and other in­dus­tries.

Al­ler­gan, for­merly head­quar­tered in Cal­i­for­nia, is now a Dublin-based en­tity fol­low­ing its March ac­qui­si­tion by Ac­tavis.

“An ac­qui­si­tion of Al­ler­gan by Pfizer makes sense,” said Maxim Ja­cobs, an an­a­lyst at Edi­son In­vest­ment Re­search. “Pfizer des­per­ately needs a large ac­qui­si­tion and the re­sult­ing syn­er­gies to rein­vig­o­rate its tepid earn­ings growth rate. Also, Al­ler­gan would help Pfizer es­cape the un­com­pet­i­tive U.S. cor­po­rate tax rate, which has led com­pany af­ter com­pany to domi­cile away from its shores.”

The so-called tax-in­ver­sion strate­gies have been in the crosshairs of the Obama ad­min­is­tra­tion and some mem­bers of Congress.

Trea­sury Sec­re­tary Ja­cob Lew last week in­tro­duced new rules that would limit the fi­nan­cial ben­e­fits of such deals, al­though the agency doesn’t have the power to pre­vent them. Nev­er­the­less, the rules re­duce the tax in­cen­tives for an in­ver­sion and make it more dif­fi­cult for a U.S. com­pany to qual­ify for one.

Rep. Mark Po­can (D-Wis.) this month in­tro­duced two bills that would put more teeth into pre­vent­ing tax-in­ver­sion deals. One bill would pre­vent com­pa­nies from de­fer­ring taxes on for­eign prof­its, while the other tar­gets “earn­ings strip­ping,” or the prac­tice of mov­ing prof­its to lower-tax ju­ris­dic­tions.

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