Red dollar symbol wrapped up by a stethoscope

Tax inversion is a topic that has been making waves in the health care industry lately. Most recently, it has come up regarding Pfizer’s proposed deal with Ireland-based Allergan, which would be the largest health care deal in history, if approved. Pfizer, a household name in pharmaceuticals, represents yet another firm to flee the US in the search of lower tax rates. It follows on the heels of several other pharma companies moving their headquarters overseas, such as Horizon Pharma, Valeant Pharmaceuticals, and Endo Pharmaceuticals.

The Pfizer-Allergan deal has come on to the medtech radar because of Allergan’s portfolio of aesthetic products, particularly its flagship BOTOX injection, which can be used for both aesthetic and therapeutic purposes. Allergan is already fresh off of a recent acquisition itself; legacy Allergan managed to move its headquarters overseas after it was acquired by Ireland-based Actavis, which later took on the Allergan brand name. BOTOX, a major brand in the aesthetic industry for years, is now looking at changing hands again in rapid succession. Although the acquisition by Actavis effectively lowered the company’s tax rate, the move was not without consequences: Allergan’s client base was surprised by this move and uncertain about the direction the company would take, resulting in sales of BOTOX dropping off a bit. Imagine how they might feel about the acquisition by Pfizer, one of the largest drug makers in the world.

Of course, this isn’t the first time tax inversion has been on medtech’s radar. Medtronic’s acquisition of Covidien similarly resulted in Medtronic moving its headquarters to Ireland, freeing up billions of dollars that Medtronic held overseas in order to avoid it being taxed.

While US regulators scramble to find a way to stop companies from leaving, these sorts of deals are happening at dizzying rates as everyone frantically tries to get on equal tax ground: the more companies that move their headquarters overseas, the more their competitors feel the pressure to also move overseas, and so on. This could mean more focus on deals and integration efforts than on R&D and organic growth.

But how do you stop a trend with so much momentum? The best answer to that might be to update the outdated US tax system.

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