Elan Corp. and Warner Chilcott Plc (WCRX:US), drug companies both domiciled in Ireland, this year found buyers motivated in part to cut their tax bill. The latest agreement, Perrigo Co. (PRGO:US)’s purchase of Elan announced July 29, helped drive shares of Jazz and Alkermes to a record (JAZZ:US) and 12-year high (ALKS:US), respectively, according to data compiled by Bloomberg.
With Ireland, where the corporate tax rate is 12.5 percent, emerging as a favorite base of operations for drug companies, narcolepsy medication producer Jazz looks like it has takeover potential, Brean Capital LLC said. Leerink Swann LLC sees Alkermes, a maker of treatments for nervous system disorders, possibly luring suitors after Elan and Warner Chilcott agreed to sell for a combined $17 billion.
“It’s been sort of a feeding frenzy,” Timothy Chiang, a Stamford, Connecticut-based analyst at CRT Capital Group, said in a phone interview. “I think some companies have just been screening for anything that has an Irish corporate tax structure. It’s been front and center on investors’ minds.”
Laurie Hurley, a spokeswoman for Jazz, declined to comment on the company’s takeover prospects. Representatives for Alkermes didn’t respond to requests for comment.
Elan, based in Dublin, became a target after Biogen Idec Inc. (BIIB:US) bought the company’s stake in multiple sclerosis drug Tysabri for $3.25 billion in cash plus future royalties. Less than three weeks after that Feb. 6 agreement, Royalty Pharma started an unsuccessful campaign to purchase Elan.
While Perrigo won, Elan lured suitors such as Allergan Inc., Mylan Inc. and Forest Laboratories Inc. (FRX:US), people with knowledge of the matter told Bloomberg News last month. Perrigo of Allegan, Michigan, will save more than $150 million a year from lower taxes and other expense cuts due to the purchase.
Actavis Inc. (ACT:US) agreed to buy Dublin-based Warner Chilcott in May, letting the company shift its domicile to Ireland from the U.S. and reduce its tax rate to about 17 percent. The deal also helps Parsippany, New Jersey-based Actavis expand in women’s health and urology.
The same motivation that drove buyers to Elan and Warner Chilcott could also spark interest in other Irish pharmaceutical companies, said Annabel Samimy, a New York-based analyst at Stifel Financial Corp.
“It’s definitely something that’s gotten people’s attention in pharma,” she said in a phone interview. “Everyone’s trying to find these strategies to lower these tax rates,” she added. The trend will continue “as long as there are assets.”
There are 23 Irish-domiciled corporations valued at more than $1 billion that trade in the U.S., data compiled by Bloomberg show. Eight are health-care companies, the data show. Besides Jazz, Alkermes, Elan and Warner Chilcott, the group includes Covidien Plc (COV:US), Icon Plc (ICLR:US), Mallinckrodt Plc (MNK:US) and Shire Plc. (SHP)
Both Jazz, which is now valued (JAZZ:US) at $4.6 billion, and Alkermes, with a market capitalization of $4.7 billion, have rallied after Elan’s takeover was announced on July 29. Today, Jazz surged 2.6 percent to a record high of $78.18, while Alkermes advanced 3.1 percent to a 12-year high of $34.66.
Jazz won its Irish domicile through a takeover, buying Azur Pharma Ltd. last year. Azur was founded by Seamus Mulligan, a former Elan executive.
Jazz may fetch $100 a share in a sale, said Gene Mack, a New York-based analyst at Brean Capital. That’s 31 percent more than last week’s close.
“It could get very difficult for them to fight off an acquisition,” Mack said in a phone interview. Not only could the tax rate lure suitors, Jazz’s narcolepsy drug, Xyrem, also has value, he said.
A Jazz takeover might be delayed until after its patent lawsuit against generic drugmaker Roxane Laboratories Inc. over Xyrem wraps up, Mack said. While Jazz will probably win the case, “it would be very unusual for an acquirer to step in front of that litigation,” he said. The analyst estimates the case will end in late 2014.
Alkermes also gained its Irish domicile through an acquisition: buying Elan’s drug technology and formulation unit in 2011. Alkermes’s pipeline and tax rate could prompt takeover interest, said Michael Schmidt, a Boston-based analyst at Leerink Swann.
An impediment to more bids for Irish drugmakers is finding reasons beyond the low tax rate to justify offers, said David Amsellem, a New York-based analyst at Piper Jaffray Cos.
“A deal that is solely driven by tax purposes could be a slippery slope,” he said in a phone interview.
To Mack of Brean Capital, the tax rate provides a strong incentive for more takeovers.
“You’ve got a classic inefficiency in the tax rate market,” Mack said. “I think everybody is trying to find a synergy in the Irish tax rate right now.”
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