Big Pharma Murdered Tax Inversions

Hubris and massive deals inevitably drew the government's ire.

Congrats big pharma! You ruined a favored and often lucrative tax tactic for the entire corporate world. 

With hubris and attempted mega-deals, the industry called forth the wrath of the U.S. Treasury Department against inversions and similar deals designed to net U.S. firms lower tax rates.

AbbVie's $52 billion attempt to buy Ireland's Shire in 2014 helped prompt new rules making the combination less appealing. About a month later, that deal was dead. And then Pfizer's $160 billion mega-reverse-merger produced a new set of seemingly targeted Treasury rules on Monday. Those rules blew up the industry-record deal and dramatically reduce the tax benefits and appeal of many inversions. 

Both sets of companies had long protested their mergers were about strategic fit, not just tax rates. In Pfizer and Allergan's case, it took less than two days for the deal's death to put lie to that.

Tax inversion has never been politically popular. But it was pharma's two-armed, passionate embrace of the tactic -- and its recent tendency to take it to unheard-of extremes -- that likely led Treasury to break out the regulatory equivalent of the nuclear option. 

Inversionpocalypse Now

The Pfizer/Allergan megadeal is dead, less than two days after Treasury announced rules that seemed designed to sink it.

Source: Bloomberg

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It's easy to see why such deals appeal to the industry. U.S.-based pharma companies can be at a serious tax disadvantage to their overseas peers. They generate significant revenue overseas they can't bring into the U.S. without paying tons of taxes on it. A foreign tax domicile unlocks that money for dividends, buybacks, acquisitions, whatever a company might want. There are other substantial tax benefits as well. 

Trapped Abroad

Pfizer generates huge amounts of cash abroad, making a new tax address very attractive.

Source: Bloomberg

It's not as if tax inversion is a new phenomenon. The practice started way back in the 1980s and eventually provoked a congressional crackdown in 2004. But that crackdown left a loophole that let companies adopt the tax address of foreign acquisitions of a certain size, which prompted a second inversion wave. 

No industry went as big or as bold as pharma. Health-care companies have attempted a disproportionate number of such deals. Valeant and Allergan notably used inversions to go on serial acquisition sprees, and some of the biggest companies in the industry attempted tax escapes. 

Switching Teams

Health care firms have been behind the biggest attempts to escape high U.S. corporate taxes.

Source: Bloomberg

The recent megadeals that drew Treasury's attention followed a series of bigger and bigger tax-domicile departures that had already directed political ire at companies seeking to avoid U.S. taxes. Pfizer even dropped its announcement in the middle of a contentious election.

The deals got so big they were impossible to ignore. The departure of Pfizer and other massive pharma companies, and their potential to provoke further tax-fleeing, represented a real threat to the U.S. tax base. The size of these deals, along with the dismal reputation of the industry over drug-pricing shenanigans, made targeting them politically expedient. 

Treasury's most recent reaction has been far more aggressive than almost anybody expected, and it at least looks like an attempt to stop an individual deal as an object lesson (though the Obama administration claims otherwise).

The result is that all sorts of tax-minimization strategies and deals are in upheaval, and Pfizer CEO Ian Read is likely an unpopular man in boardrooms the world over. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Max Nisen in New York at

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