Pharma Feels Impact of US Tax Inversion Legislation

 The recent termination of AbbVie’s deal to acquire Shire has “jolted the industry out of its reverie” by becoming pharma’s first major casualty of new US tax inversion legislation,  says research and consulting firm GlobalData.

The decision by AbbVie’s board of directors to terminate the Shire M&A deal is due to the realization that its value would be too much of a financial risk without the tax incentive component. GlobalData’s analyst for healthcare industry dynamics, Aparna Krishnan, comments: “By acquiring UK-based Shire, AbbVie’s effective tax rate would have dropped by 7%, enhancing its earnings by $350 million on a pro forma basis in 2013. In effect, the tax savings would have contributed anywhere between $15–18 billion in savings over the next 15 years, creating significant cash flow for the expanded AbbVie.”

Krishnan explains: “As these tax savings were inherent in the value of the deal, it is no longer viable. Furthermore, new tax inversion laws are potentially corrosive to the industry earnings of others, meaning that the market may cool down on M&A deals in the near term.”

While Shire will receive a $1.6 billion termination fee from AbbVie, its share price has unsurprisingly been hit hard. Krishnan adds: “Notwithstanding this near-term impact, Shire will push ahead with premerger plans to expand its orphan drugs portfolio through acquisitions.

“Meanwhile, AbbVie will have to take stock and reassess its M&A strategy with its next move to diversify its portfolio. This will counter the risks associated with the company’s dependency on its highest revenue contributor, Humira, which could face biosimilar competition from as early as December 2016 in the US and April 2018 in other markets.”