Dems’ Solution to Pfizer’s AstraZeneca Bid Fails to Address the Real Problem

Editors Note: After this story was written, Pfizer stopped its bid to acquire AstraZeneca.

Six U.S. Senators have asked Federal Trade Commission (FTC) Commissioner Edith Ramirez and Assistant Attorney General William J.  Baer to launch an antitrust review of drug manufacturer Pfizer, Inc.’s bid to acquire British-based AstraZeneca, PLC. On May 2, 2014, Pfizer announced a $106 billion bid, which has since risen to $119 billion. The request for antitrust review, sent by Senators Chris Coons (D-Del.), Richard Blumenthal (D-Conn.), Sherrod Brown (D-Ohio), Mazie Hirono (D-Hawaii), Sheldon Whitehouse (D-R.I.) and Dick Durbin (D-Ill.), not only stressed the impact that this deal could have on competition, the supply of prescription drugs, and pharmaceutical research and development (R&D), but also their concern regarding Pfizer’s stated objective to avoid U.S. corporate income taxes.

Potential Reduction of Innovation

The senators’ letter details to regulators the recent record of consolidation in the drug industry, i.e., Novartis’ acquisition of Alcon (2011); Sanofi-Aventis’ acquisition of Genzyme (2011); the consolidation of Roche and Genentech (2009); Pfizer’s acquisition of Wyeth Laboratories (2009); Merck’s acquisition of Schering-Plough (2009); and Pfizer’s acquisitions of Pharmacia (2003) and Warner-Lambert (2000).  According to the senators, should this acquisition proceed, the combined Pfizer-AstraZeneca entity would rank first in global pharmaceutical sales, U.S. pharmaceutical sales, and pharmaceutical research and development (R&D) spending, leading to significant competitive concerns in the industry.

The senators also state their belief that, under the Horizontal Merger Guidelinesthe regulators are called on to determine whether the Pfizer-AstraZeneca deal is “likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger.” In support of this concern, the senators cite Pfizer’s record of reducing efforts to innovate and bring new products to market. Following its acquisition of Wyeth in 2009, Pfizer closed six of 20 research sites worldwide and cut R&D spending to half of what the companies individually spent in 2008.

Tax Avoidance

Finally, the senators expressed their concern for another motivation for the Pfizer-AstraZeneca transaction — avoidance of U.S. corporate income tax. Specifically, the senators allege that “Pfizer has made clear its goal is to move its tax residence to England, and thereby access billions of dollars it has stored overseas while operating as a U.S. company, without any payment of U.S. taxes.” This practice, called “inversion,” involves a U.S. company buying a foreign company, but structuring the deal so that either the foreign company takes over the U.S. company or a new holding company owns both of the merged companies. Under this scenario, if more than 20 percent of the U.S. operations are owned by the foreign company, or if the merged company has at least 25 percent of its employees, sales and assets where it is incorporated, then the U.S. company gives up its U.S. domicile and is freed from the U.S. corporate tax.

Democratic Party’s Response

As reported by Bernie Becker of The Hill on May 8, 2014, Senate Finance Chairman Ron Wyden (D-Ore.) and other top Democrats want to take legislative action to stop the practice of “inversion.” However, according to Becker, both the House Ways and Means Chairman, Dave Camp (R-Mich.),, and Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, believe that addressing the inversion problem outside of a comprehensive rewrite of the tax code is unlikely.  The current U.S. corporate tax rate is 35 percent, which is the highest in the industrialized world.

Despite the lack of bipartisan support, on May 20, 2014, Senator Carl Levin (D-Mich.) introduced the “Stop Corporate Inversions Act of 2014,” which increases the needed percentage change in stock ownership from 20 to 50 percent and provides that the merged company will continue to be treated as a domestic U.S. company for tax purposes if management and control of the merged company remains in the U.S. and either 25 percent of its employees or sales or assets are located in the United States.  Representative Sander Levin (D-Mich.), Sen. Carl Levin’s brother, introduced a companion bill in the House.

Facing the Real Problem 

As reported by Michael Hodin in The Fiscal Times, the politicians are missing the point. Closing a corporate loophole regarding “inversion” is not the solution because “inversion” is not the problem.  Politicians are trying to fix the symptom, rather than the disease, according to Hodin. The disease, says Hodin, is the “confiscatory U.S. tax policy” which encourages Pfizer and other companies to move overseas. Policymakers are “asking how to stop inversion when [they] should be asking why companies are inverting.”

Policymakers need to understand that this is not about loyalty to the United States. Corporate boards and CEOs are actually obligated to do what is best for the health and profitability of their companies — it is their fiduciary duty.  So, what a real solution to inversion? Amend the federal tax code by reducing the corporate tax rate and allowing the repatriation of trillions that are invested overseas.  If the true concern of U.S. policymakers is the stimulation of R&D, filling the drug pipeline, and creating jobs, then the tax laws that are stifling U.S. investment and leading corporations to flee the U.S. should be changed.