Death and taxes
The U.S. clampdown on tax-driven cross-border M&A should deter half-baked pharma deals. Some U.S.-led transactions, like AbbVie’s recent agreement to buy UK-based Shire, may survive on strategic logic. But pure tax-avoiding combinations look tricky.
Several changes to the tax code were immediately put into place after the new restrictions were unveiled by the Treasury on Sept. 22. The target is tax savings achieved when companies “invert” into another fiscal jurisdiction by doing share-based mergers with foreign peers.
One new curb will make it harder to restructure overseas assets so that they are no longer U.S.-controlled following inversion, making it harder to access cash trapped overseas tax-free. Foreign-based firms will also face constraints on borrowing from the overseas subsidiaries of acquired U.S. companies. Such “hopscotch” loans also helped extract cash that would otherwise be taxed.
Agreed inversion deals justified almost entirely on tax savings now risk becoming unviable. Mylan’s purchase of $5.3 billion of declining overseas assets from Abbott looks endangered. Medtronic’s $42.9 billion purchase of Covidien also looks in doubt. The value of operational synergies didn’t cover the $10 billion premium Medtronic had agreed to pay: the deal’s attraction resided in Medtronic having greater ability to tap overseas cash.
AbbVie’s deal to buy Shire, however, has appeal beyond tax benefits. AbbVie needs to reduce its reliance on one drug, Humira, a treatment for arthritis, while Shire has a broad portfolio of fast-growing niche compounds. The slight fall in Shire’s stock may reflect just the lost value of the tax benefits.
The biggest potential deal, a Pfizer takeover of AstraZeneca, faces even longer odds of happening. Pfizer may have been keen to get its hands on some of AstraZeneca’s drugs, including its oncology business, but the deal seemed to rely far more on tax benefits than AbbVie’s purchase of Shire.
Citigroup reckons an acquisition could yet lower Pfizer’s corporation tax rate from 28 percent to 22 percent. But Pfizer’s ability to justify a high premium is diminished – particularly if the Treasury’s move is just the first salvo. AstraZeneca’s defence narrative, which stressed the ongoing political risks of inversions, is starting to be vindicated.