Tax Inversion Intrigues Medical Mergers

Lawmakers work toward a legislative solution

A growing trend in the healthcare field is landing some medical device and pharmaceutical companies in hot water for a controversial, tax-saving strategy called tax inversion. Lawmakers are taking notice of the inversion loophole in the law and are working to close it.

Tax inversion happens when one company reincorporates in a country with lower taxes. One way of reincorporating is by acquiring another company. U.S.-based companies are attracted to this strategy because the U.S. has one of the highest corporate tax rates.

Source: Wells Fargo Wealth Management Insights Center “Tax Inversion Strategy: A Primer”

Source: Wells Fargo Wealth Management Insights Center “Tax Inversion Strategy: A Primer”

 

Four of the largest mergers announced this year are pharmaceutical and healthcare companies, according to The Wall Street Journal.

  • AbbVie is acquiring Shire for $54 billion and reincorporating in Jersey, U.K. (Shire’s current place of incorporation).
  • Canada’s Valeant Pharmaceuticals will likely acquire Allergan for $53 billion.
  • Medtronic is acquiring Covidien for $42.9 billion. The plan is to move the executive offices to Covidien’s current Ireland headquarters, but the chief executive officer and the operational headquarters will remain in Minneapolis, Minnesota.
  • Ireland’s Actavis has completed the Forest Laboratories acquisition for $28 billion.

 

“For every company that takes efficient tax planning to its end game and inverts, the U.S. loses tax revenue to another country as its own tax base erodes,” according to a report by Wells Fargo. U.S. lawmakers are trying to find a solution to keep corporate tax dollars here—even though inversion is legal.

Under scrutiny, healthcare organizations are stalling, dissolving or defending deals. Hospira’s plan to acquire France-based Danone for $5 billion is stalled. Pfizer ended its attempt to acquire AstraZeneca earlier this year, but the deal may be back on soon. Medtronic CEO Omar Ishrak defended the inversion deal during an earnings call stating the company will still pay substantial U.S. taxes ($112 million in 2014) and create more U.S.-based jobs.

Meanwhile, Smith & Nephew, based in the U.K., expressed it is not interested in striking a deal for tax purposes, and Stryker has backed away from pursuing this acquisition.

Hospitals can expect to see a larger scope of product offerings from merged organizations, like Medtronic, that try to become a one-stop shop for physicians, hospitals and patients.  However, be wary of companies using these mergers against you in your negotiations for new or renewal of existing contracts. Until the mergers are complete, the companies will run separately, and contracts should be negotiated as such.

This article is intended for the purpose of educational information and is not for the purpose of legal or financial advice.

LeAnne Smith
ABOUT THIS EXPERT
LeAnne Smith, Consumables Analyst — Ms. LeAnne Smith joined MD Buyline in 2001, initially fulfilling the role of an associate analyst. Prior to joining MD Buyline, Ms. Smith worked with HELP International, a medical equipment consulting firm, as a project associate and oversaw equipment planning for surgery centers and clinics. At MD Buyline, Ms. Smith currently serves on the Buyline Consumables team as a senior analyst. She has been an integral part of the development and launch of several MD Buyline products and services, such as Buyline Consumables, Buyline Recall Tracker and the IBM Watson project.