Another day, another tax inversion. Today it was the turn of Auxilium Pharmaceuticals, which announced plans to seek shelter from US corporate taxes via an acquisition of the Canadian ophthalmology company QLT.
Auxilium did not use the word inversion – in the fallout of the Pfizer bid for AstraZeneca that irked politicians in both the US and UK, this has almost become a dirty word. But by stressing that it will seek to partner QLT’s sole clinical-stage asset in the near future, there can be no doubt that this transaction was designed with tax efficiency in mind.
Not that Auxilium tried to hide the motivations behind this deal. On a conference call this afternoon executives highlighted first and foremost how the Canada-domiciled structure of the new company would create competitive advantages, mainly through the lower tax rate, that would make it stronger and more capable of striking further deals in the future.
Interestingly, the company did not forecast a particularly low tax rate compared with some other recent deals – it estimated that its long-term tax rate could be reduced to the mid 20% range, from the high 30s. However it made clear that in intended to strike deals that should bring that down further.
The deal “will allow us to more aggressively compete on the M&A and partnering fronts”, Adrian Adams, Auxilium’s chief executive, said on the call, adding that these activities would become “a very important part of our strategy”.
This plan could not echo much more closely the history of another Canada-domiciled company, Valeant, the success of which appears to have bred another imitator.
The target company
QLT has long been fingered as a takeout target and it has effectively been positioning itself as such since a strategic review a couple of years ago (QLT dresses for ophthalmology courtship dance, September 25, 2012). This focused the company on its orphan eye disease projects and beefed up its balance sheet; it had a $140m in cash at the end of March.
Partnering talks over a phase III-ready ophthalmology asset, QLT091001, are at a late stage and will be continued, Auxilium said. Although eye disorders is an active area for dealmaking the company has no existing expertise here, so the intended sale signals that it is unlikely to focus future dealmaking on this therapy area.
As such, there really are no reasons beyond the financial for this deal, which is being structured as a reverse merger. The agreed terms state that each Auxilium share will be exchanged for 3.1359 QLT shares, which represents a 25% premium to the companies’ closing prices yesterday, they said. After the merger, Auxilium shareholders will own 76% of the company, and QLT's the remainder.
Based on QLT’s opening share price today, which jumped 19% to C$6.92, the new company would be worth around C$1.3bn. After initially spiking, Auxilium shares were flat mid-morning at $21.40.
Set to continue
The quickening pace of these types of deals – AbbVie’s move on Shire was similarly framed – suggest that American companies are moving to take advantage of tax-lowering loopholes while they can. Pressure is building on lawmakers to close them and, while immediate action is considered unlikely, the steady stream of tax-driven deals means US politicians will soon be forced to respond with more than criticisms and proposals.
But at the same time companies like Auxilium are coming under financial pressure to strike these transactions, not only to snap up viable assets before the competition does, but because shareholders will be highly critical of a company paying more tax than its peers.
On the call today Auxilium was grilled by analysts on why it was not just re-domiciling in an even lower tax region like Ireland. Politicians might not like these deals, but it is clear that the financial world is heavily supportive. And they will continue to happen until the sums no longer add up.