Pfizer, Allergan To Combine

Pfizer has struck a $160 billion deal to combine with Allergan and move its headquarters from New York City to Ireland, where Allergan is based. The deal would make Pfizer the world’s largest drug company, but it is meeting criticism for being motivated by tax avoidance and for continuing Pfizer’s questionable strategy of megamergers.

The announcement comes less than a month after the companies confirmed they were in merger talks. If successful, the deal will be the largest-ever “inversion,” a transaction in which a U.S. company purchases a smaller overseas firm and shifts its headquarters abroad to ease its tax burden.

Pfizer CEO Ian Read, who will remain head of the combined firm, has been hunting for a partnership that could lower the company’s taxes, which he has said put it at a disadvantage against foreign rivals. Last year, Pfizer made a bid for the British drugmaker AstraZeneca but was rebuffed.

In September 2014, the U.S. Treasury Department changed its rules on inversions, requiring the foreign company to account for at least 40% of the combined entity, up from 20% previously. Earlier this month, the government further toughened its requirements.

Since being announced, the deal has faced withering criticism from politicians on both sides of the aisle and prompted calls for Congress to take immediate action to close the loopholes that allow inversions of this size to occur.

But Read is confident the deal will pass muster. “As we read the current law, with Allergan owning approximately 44% of the new company and Pfizer shareholders owning approximately 56%, we think we will be able to realize the full benefits of that type of transaction,” Read said on a Nov. 23 call with analysts.

Pfizer’s tax rate will shrink to 17 to 18% by the first full year after the deal closes, compared with the 25% it currently pays. Pfizer and Allergan also think they can squeeze more than $2 billion in costs out of the business within three years. With little overlap between the companies’ research activities, less than a third of the savings will come from R&D, they say.

The deal will create the world’s largest drug firm, with combined annual sales totaling roughly $64 billion and about 110,000 employees. It would be Pfizer’s fourth mega merger since 2000. The prior three deals each brought sweeping job cuts—more than 107,000 jobs in total—and criticisms that integrating two large firms can derail productivity.

Bernard Munos, founder of the InnoThink Center for Research in Biomedical Innovation, points out that despite its acquisitions, Pfizer hasn’t improved on its average of one new drug approval per year. Similarly, the revenue surge derived from each merger flattened soon thereafter. “This idea that they’re merging in order to deliver a greater future? None of that has come true—three times in a row,” Munos says.

He doesn’t expect the latest deal to be any different. Disruption to work flow, worries over job security, and talented employees jumping ship all could affect the combined firm’s output. “In the end, I don’t think we’re going to end up with an organization that is equipped to perform better,” Munos adds.

On the analyst call, Read claimed the integration with Allergan can be completed “with very minimal disruption to current R&D work.”

The combination also puts Pfizer in a better position to act on a long-considered plan to break into separate companies—one focused on innovative products and the other on older branded drugs and generics. Pfizer started contemplating such a split in 2011, and its purchase of specialty drug firm Hospira earlier this year brought it closer to that goal. Buying Allergan adds more branded drugs but will also delay a decision on the separation until 2018.