Bloomberg News

Merck, Mylan Want U.S. Tax Changes as Rivals Move Overseas (2)

May 13, 2014

It’s not time to leave the U.S. just yet, say the leaders of two top drug companies who are faced with their biggest domestic competitors fleeing abroad for more competitive business tax rates.

Merck & Co.’s Ken Frazier, whose company is the second-largest U.S. maker of brand-name pharmaceuticals behind Pfizer (PFE:US) Inc., and Mylan Inc.’s Heather Bresch, the leader of the nation’s biggest generic-drug maker, don’t want leave if it can be helped, they told Bloomberg News in separate interviews.

Unless Congress acts to level the tax playing field with the rest of the world, though, others may be forced to follow the examples set by Pfizer and Actavis Plc (ACT:US), they said. Pfizer is seeking to buy London-based AstraZeneca Plc (AZN) to redomicile in the U.K., while Actavis based itself in Ireland after an acquisition six months ago.

“The loser in this is our country,” Bresch said during an interview in New York. “No one seems to care about that. Congress can’t find it within themselves to make our country competitive.”

As competitors head to tax-friendly countries and cut their bills to the federal government, they typically keep their operations in the U.S. While that means their day-to-day activity doesn’t have to change, it gives them an edge in raising after-tax profits and more cash to use for deals to buy assets or pay dividends. Those left behind, meanwhile, are at a competitive disadvantage, in the view of investors.

Before getting an Irish address, Actavis with headquarters in New Jersey was Canonsburg, Pennsylvania-based Mylan’s biggest U.S. rival. Pfizer, based in New York, has proposed a $106 billion takeover of AstraZeneca that has so far been rejected.

Congressional Work

The solution for Whitehouse Station, New Jersey-based Merck isn’t to leave, Frazier said in an interview in Boston. It’s to work with the Congress to lower the U.S. corporate tax rate of 35 percent so that it’s in line with the rest of the world, including the U.K.’s 21 percent rate.

“I continue to be optimistic, because we’re a rational country of rational people,” Frazier said. “We’re proud of being an American company, but we’d like to be on an even playing field with our European and Japanese competitors.”.

Merck gained less than 1 percent to $55.75 at the close in New York. The company increased 21 percent in the past 12 months. Mylan was unchanged at $47.57 and has jumped 63 percent the past 12 months.

Little Progress

So far there’s been little progress in changing the tax law. Now, U.S.-based companies pay the federal tax rate no matter where the income is made. Other countries use what’s called a territorial tax system that requires companies to pay taxes where the income is earned, rather than where their headquarters is located.

At the same time, the drugmakers remaining behind aren’t sure they’ll like the reform they get.

Senator Ron Wyden, the Oregon Democrat who heads the Senate’s tax committee, has said he will consider legislation designed to make it much more difficult for U.S. companies to use foreign mergers as a way to change legal residence.

Representative Dave Camp, the Michigan Republican who chairs the House Ways and Means Committee, also has a proposal that would lower U.S. rates to 25 percent, close to the rest of the world. That would reduce the incentive for companies to move their legal address abroad.

No Concern

Neither proposal appears headed anywhere fast, and Pfizer CEO Ian Read dismissed the U.S. Congress as a concern to his bid for AstraZeneca. “The U.S. needs to decide what it wants to do with taxes,” he said at a hearing today in front of the U.K lawmakers. “It’s a very remote possibility in the timeline of this deal that U.S. will change its tax laws.”

Bresch said she is concerned that whatever Congress does may end up hurting Mylan.

“If everyone in my sector has left and Pfizer goes, and Congress wakes up and says, ‘We better do something to stop it,’ now I’m penalized if I go, and yet they’re at a huge advantage for already leaving. They’ve already let it go too far.”

Bresch has considered leaving, she said, though she insists the tax advantage won’t be the main driver of any business deal for the company. In April, Mylan proposed a merger with Swedish drugmaker Meda AB (MEDAA) that was rejected.

A tax advantage “could have potentially been a byproduct of that deal,” she said.

While Bresch said Mylan is now looking at other potential targets, she refused to say whether a Meda deal was still possible. “Nothing’s ever dead until it’s dead,” she said.

Negotiation Strategy

“There’s always a point where everything becomes too expensive,” Bresch said. “It’s all the art of the negotiation and we’ll certainly comment when it’s appropriate. But I try to stress that we’re looking at a lot of assets and feel confident we’ll execute on something before the year’s end.”

Still, Bresch and Mylan may remain at a disadvantage, even then. The foreign companies they might like to buy will be cheaper for lower-tax rivals, such as Actavis and Valeant Pharmaceuticals International (VRX) Inc.

“We’re the only ones left” in the U.S. to do these kinds of deals, she said.

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Bruce Rule, Andrew Pollack


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Companies Mentioned

  • PFE
    (Pfizer Inc)
    • $30.39 USD
    • -0.10
    • -0.33%
  • ACT
    (Actavis plc)
    • $219.63 USD
    • 3.26
    • 1.48%
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