DOTW Keeps Tabs As Tax Trimming Fuels Deals

As an industry, biopharma actually fares pretty well when it comes to taxes. Among profitable companies, biotech and pharma have some of the lowest effective U.S. tax rates compared to companies in other sectors. But that doesn’t mean they have stopped working to push their tax rates even lower.

Along with a recent ramp-up of the usual strategies, such as buying companies or assets based in low-tax locales or moving intellectual property there, the industry also is starting to take advantage of the newest twist on tax inversions – in which two companies in high tax locales, only one of them the U.S., merge and create a new company based in a low-tax country.

The specialty pharma consolidation frenzy is driven in part by tax benefits derived from buying companies in lower tax jurisdictions like Ireland. The spec pharma with the lowest tax rate wins – or at the very least earns the right to leverage all that cash on their books to gobble up higher tax rate competitors, thereby making higher margins on the same products.

Valeant is the obvious winner on this front; it will have an astonishing 2% tax rate in 2014, according to data from RBC Capital. But most recently, taxes were also a factor in the Actavis purchase of Forest Laboratories Inc. Actavis had already lowered its tax rate with the acquisition of Irish-headquartered company Warner Chilcott that completed last fall. Now Actavis can apply that reduced tax rate to a product portfolio that will encompass Forest. Prior to the deal announcement, RBC expected Forest would have a 24% effective tax rate in 2014 and that Actavis’ would be 17%.

And, of course, Perrigo is also a newly Irish company, with its purchase last year of the floundering Elan. But there aren’t a lot of direct routes left to Ireland. The largest independent, public Irish therapeutics company is drug delivery company Alkermes; it’s only one of six remaining that also include another drug delivery play Merrion Pharmaceuticals as well as antibody company Prothena, according to the Strategic Transactions database.

(In Ireland, all roads lead back to Elan. Alkermes garnered its Irish locale after a 2011 merger with the drug delivery unit of Elan, while Prothena is the 2012 spin-out of Elan’s drug discovery business. Merrion is also based on IP purchased from Elan.)

Most biopharmas count themselves lucky to have an effective tax rate in the teens – or even the low 20s. The big biotechs with the highest anticipated 2014 effective tax rates are Biogen Idec Inc. at 27% and Gilead Sciences Inc. at 25%, according to RBC. Between them they’ve had two of the most successful launches in recent years for Biogen’s Tecfidera (dimethyl fumarate) and Gilead’s Sovaldi (sofosbuvir).

Intellectual property for each of these products is domiciled in Ireland in an effort to curb tax expenditures. But that’s a long-term solution that could take years to work. Biogen had a 28.8% non-GAAP tax rate in the fourth quarter. Due to a larger percentage of its profits coming from the U.S. with the Tecfidera launch, the biotech expects the rate to remain at this level through 2014 but for it to subsequently decline in the following two years.

Alexion beefed up its Irish and Singapore operations last year and in January bought an Irish vialing facility for its Soliris (eculizumab). These efforts resulted in tax benefits that are expected to give it a 2014 non-GAAP tax rate of 11% to 12% (GAAP tax rate of 20% to 25%). That’s down from a whopping 51.9% effective tax rate in 2013, which translated into an income tax provision of $273 million. Alexion’s non-GAAP rate is expected to rise to 13% to 14% in 2015 and 16% to 18% in 2016 and beyond, since some benefits are only short-term tax credits.

The most creative tax tactic in the sector is the recent Endo-Paladin deal. The usual approach to tax inversion is for a U.S. company to become the subsidiary of a foreign company. The latest twist on this long-standing move, the third deal of its kind according to RBC, is exemplified by the Endo-Paladin merger, in which a U.S. and Canadian company are merging to form a new entity – in this case, an Irish company.

One risk of being overly imaginative with corporate tax strategy is always bad publicity, as it can trigger allegations of being a ‘tax avoider’ or, even worse, attract the tender attentions of the IRS. Those issues make it difficult for the big multinationals to be very aggressive on the tax front, although becoming enormous hasn't slowed Valeant’s efforts on this front.

The highest corporate income tax rate in the United States is around 40%, including federal, state and local taxes. But at $242 billion in 2012, corporate income taxes are a small percentage of U.S. federal receipts compared to the $1.1 trillion in individual income taxes and $845 billion in social insurance taxes during that year, according to a recent Government Accounting Office report. Since the 1980s, corporate taxes have ranged from roughly 6% to 15% of federal revenue.

Ireland isn’t the only useful tax locality – the top four are the UK, Ireland, the Netherlands and Switzerland, according to RBC. These countries had a 2013 corporate tax rate of 23%, 12.5%, 25%, and 18%, respectively, according to data from KPMG.

Ernst & Young’s Mitchell Cohen, the life sciences global tax leader at Ernst & Young, also includes Belgium (35%, with substantial patent and R&D related deductions and credits), Singapore (17%) and Puerto Rico (20% to 30%) among the ranks of countries with a significant life sciences presence that provide tax benefits.

Among profitable companies overall, the average effective tax rate is 26.6%, according to a current dataset from Aswath Damodaran, a professor of finance at the Stern School of Business at New York University. The profitable pharma companies in his dataset had a 22% average effective tax rate, while the money-making biotechs were at an average of 17.4% That puts both groups in the bottom one-third of corporate tax paying sectors.

And while DOTW can't promise that you'll personally enjoy an effective tax rate of 2% this season, we do want to send you off with this week's deal news. Please read on to discuva the latest, including a pair of preclinical deals and another two that were called off in this week's edition of. . . .

Celgene/Abide: Celgene likes to keep all its options open – to acquire companies, to acquire programs and to license programs. In its latest R&D deal with the preclinical Abide Therapeutics, disclosed on Feb. 28, it included an option to purchase its biotech partner as well as an option to license the rest-of-the-world rights on the first two programs to reach the clinic. Abide’s most advanced compound, AB101131, is expected to enter the clinic in 2015. The biotech expects to get three or four additional candidates into the clinic under the collaboration.  Its technology selectively targets serine hydrolases to develop new treatments for inflammation and immunological disorders. Founded in 2011, Abide was seeded by venture firm Cardinal Partners. Celgene and Cardinal Partners both participated in an undisclosed equity financing concurrent with the deal. Other terms of the deal, including the upfront, also remain undisclosed. Abide is headed by Alan Ezekowitz, an entrepreneur-in-residence at Cardinal Partners who became the biotech’s president, CEO and co-founder. Prior to that, he was at Merck Research Laboratories, the research division of Merck & Co. Inc., as SVP and franchise head of bone, respiratory, immunology and endocrine. Abide’s platform is based on work by Professors Ben Cravatt and Dale Boger of the Scripps Research Institute. The biotech secured its first big biopharma deal last May; it partnered with Ezekowitz’ former employer, Merck. In that deal, it garnered an undisclosed upfront and milestones of up to $430 million to discover, develop and commercialize small molecules against three novel targets to treat metabolic diseases with a focus on type II diabetes. In the last few years, Celgene has done at least three prior deals that included an option to purchase the company: an October 2013 deal with cancer and fibrotic disease company PharmAkea Therapeutics, a July 2013 partnership with toll-like receptor agonist developer VentiRx Pharmaceuticals, and an October 2012 deal with selective small molecule histone deacetylase (HDAC) inhibitor developer Acetylon Pharmaceuticals. - Stacy Lawrence

Roche/ Discuva: Roche and U.K. biotech Discuva are collaborating on the discovery and development of new antibiotics to treat multi-drug resistant gram-negative infections using Discuva’s Selective Antibiotic Target Identification technology platform. SATI uses next-generation sequencing and bioinformatics to identify bacterial targets and select from among them promising drug development candidates. The deal, announced on Feb. 28, fits well with Roche’s revamped research strategy in infectious diseases, a field its R&D organization exited more than 20 years ago, but recently has re-entered. The new, narrower focus is on multi-drug resistant, pathogen-specific, hospital-directed therapies, rather than broad spectrum antibiotics that were Roche’s original focus. Companion diagnostics, an area of strength due to Roche’s long experience in molecular diagnostics, will be important in identifying pathogens. In an October 2013 meeting in New York, Roche’s head of research and early-stage development John Reed outlined his organization’s priorities, noting that the antibiotics field is attractive now in part because “the animal models are good in the clinical context” and the regulatory path is clearer, particularly for safety requirements, thanks to recent FDA guidance.” Discuva will receive an upfront payment of $16 million, as well as research fees and payments on multiple programs of up to $175 million per product upon achievement of certain development, commercial and sales milestones. It will also receive potentially double-digit royalties on product sales. Discuva uses proprietary methods built from recent genomic discoveries to identify targets that affect bacterial growth and viability, as well as related genes potentially associated with development of downstream resistance. The problem of multi-drug resistance to gram-negative infections is growing but has not received as much attention as gram-positive infections. Gram negative pathogens addressed by Discuva include Pseudomonas aeruginosa, Acinetobacter baumannii, Klebsiella pneumonia, Escherichia coli, and Neisseria gonorrhoeae. The company was founded in early 2012, with backing from New Wave Ventures. New Wave’s co-founder Tim Bullock is chairman of Discuva’s board; the amount his firm contributed to the start-up is not public. David Williams is an entrepreneur who founded Sareum, a U.K. oncology biotech that went public on AIM, and previously worked at Millennium Pharmaceuticals, Acambis, and Medivir. - Wendy Diller

Merck/Ariad: The fate of Ariad Pharmaceuticals’ mTOR inhibitor ridaforolimus is uncertain now that pharma partner Merck & Co. has decided to return rights to the cancer drug. Ariad revealed in its year-end financial release Feb. 25 that Merck is terminating a licensing agreement for the development and commercialization of ridaforolimus effective in November. The move creates “a new clinical and business opportunity for Ariad,” the company said in a statement, but management didn’t even mention ridaforolimus during a same-day conference call. Ariad is focused on the re-launch of Iclusig (ponatinib), which re-entered the U.S. market in January for the treatment of leukemia after sales were temporarily halted last year due to safety concerns. The company is also running clinical trials to meet FDA’s post-marketing commitments for Iclusig and to expand its label to new indications. Merck’s decision to end the agreement shouldn’t surprise investors, especially now that the big pharma’s oncology focus has shifted to its PD-1 immunotherapy program. Ridaforolimus was rejected by FDA in 2012 as a maintenance treatment for sarcoma after it failed to demonstrate a benefit on survival in a Phase III trial and only a limited two-week progression-free survival advantage. Under the original 2007 collaboration between the two companies, Merck paid $75 million upfront for development and commercialization rights to ridaforolimus and agreed to pay up to $452 million in development milestones and $200 million in R&D payments; the deal was revised in 2010 to give Merck global rights rather than a U.S. profit split. Merck paid out some $222.5 million in upfront and milestone payments during the life of the deal, according to the Strategic Transactions database. - Jessica Merrill

Teva/Andromeda: In a case of a “No-Deal” possibly leading to another deal – Andromeda Biotech reacquired rights to type 1 diabetes candidate DiaPep277, along with equity, from fellow Israeli company Teva. To undo the firms’ 2007 partnership around the human heat shock protein 60 (Hsp-60)-derived peptide, Andromeda will pay Teva total consideration of approximately $72 million in future installments based upon revenues or proceeds payable to its shareholders.That unraveling of a deal on Feb. 24 was followed by media reports Feb. 26 that Clal Biotechnology, another Israeli company which owns 96% of Andromeda, was working on selling Andromeda and the DiaPep277 program to an undisclosed U.S. biopharma for a price that might number in the hundreds of millions of dollars. At press time, however, a second transaction could not be confirmed. Andromeda said it will continue a 475-patient confirmatory Phase III trial for the candidate. The 24-month, double-blind, placebo-controlled trial is being conducted at more than 100 locations in North America, Europe, Israel and Argentina. Patient recruitment was completed in September 2012 and the trial is expected to produce data by the end of this year. The trial is studying DiaPep277’s ability to preserve the patient’s insulin secretion by the pancreas, with a primary endpoint of maintenance of glycemic control. - Joseph Haas

Thanks to 401(K) 2013 from Flickr for the use of the image, which we find both alarming and strangely beautiful.

What If Deals Of The Week Had A Party And Nobody Showed Up?

What if they had a week and no biopharma deals happened? We’re not quite at that point but it has been slow-going, to put it mildly, on the deal-watching front.

Did everybody go on vacation all at once? Well, your trusty correspondent got back from his time off about two weeks ago and Deals of the Week has a schedule to keep. Let’s see what activity we can find.

There have been a few deals the week of Aug. 19, although none of the blockbuster sort or even all that close (see below). In fact, deal rumors may have outnumbered actual signed deals this week – they certainly set more tongues wagging. The biggest news in business development and M&A likely was renewed speculation that rare disease specialist Shire might be a buyout target for big pharma. The rumor gained in plausibility coming on the heels of Perrigo’s $8.6 billion acquisition of Elan on July 29 for the primary purpose of benefiting from Irish tax laws.

Focused on over-the-counter products, nutritionals and generic drugs, Perrigo bought out Elan largely for its appealing tax structure, as well as the royalties it earns from multiple sclerosis blockbuster Tysabri (natalizumab). Because Perrigo is merging with Dublin-based Elan, rather than just moving to Ireland, the new combined company will be able to take advantage of that country’s tax rates, which are considerably lower than those in the U.S.

On Aug. 15, Perrigo held its first earnings call since the transaction, saying that its expectations for increased global business are expected to offset slowing U.S. revenues in its OTC business. The company reported overall record net income of $967 million for its fourth quarter, a 16% increase from the year-ago period, and income of $3.5 billion for its fiscal 2013, which ended on June 30, a 12% increase from 2012.

While sales for its consumer health care business, which includes OTC drugs and pet-care products, grew 16% to $562.4 million for the quarter, Perrigo executives said during the call that sales in some OTC categories are slowing, a trend that likely will continue. Perrigo’s nutritionals sales, comprising supplements and infant formula, reached $150 million, an 11% increase year-over-year, with all categories within the segment growing and new product sales reaching $7 million.

It’s unclear whether Bristol-Myers Squibb, said to be reprising its interest in acquiring Shire, would be looking for tax advantages – Shire is headquartered in Ireland, as well, but also maintains corporate offices in Philadelphia and Cambridge, Mass.

Industry analysts on Wall Street and in London have said the pharma’s main interest might be Shire’s business model of producing and selling high-priced drugs for small specialist populations that discourage generic competition because they are hard to make and extremely targeted. However, if Bristol bought Shire, Irish tax rates would apply to any existing Shire products sold by Bristol and it likely could use the Irish rate on future products of its own, resulting in a reduced, blended tax rate for its overall business.

Shire has pursued an interesting business development strategy, using small to mid-sized acquisitions, particularly of companies with late-stage or commercial assets, to transform itself. The centerpiece of this strategy was the 2005 buyout of Transkaryotic Therapies that led to the establishment of its growing Human Genetic Therapies division and became a primary competitor to Sanofi’s rare-disease subsidiary Genzyme.

In an effort to build a franchise around bio-engineered skin-substitute product Dermagraft, Shire bought out Advanced BioHealing for $750 million in 2011, but to date that deal has not succeeded greatly in growing the Regenerative Medicines unit. On July 25, Shire announced that sales of Dermagraft, the primary motive for the acquisition, declined 57% to just $22 million during the second quarter.

Overall, however, the company reported sales growth of 7% during the quarter and said it was on track for double-digit full-year sales growth as it had projected.

Recently, it was reported that Shire has hired Lazard as a financial investor to assist it if a hostile takeover bid emerges. Bristol reportedly was going to offer nearly $17 billion to purchase Shire this past May. Shire’s share price has been trending up lately, nosing over the $100 mark on July 11 and continuing to incline. The stock closed trading Aug. 21 at $114.02, undoubtedly helped by the new rumors of possible takeout interest.

While DOTW waits for that potential story to percolate, we point you to these actual transactions that occurred over the past week:

Shire/Santaris: Meanwhile, Shire transacted some actual business, announcing an extension Aug. 23 of its strategic alliance with Santaris Pharma to discover and develop RNA-targeted therapies for rare diseases. Specific financial terms were not disclosed. Under the original deal, signed in 2009, Santaris has been using its proprietary Locked Nucleic Acid (LNA) platform to discover and begin development of preclinical oligonucleotides against rare genetic disorder targets selected by Shire. Shire paid $6.5 million upfront for access to the technology along with research funding and $13.5 million for completion of early studies in the original deal, which specified five targets. Santaris also was eligible for up to $72 million in milestones for each program, plus sales royalties on any product reaching the market. The revised deal adds an undisclosed number of additional targets to the collaboration. Santaris gets upfront cash and research funding, and again can earn milestones and royalties if a product derived from the target research gets to market. As with the initial agreement, Shire holds worldwide development and commercialization rights to any resulting compounds.

Adimab/Celgene/Innovent: Less than a month after antibody-engineering firm Adimab signed a pair of non-exclusive R&D partnerships with GlaxoSmithKline and Biogen Idec, the New Hampshire biotech struck again, announcing a pair of deals Aug. 20. This time, Adimab has signed discovery partnerships with Celgene and Innovent, again to generate therapeutic antibody candidates against multiple targets. The July deals brought Adimab’s total to 19 partners, including a “who’s who” of big pharma and big biotech, and the company said it expects to sign at least three tech-transfer deals a year through 2015. However, the deals with GSK and Biogen transferred non-exclusive rights to Adimab’s antibody discovery and protein-engineering platform, giving them expanded use of the technology beyond prior tie-ups with the biotech. In the Celgene agreement, Adimab will use the platform to generate antibodies against multiple, undisclosed therapeutic targets. Adimab receives an undisclosed upfront payment, while Celgene will have the option to develop and commercialize all antibody candidates resulting from the collaboration. For any candidate that Celgene options, Adimab will receive a licensing fee and be eligible for clinical milestones and royalties on product sales. Meanwhile, Adimab and China-based Innovent will partner on a single program to discover, develop and commercialize an antibody-based therapeutic against an undisclosed target. Innovent will coordinate all initial product development, including manufacturing and clinical trials. Each company will retain the right to develop and commercialize any resulting drug candidate in its respective geographic territories. Innovent will hold those rights in China, while Adimab retains U.S., European and Japanese rights to the program. Innovent will compensate Adimab for discovery and optimization of therapeutic leads, while Adimab will reimburse Innovent for specific development costs.

Evotec/Jain Foundation: Germany’s Evotec AG, a drug-discovery alliance and development partnership company, and the Jain Foundation announced Aug. 21 that they have extended and expanded their research collaboration in skeletal muscular dystrophy diseases. No financial details were disclosed. Based in Bellevue, Wash., Jain is a privately funded foundation whose goal is to cure muscular dystrophies caused by deficiency of dysferlin protein. In a release, foundation CEO Plavi Mittal said the collaboration is moving toward the screening of compound libraries with Evotec. “This is an important step toward accomplishing our mission of finding a therapy for Limb-girdle muscular dystrophy type 2b/Miyoshi Myopathy,” he said. Earlier this year, Evotec partnered with Harvard University to identify and develop a new class of small-molecule inhibitors of bacterial cell wall synthesis. Evotec is applying its drug-discovery technologies and expertise toward developing anti-bacterial agents that target peptidoglycan biosynthesis, while the university brings assays, anti-bacterial chemical starting points and x-ray crystallography tools to the collaboration.

Mount Sinai Medical Center/Exosome Diagnostics: Mount Sinai Medical Center (NY)’s Icahn School of Medicine is collaborating with Exosome Diagnostics Inc. on research and development of real-time nucleic acid-based body-fluid diagnostics to advance personalized medicine in areas such as oncology and inflammation. From the work, Exosome anticipates pursuing commercial development of potential in vitro diagnostics. Under the five-year collaboration, Mount Sinai researchers will get early access to Exosome technology for use in targeted molecular research, the two New York-based organizations said Aug. 21. The Exosome technology enables real-time capture of genetic biomarkers that are responsible for disease directly from blood, urine and cerebrospinal fluid without need for a tissue biopsy. The medical center will retain rights to molecular biomarkers associated with disease progression and drug response under the agreement, while Exosome will get commercial development rights to any molecular in vitro diagnostic products that may result from the collaboration.

Photo credit: Wikimedia Commons