Merck's Frazier disses tax inversion strategy, at least for Merck

Merck CEO Ken Frazier

Tax inversion deals--buying a controlling share in a sizable company to shave a corporate tax rate--are all the rage among pharma players. AbbVie ($ABBV) is buying Shire ($SHPG). Perrigo ($PRGO) picked up Elan ($ELN), Actavis ($ACT) got Warner Chilcott and Pfizer ($PFE) fumbled a huge deal for AstraZeneca ($AZN), all in the name of lower taxes. But to Ken Frazier, doing a megadeal just to pull off tax inversion doesn't make sense, at least not for Merck.

Frazier told investors at the Morgan Stanley Global Healthcare Conference Tuesday that "the size of transactions that would make us eligible for an inversion" were inconsistent with the company's strategy of doing deals to nab solid commercial and scientific prospects. On top of that, "I think frankly that there is a lot of distraction that you create when you do a big merger," Frazier said, according to Seeking Alpha's transcript from the presentation.

Frazier pointed to last week's FDA approval of Merck's ($MRK) breakthrough melanoma drug Keytruda as an example of what he means. Merck originally planned to submit it for approval in 2019 but was able to get the cancer drug to market in 2014, just three and a half years after the first patient dose. "Those kinds of things require that your scientists, your commercial people, be able to work together and understand what the plan is for tomorrow, 5 years and 10 years from now," Frazier said.

That is not to say the U.S. tax code is not creating a huge disadvantage for U.S. companies or that it doesn't need to be overhauled, Frazier said. In fact, it will be eventually, and the end result may end up penalizing companies that do tax inversion deals, he speculated.

Just last week, the U.S. Treasury Department said it's reviewing a "range of options" to discourage tax inversions, which could include policies that "meaningfully reduce the tax benefits," of the deals. That has some investors spooked, particularly since some run-up in share prices have been tied to the likelihood of companies being nabbed for the low-tax domiciles. American depository receipts for Dublin-based drugmaker Shire--which has agreed to a $55 billion buyout from AbbVie--were off 3.6% for the day and AstraZeneca declined 2.1%.

- here's the Seeking Alpha transcript