By Louis Garguilo, Chief Editor, Outsourced Pharma
You’ve got to give credit to companies in our industry. If punitive U.S. taxation policy is going to drive them to do deals overseas, they are going to go big-time and in style. If they are not allowed to repatriate global dollars in a sensible manner, they will invest them with fanfare abroad.
In a New York Times story on July 14 reported by Liz Hoffman and Hester Plumridge, among the top six deals of any kind to date in 2014, four of them are in our industry – and each involves slashing taxes and performing inversions, when a U.S. company buys a foreign one to reincorporate at the new location to obtain the lower tax rate. (Thanks to Pfizer (and AZ) for making reincorporate a household word this year. See an earlier Outsourced Pharma article.) Here are the top four deals with the U.S. entity listed first. (The other two on the list are ATT-Direct TV and Comcast-Time Warner Cable):
Abbvie-Shire (Ireland): est. $53.6 billion (not fully consummated)
Allergan-Valeant (Canada): $53.3 billion
Medtronic-Covidien (Ireland): $42.9 billion
Forest Laboratories-Actavis (Ireland): $25 billion
Special kudos go to Abbott’s Chief Executive Miles White, quoted in The Times article as saying, "Everyone seems apologetic about inversions. I'm not." And just to make sure he was clear: "I don't think there's anything to apologize for." Now, that’s the spirit. Mylan is buying Abbott Laboratories' generic-drugs business in developed markets for stock valued at about $5.3 billion. The new entity will be centered in the Netherlands, which will reduce the tax burden.
Helping to drive the timing of the “frenzy,” according to The Times article, is the fear that the U.S. government will enact even more aberrant tax law and somehow prohibit inversions. “Lawmakers worry that the growing allure of lower tax rates will spark a wave of such moves in the next couple of years if Congress doesn't make progress on rewriting the tax code,” writes The Times. “The congressional Joint Committee on Taxation has estimated that curbing inversions would save $19.46 billion over 10 years in tax revenue.”
Now that is a thought process that might itself be labeled as an “inversion.” (Note the use of the word “progress.”) Here’s a novel thought: What if tax laws were enacted to allow for a sensible repatriation of foreign-derived sales, and more competitive global corporate tax policy? “Save $19.46 billion over 10 years?” GE and Pfizer could reinvest that back into the U.S. economy in an afternoon (speaking with extended exuberance, of course).
How bad (or good) has it gotten? The current state of affairs has even spurred relatively smaller players in our industry to make the move. According to The Times, “North Carolina's Salix Pharmaceuticals Ltd. last week agreed to acquire a subsidiary of an Italian drug company and reincorporate in Ireland in the process.” Sounds like another soccer tournament in which we don’t advance to the championship.
Quoting The Times, “Overall deal making this year, at $1.86 trillion, is at its highest pace since 2007, and health-care deals, at more than $330 billion, are at their highest pace since Dealogic began keeping records in 1995.” The U.S. pharmaceutical (including biotechnology and medical device) industry deserves credit for leading the way.
How did we get to this tipping point?
According to The Times article, “Inversion deals have been around since the 1980s, but had been used less frequently. Companies that wanted a lower overseas tax rate could just reincorporate in, say, Bermuda or the Cayman Islands. But recent rules have made that type of tax strategy virtually impossible. The latest rule tightening, in 2012, left foreign takeovers as the only clear path to gaining a new, lower-tax home,” says The Times.
So, is this current analysis extolling the virtues of Cayman Island incorporations to avoid U.S. taxes? Absolutely not. But it is pointing out that a government tax policy that constantly tries to grab more free-market, globally-won revenue for itself ends up doing more harm than good, and fosters unintended consequences (i.e., moves to the Caymans or Ireland). If instead of tightening regulations on off-shore corporations, tax policy in the U.S. had called for the sensible repatriation of outside funds and global competitive tax rates, we wouldn’t have this rush of U.S. companies, led by our illustrious industry, to reincorporate. Instead, what companies really want to do is reinvest right here in the U.S., the largest consumer and pharmaceutical markets in the world.
By the way (and paraphrasing The Times), another not insignificant reason pharma in the U.S. is trying to increase earnings from tax savings is to find growth amid pressure from the (very same) government and insurers to control (lower) costs. And just for good measure, let’s throw into the mix the need to look at extending patent protection on the new drugs that cost more than ever to bring to market as a factor in raising drug prices. These and other factors all add up, literally.
My colleague and the Chief Editor of Outsourced Pharma recently wrote an article entitled, “What Can Be Done To Change The Reputation Of Pharma?” To answer that question, let’s first give credit to companies in the industry for the way they work to reduce costs and keep profits in what can only be perceived as a hostile environment (despite the fact they are saving lives). However, maybe the real reputation-booster will be if somehow pharma’s U.S.-based, global companies lead all companies in the U.S. in a successful lobbying of Washington to allow for billions upon billions of dollars to be sensibly repatriated, and for a globally competitive tax rate on corporations.
It will then be up to the heroes in our industry – big pharma and others – to do the right thing, for their business, the U.S. worker and the country: Reinvest, reinvigorate the economy, and discover, develop and manufacture more new and less costly drugs here in the U.S. Do we have a deal?