Corporate tax inversions didn’t go out of style last September after the U.S. Treasury enacted rules designed to restrict them. The practice entails a U.S. company buying a foreign company and then moving its headquarters overseas, where the corporate tax rate is lower than the U.S.’s nominal 35 percent – and to accumulate foreign earnings without having to pay the higher U.S. corporate tax.
While major U.S. firms such as General Electric, Microsoft and Apple also utilize the tax advantage of keeping overseas earnings offshore, pharma manufacturers are particularly high-profile in the corporate tax shell game – among them, Pfizer, Merck, and Medtronic.
When the new regs went into effect last September, objectors said their restrictions would tie the hands of U.S.-based companies. The stricter rules of ownership caused North Chicago-based Abbvie, a spinoff from Abbott Laboratories, to scuttle its deal to team up with Dublin-based Shire. The deal would have chopped Abbvie’s effective tax rate from 22 percent to 13 percent. Instead, Abbvie ended up paying a $1.6 billion breakup fee.
Abbvie’s blockbuster drug, Humira, developed in Worcester before the Abbvie-Abbott split, is due to go off patent in 2016. Humira now accounts for more than half of Abbvie’s revenue. The investment world is asking, as it inevitably does, “What else you got?”
Abbvie’s arsenal of potential replacements includes Viekira, a Hepatitis C drug. It’s a lucrative category in terms of return on investment, but it’s up against Gilead Sciences, which already has a product on the market, and Merck.
Competition isn’t Big Pharma’s only challenge. Big Payers and Big Insurers, with plenty of clout in the pharma marketplace can and do influence market prices of even blockbuster drugs. And national health programs in other countries have also been exerting resistance to U.S. prices.
There’s another catch in the whole corporate tax inversion situation; companies domiciled overseas are more vulnerable to hostile takeovers. One need look no further than the big-fish-eating-smaller-fish scenario, currently playing out, of Teva Pharmaceuticals Industries Inc.’s unsolicited $40 billion bid for Netherlands-based Mylan N.V., which in turn had made two offers to acquire Ireland-based Perrigo Company PLC, which had moved its headquarters from Michigan (both offers were rebuffed, but at press time Perrigo was reportedly willing to come back to the bargaining table). Mylan’s defense against Teva is its ability to issue preferred shares to a foundation known as a “stichting” – a legal entity with limited liability, but with no members or shares – seldom used, but an effective tool in protecting assets from the Nazis during World War II. The only problem – the stichting is not under Mylan’s control.
Stricter federal regulation of U.S.-overseas acquisitions won’t stanch them if the companies involved are determined to carry them out. The bigger companies, under shareholder pressure to produce results, also have tax departments that can find workarounds to get their deals done. So it’s best to see beyond the rhetoric to determine how effective federal legislation will be on the global stage.
