Did you hear about the revolutionary discovery by global drug companies? Tax avoidance!

Last week two of the world’s biggest drug companies came together when Pfizer and Allergan decided to become one. The combined behemoth will replace J&J as the world’s largest drug company.

Adjusted for industries, this would roughly equal Apple acquiring Google in technology. Imagine the potential that would unleash as Apple’s hardware gets wedded to Google’s software, leading to a new era in consumer advancement and user joy.

Can we expect something similar with Pfizer + Allergan? Will this lead to a new age of drug discoveries and enhanced efficiencies in development? Perhaps break-through R&D which combines Pfizer’s vaunted scientists with Allergan’s household reach?

Alas, nothing of that sort. The new breakthrough in the drug industry is not about exciting science or improving efficiency. It is just an exercise in US tax avoidance by incorporating in the more tax friendly Ireland. A well-worn strategy innocuously called a corporate “inversion”.

This should give you an idea on how blatant the underlying cause is: even though Pfizer is about 40% larger than Allergan, and Pfizer’s CEO will serve as the head of the combined company, technically – Allergan is buying Pfizer. This is because Allergan is already incorporated in Ireland and…well you know.

I am not particularly against companies doing their best to reduce their tax liability. However, the exercise is particularly fraught with moral hazard for drug companies. This is because almost ALL exciting drug discoveries begin with experiments in academic labs at universities. And almost ALL such experiments are funded by the US taxpayer.

Drug companies use published research from these labs as a foundation for their products (and profits). Avoiding corporate taxes that pay for that very foundation does not sound like a great idea.

In my view, it is best if drug companies set themselves apart through organic growth that relies on the genius and passion of their scientists. Unlike, their tax bill, both companies have ample supplies of these.

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