Pharmaceutical Industry Feeling Force of Tax Inversion Legislation

The recent termination of AbbVie’s deal to acquire Shire makes this pharmaceuticals’ first major casualty of new US tax inversion legislation, and has jolted the industry out of its reverie, according to an analyst with research and consulting firm GlobalData.

Aparna Krishnan, MS, GlobalData’s Analyst covering Healthcare Industry Dynamics, states that the decision by AbbVie’s board of directors to terminate the Shire merger and acquisition (M&A) deal is due to the realisation that its value would be too much of a financial risk without the tax incentive component.

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.

“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.”

The analyst notes that while Shire will receive a $1.6 billion termination fee from AbbVie, its share price has unsurprisingly been hit hard.

Krishnan continues: “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.”