Inversion Insanity: Drugmakers form a herd, try to run away from home

Six generations ago in a German town called Ingelheim-am-Rhein, a man named Albert Boehringer started a small chemical company. It grew, and became a global pharmaceutical group. To this day, the company thrives as a privately held enterprise known in acknowledgment of the founder, and the place of origin, as Boehringer Ingelheim.

BI is not the only pharma company that succeeds while maintaining its roots, and continues to carry out its mission in or near the locale where the founder set up shop. Think of the eponymous Laboratoires Pierre Fabre, the two-billion-euro enterprise which, since its beginning in 1962, remains nestled in the Midi-Pyrénées locale of Castres, population 43,000. Among other distinctions, Monsieur Fabre oversaw the town’s cherished rugby team, Castres Olympique. Since his death last year, the company is owned by a foundation that was established for the admirable purpose of providing safe drugs to the developing world.

It’s reassuring to think that the pharma industry was built by visionaries such as Herr Boehringer and Monsieur Fabre, and that there are still viable locales where the industry flourishes, such as Ingelheim-am-Rhein and Castres. And it seems especially important to take note of these names in 2014, which may go down as “The Year We Learned About Inversion.”

The word “inversion” may have several meanings: the anatomical (as in toenails, nipples), the chemical (referring to hydrolysis of carbohydrates), or the rhetorical (“You say what?”)

To be clear, the inversions that have made recent headlines have little to do with linguistics, and everything to do with international corporate tax codes.

Spearheaded by precedents such as the rock-bottom tax rate the multinational Valeant Pharmaceuticals group enjoys by maintaining its headquarters-of-record in the Province du Quebec, U.S.-based drugmakers earlier this year began a stampede to merge with foreign domiciled competitors. This was done for the purpose of tithing less to Uncle Sam, who demands a 35 per cent slice, and preserving profit for more appropriate purposes. (Here you might imagine Scrooge McDuck in his money-counting room, throwing stacks of currency up in the air because he likes the sensation as they fall back and land on his head.)
The flurry of inversions and attempted inversions reads like a roster of the most familiar names in our sector.

Pfizer, the industry leader, hoped to unite with AstraZeneca, and move its headquarters to the UK from New York City, where they’ve been ensconced only since 1849.

AbbVie proposed to buy Shire and transfer its charter from Chicago to Jersey (that is, the Isle of Jersey; not the place where Chris Christie, pictured below, governs.)
Mylan of Pennsylvania somehow figured that by buying Abbott Laboratories’s generics business, it could begin filing tax returns in Holland.

Auxilium Pharmaceuticals wants to merge with QLT of Vancouver — although Endo Pharmaceuticals now has its sights set on Auxilium. Endo inverted earlier this year through acquiring Paladin Labs of Montreal, at which point it shifted its head office to Ireland.

This most recent rush to beat the traffic out of town may have been touched off earlier this year when that wily old inverter, Valeant, began its takeover moves against Allergan. Currently Allergan hopes to head off the unwanted advance by linking with Salix, which is merging with Cosmo Pharmaceuticals SpA, an Italian drugmaker that maintains a tax address in Eire.

Head spinning? You’re far from alone. As Prof. J. Richard Harvey Jr., of Villanova University’s law school tells the New York Times: “There is likely a herd mentality going on where pharma companies are afraid they will be put at a competitive disadvantage if they don’t find a suitable foreign merger partner.”

Of course, as the professor might have added, part of the problem with a herd mentality is that the herd often plunges over the precipice, or else slams into a solid object. In this case, the collision came in the form of a to U.S. Treasury Department rules, just announced by Washington. To interpret the legislation: President Obama isn’t about to allow the inversion tactic to continue depleting his federal tax coffers, at least not when Congressional mid-term elections are only weeks away.

Regardless of where this issue now stands, it’s impossible to experience, without feeling cheapened or queasy, the spectacle of Life Sciences organizations anxious to make tracks from their communities, solely for the purpose of putting a slick move on the taxman.

We know the arguments on both sides. For C-level management of publicly traded companies, value creation for investors is, and must be, Job One. We all get that — just as we get that capitalism continues to create and bring to market many wonderful things that have enhanced human health, and therefore capitalism is to be entirely encouraged.

But the Inversion Insanity of 2014 shone a light on the unacceptable face of capitalism, just as it displayed the least lovely side of our industry. For, you can turn your back on your community through a simple directors’ resolution, and you can always reinvent yourself in a distant terrain. But, as Messrs. Boehringer and Fabre likely concluded back in the day, all you’ll leave behind is your soul.

Inversion begs the question: If you’re prepared to abandon your roots and identity just because it seems momentarily to be the prudent thing to do, what else are you prepared to abdicate? One traditional defence often issued to justify drugmakers’ high margins is, “Profits fund important research.” Now several of the companies that have championed inversion are also devaluing the importance of R&D programs. They may be likened to farmers who don’t care for the work of planting, regard harvesting as a sweaty and unpleasant chore, and see agriculture as a demeaning sideline to their main business, which is… what, exactly? Chasing away trespassers? Watching the Weather Channel?

What would you tell such rusticated connivers? Exactly what we now say to those of our friends who followed the herd of inverters:

Look. Why don’t you quit screwing around, and just do your damn job? And, while you’re at it, you may as well just pay your damn taxes.

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