Deerfield drugmaker defies Democrats' anti-inversion effort
Horizon Pharma Inc., a Deerfield-based specialty drugmaker, shifted its corporate address to Ireland today, defying a threat by Democratic lawmakers to unwind such maneuvers retroactively.
Now known as Horizon Pharma Plc, it's the first company to complete an address change, known as an inversion, that risks being overturned if legislation submitted by congressional Democrats this year becomes law. Under that proposal, intended to halt a wave of such deals, companies that carry out certain types of inversions after May 8 would remain U.S. corporations for tax purposes.
"The probability of legislation being enacted to affect inversions is pretty close to zero, because you've got a divided Congress," Robert F. Carey, Horizon's chief business officer, said yesterday in an interview. "The legislation that's being proposed right now is simply campaigning for the midterm elections."
Carey said the reincorporation allows Horizon, a maker of pain treatments for arthritis, to keep pace with rivals that have already fled the U.S. tax system. Horizon got the new address in connection with its $660 million acquisition of Irish-incorporated Vidara Therapeutics International Ltd., the owner of a drug that treats two rare diseases. The company completed the deal today, according to a regulatory filing.
Virtually all of the largest U.S. specialty pharmaceutical companies have reincorporated outside the country, Carey said, giving them an edge when competing for acquisitions.
Fairer Competition
"As we move forward, we're on a level playing field with all the other parties," he said. Among those to invert since 2010 are Valeant Pharmaceuticals International Inc., Actavis Plc, and Endo International Plc.
"That's the unfortunate unintended consequence" of the U.S. tax system, Carey said. "The tax code has been structured to stack the deck against domestic corporations."
The U.S.'s 35 percent corporate income tax rate is the highest in the developed world. It also applies that rate to foreign earnings of U.S. corporations; most other major economies tax only domestic profits.
Apart from Horizon, 13 large U.S. companies have inverted since Jan. 1, 2012, and eight more have announced plans to join them. President Barack Obama in July labeled the practice an "unpatriotic tax loophole" and has vowed a Treasury Department crackdown. U.S. Senator Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, is calling for retroactive legislation in hopes of preventing more expatriations until Congress can agree on a comprehensive revision of the tax code.
Provision Criticized
Republicans argue that a targeted attack on inversions would be counterproductive and the focus should be on the broader rewrite of the tax code. The retroactive part of the Democrats' plan is particularly controversial. The U.S. Chamber of Commerce recently produced a television ad attacking the idea, showing airplanes and automobiles traveling in reverse.
A bill submitted in the House by Representative Sander Levin, a Michigan Democrat, would deny the tax benefit of inversions after May 8 to companies that merge with a foreign company, unless the foreign company's shareholders end up with more than 50 percent of the combined company. Under current law, that threshold is 20 percent. In the Horizon transaction, the Vidara shareholders got about 26 percent.
The Joint Committee on Taxation, a nonpartisan arm of Congress, estimates the Levin bill would preserve $19.5 billion in otherwise lost tax revenue over the next 10 years.
Cayman Islands
Theravance Inc., a South San Francisco, California-based drugmaker, got a Cayman Islands address for its research division when it spun the unit off as Theravance Biopharma Inc. in June. That transaction was made possible by a section of the tax code that wouldn't be affected by the Levin bill.
Horizon doesn't foresee paying significant taxes until 2016, Carey said, because of the impact of net operating losses the company has accumulated. Absent the Vidara transaction, the company's tax rate would have been in the high 30's once it started paying, Horizon said in March. With the Vidara transaction, it will be in the "low 20's or lower."
Carey said he and Horizon's other top executives will remain in Deerfield, a Chicago suburb, while board and executive committee meetings will take place in Ireland. The combined company has more than 500 employees.
Vidara was founded in 2011 by Bala Venkataranam, a former pharmaceuticals executive who now runs a private investment firm in an Atlanta suburb. Most of Vidara's 24 employees are based near Atlanta or elsewhere in the U.S., Carey said. Some "five to eight" of Vidara's employees are in Ireland, Carey said.
Separate from the legislative proposals, Treasury Secretary Jack Lew is working on regulations to limit the tax advantages of inversions. He said this week he expected to take action "very very soon."