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Political dimensions of the $160 billion Viagra-Botox merger

23 November 2015 Gustav Ando

Yesterday’s announcement that Pfizer has agreed to combine with Ireland-domiciled Allergan didn’t really come as any surprise – a deal had been mooted for some weeks previous to the formal announcement – but it doesn’t make the deal any less breath-taking in terms of sheer scope, ambition and audacity. At a superficial level, the fact that this represents,  by far, the largest merger in the history of the pharmaceutical industry (an industry which is pretty accustomed to large mergers) by itself creates headlines. And of course the fact that the deal centres on the makers of two of the most famous brands in the pharmaceutical industry – Viagra and Botox – generates further public interest – even if neither of these treatments are major components of the deal.

But the deal has far more political dimensions that has immediately generated a strong backlash. US politicians have reacted angrily, with President Obama already criticising the proposed merger as essentially a tax dodge. Presidential candidates Bernie Sanders and Hilary Clinton have also stepped in – Sanders called for the Obama administration to “stop this merger”, while Clinton criticised it more generally by noting that it “will leave US taxpayers holding the bag”.

Clearly, Pfizer is risking the severe ire of the US government and Treasury, which still has a number of tools at its disposal to disrupt Pfizer’s broader fortunes, particularly since the major buyers of Pfizer’s products are tax-funded government health care programmes, including the Veterans Administration. Pfizer has certainly drawn attention to itself through this manoeuvre. This kind of risk and backlash was enough to deter most inversion strategies in the past, but pharma companies have been more aggressive in pursuing this in the last 18 months, and certainly risks coming to a loggerheads with the government. Pfizer is now at the forefront of the battle – a position it appears comfortable with having pursued the strategy (albeit unsuccessfully) last year with its bid for AstraZeneca. And whilst the deal has been structured in a way that appears to limit the ability of the state to intervene, it is certainly still subject to major political risk, and the Treasury will seek to introduce measures to trip the agreement up.

And in many ways the timing is pretty bad – the announcement comes with memories over the Turing drug pricing controversies still fresh in the mind of the public. Even if the pricing controversy represents an entirely different issue – and indeed the Turing pricing controversy was a very isolated case – the motivations and drivers of the entire industry are being tarnished with the same brush, rendering it vulnerable to a wide range of attacks and reputational risks. And this at a time when presidential candidates are trying to posture themselves on major issues that can raise their profile. Certainly, the industry needs to do a better job of presenting its case when controversial issues such as pricing and M&A arise – and the inevitable backlash will certainly not be limited to just Pfizer, or Turing, or other targets that have been subject to scrutiny in the past.

Gustav Ando is the Director of Life Sciences at IHS Markit
Posted 24 November 2015

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