Wall Street Overreacting To Inversion Proposals, Says ISI Group

Published: Sep 23, 2014

Wall Street Overreacting to Inversion Proposals, Says ISI Group

September 23, 2014

By Riley McDermid, BioSpace.com Breaking News Sr. Editor

Wall Street is overreacting to the U.S. Treasury’s announcement yesterday that it will be cracking down on so-called tax inversion deals and should wait for final guidelines before fleeing pharma stocks, said well-known biotech analyst Mark Schoenebaum Tuesday.

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.”

Traders have reacted to that by pressuring the stocks of pharmaceutical companies that may be planning to move their headquarters to friendlier tax climates abroad. That flight from risk has dropped shares of AstraZeneca PLC down more than 4 percent, AbbVie by 2.4 percent and Shire Pharmaceuticals has plummeted 6 percent day-over-day.

But that downward trend is premature, said Mark Schoenebaum, an analyst with ISI Group, who said in a note to investors that it’s important to remember that Lew’s remarks were only a “notice” that new guidelines will be coming soon.

“Of course there are a host of unclear issues, including whether Treasury’s actions to take immediate action (application to inversions completed on or after Sept. 22, 2014) are even valid,” wrote Schoenebaum. “Federal law from our understanding would first require any regulatory agency when proposing new rules to have a public process and some sort of deliberation taking public comments into consideration.”

Many domestic companies have been seeking inversions via subsidiaries purchased in a flurry of M&A deals lately, but pharmaceutical and biotech firms have been by far the most active.

That could affect any number of deals, wrote Schoenebaum, but not yet—meaning traders would be smarter to sit tight while the regulatory process continues.

“There may also be other loopholes that were not addressed in the notice from last night (e.g. earnings stripping),” he concluded. “Although, we note, Treasury intends to take more actions in the future.”

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