Jazz Deal for Gentium Shows Benefits of Inversions

In 2011, Jazz Pharmaceuticals, a California-based drug maker, acquired Azur Pharma, a small rival based in Ireland.

Because the stock deal transferred more than 20 percent ownership of the combined company to foreign holders, Jazz was able to enact an “inversion” â€" relocating its corporate headquarters to Ireland and escaping the U.S. tax regime.

Jazz’s deal for Azur was part of a new wave of inversions that is occurring as U.S. companies look for tax relief wherever they can find it. And Ireland has proven a popular destination for inverted companies, thanks to its relatively low tax rate. Just this year, Michigan-based Perrigo, another drug company, inverted when it bought Elan, an Irish drug maker for $6.7 billion; Actavis, another U.S. pharmaceutical company, inverted when it bought Dublin-based Warner Chilcott; and Endo Health Solutions, based in Pennsylvania, bought a small Canadian rival, but said it would move its headquarters to Ireland.

In addition to the basic savings companies achieve by not paying taxes on their international profits, a big reason companies invert is so they can acquire companies on a tax-efficient basis. And on Friday, Jazz took full advantage of that benefit, agreeing to to buy Gentium, a U.S. drug maker, for about $1 billion.

Had Jazz still been a U.S.-domiciled corporation, it would have had to pay higher taxes on the deal, and earnings from Gentium’s products would have been taxed at the higher rate. But because Jazz is now based in Ireland, it will be able to save taxes on the deal, and significantly reduce its tax bill on future profits from business lines it is acquiring from Gentium.

On a conference call with analysts after the deal was announced, Jazz executives nodded to the advantages of their inversion, without ever mentioning the maneuver by name.

“We have a tax structure that we believe is good for our current business but also allows us to competitively acquire additional assets into our business,” said Bruce C. Cozadd, Jazz’s chief executive.

For example, one way Jazz might take advantage is by locating any debt it needs for the deal in its U.S. subsidiary, thereby offsetting any taxes it might have to pay on U.S. profits.

Explaining the expected synergies, the tax savings were top of mind. “We think it slots very well into our international the tax structure,” said Jazz’s chief financial officer, Kathryn E. Falberg. “So we certainly think that this does leverage the fact that we do have an efficient corporate structure.”

As more companies have inverted in recent years, Washington has once again turned its attention to the thorny issue of how to protect the government’s tax base. Senator Max Baucus recently proposed an overhaul of the corporate tax code that would curtail inversions, but also exempt overseas earnings from U.S. taxes.

But with Mr. Baucus now set to become President Obama’s next ambassador to China, it seems unlikely that any changes to inversion rules are imminent. That means companies like Jazz are likely to be able to continue to take advantage of inversions and all they have to offer for a long time to come.

“Could there be changes in tax laws in the future?” Mr. Cozadd said on Friday. “Absolutely, there could be. I think some of those could actually be beneficial, particularly to the extent the U.S. decides at some point that one of the reasons companies pursue some of these transactions is because on a relative basis, the U.S. tax rate of course, is very, very high.”

Jazz did not respond to requests for comment.