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Tax-Advantaged Pharma Deals Come Under Fire

Acquisitions: Mergers involving AbbVie, Abbott, and Mylan face government backlash

by Ann M. Thayer
July 21, 2014 | A version of this story appeared in Volume 92, Issue 29

Lew
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Credit: Newscom
U.S. Secretary of the Treasury Jacob Lew.
Credit: Newscom

AbbVie and Abbott, the two Illinois companies formed from the 2012 split of Abbott Laboratories, are both involved in tax-inversion acquisitions being criticized by lawmakers because they would allow U.S. companies to move offshore to pay less tax.

AbbVie, a research-based drug firm, looks close to succeeding in its quest for Shire after pursuing the Irish firm since May. Acquiring the specialty drugmaker would allow AbbVie to lower its tax rate to about 13% from 22% by moving its headquarters to the U.K.

After refusing many previous offers from AbbVie, Shire finally agreed to talk last week. On the table is a new cash and stock offer of nearly $54 billion that would give Shire’s shareholders a 25% stake in AbbVie. Shire’s board says it will support a merger if other terms are resolved.

Meanwhile, Abbott will sell a primarily European generic drug business to Pennsylvania-based Mylan. Under the $5.3 billion deal, Abbott will get a 21% stake in a new company created from the business and Mylan. Abbott will retain its generics business in emerging markets, along with its medical devices, diagnostics, and nutritionals units.

The deal would allow Mylan to reincorporate in the Netherlands at a lower tax rate. In April, Mylan had pursued a merger with Sweden’s Meda for similar reasons.

Debate around inversions heated up this spring when several major drug firms started chasing tax-related deals. In May, legislators introduced bills in Congress to quash such moves after Pfizer attempted and failed to acquire London-based AstraZeneca. The latest deals prompted U.S. Treasury Department Secretary Jacob J. Lew to ask House and Senate leaders last week for immediate action to ban inversions, retroactive to May.

Similar anti-inversion rules were included in President Barack Obama’s 2015 budget proposal. Lew wants a ban on inversions until Congress passes tax reform, according to Terry Haines, senior political strategist at the investment research firm ISI Group. But for now it’s mostly “political noise,” Haines says. “We continue to believe Congress will not take action this year to stop inversions, and 2015 will see a bipartisan comprehensive tax-reform effort that improves incentives for U.S. companies to stay in the U.S.”

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