All eyes are on Pfizer Inc. and Allergan PLC this week following the pharmaceutical giants’ Monday announcement that they plan to undertake a mega-merger. Not everyone likes what they’re seeing.
Pfizer said it will buy Allergan for $160 billion, the biggest deal in the history of the health care sector. The move will bring popular drugs like Allergan’s Botox into the same company that makes blockbuster pharmaceuticals like Viagra and Lipitor.
While the deal will likely be a boon to Pfizer’s shareholders, the U.S. Treasury and drug consumers at large stand to lose big once the deal is finalized. Even Sen. Bernie Sanders (I-Vt.) and business mogul Donald Trump — two presidential candidates who generally couldn’t be more different from each other — have both said the deal is bad news for anyone outside the Pfizer boardroom.
Fortune editor Alan Murray on Tuesday published a scathing editorial on the merger, arguing that “Americans are getting screwed — or perhaps raped is more appropriate, if you consider the price-gouging actions of companies like Turing and Valeant.”
“Enjoy the day, and stay well,” Murray wrote. “Illness will cost you.”
Despite the size and market power of each company, it’s unlikely that antitrust concerns will torpedo the deal, according to Tom Cotter, a professor at the University of Minnesota Law School who specializes in business law, antitrust and trade regulation issues.
“More frequently than not, these mergers go through, even with provisions,” Cotter said.
Here’s a look at how the marriage of the two pharma giants could play out.
Pfizer will pay less in taxes…
The allure of lower taxes is thought to be a key factor in Pfizer’s purchase of Allergan, an Irish company. Once the deal is complete, Pfizer is expected to switch its corporate domicile from the U.S. to Ireland, in the process shedding over two-thirds of its current corporate tax burden. The U.S. Treasury stands to lose billions in revenue as a result.
Pfizer disclosed a global cash income tax payment of $2.87 billion in a 2013 tax filing, Reuters reported last year.
This kind of arrangement, where a U.S. company reincorporates overseas in order to pay lower taxes, is known as an inversion deal. President Barack Obama has called the practice “unpatriotic,” and in 2014 he urged Congress to close the loophole in U.S. tax law that makes inversion deals possible.
Pfizer executives this week defended the merger as “a great deal for America,” arguing that by reducing its own tax burden, Pfizer will have more money that it can use to create jobs in the U.S. But politicians and other public figures have slammed the deal as exploitative and “a disaster.”
“For too long, powerful corporations have exploited loopholes that allow them to hide earnings abroad to lower their taxes. Now Pfizer is trying to reduce its tax bill even further,” former Secretary of State Hillary Clinton said in a statement. “This proposed merger, and so-called inversions by other companies, will leave U.S. taxpayers holding the bag.”
Sanders, who is challenging Clinton for the Democratic presidential nomination, argued that the deal will be “a disaster for American consumers, who already pay the highest prices in the world for prescription drugs.”
Even Trump, a Republican presidential candidate who’s not particularly anti-business, called the deal “disgusting.”
“Our politicians should be ashamed,” Trump said in a statement.
Rep. Chris Van Hollen (D-Md.), a ranking member of the House Budget Committee, on Tuesday criticized Pfizer’s plan to reincorporate itself in Ireland and urged Pfizer CEO Ian Read to rethink the move.
“Pfizer’s employees are educated in American high schools and colleges, it receives research and development incentives in our tax code, and it benefits from world-class, government-funded research,” Van Hollen said in a statement addressed to Read. “I urge you to reconsider this decision, keep Pfizer as a U.S. company, and show your commitment to American workers and taxpayers.”
…while consumers could end up paying more for drugs.
“A merger of this level might lead to substantial increase in drug prices,” Cotter said, since “there’s going to be one fewer company” making certain products.
By joining forces with another pharmaceutical giant, Pfizer is effectively neutralizing any competitive threat from Allergan.
Cotter noted that historically, mega-mergers tend to be bad for consumers. He cited recent examples in the airline and pharmaceutical industries.
Even people who don’t use Pfizer products could wind up paying more as result of the Pfizer deal.
“Tax inversions reduce effective corporate tax rates, which means in the end less taxes for shareholders, and probably more taxes for everybody else,” economist Gabriel Zucman told The Huffington Post earlier this month.
Though Pfizer hasn’t announced any specifics, layoffs are also anticipated as a result of the merger. Yet even if the deal spells bad news for workers, Cotter said job cuts are not something antitrust agencies take into account.
Innovation could stall out.
Cotter warned that another negative side effect of Pfizer’s multibillion-dollar deal could be a slowdown in new ideas and innovative approaches.
“Sometimes you might have research going on to produce a new product that isn’t on the market. That complicates the way economists look at mergers,” he said. “If you have two companies both researching or developing a product and they merge, there will be less competition and less incentive to get a product out to market.”
Cotter said that one way to prevent a dramatic slowdown in research and development would be for the Department of Justice or the Federal Trade Commission to order the companies to license their technology to third parties, or to divest of certain assets and intellectual property.
“It happened between the two firms merged into Novartis — the FTC required them [to] license certain technologies to a third party,” Cotter said, referring to the 1996 deal between the pharmaceutical companies Ciba-Geigy and Sandoz. Such moves on the FTC’s part can reduce the chances that newly merged companies will feel less incentive to innovate.
Big Pharma will grow even stronger.
When it comes to lobbying Congress, the pharmaceutical industry spends more than any other.
The industry spent over $178 million in 2015, according to Open Secrets, a nonprofit database that tracks contributions and lobbyist spending. Pfizer came in fourth on this year’s list of the industry’s biggest spenders, flexing its lobbying muscle with a total contribution of over $5.6 million.
It’s not just Capitol Hill, either: In 2012, a Washington Post analysis of articles in The New England Journal of Medicine showed Big Pharma’s growing influence on the research community.
Out of 73 articles that the Post reviewed, 60 were funded by a drug company, 50 were co-written by drug company employees and 37 had a lead author “who had previously accepted outside compensation from the sponsoring drug company in the form of consultant pay, grants or speaker fees.”
“A lot of economists and regulators are going to be spending a lot of time” scrutinizing the Pfizer deal, Cotter said. “The ultimate question is, is this going to make consumers better off or worse off?”
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