AbbVie Ends Purchase of Shire on U.S. Tax Rule Changes

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A Shire foil blister pack of Reminyl XL 16mg prolonged release capsules.

Photographer: Chris Ratcliffe/Bloomberg

AbbVie Inc. and Shire Plc agreed to terminate what would have been the biggest U.S. tax inversion after AbbVie pulled its support for the deal in the wake of proposed changes to U.S. rules governing such transactions.

AbbVie, based in North Chicago, Illinois, planned to buy Shire for an estimated $52 billion, then move the combined company’s legal address to the U.K. to lower its tax bill and access cash trapped overseas. After confirming the deal was dead, the drugmaker announced a $5 billion share buyback over the next several years and increased its quarterly dividend by 17 percent, to 49 cents per share.

“We recognize that without a transaction the size of Shire, our cash position will build quickly, it has always been our commitment to return cash to shareholders,” Richard Gonzalez, AbbVie’s chief executive officer, said in a conference call following the announcements.

The deal is the largest casualty yet of rules announced last month by the U.S. Treasury Department to make tax inversion deals more difficult. The new rules “reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions,” AbbVie said late yesterday in a statement.

Representative Sander Levin of Michigan, the highest-ranking Democrat on the House’s tax committee, said Treasury had “done its part” to ensure U.S. companies reconsider moving overseas for tax purposes.

Different Rules

“Now Congress must live up to its responsibility and take legislative action to ensure that a small number of large corporations don’t get to play by a different set of rules than everyone else,” Levin said today in a statement.

A bill submitted in the House by Levin would deny the tax benefit of inversions after May 8 to companies that merge with a foreign company, unless the foreign company’s shareholders end up with more than 50 percent of the combined company. Under current law, that threshold is 20 percent.

AbbVie said it will pay Shire a breakup fee of $1.64 billion. Shire is based in Ireland for tax purposes, but has executive offices in Basingstoke, England.

Shire said it remains “well-positioned” to deliver on the company’s previously announced growth strategy of doubling annual product sales to $10 billion by 2020, and will focus on doing its own deals in areas where it has treatments as well as “adjacent therapeutic areas.”

Unfortunate Collapse

Shire rose 2.6 percent to 3,848 pence in London. The stock dropped 28 percent over two days last week after AbbVie said its board had decided to recommend shareholders vote against the deal. AbbVie gained 3.5 percent to $56.29 at the close in New York.

“It’s unfortunate that it’s falling apart,” said Michael Leuchten, an analyst with Barclays Plc in London. “But Shire’s in a pretty good position.”

Since the U.S. Treasury’s Sept. 22 notice about tightening tax rules, three of eight inversion deals have fallen apart. Auxilium Pharmaceuticals Inc. canceled its merger with QLT Inc., a Vancouver-based biotechnology company, which would have shifted its legal address to Canada. Auxilium instead agreed to be acquired by Endo International Plc, which is run from the U.S. though incorporated in Ireland.

Salix Pharmaceuticals Ltd., based in Raleigh, North Carolina, also terminated a $2.7 billion merger agreement with Italy’s Cosmo Pharmaceuticals SpA.

New Inversions

Two new tax relocations have been announced since then, leaving seven pending inversions including Ohio-based Steris Corp.’s 1.2 billion pound ($1.9 billion) offer for Synergy Health Plc, which would allow the U.S. company to move to the U.K. for tax purposes. Civeo Corp., a Houston-based owner of worker housing, said it would relocate its tax address to Canada instead of becoming a real estate investment trust.

The takeover of Shire would have expanded AbbVie’s portfolio of medicines, particularly by gaining treatments for attention deficit hyperactivity disorder.

AbbVie’s “challenge now is in two years they lose their patent on one of the biggest blockbusters of all time, and they’ll have to replace that,” said Bill Smead, CEO of Smead Capital Management, in reference to the arthritis drug Humira. Smead owns AbbVie shares.