Pharma's tax inversion craze has Washington's attention, but doubts persist about appetite for action

Print 22 July 2014
Michael Flanagan, FirstWord Lists

What began as a trickle of companies seeking to take advantage of lower corporate tax rates overseas is beginning to look more like a fully fledged stampede for the exit as at least eight US-based companies have announced plans this year for deals that would involve reincorporating abroad.

Other than some minor hemming and hawing from politicians related to an aborted transaction between Pfizer and AstraZeneca, Washington had been notably silent while billions of dollars in potential tax revenue is being whisked away. Until last week, that is, when US Treasury Secretary Jacob Lew sent letters to members of Congress urging immediate action.

In the letters, which were addressed to top members of the House Ways and Means Committee and Senate Finance Committee, Lew suggested sweeping tax reform would be the most ideal solution, but barring that he proposed Congress enact legislation that would effectively eliminate the tax benefits of tax inversion deals – and apply it retroactively to May of this year.

In theory, that could mean as many as four transactions may be in jeopardy, including deals announced this week involving AbbVie and Shire as well as Mylan and Abbott.

The Street does not seem particularly concerned about prospects of near-term political action.

ISI analyst Mark Schoenebaum sent out a note written by the firm's DC Policy Team that made a case for why legislation is unlikely to happen this year. "The sudden Washington interest in inversions was stirred three months ago by Wall Street's concern that the potential Pfizer-AstraZeneca merger might be 'an inversion too far' that would spur Washington action," read the note. However, the "debate is being driven much more by midterm election politics than policy differences," and is unlikely to result in any legitimate actions before the election.

"We continue to believe 2015 sees comprehensive tax reform legislation that lowers the corporate tax rate and moves the US towards a territorial tax system, making inversions legislation unnecessary because the US then would have a friendlier and more competitive tax system," it continued.

Not every US company has aspirations to reincorporate elsewhere. Johnson & Johnson CEO Alex Gorsky said specifically during a July 17 conference call to discuss the drugmaker's quarterly earnings that it has no plans to leave the US.

Even after the dust settles from the recent flurry of deals there are still plenty of overseas candidates for US companies to target. Among those highlighted by Bloomberg are Prothena in Ireland; Gedeon Richter in Hungary; and Meda, Orexo and Swedish Orphan Biovitrum in Sweden.

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