PrintSAN FRANCISCO—OCTOBER 1, 2014—The U.S. Treasury Department in September took steps to discourage U.S. corporations from seeking to acquire or merge with off-shore companies in so-called inversions in order to avoid U.S. taxation. Inversions have in 2014 been a substantial driver of M&A activity in the life sciences and the new rules will likely slow activity and could lead to more restrictive legislation, according to Burrill Media.
Under the rules that immediately took effect, the Treasury Department’s actions eliminate the ability of U.S. companies to use earnings of their foreign subsidiaries to fund acquisitions without paying U.S. taxes on that capital. It also makes it more difficult for companies to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity. The rules apply to deals that have not closed as of September 22, 2014.
Of the $286.2 billion in life sciences M&A transactions announced during the first three quarters of 2014, 44 percent involved inversions. This includes AbbVie’s $54.7 billion acquisition of Shire and Mylan’s purchase of Abbott Lab’s European branded generics division $5.3 billion.
“The actions by the Treasury Department will diminish the attractiveness of inversions, but will fall short of putting an end to them. They will need to be justified by more than their tax benefits alone,” says G. Steven Burrill, CEO of Burrill Media, which produces publications and conferences focused on the global life sciences industry. “It will take legislative action to put a halt to these transactions. When the new session of Congress begins, the controversy over inversions represents an opportunity for comprehensive tax reform and the opportunity to address substantive tax issues of concern to the industry from the effects of tax policy on investment to its ability to incentivize R&D spending.”
The brisk pace of life sciences initial public offerings continued in September with a total of seven IPOs completed during the month on global markets, six of which occurred on U.S. exchanges. The activity raised the total number of U.S. IPOs to 82 for the first nine months of the year for a total of $6.3 billion. That compared to 39 IPOs on U.S. exchanges during the first nine months of 2013 in which companies raised a total of $6 billion. The 82 IPOs are already the most to be completed in a single year with the final quarter left to go in 2014. Though these new issues are up an average of 8.3 percent, 40 are above their initial offering price while 42 are below. Overall, a total of 102 IPOs have been completed globally year to date through the end of September 2014 to raise a total of $7.8 billion. That compared to 46 IPOs globally that raised nearly $6.2 billion.
In September, four of the six IPOs on U.S. exchanges included companies that were based overseas, a reflection that companies are finding an easier time raising capital in the United States rather than in their home countries. This included IPOs for Affirmed Therapeutics (Germany), ReWalk Robotics (Israel), ProQR Therapeutics (Netherlands), and Foamix (Israel). Four of the six companies that completed IPOs in September fell short of their target prices and needed to settle for a significant discount to their expectations. Though these issues ended the month up an average of more than 32 percent, the overall performance was largely due to the strength of ReWalk Robotics, which rose 182 percent. Of these six issues, three ended the month down and one was essentially unchanged.
“Though the market has been choppy, deals are continuing to get done in this historic IPO market,” says Burrill. “Companies will be opportunistic and need to balance their desire to go public with their adjusted expectations.”
The Burrill Select Index managed to stay positive in September with just a 0.6 percent gain for the month.
Nevertheless, the modest increase was enough to best the major market indices, which all ended the month lower than they began. For the month, the Dow Jones Industrial Average fell.0.32 percent, the S&P 500 dropped 1.55 percent, and the Nasdaq Composite Index sank 1.9 percent. Despite the weak month, the Burrill Select Index is up 20.03 percent for the year, strongly outpacing all of the major indices.
September also represented another solid month of venture financings for the life sciences with nearly$1.5 billion raised during the month. Adaptimmune, a U.K.-based developer of T-cell immunotherapies for cancer, completed the largest private financing for the month, raising a total of $104 million. Overall, total global venture financing through the end of September totaled $12.3 billion, nearly 35 percent more than the same period a year ago.
The pace of licensing and partnering transactions continued to accelerate in September with transactions with potential total value of $7.1 billion announced during the month. Takeda’s strategic alliance with MacroGenics to develop and commercialize up to four product candidate for autoimmune diseases represented the largest partnering deal of the month with a $33 million upfront payment and a total potential value of $1.6 billion. The agreement expands on an earlier collaboration announced just four months earlier.
The U.S. Food and Drug Administration’s Center for Drug Evaluation and Research approved three new molecular entities and biologics license applications during the month. This included the approval of Merck’s Keytruda for patients with advanced melanoma or melanoma that cannot be surgically removed. Keytruda is the first of a new class of highly anticipated cancer immunotherapies known as PD-1 inhibitors that blocks a pathway that is involved in protecting the cancer from the body’s own immune system.
The FDA also approved AstraZeneca’s Movantik for opioid-induced constipation and Eli Lilly’s Trulicity a once-weekly injection to improve control of blood sugar levels in adults with type 2 diabetes. Trulicity approval included a boxed warning because rodents involved in animal studies developed thyroid gland tumors. As of the end of September, the FDA approved a total of 29 new drugs and biologics. That compares to 16 through the same period a year ago and more than the 27 approved in all of 2013.
“As we move into the final quarter of the year, we are setting records for IPOs, M&As, and could see even more records broken, despite global uncertainties,” says Burrill. “Though expectations are high, 2015 may have a tough time beating biotech’s biggest year.”
About Burrill, LLC
Burrill. LLC is a life sciences/healthcare focused firm focused exclusively on company building, using its almost 50 years of experience capital, network capital, and expertise to help build the next generation of life science leaders. Burrill’s global relationships with healthcare/life science leaders worldwide is without peer, providing Burrill portfolio companies and clients with sustainable competitive advantage.
Burrill Media is Burrill’s information, intelligence, and insight business, publishing weekly, monthly, quarterly and annually developments in the life sciences/healthcare ecosystem. Burrill Media also hosts meetings and events for the life sciences/healthcare industry.
September 30, 2014
http://www.burrillreport.com/article-u_s_government%e2%80%99s_effort_to_quell_tax_driven_acquisitions_could_slow_life_sciences_dealmaking.html
