Elan Pharms., Inc. v. Director

Re: Elan Pharmaceuticals, Inc. v. Director, Division of Taxation

Dkt No. 010589-2010

TAX COURT OF NEW JERSEY

May 1, 2014

NOT FOR PUBLICATION WITHOUT APPROVAL OF

THE TAX COURT COMMITTEE ON OPINIONS

Mala Sundar

JUDGE

BY ELECTRONIC MAIL

Charles J. Moll, Esq.

Jeffrey P. Catenacci, Esq.

Winston & Strawn, L.L.P.

Michael J. Duffy

Deputy Attorney General

Dear Counsel:

This letter constitutes the court's opinion as to the parties' partial summary judgment motions. The issue is whether the gain of about $360 million from the sale of the U.S. and Canadian markets for a pharmaceutical drug called ABELCET, administered primarily to cancer patients, along with the drug's New Jersey manufacturing facility, is operational income subject to apportionment and to corporation business tax ("CBT") in New Jersey. Plaintiff, a Delaware company headquartered in California and doing pharmaceutical business in New Jersey that is unitary with its world-wide corporate family, argues that the sale was a liquidation of its corporate family's oncology business in a geographical segment, thus, results in nonoperational income that is not subject to apportionment pursuant to McKesson Water Prods. Co. v. Director,Div. of Taxation, 23 N.J. Tax 449 (Tax 2007), aff'd, 408 N.J. Super, 213 (App. Div.), certif. denied, 200 N.J. 506 (2009). Defendant ("Taxation") maintains that McKesson does not apply because Plaintiff retained its foreign business rights and assets of the ABELCET product line, continued to operate its business as to other medical drugs, some of which were oncology related, and further because Plaintiff retained a portion of the sale proceeds. Taxation alternatively argues that Plaintiff's operation of the ABELCET business was conducted in and from New Jersey, therefore, even if the income was deemed nonoperational, New Jersey can tax it under N.J.S.A. 54:10A-6.1(a).

For the reasons explained below the court finds that Taxation's arguments of the inapplicability of McKesson as persuasive, and supported by the facts on the record. Therefore, its assessment in this respect is proper.

FACTS

(A) Background

Elan Corporation, PLC, ("Parent") is an Irish public limited company headquartered in Ireland. It is a worldwide pharmaceutical company with its research and development ("R&D"), manufacturing, and marketing facilities in Ireland, and other countries including the U.S. Its 1999 annual report notes that it "has had a strategy of investing in biotechnology, drug delivery and genomics companies."

Parent conducted operations through two primary business units. One unit was Elan Pharmaceuticals, which was "engaged in the discovery, development and marketing of products in the therapeutic areas of neurology, pain management, oncology, infectious diseases and dermatology." It was also involved in clinical development programs in "the fields of," among others, oncology. The other business unit was Elan Pharmaceutical Technologies, which wasengaged in the "development, licensing and marketing of drug delivery products, technologies and services to pharmaceutical industry clients on a worldwide basis."

Plaintiff was incorporated in Delaware and during 2002, the audit period at issue here, it was headquartered in California. Plaintiff became licensed to do business in New Jersey in 1999. It used to be Parent's subsidiary but at some point became wholly owned by Athena Neurosciences, Inc. ("Athena"), a company located in California. Parent had acquired Athena and its subsidiaries sometime in 1996. In 1999, Athena became the wholly owned subsidiary of Elan Holdings, Ltd., an Irish company, which was wholly owned by Parent.

(B) Acquisition of Liposome Company Inc.

Starting in 1996, Parent acquired a series of biotechnology companies so it could grow into a world-wide fully integrated pharmaceutical company. One such acquisition was the Liposome Company, Inc. ("Liposome"), a Delaware biotechnology corporation, listed on the NASDAQ, and qualified to do business in New Jersey since 1981. Liposome's R&D facility was in New Jersey ("Princeton facility"). Its manufacturing facility was in Indianapolis ("Indianapolis facility"), operated by its wholly-owned subsidiary, the Liposome Manufacturing Company, Inc., which was headquartered in Indiana.

Liposome was in the business of developing, manufacturing and marketing therapeutic drugs to treat diseases incurring in among others, cancer patients. One such proprietary (i.e., patented) drug that was the major source of Liposome's revenue was ABELCET, which was commercially marketed world-wide for treating severe, systemic fungal infections in cancer, AIDS or transplant patients who were intolerant to conventional therapy. It was approved forsale nationally by the FDA¹ and commercially marketed mostly to hospital-based oncologists. Liposome's staff marketed and distributed ABELCET in the U.S. and Canada, while it partnered with other companies for sales in other countries. One of Liposome's foreign subsidiaries was Liposome Canada, Inc., which held the license from the Canadian government to sell ABELCET in Canada, and operated the stand alone Canadian ABELCET business. Liposome also owned or held several intellectual property rights to, and in, clinical studies/research as to ABELCET and other products in the pipeline.

On March 16, 2000, Parent issued a "Notification" of its intent to acquire Liposome. The proposed acquisition was to be accomplished by merging Liposome into Lithium Acquisition Corporation, a wholly owned subsidiary of Parent (created only for purposes of acquiring Liposome), and by issuing Parent's stock as consideration for purchase of Liposome's shares.

Per the Notification, Parent had no "share" in the oncology market in Ireland although it had several oncology related products which it had "licensed to Ligand for the U.S. and Canada." Whereas Liposome had about 20%-30% market share of ABELCET in Ireland. The "proposed acquisition involve[d]" Parent's entry "into the oncology (cancer drug) market," which was "its next therapeutic area of interest," and the acquisition would allow it to develop its oncology business "through product and strategic acquisitions." The Notification also stated that Liposome "will complement [Parent's] existing activities in oncology and oncology-related fields in the [Parent's] drug-delivery business and alliances" and benefit Parent's "marketing of ziconotide in the treatment of severe chronic cancer pain" by use of Liposome's sales force.²

An internal corporate bulletin of March 6, 2000 echoed these statements. Liposome's representative added that the "combination of Liposome's experience in the oncology field with [Parent's] extensive resources in oncology and related activities" favored the merger.

On May 12, 2000, Parent completed acquisition of Liposome and Liposome's subsidiaries for about $731 million, the price being primarily allocated to goodwill, patents and licenses. Within two weeks, on May 24, 2000, Parent transferred ownership of Liposome and its subsidiaries to Elan Holdings, Ltd., its Irish subsidiary. On the same day, Elan Holdings, Ltd. transferred ownership of Liposome to Athena, its California subsidiary, and Plaintiff's parent.

Although the dates of transfers are somewhat confusing chronology-wise, Liposome Canada, Inc. became Plaintiff's subsidiary with the name Elan Canada, Inc. on December 11, 2001. On December 28, 2001 Liposome's Indianapolis subsidiary became Plaintiff's subsidiary renamed as Elan Operations, Inc. Three days later, at midnight of December 31, 2001, Parent merged Liposome into Plaintiff.

The corporate structure as of December 31, 2002 showed Plaintiff as parent of foreign subsidiaries in Canada (Elan Canada, Inc.); U.K.; France (Laboratories Liposome); Switzerland; and Japan (Nychiyu Liposome Co., Ltd.). It was unclear when and how these subsidiaries (other than Elan Canada, Inc.) were created but it is undisputed that most of them were created to be able to market/sell ABELCET in these foreign countries, along with the other drug products such as MYOCET. Plaintiff's subsidiary, Elan Operations, Inc., had a "division" within it also named "Elan Operations, Inc.," which was a business unit that held title to the Princeton facility after sale of the Indianapolis facility.

According to the certification of Parent's employee, sometime after the Liposome acquisition, the European ABELCET business and distribution rights; the MYOCET distributionrights in Europe; and the Asian rights in ABELCET were transferred to and held by Elan Pharma International, Ltd. ("EPIL"), an Irish based subsidiary of Parent which did not do business in the U.S. These distribution rights did not require EPIL to own title to the intellectual property (i.e., of ABELCET's patents, trademarks, or licenses), and the same remained with Plaintiff as cost/time saving efficiency measures.³ The distribution rights "were the essential assets" used by EPIL "to run this business" and per the employee, Plaintiff never participated in EPIL's "operation of the [ABELCET and MYOCET] . . . business" in Europe.

Per the employee, Parent created subsidiaries in France (Elan Pharma Sarl); Germany (Elan Pharma GmBH); Italy (Elan Pharma Italia S.p.A.); and Spain (Elan Pharma S.A.U.) for marketing ABELCET and MYOCET in these countries since European laws required a localized corporation. EPIL sold ABELCET and MYOCET to these subsidiaries (presumably through inter-corporate arrangements), which in turn sold those products to the local health care providers in the respective countries.

Parent's 2001 annual report represented that Parent had achieved its goal to become an integrated biopharmaceutical company through a "corporate development" program of acquiring corporate entities such as Liposome, in addition to other measures of investments, cost/risk sharing in R&D areas, and forming business ventures to leverage the group's portfolio of intellectual property as a revenue raising...