This will be the first in a series of discussions about what is going on with and among big pharma [the pharmaceutical industry].  But, really, this specific post is more about the corporate taxation process in America and the world.

All these mergers about which you have been reading between the various pharmaceutical firms have not been good ideas.   Why do I say that?  Because they have not led to any new drugs or better development processes or even more sales of a specific drug.  At the very least, the mergers over the past 5 years have specifically led to the slashing of more than 150K jobs in the pharmaceutical sector.  But, it’s not just the last five years- there have been more than 350K jobs eradicated over the past decade or so, due to these mergers.

These cuts are the direct results from the mergers of the  big pharmaceutical firms. For example, Upjohn used to be a major player in Michigan- but, now as part of Pfizer, it’s employee base has been decimated .  (O.K.,  not quite decimated- but it’s dropped from 6700+ to 2100-.)  It’s a little worse for Ann Arbor’s Parke Davis, after Pfizer terminated the 2100+ researchers there.  The famed research campus has been taken over by the University of Michigan, once the firm became part of Pfizer. This jobs decline is a big problem for the economy, since most of the jobs in big pharma are well-paid.

It’s about to get much worse, too. Because Pfizer, the grand-daddy of American pharmaceutical firms, wants to buy Astra-Zeneca. (Truth: I actually worked for Pfizer as an undergrad- they had a big facility [their first] in Brooklyn; I also was retained as a consultant for Pfizer over the years.)

But, it’s not clear that Pfizer wants to buy AstraZeneca for its pharmaceutical prowess. No, it seems that this acquisition is being made so that Pfizer can become a UK firm. Where Pfizer has been squirreling cash away for a decade or more (actually, in Europe). And, if this acquisition proceeds, Pfizer will have total access to that cash, without owing or paying one cent in taxes.

Britain has already adjusted its tax rates, allowing big business to pay less taxes (currently 20% or less- especially when intellectual property is involved).  You might recall that Starbucks relocated it’s European headquarters to the UK to take advantage of these new British laws.  And, now, Pfizer’s idea about becoming a UK company helps it avoid the 35% tax rate, the tax on accumulated profits- and to use the lower British rates. Or, in Pfizer’s case- no tax rates, because they will move all their profits around the European countries, effectively paying zero taxes (or very close to it).

The big joke (on you and me) is that Pfizer really doesn’t pay US taxes. After all, if it didn’t lie (see my post about Apple), it paid all of $ 142 million in taxes on $ 15.7 billion in profits. That’s less than 1%!   Oh, and the year before- they were refunded $941 million, even though they made a profit.

Moreover, like Apple, Pfizer has “set aside”  some $ 19.4 billion in cash to take care of its stash in Europe.  Which is exactly 1/5 the money they plan to use to acquire AstraZeneca; and that acquisition will “evaporate” the cash hoard, so there will be no taxable issues.

Oh, I know, you can point to the similar strengths in cancer and cardiovascular drugs between these two firms. And, if Pfizer continues its traits, you can bet that many, many jobs will be slashed. Just like they did to Parke Davis, Upjohn, and Wyeth, after their acquisition and absorption by Pfizer.

These research jobs they are cutting also mean it will be less likely that the firm will come up with a blockbuster drug, one that will provide smooth sailing for the firm in years ahead. Now, you know why this is really a play to capture the cash, without any tax obligations.

That is one of the big differences between when big pharma merges and when the high tech/biotech firms merge. When big pharma merges, the resultant firm kills their R&D (research and development teams). Biotech and high-tech firms know they live or die with their R&D- and they will continually raise funds to insure that ‘win, lose, or draw’, they can continue their R&D efforts. Oftentimes, the original goals of the biotech firms are not where they end up, once they have a marketable product.

Maybe this merger- and the reason why Pfizer wants AstraZeneca- will be the wake-up call our Congress needs to actually change the way we tax firms. As I’ve written many times, we need to apply our federal income tax the same way the various states tax multi-state entities.  Which means, one’s taxes are directly related to their involvement in the US, regardless of where they claim they move their profits.  (Intellectual property owners can claim the “product” or service sold is owned by an entity in Lichtenstein [for example]- even with zero employees or staff in that location.)

Tomorrow (and further), I will discuss the business of big pharma, not its tax avoidance schemes or job slashing methods due to mergers.

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