- Although Merck and Johnson & Johnson have huge cash reserves, the only size-matched inversion options are Novartis, Roche, Sanofi, Bayer, and GlaxoSmithKline. Generally speaking, these companies are averse to being acquired.
- Smaller companies, such as Celgene, have more options.
- While many companies now look to acquisitions to lower corporate tax rates, they still are useful for enhancing product portfolios and pipelines.
As the Pfizer-Allergan merger announcement proved, U.S. companies often look to inversion deals as a mechanism to lower corporate tax rates. For example, the first year after the merger with Allergan closes, Pfizer's tax rate will drop from 25.5% (in 2014) to 17%. What large U.S.-based multinational company wouldn't want to enjoy that advantage?
However, there are a couple of noteworthy challenges standing in the way of companies looking to follow Pfizer's lead. First there needs to be a strategic fit and a willing partner. Otherwise the acquirer may face strong resistance. Case in point: Last year, AstraZeneca successfully fended off Pfizer's advances and Pfizer had to start again looking for another deal.
Size matters too. Smaller companies like Celgene, which recently bought Receptos and signed a 10-year collaboration agreement with Juno Therapeutics, are better positioned for inversion deals. For these nimbler companies, more appropriate partners are available.
If the Pfizer-Allergan deal is included, total M&A activity in the biopharma sector this year has surpassed the $400 billion mark. Given the tremendous pressure from investors and the need to turn around declining revenues, companies will continue to hunt for the right deal.