​5 things to know about the biggest ever drug merger

Last Updated Nov 23, 2015 2:08 PM EST

Pfizer (PFE) and Allergan (AGN) are merging in what will be the biggest pharmaceutical industry merger ever, combining the makers of Lipitor, Botox and Advil in a $160 billion deal.

While the numbers may be stratospheric, the merger has some very down-to-earth implications for consumers, taxpayers and investors, all of whom have a stake in the combination's outcome.

For one, it would result in the largest ever corporate tax "inversion" by headquartering the merged company in Ireland, Allergan's base, which would lower its tax rate and potentially provide less tax revenue to the U.S. The Obama administration and other critics attack such arrangements as blatant tax dodges, and even "unpatriotic," while corporations say they are acting in the best interest of shareholders.

Democratic presidential candidates Hillary Clinton and Sen. Bernie Sanders on Monday criticized the merger. Sanders said on Twitter that the deal "would be a disaster for Americans who already pay the highest prices in the world for prescription drugs," while Clinton said U.S. taxpayers would be left "holding the bag."

Then there are the consumer issues. The pharmaceutical industry has been on a mergers-and-acquisitions kick as corporations seek to gain scale by combining research and development departments, and to expand into new markets. But the impact on consumers hasn't always been positive, with mergers leading to less competition and higher drug prices. Some generic drugs, which account for eight of 10 prescriptions, have seen surging costs, prompting lawmakers to spark an investigation.

Turing Pharmaceuticals, for one, came under fire after hiking the price of an anti-parasite tablet to $750 per pill from $13.50 -- a 5,000 percent increase -- after the company bought the 62-year-old drug this year.

Still, the more immediate question may be how a tax inversion of this size could succeed, given the Treasury Department's move last week to introduce new rules to make inversions more difficult.

"The proposed merger may be the subject of major political backlash," said Gustav Ando, research director for IHS Life Sciences, in an emailed statement. "This time around, there are many presidential candidates jostling for position, and following on from the controversies over drug pricing in the wake of Turing Pharmaceuticals, the Pfizer-Allergan deal could enter similar territory."

Companies that have used tax inversions will avoid paying almost $20 billion in taxes over the next decade, according to a study from the Joint Committee on Taxation.

Below are five things to know about Pfizer and Allergan's proposed merger.

How will the tax inversion work?Even though Pfizer is the bigger company, Allergan will technically become the purchaser. That's because Allergan is headquartered in Dublin, which will allow the newly merged company to establish its legal domicile in Ireland and take advantage of the country's lower tax rate. Pfizer and Allergan estimate the new company will have a tax rate of 17 percent to 18 percent, compared with Pfizer's effective tax rate of about 27 percent.

How can the inversion move forward if the Treasury has introduced rules to deter companies from using the tax strategy? The government's rules aren't broad enough to stop Allergan and Pfizer from using the tactic. The Treasury Department's regulations bar corporations from inversions if the shareholders of the old U.S. parent company own at least 60 percent of the shares of the new foreign company. In the proposed Allergan-Pfizer deal, the shareholders of Allergan will own 44 percent of the merged company, while Pfizer shareholders will own 56 percent.

Asked on a conference call about the regulatory outlook and potential backlash against the inversion, Pfizer chief executive Ian Read said, "We assessed the legal regulatory landscape and moved forward. That is our obligation" to shareholders.

What's in it for investors? The deal values Allergan's shares at $363.63 each, a premium of about 27 percent above where the stock traded in late October before news of the merger leaked. Still, Allergan's stock has jumped since then, which means the premium is now smaller than it was earlier.

The companies' executives are billing the merger as a way for shareholders to benefit from higher profits, market share, and a stronger research and development effort. The deal will boost Pfizer's profits by 10 percent in 2019, the companies predicted.

"We believe this combination will create a top-tier, growth pharmaceutical business," Pfizer CEO Read said on the call.

Will the merger benefit consumers? Pfizer and Allergan say the union will lead to a stronger R&D effort from the two business, but the Monday conference call to discuss the merger was focused more on financials than the impact on consumers.

Consumers have reason to be concerned about the impact of the deal, which could affect prices for some of the most widely used prescription and over-the-counter drugs. Pfizer's products include Advil Dristan and Robitussin, for example, while Allergan makes eye lubricant under the Refresh brand

One former Pfizer executive once wrote in Nature that pharmaceutical mergers have "resulted in less competition and less investment in R&D." Consolidation has also been cited as a reason why some generic drugs have seen soaring prices, despite the fact that the drugs themselves haven't changed.

Pfizer and Allergan will face antitrust scrutiny from both U.S. and European regulators in getting the deal done. The deal is also dependent on Allergan's pending divestiture of its generics business to Teva Pharmaceuticals (TEVA), which Allergan said is expected to take place in early 2016.

What about Pfizer's potential split? Prior to the merger announcement, there had been discussion about Pfizer potentially splitting into two businesses: one would focus on generic drugs, while the other would focus on developing new drugs through R&D efforts.

A split is still on the table, according to Pfizer. In the merger announcement, the companies said Pfizer would make a decision about separating the businesses by no later than 2018. That could mean more upheaval for the drug industry, and for consumers.

"Pfizer is potentially heading towards a split, while its major competitors will be forced to respond to the most mega of all the mega-mergers," Ando said. "The industry has to adapt to the twin energies of major innovation driving astonishing growth through the sector on the one side, versus an unprecedented backlash from government payers over the prices of new medications on the other -- the end-result, inevitably, is further M&A."