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Pfinancial engineering 

23 November 2015 By Robert Cyran

Pfizer’s $160 billion opus of financial engineering theoretically could pay off. On paper, merging with Allergan will result in hefty tax and cost savings worth barely more than the $30 billion premium the larger drug firm is paying. In reality, though, giant drug deals often end up disappointing backers. As the biggest inversion ever, this one will annoy the U.S. political class, which is taking a bigger role in healthcare. And slamming together two drug giants often creates dis-synergies in the laboratory.

Domiciling the Pfizer-Allergan beast in Ireland will result in chunky tax benefits. At a 17.5 percent rate, Pfizer will save about $1.7 billion in taxes in 2018 based on analysts’ estimates. Put these on a multiple of 10, and they may be worth about $17 billion today. Apply the new, lower tax rate to the at least $2 billion of costs Pfizer expects to cut and put them on a multiple of 10 and the savings are worth over $16 billion. Combined, these slightly exceed the premium paid to Allergan.

Yet the deal will carry adverse effects. Big drug mergers in the past haven’t always panned out. Firing lots of workers can dishearten those who remain. Worse, lab productivity doesn’t scale. Key researchers get fed up and leave. The result is often a disappointing pipeline of new therapies – and a stagnating share price. Pfizer has long mulled splitting itself in two – such a move could help reduce bureaucracy in the new firm, but permanent revolution may not help employees get on with their jobs.

Moreover, the deal will be controversial. Pfizer’s latest inversion shows that the U.S. Treasury’s attempts to curtail the number of firms that move their tax address overseas have not been successful. Pfizer escaped new, tighter rules simply by designating Allergan as the buyer. Yet Pfizer’s investors will control a majority of the combined firm, its Chief Executive Ian Read will run it and the new company’s board will be dominated by Pfizer’s directors. Taking on the government so directly is a risky tactic in a such a heavily regulated sector.

The politics, the minimal financial upside of the deal relative to its cost and Pfizer’s mediocre track record on deals do have one potential upside: its wiser pharma rivals are likely to watch this tax experiment from afar.


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