AstraZeneca PLC, Shire Shares Plummet On New U.S. Rules To Curb Tax-Inversion Deals
September 23, 2014
By Mark Terry, BioSpace.com Breaking News Staff
After the Obama administration’s pledge a further crackdown on tax inversions Monday, life science stocks dropped significantly, with AstraZeneca and Shire feeling much of the downward pressure as their deal to merge became increasingly endangered.
U.S. Treasury Secretary Jacob Lew outlined new rules late Monday to dissuade domestic companies from moving their headquarters abroad in order to pay lower tax rates. “This action will significantly diminish the ability of inverted companies to escape U.S. taxation. For some companies considering deals, today’s action will mean that inversions no longer make economic sense,” Lew said at a press conference. “It is critical that this unfair loophole be closed.”
The announcement immediately pushed biotech stocks lower. Although much of the focus was on AstraZeneca’s 5 percent decrease in share price and Shire’s 6.1 percent drop at end of day trading Monday, numerous other life science company’s stock took a hit as well, including Smith & Nephew with a drop of 3.5 percent and biotech company Actelion, losing 2.2 percent.
A stock inversion is when a U.S. company acquires a smaller company in a country with lower corporate tax rates, then changes the company domicile to the other country to avoid paying U.S. corporate taxes. Treasury Secretary Lew announced a broad range of changes that will take effect immediately to make it more difficult for companies to undergo tax inversions.
AstraZeneca and Shire have been under close watch by analysts for tax inversions. In July, U.S. company AbbVie Inc. acquired Shire for $54 billion. In a July call, AbbVie’s chief executive Richard Gonzalez said, “It will be domiciled in the U.K. for tax purposes. This structure provides AbbVie with flexible access to its global cash flow.”
Pfizer and AstraZeneca have been the source of ongoing speculation regarding an acquisition deal since a bid for £70 billion was rejected earlier in the year. Ever since, analysts have been expecting Pfizer to take another shot at the UK-based comopany or possibly GlaxoSmithKline. Pfizer CEO Ian Read has been very straightforward about indicating the company was looking at acquisitions in order to lower the company’s tax rate. There was a six-month cooling off period before Pfizer could make another official bid for AstraZeneca, which would open up at the end of November.
As the deal between AstraZeneca and Shire has not yet closed, there is some concern that the Treasury Department’s new regulations will jeopardize the deal. The stock drop cut both companies’ combined market value by around $8 billion. “Inversion deals now are clearly going to be very difficult to pull off,” said Navid Malik, head of life sciences research at Cenkos Securities, in a Reuters article. AstraZeneca's deal was expected to be completed in Q4 2014, but it is now unlear if the Treasury Department’s new regulations will affect deals already in progress.
However, Andrew Baum, an analyst with Citi, wrote in a research note that much of the hullabaloo may for nothing. “Today’s measures do little to negatively impact the economic benefit from the proposed Pfizer acquisition of AstraZeneca,” Baum wrote. Even with new changes that act as disincentives to tax inversions, Baum theorized that Pfizer could still cut its tax rate from 28 percent to 22 percent with the deal.