Cecil-based generic drug giant Mylan Inc. announced Monday it would acquire a major chunk of Abbott Laboratories’ generic business outside the U.S. in an all-stock transaction through which Mylan would reincorporate in the Netherlands. The maneuver would lower Mylan’s corporate tax bill.
In a move known as an inversion, Mylan would use the acquired assets to form a new publicly traded parent company called Mylan NV. Current management from its U.S. headquarters would continue to lead the company, and the stock would continue to trade on Nasdaq under its current symbol, executives said.
Inversions have become increasingly popular for U.S. companies, but the maneuver has raised the ire of some legislators, who view it as a tax dodge, costing the federal government billions in revenue.
Earlier this year, Mylan CEO Heather Bresch said the company was looking at an inversion to remain competitive with other drug makers that have pursued the same strategy. She said an inversion wouldn’t be the driving force in any acquisition but “may be a byproduct.”
Under the deal with Chicago-based Abbott, about 21 percent of the shares in Mylan NV would go to Abbott. The stake, valued at about $5.3 billion, would satisfy U.S. tax rules allowing inversions. Abbott said in a statement that it did not plan to be a long-term shareholder in Mylan and eventually would sell its shares.
While Mylan expects to cut its tax bill, the current shareholders will have to pay capital gains tax when their shares are exchanged for shares in the new parent company.
Mylan, which had $7 billion in revenue last year, said the deal would improve its cash position, which it would use for more acquisitions. “You should be expecting more bolt-on type acquisitions,” chairman Robert Coury told analysts Monday in a conference call.
The transaction is expected to be completed early next year, pending approval from regulators and Mylan shareholders, and add about 25 cents per share to Mylan’s earnings in the first year, the company said.
Officials said the deal would bolster Mylan’s operations abroad, adding 3,800 employees in more than 40 countries, two manufacturing facilities in France and Japan, an estimated $1.9 billion in revenue and a portfolio of about 100 specialty and branded generic drugs, including Creon, Influvac, Brufen, Amitiza and Androgel.
Branded generics are generic medications that are marketed under a company’s brand name. Specialty generics are drugs that are more difficult to make, so they often enjoy limited competition.
The deal will mean Mylan for the first time will derive more of its revenue from abroad than in the U.S., with domestic revenue dropping to 48 percent of the total, down from 60 percent, the company said.
The acquisition does not include Abbott’s branded or specialty businesses in emerging markets and its other businesses in the U.S. and abroad. Abbott had $21.8 billion in revenue in 2013.
While U.S. companies complain about corporate tax rates, many of them pay far less than the 35 percent statutory rate because of tax credits and other allowances, tax experts say. Fortune 500 companies that were consistently profitable from 2008 to 2012 had an average effective rate of 19.4 percent, according to Citizens for Tax Justice. The Washington, D.C., tax policy group said 26 of the companies paid no federal income taxes over the five-year period.
Mylan paid an effective federal tax rate of 16.2 percent in 2013, according to a company securities filing, which also indicates an effective tax rate of 20 percent in 2012 and 17.7 percent in 2011.
Mylan chief financial officer John Sheehan said in the call with analysts Monday that the inversion would drop the company’s global effective tax rate from 25 percent to about 21 percent in the first year and down to the high teens over time.
Mylan did not respond to an email Monday seeking comment.
Inversions have caught the attention of President Barack Obama and some members of Congress. The president has proposed trying to limit inversions by requiring shareholders of the selling company to own at least 50 percent of the new company, up from the current 20 percent. Sen. Carl Levin, D-Mich., and his brother, Rep. Sander Levin, D-Mich., introduced legislation in May that would accomplish the same thing.
“These transactions are about tax avoidance, plain and simple,” Sen. Levin said in a statement in support of his bill.
His legislation has been given little chance of passage because congressional leaders want to consider the issue when they overhaul the tax code, and that process is not expected any time soon.
Mylan’s planned inversion “underscores the need to reform our hopelessly flawed tax code to be more globally competitive so businesses want to keep all operations in America,” Rep. Tim Murphy, R-Upper St. Clair, said in an email Monday.
Sen. Joe Manchin, D-W.Va., father of Mylan’s Ms. Bresch, did not respond to a telephone call or email seeking comment.
Opponents of inversions note that companies seeking to renounce their U.S. tax citizenship often benefit from doing business with the U.S. government.
Citizens for Tax Justice criticized the New York-based pharmaceutical giant Pfizer Inc., which recently failed in its bid to acquire British drug maker AstraZeneca, for wanting to reincorporate overseas after it received $4.4 billion in federal contracts.
The Department of Veterans Affairs has granted Mylan four contracts since 2009 valued at nearly $3 billion, according to the agency’s records.
Mylan shareholders will have to pay capital gains taxes when they turn in their current shares for shares in the new Netherlands-based parent company, said Mary Richter of Schneider Downs, a regional accounting firm.
Long-term capital gains tax — at a rate of 15 percent to 25 percent, depending on the holder’s income — will be based on the price a shareholder paid for Mylan shares and their value at the time of the transaction, she said.
On Monday, Mylan’s stock added $1.04, or 2.07 percent, to close at $51.24.
Patricia Sabatini: firstname.lastname@example.org or 412-263-3066. Len Boselovic: email@example.com or 412-263-1941. Bill Toland contributed. First Published July 14, 2014 8:51 AM