Horizon Pharma defies lawmakers, moves to Ireland

9/21/2014

The arthritis pain drugs Duexis and Vimovo may not be covered by CVS Caremark or Express Scripts come January, drugmaker Horizon Pharma Inc. said.

Despite growing criticism from lawmakers in Washington, a Deerfield drugmaker on Friday officially planted its corporate flag in Ireland, a move designed in part to lower its tax bill.

Horizon Pharma completed its $587 million acquisition of the Irish pharmaceutical company Vidara Therapeutics International in a deal that allowed it to officially move its headquarters to Dublin.

The announcement came the same day that U.S. Sens. Dick Durbin of Illinois and Sherrod Brown of Ohio, both Democrats, unveiled the latest in a flurry of bills aimed at stemming the exodus of U.S. companies to more tax-friendly countries.

"It's a terrible corporate decision by these companies and we have to change our tax policies to discourage it," Durbin said. "I think this issue is picking up momentum … and people are unhappy about it. So am I."

Horizon is one of 14 large U.S. companies to complete an address change since the beginning of 2012. Eight more have announced plans to follow suit, including its north suburban neighbor and fellow drugmaker, AbbVie Inc.

The rush to reincorporate overseas, known as inversion, is being fueled by a desire to escape the U.S.' 35 percent corporate income tax rate, the highest in the developed world.

Tim Walbert, Horizon's chief executive officer, who will remain in Deerfield, estimates the company's tax rate will drop into the low-20 percent range or lower, down from the high-30 percent range before the move.

Decamping for the Emerald Isle, he said Friday, "will level the playing field for us in terms of pursuing our broader acquisition strategy."

Horizon, which first announced the Vidara acquisition March 18, focuses on acquiring lesser-known drugs with less than $200 million in annual sales and backing them with an aggressive promotional strategy to grow revenue. It often competed for those drugs against foreign-domiciled competitors, which Walbert said held a substantial advantage because of their lower corporate tax rates.

"If I'm a U.S. company with a tax rate in the high 30s and I'm competing with (a foreign company) with a tax rate in the low 20s, they can pay 18 percent more and get the deal and it's not going to cost them any more money," Walbert said. "We would consistently be at a disadvantage."

Horizon is the first company to complete an inversion that risks being overturned if a separate bill submitted by congressional Democrats this year becomes law. The proposal, submitted by Rep. Sandy Levin, D-Mich., would deny the tax benefits of certain types of inversions that occurred after May 8.

Under that bill, U.S. companies that merge with a foreign company would remain U.S. corporations for tax purposes unless the foreign company's shareholders wind up with more than 50 percent of the combined company's shares.

In the Horizon deal, Vidara's shareholders got about 26 percent, above the current threshold of 20 percent.

Walbert said the probability that the Levin proposal will become law in the near term is low.

"It's a good debate to have, but we don't worry about it," Walbert said. "When you've got a divided Congress like we do now, we tend to see a lot of opinions but not a lot of actions."

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.

Republicans want to address the problem through broad corporate tax reform that lowers rates. But many Democrats want to act sooner. Proposals range from making it more difficult to invert to blocking certain tactics foreign companies use to reduce U.S. taxes.

Foreign profits earned by U.S.-based companies are not taxed in the United States until they are repatriated, so many companies hold cash and invest overseas to avoid those taxes. Citing research from Audit Analytics, Durbin said more than 500 U.S.-based companies held a combined $2.1 trillion outside the country in 2013.

Durbin's bill aims to eliminate the appeal of inversions by going after money parked outside the U.S. if a company seeks to incorporate abroad.

Under his proposal, any attempt by a U.S. company to move overseas would trigger a tax on its foreign earnings held abroad.

Although the bill would not have much of an effect on Horizon, which has limited overseas earnings, Durbin said the U.S. should consider every possible avenue to "find a way to slow down this trend and stop it."

"It's irresponsible on their part, particularly for pharmaceutical companies who rely on the federal government for so much of what makes them profitable," Durbin said, noting that a substantial amount of their profits are derived from selling drugs covered by government programs like Medicare and Medicaid.

President Barack Obama in July labeled the practice an "unpatriotic tax loophole" and has vowed a Treasury Department crackdown.

Durbin said the Obama administration is serious about stopping inversions. He said he spoke about the issue this week with Treasury Secretary Jack Lew, who is working on regulations to limit tax advantages for "corporate deserters."

source


Related:  U.S. Senate Democrats propose exit tax for inverting companies