Actavis Departs to Ireland for Lower Taxes
May 21st, 2013 // 12:34 pm @ jmpickett
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If there is anything we can learn from the $9 billion deal that has Actavis buying Warner Chilcott, it is that taxes really do matter. As part of the deal, Actavis is going to place its headquarters in Ireland. In that country, the drug maker can pay a lot less in corporate taxes.
This year, Actavis will pay about 28% of its profits in corporate taxes, but by moving overseas, its tax rate will be 17%. This will provide a boost to Actavis is several ways.
Competitors that have lower taxes to pay can now buy some products at a higher price and they can absorb new deals in an area with lower taxes. They end up paying lower taxes not just today, but also down the road in future acquisitions.
This is a clear example of how high tax rates hurt businesses. The US is losing out. It is not getting the short term cash from Actavis, and it also loses out for years on future taxes from the company. Of course, Actavis will have to pay taxes on profits that occur in the US but the US treasury is going to get less tax money because of this move.
It appears that many Actavis executives will continue to live in the US though. The CEO of the firm stated that the senior management team will stay in the US. It turns out that the managers just like living in New Jersey too much.
A big reason for this deal is that Actavis will have a better chance of getting a better deal as the patent cliff approaches. Fewer patents are expiring on big name drugs, so generic makers have fewer chances to come up with cheap versions of the same drug. Warner-Chilcott will assist Actavis in diversifying into new therapeutic areas, such as women’s health and dermatology. Soon, brand name drug sales will be about 25% of yearly revenue, rather than the current 8%. This means that the revenue will climb from $600 million to $2 billion.
This can create yet more chances to take good advantage of other brand name drug buys. Now the Actavis name will more often show up on lists of potential buyers that bankers will pass around when they are speaking to clients about drugs that could be sold off. Actavis will be more likely to be in the hunt for these drugs.
Every company wants to buy up the next Lipitor but in general, experts say the generic opportunity is shrinking. Actavis does have some big name drugs, but the companies that can successfully negotiate the transition are small. Actavis is seeing that it will pay to have a presence in emerging market areas where a generic can actually become a brand.
