Another Day, Another Inversion

A quick search resulted in several recent examples of US-based pharma companies executing “inversions” to reduce taxes via the acquisition of companies in Ireland:

Salix merges with Cosmo Technologies, the Irish subsidiary of Cosmo Pharmaceuticals of Italy, for >20% of the combined company. Both companies focus on GI, so strategically is makes some sense. What’s interesting is that such a small portion of the company is driving the inversion:

“Combining with Cosmo Tech makes tremendous strategic and financial sense for us as it further strengthens and consolidates our position as a leader in acquiring, developing and marketing products to treat gastrointestinal disease and disorders,” Carolyn Logan, Salix’s president and chief executive, said in a statement.

Now we’ve all seen this movie before, as evidenced by the recent Medtronic/Covidien transaction. In this deal, freeing “trapped” cash appears to be a large driver of this deal:

But Covidien’s overseas cash and the future foreign earnings from its businesses will not be subject to United States repatriation taxes, giving the enlarged Medtronic a new source of cash it can use freely. That will bring the amount of Medtronic’s “trapped” offshore cash down to about 40 percent of its total cash, from 60 percent as a stand-alone firm.

Medtronic said it planned to use its strengthened balance sheet to invest $10 billion in the United States over the next 10 years, a move apparently intended both to appease critics of inversions, and to emphasize the importance of the United States for the medical device industry.

Some other examples:

Israel-based Perrigo is up for sale, and part of the attraction is the substantial Ireland operation via the former Elan operation in Ireland.

Endo acquisition of Paladin Labs (Canadian) via the creation of a new legal entity in Ireland. And what does Endo have in Ireland? Not much:

The global headquarters of Endo International is so new that, apart from a few desktop computers, the most visible purchase to date is the Nespresso machine in the kitchen. Located in the basement of a Georgian house in central Dublin, the company, which makes branded and generic medicines, does not even have a brass plate on the door.

And, of course, we have the ongoing AbbVie chase of Shire.

For some companies, merely acquiring a manufacturing facility is sufficient, as demonstrated by Alexion Pharma’s move to acquire a facility in Ireland:

Alexion is doing something different. It acquired a factory in Ireland where its drugs are packaged into vials. By establishing this factory in Ireland, Alexion was then able to transfer “technical operations” and key patents on its main drug Soliris from the U.S. and Switzerland to its Irish affiliate. 

Other examples include:

Horizon Pharma acquisition of Vidara Therapeutics, a one-product company selling product in the US, with operations in Ireland.

The Actavis acquisition of Warner Chilcott in 2013 turned Activis into an Irish company, making it that much easier to wield the balance sheet necessary to acquire New York-based Forest Labs in February, 2014.

In hindsight, the Alkermes acquisition of Elan Drug Manufacturing in 2009 was one of the transactions which really brought this strategy to the attention of many investors and analysts.

Jazz Pharmaceuticals, via the acquisition of tiny Azur Pharma in 2013, is now being touted as an attractive option for US companies looking to execute an inversion.

Can This Continue?

In the US, President Obama recently announced his intentions to slam the door on these transactions by the end of the year.

By the same token, the Obama Administration is exploring to reduce corporate tax rated to 28%, and levels of up to 25% are being discussed in Washington.

Ironically, this is an issue that won’t do well with voters who tend to reject tax cuts for “big corporations” instead of individuals.

So with another 5 and 1/2 months to go, we think we’ll see more of these transformative transactions taking place.

Even if the Obama makes it difficult through legislation, other techniques, such as spinning off divisions to Irish investors, will be utilized by sharp companies looking to reduce costs and increase cash flow.

The irony is that the efflux of companies to Ireland is now fueling the growth of a real pharmaceutical and biotech cluster in a relatively small, English-speaking country that is near both European and US markets, and with direct flights from the US.

This makes it more attractive for US companies to relocate and tap into a growing pharma and biotech expertise in Ireland.

So expect there to be more consultants, investment bankers, and attorneys poking around basements of Irish office buildings, looking for inversion opportunities for companies in the US.

Update

The NY Times is reporting two more inversions: AbbVie/Shire and Mylan/Abbott generics, with a re-incorporation in the Netherlands. They point out that it’s becoming a competitive necessity to lower taxes:

“As companies see competitors do it, they get more incentivized to do it as well,” said Wilco Faessen, a managing director at Barclays. “The competitive pressure is higher when some companies do it and others haven’t.”

It appears that health care companies are playing an expensive game of keeping up with the Joneses.

“There is likely a herd mentality going on where pharma companies are afraid they will be put at a competitive disadvantage if they don’t find a suitable foreign merger partner,” said J. Richard Harvey Jr., a professor at the Villanova University School of Law.

In fact, with the Abbott/Mylan deal, we now have a new term to deal with…the spinversion:

Abbott, which spun out AbbVie last year, will sell its pharmaceuticals operations in Europe, Japan, Canada, Australia and New Zealand to Mylan, which will then invert.

Under the unusual structure, being called a spinversion, Abbott Laboratories will divest itself of assets to allow a different company to strike an inversion. Abbott said it did not intend to be a long-term shareholder in Mylan and would seek to sell its stake.

The Wall Street Journal also chimes in with this piece:

“It’s at the point now that if you’re considering an M&A transaction, you’re absolutely thinking about whether it’s doable as an inversion,” said Christian Brause, a tax partner at law firm Sidley Austin LLP. “It’s just too good of an opportunity to waste.”