More than 65 years ago, a Los Angeles drugstore owner installed a laboratory above one of his shops to make a product that would discourage children from sucking their thumbs.

The operation quickly changed focus to an antihistamine eye drop called Allergan. Renamed after that drug, the firm moved to Irvine and grew into a global pharmaceutical giant.

Now, the Allergan name is being retired as part of a $160-billion merger with rival Pfizer Inc. that would create the world’s largest drugmaker.

The long-expected stock-and-debt deal — the second-biggest ever — already is drawing fire for being the most creative attempt yet at avoiding U.S. corporate taxes. It also is raising fears of higher drug prices for consumers.


Although Pfizer is the larger company, the deal unveiled Monday is structured so that Allergan, now an Irish company, is technically the buyer.

The move is a twist on a controversial tactic known as inversion, in which a U.S. firm buys a smaller foreign competitor in a lower-tax nation and shifts the merged company’s headquarters there to reduce taxes.

The White House and the two leading Democratic presidential candidates quickly blasted the Pfizer-Allergan tie-up as a corporate tax dodge.

“This proposed merger, and so-called inversions by other companies, will leave U.S. taxpayers holding the bag,” said Democratic front-runner Hillary Clinton.


The new firm would be called Pfizer and would be led by its current chief executive, Ian Read. Although its global operational headquarters would be in New York, the merged company’s principal executive offices would be in Dublin to take advantage of Ireland’s low corporate tax rate.

Pfizer and Allergan said the effective tax rate of the new company would be 17% to 18%, well below Pfizer’s effective tax rate last year of 25.5%.

U.S. companies have stepped up their use of inversions in recent years as foreign countries have been lowering their tax rates to lure corporate headquarters.

New Treasury Department regulations, including ones issued just last week, have made the tactic somewhat more difficult. But the Pfizer-Allergan deal is structured as a foreign acquisition to avoid those rules, said Larry Harding, vice chairman of Radius, a firm that helps U.S. companies operate overseas.


“It’s definitely an interesting inflection point and has ratcheted up the issue,” Harding said.

Lowering Pfizer’s taxes wasn’t the only motivation in the merger, which Read said would give the company more “financial flexibility” to invest in research, development and manufacturing.

“I want to stress that we’re not doing this transaction simply as a tax transaction,” he told investors on a conference call.

Later, on CNBC-TV, Read called the merger “a great deal for America,” where the new firm would have 40,000 employees.


Allergan has about 2,100 employees in Irvine and 300 in Corona out of a worldwide workforce of 30,000.

“We will continue to pump in $9 billion globally into research, mostly in the United States,” Read said. “These sort of resources are being brought together to cure major illnesses for humanity.”

Pfizer is known for the cholesterol-lowering medication Lipitor and the male erectile dysfunction drug Viagra.

Allergan was acquired in March by the Irish drugmaker Actavis in a $66-billion deal that thwarted a takeover attempt by Valeant Pharmaceuticals International Inc. The new company kept the Allergan name.


The Pfizer deal values Allergan at $363.63 a share, about 30% more than its price when reports of a deal first surfaced last month.

Allergan shareholders would get 11.3 shares of the new company for each of their shares. Pfizer shareholders would get one share of the new company’s stock for each of their shares, but have the option of receiving cash, up to a total of $12 billion, for some or all of their shares.

After the deal closes, Pfizer shareholders would own 56% of the combined company. U.S. and European regulators must approve the transaction.

The stock of both companies dropped Monday. Allergan fell $10.76, or 3.4%, to $301.70. Pfizer shares dropped 86 cents, or 2.7%, to $31.32.


Jamie Court, president of advocacy group Consumer Watchdog, worried that the consolidation of two pharmaceutical giants would lead to higher drug prices because of decreased competition.

“Certain patients are going to not only see elevated prices, but potentially a loss of choice,” he said.

On the campaign trail, Sen. Bernie Sanders, the Vermont independent seeking the Democratic presidential nomination, called on the Obama administration to block the deal.

“The Pfizer-Allergan merger would be a disaster for American consumers who already pay the highest prices in the world for prescription drugs,” Sanders said. “It also would allow another major American corporation to hide its profits overseas.”


But industry analyst Richard Purkiss, managing director at investment banker Piper Jaffray, said he thought the merger would have little effect on consumers.

“Pricing is mainly a function of what competition there is, and this doesn’t give the company any greater power in most of its categories because they’re not particularly overlapping businesses,” he said.

Purkiss didn’t think there were many barriers to the deal’s completion. But as the largest inversion-type merger so far, Pfizer and Allergan could face regulatory hurdles in Washington, said Maxim Jacobs, an analyst at Edison Investment Research.

Rep. Sander M. Levin (D-Mich.) said inversions have cost the U.S. government tens of billions of dollars in tax revenue and that the Pfizer-Allergan deal should spur lawmakers to take action.


President Obama believes “it is not fair for companies to essentially renounce their citizenship [and] seek to, at least on paper, relocate themselves somewhere else so they can pay a lower tax rate,” White House Press Secretary Josh Earnest said.

Obama and Democrats have sought to change the tax law to prohibit inversion-type deals, but bills proposed in the House and the Senate last year still have not gone to hearings in the Republican-controlled Congress.

Meantime, the administration has tried to make inversions more difficult. Last week, the Treasury Department added to prior restrictions by issuing technical rules that would limit the ability of U.S. companies to merge with foreign firms to avoid corporate taxes.

Clinton said she would propose specific steps in the coming weeks to stop inversions.


Some Republicans also have criticized inversions but said the solution is to lower the U.S. corporate tax rate significantly to reduce the incentive to reincorporate overseas. Ireland has a 12.5% corporate tax rate. The U.S. rate is 35%, the highest of any developed economy.

Rep. Charles Boustany (R-La.) called the latest deal “a sad reflection of our broken tax code, which is driving businesses away from the United States instead of encouraging them to grow here at home.”

The Business Roundtable, a trade association of chief executives at major corporations, said inversions were “a self-help solution to compete in the global marketplace” and predicted they would continue until the corporate tax code is overhauled.

But with bipartisan attempts at tax reform efforts stalling, legislation is unlikely until after next year’s presidential election.


Besides the tax benefits, the companies expect to save $2 billion in the combination. Pfizer executives had talked about splitting their company in two soon, one focused on developing new products and the other focused on established drugs. But they said Monday that they won’t be in a position to consider that option until the end of 2018.

The deal has a breakup fee of as much as $3.5 billion, which either company has the right to exercise.

jim.puzzanghera@latimes.com

samantha.masunaga@latimes.com


Puzzanghera reported from Washington, D.C.; Masunaga from Los Angeles.