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Will new tax rules stop health company inversions?

Will new tax rules stop health company inversions?

Picture of Martha Rosenberg

Just a few months ago, many US health corporations were eyeing tax inversions —reincorporating overseas, often merging with a European entity—to evade US taxes. Following the drug companies Mylan, Actavis, Perrigo, Jazz Pharmaceuticals and Endo, the Illinois-based drug company AbbVie announced  inversion plans last summer, to the joy of many investors.

AbbVie was spun off from North Chicago-based Abbott Laboratories in 2012 largely on the basis of Humira, a medication that treats autoimmune conditions like rheumatoid arthritis that’s become the best-selling drug in the world.

The growing inversion-merger deals have driven new US tax regulations to nip them in the bud. One change is a ban on loans that allow US companies to access foreign cash without paying taxes in the United States. The changes have given AbbVie second thoughts and it recommended shareholders vote against its originally planned $55 billion takeover of the drug company Shire.

"The agreed-upon valuation is no longer supported as a result of the changes to the tax rules," said AbbVie's chief executive Richard Gonzalez. The merger with Shire, headquartered in Ireland, would have created a company with a bigger market value than Boeing, McDonald’s and Cisco, said the New York Times, with a market value of more than $137 billion.

TNF-blockers like Humira are useful for autoimmune diseases but most experts agree that patients with less serious conditions should not be unnecessarily exposed to their side effects of lymphoma, leukemia, super-infections and rare cancers. Only approved for the relatively rare conditions of rheumatoid arthritis, juvenile idiopathic arthritis, ankylosing spondylitis, Crohn’s disease, psoriatic arthritis and chronic plaque psoriasis, Humira became a best-seller with the help of the public relations giant Edelman and the health care advertising firm Harrison and Star which boosted its profile.

AbbVie continues to win new FDA approvals for Humira including one last month for the treatment of pediatric patients with moderately to severely active Crohn's disease.

In September, Google announced a partnership between its under-the-radar Calico LLC life-sciences company and AbbVie "to tackle conditions like cancer and neurodegenerative disorders," according to the Wall Street Journal. Some predict more uses for Humira will result.

In September, the Federal Trade Commission filed a complaint in federal district court charging AbbVie and partner Besins Healthcare Inc. with  "illegally blocking American consumersʼ access to lower-cost versions of the blockbuster drug AndroGel." The companies filed "baseless patent infringement lawsuits" charged the FTC to "delay the introduction of lower-priced versions" of the drug.

While AbbVie's aggressive marketing clearly pleases Wall Street, some see its desire to flee US taxes as hypocritical.  In 2008 Abbott gave Humira free to elderly patients in order to stoke demand for the expensive drug while lobbying Congress to get it covered by Medicare. Humira can cost state taxpayers as much as $50,000 per patient, according to a recent letter from pharmacies and insurers to Pennsylvania lawmakers.

AbbVie is also battling drug maker Gilead over its super-expensive hepatitis C treatment, Sovaldi. AbbVie claims it holds patents to the way the drug is administered.

When Illinois-based Walgreen, the US’s largest pharmacy chain, sought a tax inversion last summer, both customers and lawmakers called the maneuver unpatriotic and unfair to corporations remaining in the US. The deal was nixed. Most will welcome new US tax rules that keep companies like AbbVie from dodging the very US taxes that support them.

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