Update: On Sept. 22, the Treasury Department announced new rules to close the loopholes that allow US companies to reap tax benefits by changing their addresses to foreign locations, a practice known as tax inversion (and explained in more detail below). This week, the AbbVie board recommended to its shareholders that they not approve the merger they were planning with the England-based pharmaceutical company, Shire.
It’s called “inversion” — US corporations reincorporating in countries like Britain, Ireland or the Netherlands to duck US taxes, often by merging with a European entity.
The latest corporation to try to please investors with this tax dodge was Illinois-based Walgreen, the US’s largest pharmacy chain. But last week, under accusations from customers and lawmakers that the maneuver was unpatriotic, unfair to corporations remaining in the US and hypocritical because most of its profits come from American households, Walgreen backed down.
The Illinois-based drug company AbbVie, on the other hand, is proceeding with its announced merger with the British drug company Shire, based on the small island of Jersey in the English Channel. The company “is expected to be resident in the UK for tax purposes,” according to AbbVie’s SEC filing. If the deal goes ahead, the company will have a bigger market value than Boeing, McDonald’s and Cisco, writes The New York Times, totaling more than $137 billion.
AbbVie was spun off from North Chicago-based Abbott Laboratories in 2012 largely on the basis of Humira, a medication that treats autoimmune conditions like rheumatoid arthritis that’s become the best-selling drug in the world.
Humira’s success rests on two factors: Big Pharma’s pursuit of costly biotech drugs (often earning $10,000 to $20,000 a year per patient) as blockbuster pills like Lipitor go off patent, and cagey marketing.
Though approved for the relatively rare conditions of rheumatoid arthritis, juvenile idiopathic arthritis, ankylosing spondylitis, Crohn’s disease, psoriatic arthritis and chronic plaque psoriasis, Humira became a best-seller with the help of the public relations giant Edelman and the health care advertising firm Harrison and Star, which gave it appeal beyond its limited indications.
Currently, AbbVie is raising “awareness” of the inflammatory bone and joint disease ankylosing spondylitis, which Humira happens to treat. Your back pain “may not be your fault” say AbbVie’s ads; your pain may be caused not by muscle strain or a bad mattress but by a disease few had heard of — until Humira’s advertising blitz. The campaign even instructs listeners to tell their friends and family that their back pain may be from ankylosing spondylitis.
The AbbVie ad campaign raises ethical questions because the safety profiles of monoclonal antibody drugs, like Humira, that target the immune system are among the most concerning of all drugs, according to the FDA. While useful for autoimmune diseases, most experts agree that patients with less serious conditions should not be unnecessarily exposed to drugs with side effects like lymphoma, leukemia and super-infections.
And, speaking of ethics, questions about Shire, AbbVie’s partner-to-be, have also been raised. Best known for its ADHD drugs Adderall, Vyvanse and Intuniv, in 2008 Shire launched a “Nationwide Adult ADHD Mobile Awareness Tour” called the RoADHD Trip. The caravan included tents with self-screening stations. A separate initiative included a “field-based team of experienced psychiatric nurses” who would “provide in-office education to physicians and their staff on ADHD in adults.” ADHD is widely seen as overdiagnosed in the US.
In a conference call about its earnings, Shire bemoaned that it loses many of its college-age ADHD customers “as they kind of fall out of the system based on the fact that they no longer go to a pediatrician and they move on to a primary care physician.” Soon ads with the slogan, “It’s Your ADHD. Own It,” telling young people they have not outgrown their ADHD, began appearing in college newspapers.
AbbVie’s flight from US taxes to merge with Shire is especially hypocritical because in 2008 Abbott gave Humira free to elderly patients in order to churn demand while it successfully lobbied Congress to get Humira covered by Medicare. In addition to Medicare reimbursements, Humira costs state taxpayers as much as $50,000 per patient, according to a recent letter from pharmacies and insurers to Pennsylvania lawmakers.
AbbVie is also duking it out with drug maker Gilead over its über-expensive hepatitis C treatment, Sovaldi. AbbVie claims it holds patents to the way the drug is administered.
As safety questions about medical devices continue to surface — and some are replaced and withdrawn from the market — “Big Device” companies are starting to look a lot like Big Pharma. So, it is no surprise that along with AbbVie — and the drug companies Mylan, Jazz Pharmaceuticals, Actavis and Endo – the device maker Medtronic is enacting a tax inversion and fleeing to Europe.
This summer, the Minneapolis-based medical device-manufacturer announced it was buying device-maker Covidien PLC which is “headquartered” in Massachusetts but is “domiciled” in Ireland.
Some may remember the scandal over Medtronic’s Infuse, a bone graft material used in spine surgeries. A journal article by a paid Medtronic consultant, Timothy R. Kuklo, was retracted in 2009 due to falsified data. According to an Army investigation, Dr. Kuklo reported much higher success rates in healing the shattered legs of wounded soldiers than was accurate. A former surgeon at Walter Reed Army Medical Center, Dr. Kuklo “was extensively involved in research and writing about various Medtronic products, including editing two books published by the company and conducting three studies that were approved by his Army superiors, according to his list of publications and an Army report,” reported The New York Times.
Not only was Infuse not as effective as Medtronic said it was, it also began to be linked to serious complications, reported Medpage Today, a journal for health care professionals. Still, Medtronic has been receiving $8,900 from the Centers for Medicare & Medicaid Services (CMS) each time Infuse has been used. Experts have questioned whether Medicare should be covering the controversial product at all.
The Infuse affair is not the first time Medtronic’s relationship with US tax dollars has come under scrutiny. In 2008, Medtronic agreed to pay the US government $75 million to settle a whistleblower lawsuit alleging that it committed Medicare fraud. The company was charged with illegally convincing health care providers to offer kyphoplasty, a spinal fracture repair surgery, as an inpatient rather than outpatient procedure, thereby making thousands more in profits per surgery.
In 2006, the Justice Department ordered Medtronic to pay $40 million to settle civil allegations that its Medtronic Sofamor Danek division (MSD) paid kickbacks to doctors to induce them to use MSD’s spinal products.
Lawsuits charge Medtronic with using high-flying tactics to sell its spinal products to surgeons, including taking them to strip clubs and giving them luxurious vacations and “patent royalties on inventions they played no part in.”
Thomas Zdeblick, MD, chairman of the University of Wisconsin medical school’s orthopedic department and a prominent spine surgeon received more than $25 million from Medtronic between 2003 and 2011, and the university hospital spent $27 million for Medtronic spinal products according to the Milwaukee Journal Sentinel. One hundred and seventy-nine patients at the hospital were given Medtronic devices between 2008 and 2011.
Public opinion is clearly turning against companies fleeing to Europe to dodge US taxes, as Walgreen’s decision to remain here shows. The Treasury Department said last week that it is “reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions.” But the maneuver is particularly contemptible in companies like AbbVie and Medtronic whose profits are so richly supported by US taxes.