by Tom Norton
The dizzying flurry of press releases from both Pfizer Inc. and AstraZeneca over a possible PFE acquisition of AZN have Rx experts on both sides of the Atlantic buzzing…
- From the US side, the most frequent thing that I have heard over the last 48 hours is, “You have got to be kidding! Pfizer’s last two takeover ventures were nothing if not painful as well as debilitating for the company. Why in the world, would PFE go down this road again when things finally seem to be on track at the firm?”
- From the UK side, the reaction has taken on a distinctly more nationalistic tone. As the Financial Times put it yesterday, “Britain has seen a number of historic centres of drug innovation close or shrink in recent years, including Pfizer’s site at Sandwich in Kent…It can ill-afford to see more follow as a result of an accountants’ merger.”
An “accountant’s merger”? Wait a minute. Is that what this multibillion dollar deal is all about? Yes, despite Pfizer’s CEO Ian Read’s assertion yesterday in Reuters that “[Pfizer] wants to have a conversation with the [UK] government about the excitement we have about combining these portfolios, the excitement we have about the strength of UK research,” there are definitely other things on Mr. Read’s mind. Read, by the way, holds a degree as a UK chartered accountant.
As Jeffrey Holford, an analyst at Jefferies and Company of New York said Monday morning in the FT, “Pfizer’s interest in AstraZeneca appears more heavily motivated by financial synergies than anything else.”
And exactly what financial synergies are apparently driving Pfizer’s actions? Specifically, US corporate tax policy, and the billions of dollars that US-based multinationals like Pfizer choose not to bring back into the US. This occurs because the US corporate taxes on those international profits are viewed by huge American companies as prohibitive.
So, what is the direct tax stimulus here for Pfizer? Currently, according to the Wall Street Journal, Pfizer is subjected to an effective US corporate tax rate of 27%. This compares to corporate tax rates in the UK which today are set at 23% — but are about to fall to 20% in 2015. Obviously, if Pfizer takes over AstraZeneca and, importantly, then decides to establish its worldwide “tax domicile” in, say, London, the direct tax savings that the “new” UK-based Pfizer would realize versus what it would pay in the US would be substantial.
But there’s more here. Billions and billions more, of already earned foreign dollars. Going back at least to the early 1990’s, Pfizer and numerous other US based global operators, when faced with the prospect of high US taxation on repatriated foreign earned income simply decided not to bring their profits home. Instead, many firms, including Pfizer, set up “banks” in tax friendly countries. In Pfizer’s case, it’s The Pfizer International Bank Europe (http://goo.gl/UqNxvX ), located in Dublin, Ireland.
And how much money is in Pfizer’s Dublin, Ireland bank? It’s a bit hard to say. The WSJ reported today that PFE reportedly is sitting on a hoard of “overseas money” in the neighborhood of $34 to $44 billion, a lot of it likely resting peacefully in Ireland.
Aside from the astounding amount of money being held outside the US, what is the other possible significance of this AZN deal for Pfizer? Theoretically, could PFE not selectively bring their overseas profits “home” to their new London-based “tax domicile,” realizing a substantial reduction in corporate tax on those overseas billions — and then put those dollars to better use instead of letting them sit fallow in some off shore tax haven bank in Dublin? Yes. Absolutely yes.
And how might a “green eye shader” like Ian Read use those newly freed up UK dollars?
Well, think about this scenario following execution of the acquisition: Once Read has done the “Pfizer acquisition thing,” i.e., shed the usual thousands of employees from the firm taken over by PFE, and after Read has spun off those AZ businesses that he views as superfluous, and finally, after he has bucketed the older AstraZeneca prescription products into Pfizer’s Established Products Business, and then placed the newer AZN Rxs into either the PFE Innovative, or Vaccines, Oncology, and Consumer companies, only enhancing the value of these three, only then will Read…
…use that $34 to $44 billion towards the actual $100 billion or so purchase of AZN?
Or more provocatively, what if he took those billions of off shore dollars and thoughtfully plowed them back into Pfizer R&D, specifically with a new plant, personnel, and intellectual property located, per the ‘friendly corporate tax policies’ of that nation, in the UK? Bet that prospect would dampen the UK nationalistic objections to the deal, especially with now US citizen Read having a very strong UK heritage.
But at this point, we must throw a bit of cold water on this “rah-rah” Pfizer-to-the-UK story. You see, the United States has some other views on this matter.
For starters, here in the good old US of A we call what Pfizer is thinking about executing an “acquisition inversion,” or more colloquially, a tax dodge. According to the FT this tax dodge “inversion” is:
“…a legal transaction whereby a company becomes the subsidiary of another company in another country – and, as a result, the original company becomes subject to the tax laws of the foreign country instead of its country of origin.”
None other than President Barack Obama has become aware of this particular “tax dodge” situation. In fact, in his proposed 2015 budget he has called for major changes to this acquisition tax inversion law. Currently companies are allowed to reincorporate in other nations if the deal they execute transfers 20% of the new firm’s stock to the owners in the country of origin. The President wants to change this to 50%, creating drastically reduced control for the acquirer and thus diminishing the attractiveness of such as action, which is exactly what the President wants.
But so far, this concept has not gained much traction in Congress. However, as Forbes points out in an intriguing article on this whole US off shore corporate tax matter, Pfizer is not the first US pharma concern to attempt a “tax inversion.” Indeed, several smaller Rx firms like Mallinckrodt, Alexion, Perrigo, and now possibly Valeant are already essentially taking advantage of, or attempting to take advantage of the same tax strategy, if in other lower corporate tax nations (Ireland and Canada). All are following foreign tax strategies that Pfizer now seems to be pursuing in the UK. The big difference? Right. These other Rx firms are not mighty Dow 30 PFE. This fact alone could incite Congress to sit up and take note.
But let’s say Congress doesn’t heed the President’s wishes, and instead sits idly by while Pfizer’s estimated $34 to $44 billion dollars in an off shore “tax dodge” goes to work as capital investment in Merry Old England. What does that suggest to you Pfizer’s US multinational pharma competitors may be doing this very morning? Right. Calling a good commercial realtor in London. “Go East Young Man!” is one homily that comes to mind.
In summary, it would be rich irony if the UK were to all of a sudden become the global “tax haven” du jour. The nation that in the US is so often denigrated by Big Pharma for its socialized “British Health Service” — and its equally reviled spawn, NICE, which has repeatedly turned down new FDA approved Rx drugs “because of cost considerations” — now all of a sudden becomes the preferred happy home to billions of off shore US dollars that huge trans-nationals like Pfizer refuse to expose to prohibitive US corporate taxes.
Yes, amazingly, US corporate tax policy today appears to be so out of kilter, (and may actually get even worse!) that that the United Kingdom, of all places, may unknowingly have become one of the world’s great antidotes for US pharma corporate “tax blues.”
Tom Norton is principal at NHD Smart Communications. He can be reached at email@example.com.