Pfizer CEO Is Impatient for Tax Reform as He Hunts for Deals

Jul 29, 2014 4:14 pm ET

(Updates with closing share price in 18th paragraph.)

July 29 (Bloomberg) -- Failing to buy AstraZeneca Plc with the drug industry’s largest-ever deal hasn’t stopped Pfizer Inc.’s Ian Read from looking far and wide for acquisitions.

“We continue to look at all types of business development, regardless of size, that we believe would add value to shareholders,” Read, the company’s chief executive officer, said today on a conference call after his company announced second-quarter results.

That may mean a deal that allows New York-based Pfizer to decamp from the U.S. for a lower-tax jurisdiction overseas, one of the goals for a merger with London-based AstraZeneca. American drugmakers are forced abroad by the U.S.’s corporate tax rate, Read said, the highest in the developed world.

“There’s no substantial advantage to being a U.S. company, to doing business in the U.S.,” he said by telephone. “We are at a tremendous competitive disadvantage.”

U.S.-based drugmakers pay a 35 percent rate on all earnings, whether made here or abroad. Foreign companies pay that rate only on profits they earn in the U.S. That’s unfair, Read said. He’s said he’s tired of criticism directed at companies and CEOs for doing what he says may be the best strategy to help shareholders.

“There’s a lot of cute ways people present this argument,” Read said. “One of them is that these U.S. companies are getting all the advantages of being in the U.S. -- the universities, the infrastructure, the National Institutes of Health, the freedom the U.S. represents economically. But every foreign company that invests in the U.S. gets that advantage.”

Lowering Taxes

It’s incumbent on Pfizer to act, rather than hope U.S. lawmakers will, he said.

“We are trying to work with Congress, we’ve been discussing it for years, and we’re looking at any other way we have of legally lowering our tax expense,” he said.

Democratic lawmakers have proposed legislation to make it harder for U.S. companies to move their legal address abroad.

U.S. Senator Ron Wyden, the Oregon Democrat who heads the Senate Finance Committee, has called for a back-dated measure to block tax inversions since May, while Senator Carl Levin, a Michigan Democrat, would raise the threshold that has to be met for an inversion to take place. Another by Democrats would ban companies from winning government contracts if they left the U.S. in a tax move. Republicans have called for comprehensive tax reform that would lower U.S. corporate rates.

Terry Haines, a policy analyst with New York-based ISI Group LLC, said he doubted legislation would pass this year to block companies such as Pfizer from making a move for tax purposes.

In a note to clients, Haines said his firm would “maintain our call that anti-inversions legislation does not become law in 2014.”

Next Move

Investors are watching Pfizer’s next move as patents end on older drugs and sales of newer products fail to offset the losses. For example, Viagra, the drug for erectile dysfunction drug, has mostly lost patent protection in Europe.

Earlier today, Pfizer reported earnings that beat analyst estimates. Excluding certain items, Pfizer’s second-quarter profit was 58 cents a share, 1 cent more than the average of 15 analysts’ estimates compiled by Bloomberg. Revenue declined 2 percent to $12.8 billion, with Viagra recording a 28 percent drop outside the U.S., the company said in a statement.

It was “overall, a decent/good quarter, and certainly an improvement” from the first quarter, Mark Schoenebaum, a New York-based analyst with ISI Group LLC, wrote in a note to clients. Pfizer will get a “re-boot opportunity during which the company can clarify its go-forward strategy after a difficult year thus far.”

Drug Sales

Revenue for the quarter also beat analysts’ estimates of $12.5 billion as demand for the company’s biggest products grew, partially offsetting its other losses. Sales of the pain pill Lyrica, Pfizer’s top medicine last year, increased 16 percent to $1.32 billion. Prevnar, a vaccine for pneumococcal diseases, grew 13 percent to $969 million.

Pfizer updated its full-year sales forecast and now projects 2014 revenue of $48.7 billion to $50.7 billion, a $500 million decrease. Net income declined to $2.91 billion, or 45 cents a share, from $14.1 billion, or $1.98 a share, a year earlier when Pfizer divested an animal health unit and received a legal settlement.

Pfizer shares fell 1.2 percent to $29.73 in New York trading. The stock has gained less than 1 percent in the last 12 months.

Pfizer is in the midst of a strategic and structural transformation under Read. The CEO is looking for a deal that would return the drugmaker to its status as the biggest in the world then might eventually split into two or three separate companies.

Right Decision

Read in May offered $117 billion for AstraZeneca and was rejected. He said Pfizer was right to walk away, for now.

“We have, in general, received good feedback from our shareholders that we demonstrated good capital discipline,” Read said.

Pfizer has other options to pursue, he said, and investors are watching closely for what could be a transformative deal. He said the company probably wouldn’t pursue a large generics company. “It would be unlikely to create sufficient value,” he said in the interview. “It may, depending on the premium. But it would be unlikely.”

A Pfizer deal with AstraZeneca would have added a pipeline of new drugs that use the body’s own immune system to attack cancer cells. It’s a promising area of therapy where drugmakers including Bristol-Myers Squibb Co. and Merck & Co. have focused, and where Pfizer has little. It would also have moved the drugmaker to the U.K., with its 21 percent tax rate.

The drugmakers AbbVie Inc. and Mylan Inc. have announced plans this year to move their legal addresses abroad while keeping their operational headquarters in the U.S.