Tax inversions are one of the hottest trends in biopharma. But with lawmakers unable so far to reach a deal on new legislation, the Obama administration is signaling that it wants to put a stop to it--now. And it's looking for a way to go it alone, leaving lawmakers on the sidelines.
With AbbVie ($ABBV) and Shire ($SHPG) hustling to wrap a $54 billion merger agreement that would allow the big pharma company to trade its U.S. tax rate for a much lower U.K. assessment, the Treasury Department put out word that it's looking at taking administrative action that could stop the tax gambit in its tracks, or at least slow it down. And the news sent a chill down the backs of investors in Shire as well as AstraZeneca ($AZN), which is still rumored to be a takeover target for a struggling Pfizer ($PFE) even after the U.K. giant wrestled its way out of an earlier takeover attempt.
Shares of both companies dropped about 5% Wednesday morning.
The implications of administrative action in the biopharma industry, though, extend beyond those two big outfits. Pfizer's attempt to buy AstraZeneca in a $118 billion inversion deal helped focus attention on other takeover targets with a sweet tax deal in the British Isles, such as Actavis ($ACT). Even GlaxoSmithKline ($GSK) has come up as a potential target, especially as it struggles in China as its numbers weaken.
So far, analysts have been shrugging off the idea of a government intervention anytime ahead of the congressional elections this fall. Democrats have been pushing new legislation that promises to close the loophole that allows big U.S. companies to escape the higher tax rate, but Republicans have pushed back, rejecting the notion of a quick fix in favor of a complete revamp of the tax rules. But with lawmakers in gridlock over a project that size, the prospect of an intervention seemed somewhat remote.
Administrative action could potentially offer an end run around Congress.
"Treasury is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place," the department said in a statement.
That's a complete reversal of what Treasury Secretary Jacob Lew said just weeks ago, when he told reporters that new laws would be required to prevent future inversions. But the green light turned yellow today and may help push a fast fix among lawmakers embarrassed by the sudden high-profile trend.