What you need to know about the merger of Pfizer and Allergan

What you need to know about the merger of Pfizer and Allergan
A Pfizer flag is displayed in front of world headquarters on Monday in New York. (Mark Lennihan / AP)

In the latest shake-up in the healthcare industry, pharmaceutical firms Pfizer Inc. and Botox-maker Allergan announced their $160-billion merger, creating the world's largest drugmaker.

The new company will take New York-based Pfizer's name but will be headquartered in Dublin, Ireland, the current home of Allergan. The move is a variation on what's known as a tax inversion and will lead to lower tax rates for the company.

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Read on to find out more about this deal.

Why is this deal happening? Read more

There have been a number of mergers in the healthcare industry since the passage of the Affordable Care Act, which complicated the outlook for healthcare companies' profits and revenue.

For Allergan, the deal is an opportunity to get into more markets. By tapping into Pfizer's much larger geographic reach, Allergan can expand sales of its products, said Ashtyn Evans, healthcare analyst for Edward Jones.

Pfizer has been actively looking for an acquisition, Evans said, to boost its earnings growth.

"It gives them an innovative business, such as Allergan, to do that with," she said.

The deal is also an opportunity to lower its tax rate. By establishing the new company's headquarters in Dublin, the new company's tax rate will be about 17% to 18%. Last year, Pfizer's effective tax rate was 25.5%, according to a regulatory filing.

What is a tax inversion? Read more

An inversion occurs when a U.S. company buys a smaller foreign competitor in a lower-tax country and establishes the merged company's headquarters in that nation.

In this case, the deal is structured so that Allergan is technically the purchaser, even though Pfizer is the larger company.

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This move allows the company to avoid the higher corporate tax rates in the U.S. President Obama and several congressional leaders have spoken out against inversions, and it has even become a hot topic among presidential candidates.

How will this affect consumers?

The merger has raised concerns from consumer advocates about higher drug prices resulting from decreased competition in the industry.

"Certain patients are going to not only see elevated prices but potentially a loss of choice," said Jamie Court, president of advocacy group Consumer Watchdog. "Even though this is a foreign company, it's actually going to create a tremendous problem for all purchasers in the U.S. market."

But one analyst disagreed. 

"I wouldn’t expect any shift in pricing or anything as a result of this deal," said Richard Purkiss, a managing director at Piper Jaffray. "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."

Pfizer is known for drugs such as Viagra and Lipitor, while Allergan's best-known product is Botox.

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Pfizer and Allergan's $160-billion pharmaceutical merger puts new twist on tax-avoiding inversions