'Economic patriotism' could dampen biopharma's M&A boom

The fervor over American companies merging with overseas rivals to lower their tax rates has drawn the ire of the Obama Administration, possibly imperiling the so-called inversion deals that have become increasingly popular in biopharma.

In a letter first reported by The Wall Street Journal, Treasury Secretary Jacob Lew urged lawmakers to act immediately and approve a bill that could "shut down this abuse of our tax system," looking to close a loophole that has allowed about 50 U.S. firms to reincorporate overseas in the last 10 years.

Drug developers have become poster children for inversion deals in recent years, marked by inversion deals by Valeant Pharmaceuticals' ($VRX), Actavis ($ACT) and Perrigo ($PRGO). Now, U.S.-based AbbVie ($ABBV) appears to be near a deal for Shire ($SHPG) that would trim its effective tax rate to 13% from about 22%, and medical device giant Medtronic ($MDT) has signed up to acquire Irish rival Covidien ($COV) in search of similar savings. A lower tax rate was in part the motive behind Pfizer's ($PFE) now-paused quest for AstraZeneca ($AZN) earlier this year, and the same promise has led smaller players like Salix ($SLXP) and Auxilium ($AUXL) to sign up for inversions this summer.

All along, there's been a slow boil among members of Congress who'd like to see an end to such agreements, whether through strengthening regulations or making the U.S. corporate tax code more business-friendly. The White House taking interest in the matter is perhaps a sign that the halcyon days of tax inversion may be coming to an end.

Would-be inverters could scramble to get deals done before the other shoe drops in Washington, but that may not do any good; in his letter, Lew recommends making any legislation be retroactive to May 2014.

"What we need as a nation is a new sense of economic patriotism, where we all rise or fall together," Lew wrote, according to WSJ. "We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes."

And while the anti-inversion rhetoric remains just that for now, investors are taking the threat seriously, sending Shire's shares down about 2.5% on Wednesday morning.

- read the WSJ story