Mylan Inc. (MYL:US) is buying Abbott Laboratories (ABT:US)’ generic drug business in established markets like Europe and forming a new company that will be incorporated in the Netherlands, cutting its taxes.
Abbott will get 21 percent of the new organization, a share valued at about $5.3 billion, the Abbott Park, Illinois-based company said today in a statement. Setting up in the Netherlands will drop Mylan’s tax rate to less than 21 percent in the first year, subsequently declining to the high teens. The company will be run by Mylan’s executive team from Pittsburgh, where Mylan’s headquarters are now.
Since January 2012, 19 U.S. companies have sought or completed purchases of companies overseas and changed their addresses to gain lower tax rates, a move known as inversion. The Mylan deal is among the first of the so-called spinversions, when a portion of a company is joined with another in a transaction that allows both to relocate.
“This transaction, in our view, is a win for both companies,” said Michael Weinstein, an analyst at JPMorgan Chase & Co. (JPM:US) in New York, in a note to clients today. Abbott will get cash for its eroding European drug business and raise the growth prospects of its remaining units, while Mylan will get a lower tax rate, he said.
Mylan Chief Executive Officer Heather Bresch said the company didn’t have an option when it came to moving its tax base abroad as her competitors left.
“We were the last Mohican standing,” she said in a telephone interview. “We’re the last in our sector to have announced an inversion or to be domiciled outside the U.S.,” she said. The move “gives us a very competitive landscape to pursue other opportunities.”
Mylan’s shares rose 2.1 percent to $51.24 at 4 p.m. in New York, while Abbott shares rose 1.3 percent to $41.82.
The sale includes more than 100 specialty and branded generic medicines to treat ailments ranging from heart and lung disease to infection and pain medicines. They generated about $2 billion in 2013 across Europe, Japan, Canada, Australia and New Zealand. The unit currently has about 3,800 employees, including a sales staff of 2,000.
In exchange for the medicines and manufacturing facilities in France and Japan, Abbott will receive 105 million shares, or about 21 percent, of the new company. The deal will at least double Mylan’s revenues in Europe, Canada and Japan and expand its geographic reach, the company said.
Abbott said it doesn’t plan to be a long-term shareholder in the new company, and will eventually sell the stock and use the proceeds for opportunities that would add to earnings. Abbott has been expanding the portion of its generic-drug business that operates in emerging markets, including the deal to buy Chile’s CFR Pharmaceuticals SA (CFR) in May.
The announcement comes as AbbVie Inc. (ABBV:US), the company split off from Abbott last year, today moved a step closer to buying Shire Plc (SHP) after the Dublin-based company said it’s willing to back a fifth offer of 31.4 billion pounds ($53.7 billion), which would be the biggest industry deal this year.
If that deal is completed, AbbVie, based in North Chicago, Illinois, has said it will change its legal address to the U.K. for tax purposes, an inversion that will potentially cut its rate to 13 percent from 22 percent.
Senator Ron Wyden, the Oregon Democrat who chairs the U.S. Senate Finance Committee, said companies are paying attention to his efforts to impose retroactive limits on inversions. In an interview at Bloomberg’s offices in New York today, Wyden said Medtronic Inc.’s inclusion of a clause allowing it to unwind a deal to acquire Covidien Plc and renounce its American address if tax law changes shows he is having an impact.
“If you have American companies that have been major employers, employers that pay good wages, saying that they’re just gonna pack up and go somewhere else, so they can have a lower tax rate,” Wyden said, “that has very ominous implications for our country.”
The Mylan and Abbott deal is expected to close in the first quarter of 2015. The new company will have sales of about $10 billion annually from more than 1,400 medicines, Mylan said.
“We have been actively looking at a wide range of opportunities, and the acquisition of this business is absolutely the right next strategic transaction for Mylan,” Executive Chairman Robert J. Coury said in a statement.
The deal will add 25 cents per share to earnings in the first year and generate $200 million in savings three years after it is concluded, Mylan said. It will give the company more flexibility with its cash, which it plans to quickly use build out its European business, Bresch said.
Mylan plans to keep much of Abbott’s infrastructure.
“It really opens up complimentary assets and companies in those markets,” she said. “We didn’t have the infrastructure in these countries. We absolutely see synergies, but we will certainly be using most of that infrastructure.”
Abbott’s sale of drugs in the world’s established markets were expected to generate about 22 cents per share in net income in 2015. It will drop ongoing earnings per share from continuing operations by about that amount, the company said.
The company will continue to expand its sales of generic medicines in emerging markets, which generated about $3 billion in 2013, said Chief Executive Officer Miles White, in a conference call. He said he wouldn’t rule out doing a tax inversion of his own if the right deal emerged, though nothing is imminent, he said.
Never Say Never
“I would never say never to anything, literally,” he said. “I don’t look at it as a strategic imperative for us. I don’t look at it as a necessary must do,” he said. “I wouldn’t rule out a lot of things, but I can’t say that you should somehow be waiting for a foot to drop here.”
Abbott may boost its acquisition efforts after it divests the branded generic business outside the U.S., said Joanne Wuensch, an analyst with BMO Capital Markets in New York.
“We anticipate that with medtech in the consolidation phase, Abbott management can now turn its focus away from identifying carve-out opportunities, to other larger types of transactions,” she said in a note to clients. “The area that needs the most attention next, in our opinion, is its medical device segment,” including diabetes and optics, she said.
Mylan received financial advice from Centerview Partners and legal advice from Cravath, Swaine & Moore LLP. Morgan Stanley (MS:US) advised Abbott on the transaction.
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