Ireland: Has it become the Bermuda of biopharma?
By Cormac Sheridan
DUBLIN – Ireland's phantom pharma sector, a growing roster of Irish-domiciled pharmaceutical companies that perform little if any activity within the country yet which channel much of their earnings through it, is attracting uncomfortable levels of scrutiny in the global industry's current cycle of M&A and drug licensing activity.
Corporate inversion has become a major theme in the pharmaceutical industry, particularly since New York-based Pfizer Inc. declared its intent to relocate to the UK should it succeed in its takeover of London-based Astrazeneca plc. But Ireland is where most of the action has been in recent years. Large chunks of the global pharmaceutical industry's assets and cash are now being gathered into Irish-domiciled entities in order to minimize their exposure to tax regimes in their originating countries.
The most egregious example to date must be Celgene Corp.'s recent licensing deal with Dublin-based Nogra Pharma Ltd. for the phase II Crohn's disease drug GD-0301. The agreement ticks all the boxes in terms of value creation and innovation. An up-front payment of $710 million – and another $1.86 billion in development, regulatory and sales milestones – is off the Richter scale for a product with just a 166-patient phase II study under its belt. Summit, N.J.-based Celgene, no slouch when it comes to building highly profitable drug franchises, thinks it has a mega blockbuster on its hands. (See BioWorld Today, April 24, 2014.)
Moreover, the deal could spark a major revival in a drug class that has yet to deliver on its considerable promise. The drug in question, GD-0301, is an antisense DNA oligonucleotide targeting expression of the SMAD7 gene, which encodes a protein that down-regulates the activity of transforming growth factor beta-1 (TGF- β1), an immunosuppressive cytokine.
The transaction should represent a major milestone for Ireland's biotechnology sector, therefore, and send out a signal that the country is now a significant player in innovative drug discovery. The deal went completely unnoticed in Ireland, however. That's because Nogra Pharma's sole connection with the country is through a legal firm – Dillon Eustace – based in Dublin's docklands district. While the transaction may represent a nice day's work for the country's legal and accountancy professions, the real kudos belongs to Italy, particularly to Giovanni Monteleone, professor of gastroenterology at the University of Rome Tor Vergata, who developed the treatment concept, and to a long-established, Milan-based specialty pharma firm called Giuliana SpA, which licensed his intellectual property. It's unlikely that a single vial of the drug ever crossed Ireland's borders.
Dublin-based ERS Genomics Ltd. is another company with little or no profile, despite its central position in one of the hottest new fields in biotechnology. The company was set up this year to manage and license intellectual property associated with the revolutionary CRISPR/Cas9 genome editing technology, owned by its co-inventor Emmanuelle Charpentier, of Hannover Medical School and the Helmholtz Centre for Infection Research (HZI) in Braunschweig, Germany. However, the real innovation will happen elsewhere. Crispr Therapeutics AG, the gene therapy firm she co-founded with Nobel laureate Craig Mello and other distinguished U.S. scientists, and which recently raised $25 million, will operate between Basel, Switzerland, and London. (See BioWorld Today, April 25, 2014.)
A SWEETNER GONE SOUR?
Ireland's corporate tax regime was introduced decades ago as a sweetener to persuade multinational firms to establish branch manufacturing plants here. The goal was simply to accelerate the country's industrial development, which at that time lagged far behind that of most other Western countries. It has since evolved – or mutated – into a system that is having significant and unintended effects. Ireland's tax regime has become an essential element in M&A transactions involving companies, products and personnel that have little or no substantive connection with the country.
The largest deal so far involves Actavis plc's pending $25 billion cash-and-shares takeover of New York-based Forest Laboratories Inc., which was unveiled on Feb. 18. Actavis shareholders are entitled to vote on the move at an extraordinary general meeting on June 17, but any investor who wants to quiz the company's management in person will have to travel to Dublin for the privilege. Actavis became a Dublin-based entity last year after its $8.5 billion takeover of Warner Chilcott plc. The latter firm, whose historic roots lie in Warner Lambert (now part of Pfizer Inc.), previously paid $3.1 billion in 2009 for Proctor & Gamble Inc.'s pharmaceutical business.
Mallinckrodt Pharmaceuticals Inc. is another firm around which several M&A transactions are clustering. In recent months, the company, which is notionally based on the outskirts of Dublin – where it runs a small manufacturing plant – but whose main operations are on a handsome campus in St. Louis, has entered merger agreements with Questcor Pharmaceuticals Inc. and Cadence Pharmaceuticals Inc., worth $5.6 billion and $1.4 billion, respectively. In February, the company formerly known as Endo Health Solutions Inc., of Malvern, Pa., completed its $2.7 billion takeover of Montreal-based Paladin Labs Inc. Neither firm previously had any connection with Ireland, but the combined entity, now Endo International plc, has put its headquarters in the basement of a Georgian building in central Dublin.
Shire plc, the specialty pharma firm that originated in Basingstoke, UK, but which moved its global headquarters to Dublin in 2008, attracted some unwelcome attention at its sparsely attended AGM in Dublin recently. Activists from ShareAction, a UK-based charity that campaigns for responsible investment, and Christian Aid, an international development charity, raised questions about the possible negative effects and reputational damage arising from its tax strategy.
"We just wanted to put this on the agenda for Shire," Louise Rouse, director of engagement at ShareAction, told BioWorld Today. The company, which employs about 1 percent of its work force in Ireland, declined to comment.
THE ELAN CONNECTION
The long drawn-out breakup of Elan Corp. plc. also forms part of the jigsaw. Acquirers of Elan assets, including Alkermes plc and Perrigo Co. plc, also became Irish domiciled, as have the acquirers of several specialty pharma companies established by former Elan executives. Most of those have more tangible connections with the country. Alkermes has taken over Elan's former manufacturing and research facilities in Athlone. Jazz Pharmaceuticals plc, which acquired Azur Pharma Ltd., is building a manufacturing plant in the same town. The inversion trend has also led to at least one biotech start-up locating here. Heart Metabolics Ltd., which recently raised $25 million to fund clinical development of a drug for hypertrophic cardiomyopathy, is setting up shop in Dublin and will conduct its business from here. CEO and founder Peter Milner – who has strong family links with Ireland and who has long maintained a residence here – is clear on the rationale.
"The development skills are here. On their own, that would not be enough, but everyone wants to buy a bone fide Irish company," he told BioWorld Today.
IDA Ireland, the country's influential economic development agency, has long argued that the foreign direct investment (FDI) it attracts here involves substance. Nine of what were historically considered the top 10 pharma companies have established production facilities in the country, alongside biotech firms, such as Amgen Inc., Biomarin Pharmaceutical Inc. and Regeneron Pharmaceuticals Inc. Annual exports from the sector total about €50 billion (US$69 billion). Most of these firms are members of Pharmachemical Ireland, which is part of Ireland's main business lobby, the Irish Business and Employers Confederation (IBEC). The newer brassplate companies are not part of this group and have located minimal corporate functions here.
"They don't bring any value to the sector in terms of activity on the ground," Pharmachemical Ireland director Matt Moran told BioWorld Today. They could also undermine Ireland's position as a location for FDI. "This muddies the water. It's not helpful," he said.
IDA Ireland CEO Barry O'Leary takes a similar view, as the Financial Times reported on April 29: "Transactions that rely solely on tax benefits, with no substance behind them, will not bring economic benefits to Ireland," he stated.
But aggressive tax planning maneuvers undertaken by companies with real operations in Ireland are also falling foul of U.S. legislators. The Irish authorities have long turned a blind eye to quirkily labeled tax avoidance ploys, such as the "Double Irish" or the "Dutch Sandwich," exploited by major software, internet and big pharma firms. As long as these firms had a substantial presence in Ireland, the Irish Revenue Commissioners appeared unconcerned about the large flows of cash washing between Ireland, the Netherlands and tax havens like Bermuda, even if the stratagems kept these companies' effective tax rates far below an already generous headline rate of 12.5 percent.
"Ireland still has significant features of an entrepôt economy, with various goods, royalties, licenses and funds flowing through the economy with little connection to productive activity," Séan Ó Riain, professor of sociology at the National University of Ireland, Maynooth, recently wrote in a book, titled "The Nuts and Bolts of Innovation – New Perspectives on Irelands's Industrial Policy" (Ed. David Jacobson, Glasnevin Publishing 2013).
During the last decade, the big question that encapsulated debate on Ireland's economic policy was whether it should be closer to Boston or Berlin, that is whether it should embrace America's go-getting, winner-takes-all culture or Europe's more equitable model of social democracy. There is now a growing international perception that Bermuda, the most emblematic of tax havens, may be the country's real exemplar. That could undermine Ireland's efforts to foster an enterprise culture based on scientific innovation rather than aggressive tax planning. And it could cause long-term damage to the more innovative parts of the drug development industry. Denying governments tax revenue directly undermines the case that the pharmaceutical industry repeatedly makes for generous reimbursement of its products.
How long the present situation will continue is unclear. Noises emanating from Washington could signal the beginning of the end for some of the taxation arrangements that some pharmaceutical firms are entering into. Sens. Carl Levin (D-Mich.) and Ron Wyden (D-Ore.), who chair the Senate Finance Committee, have called for measures – both carrot and stick – that would reverse the inversion trend. Relying on inversion may offer short-term benefits, but its long-term sustainability is becoming increasingly questionable.
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