Pfizer’s $160 billion megadeal with Allergan, which comes with the benefit of an overseas tax address, is likely to be envied by competitors who won’t be able to do much to mimic it.
The idea is certainly alluring. Many large drugmakers, including Johnson & Johnson and Merck & Co., are flush with cash and under pressure from investors to continue to grow quickly. Doing an “inversion” deal to relocate their legal domiciles abroad would give them a lower tax rate and let them use cash earned overseas in the United States without having to pay a 35 percent levy to repatriate the money.
And Pfizer’s deal, the largest inversion in history, shows that such a transaction is still possible, despite increasing pressure from the Treasury Department and potential changes to the law that could make it harder to invert.
Pfizer’s tax rate will drop to about 17 percent in the first year after closing the merger, chief financial officer Frank D’Amelio told investors last week. It was 25.5 percent in 2014.
Yet however attractive an inversion is, pickings are slim for the big companies, said Andrew Weisenfeld, a partner at investment banking firm MTS Health Partners, which focuses on health care.
“There aren’t that many deals of scale out there,” he said.
U.S. lawmakers might reform tax laws to make it harder to invert by 2017, said Henrietta Treyz, an analyst at Height Securities, a policy-focused investment firm in Washington. That might push drugmakers to move quickly.
“Given it takes six to 12 months to do an inversion deal, if you’re a company that wants to invert, you need to do so right now,” Treyz said.
J&J has a large war chest — $37 billion, including short-term investments — that could be used to purchase drug or device assets.
Still, to shift its legal domicile abroad under current law, it would need to consume a foreign entity that’s at least 25 percent of its $284 billion size, preferably larger to avoid coming under Treasury scrutiny.
Merck, with $60 billion in earnings trapped overseas in 2014 and an average 27.9 percent effective tax rate over the past three years, could also benefit from moving abroad, but likewise has few choices. It’s valued at $151 billion.
