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  November 25, 2015

Is America Powerless to Stop Pfizer Merger?

Pfizer-Allergan deal will create world's largest pharmaceutical company, higher drug prices, and hundreds of millions in lost tax revenue, but economist James Henry explains why Congress is turning a blind eye
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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.


JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I'm Jessica Desvarieux in Baltimore.

The big pharmaceutical company Pfizer is merging with one of its competitors, Allergan, potentially creating the world's largest drug company. But what about antitrust laws, and how will this affect drug consumers, especially in America, who already pay more for drugs than anyone in the world? And what about the loss in taxes now that Pfizer will be taking advantage of lower tax rates in Ireland?

Now joining us to help us answer these important questions is our guest James Henry. James is a leading economist, attorney, and investigative journalist who has written extensively about global issues. Thanks so much for joining us, James.

JAMES HENRY: Good to be with you.

DESVARIEUX: So James, we have got a $155 billion deal which would allow New York-based Pfizer to move its operations to Ireland and avoid paying taxes on about $148 billion that it has offshore. So can you just explain, how does this process known as tax inversion work in the first place, and why is this loophole even legal if the government will lose more than $2 billion in revenue from deals like this one?

HENRY: Well, that's $2 billion a year. It's basically a function of the fact that the U.S. corporate tax system allows companies to move offshore and relocate, and have what's called a reverse merger in this case with Allergan, the Irish-based company. And then take advantage of the fact that Ireland has a 12.5 percent corporate tax rate, whereas the nominal U.S. corporate tax rate is 35 percent. So you know, there's immediate gain to Pfizer to be able to, in the first year they will recognize a tax benefit of just $21 billion.

There have been a number of these offshore deals recently. Burger King, Liberty Mutual. Chrysler was another one. But this is by far the largest. And it takes place in the context of a year which is the largest merger activity in the United States since 2007, $4.2 trillion of mergers. A lot of companies getting together because they see the stock market values peaking now, and trying to get these deals closed before we have a leveling off, or substantial decline in the stock market.

But the offshoring activity could have been stopped by the U.S. federal government. Obama has made some kind of weak modifications to Treasury regulations. But there's only so much he can do given the fact the basic rules here are being made by Congress. So it's still permissible, everything that Pfizer's doing here is legal, but it's not very patriotic. And that's one reason that I think Hillary Clinton in particular has come out against this deal. It hurts taxpayers. The U.S. government has subsidized a lot of medical research that ends up in patents, through the NIH programs. Somebody has to pay for those grants. And drug companies increasingly are doing--in this case, Pfizer and Allergan are actually talking about being able to bring this money back and spend more on R&D. But their track record in this respect is terrible. They've been reducing the amount of R&D spending, and their plan for the next three years is to cut R&D again. So there's no evidence that they're actually going to use this money for generating innovation. They're actually going to use a lot of it for buying back shares, which is typically what's done here.

The other bad thing about this is it allows something called asset stripping. So that's when a company moves offshore, then they lend money back to the U.S. subsidiary. And you know, they have to pay interest, and the interest is tax deductible. But they end up with showing no profits at all in the U.S. economy. So that's another way in which this really reduces the tax rate tremendously.

DESVARIEUX: James, I want to go back to your point about what the Obama administration is doing about this, or not doing, really, about this. Treasury Secretary Jack Lew, he came out signaling that essentially they don't have the authority to really break this deal. The argument is essentially that this merger is much more like a straightforward acquisition by a foreign company of a U.S. company. So Allergan is buying Pfizer.

So is the American government really helpless in this situation?

HENRY: I think that a really aggressive Treasury Department could make it very difficult for Pfizer and Allergan. But there's something to Lew's point. The fundamental rules here, for example the rule that says that the U.S. shareholders cannot own, have to own at least 60 percent or more, in this case they've structured the deal so that Pfizer shareholders will own only 56 percent. So it meets that test. And you know, so that makes the reverse merger here legal.

And you know, I think basically the Congress is dominated by folks that, you know, are all in favor of these corporate tax games. And the new chairman of Pfizer is interesting. He's been there for a couple years. He's an accountant. He's not, he's not a drug scientist, he's not an expert on the pharmaceutical industry. But he does understand financial chicanery. And the CEO of Allergan, his partner in crime here, is a fellow who's notorious for reducing R&D expenditures after he acquires companies. He's grown entirely by acquisition.

So I would expect going forward that Pfizer and Allergan will ultimately--you know, they're trying to manage about 60 different drugs. They're--you know, it's a huge portfolio of drugs. Many of them are direct competitors. And it's just a huge management problem. So a couple years down the road we'll see, you know, a spinoff of these two companies. And this is what the drug industry has kind of become. It's a financial engineering game as opposed to an innovation game.

DESVARIEUX: Yeah. And I mean, you have to think about the consumers, us, everyday people. How is this going to affect everyday people and drug prices? Because not too long ago, back in August, I'm sure some of our viewers remember there was Turing Pharmaceuticals that acquired the drug Daraprim, which was often used by AIDS patients, and overnight the prices went up, from $13.50 per tablet to $750.00. That's a 5000 percent increase. So James, can we expect to see more of this type of price gouging with this Pfizer-Allergan merger?

HENRY: I think the folks that are running these companies these days are betting very heavily on price power, 4-6 percent a year increases in prices, being able to market more effectively, and milking the franchises that they already have. They also make huge contributions to Congress. I mean, one of the deals under the Affordable Care Act was that there would be essentially very limited price regulation, and Medicare was prohibited from negotiating its prices with the drug companies. Something that's just unheard of. I mean, people around the planet look at this kind of political arrangement that the drug industry in the United States has as just unconscionable.

So it's really betting heavily on the pricing power, on being able to milk the existing franchises, and being able to make increased political contributions with the profits that are generated by these deals.

DESVARIEUX: All right. James Henry joining us from Johannesburg, South Africa. Thank you so much for being with us.

HENRY: You're quite welcome.

DESVARIEUX: And thank you for joining us on the Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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