Bloomberg News

Perrigo, Actelion Tax Targets Abroad for U.S. Drugmakers

July 21, 2014

Perrigo medicines

Blister packs of over-the-counter allergy medicines, manufactured by Perrigo Co., are arranged for a photograph in Washington, D.C. Perrigo is “an attractive takeout candidate for certain strategic buyers” due to its “durable, highly cash-flow generative business,” David Steinberg, an analyst at Jefferies LLC, wrote in a July 15 note to clients. Photographer: Andrew Harrer/Bloomberg

Drugmakers Perrigo Co. (PRGO:US) and Actelion Ltd. (ATLN), in Ireland and Switzerland, may join U.K.-based medical device company Smith & Nephew Plc (SN/) as acquisition targets for U.S. health-care companies racing to find tax relief abroad before the U.S. government curbs the option.

Deals for these companies would be smaller than AbbVie Inc. (ABBV:US)’s $54.8 billion Shire Plc (SHP) purchase, with Perrigo’s $20 billion market value the next largest among the companies. Still, they would add to a flurry of 20 completed and pending transactions since January 2012 involving companies that seek to avoid the 35 percent U.S. tax rate and free up foreign cash by redomiciling in countries with lower corporate rates.

AbbVie’s announcement of the latest so-called tax inversion on July 18 may have upped the ante for the remaining U.S. health companies to make a move before U.S. lawmakers limit the deals. Senator Ron Wyden, a Democrat from Oregon, has already proposed a bill to make such deals more difficult.

“The congressional pot was just starting to boil and this turns up the flame,” Erik Gordon, a professor at the University of Michigan Ross School of Business, said of the AbbVie deal for Shire. “It’s going to boil over, and there’s going to be a real showdown in Congress.”

A tax inversion happens when a U.S. company acquires a foreign company at least 25 percent its size, and moves its legal address abroad, where it will face a lower corporate tax rate. It also allows an acquirer to access profits earned abroad without paying the U.S. rate.

Strategic Buyers

Perrigo, the Dublin-based maker of over-the-counter and generic medicines, is “an attractive takeout candidate for certain strategic buyers” due to its “durable, highly cash-flow generative business,” David Steinberg, an analyst at Jefferies LLC, wrote in a July 15 note to clients.

Perrigo moved its tax domicile to Dublin last year by purchasing Elan Corp.

Globes, an Israeli business paper, reported on July 14 that Perrigo had hired an investment bank to consider a sale, sending Perrigo shares up as much as 9.9 percent. Abbott Laboratories has been suggested as a possible buyer of Perrigo, but it is not a perfect strategic fit and Abbott has also traditionally shied away from deals of this size, Chris Hamblett, an analyst at Cowen & Co., said by telephone.

Actelion, a drugmaker based in Allschwil, Switzerland, may be another target, UBS Securities LLC analyst Guillaume van Renterghem said in a phone interview.

More ‘Difficult’

“The next in line which was flagged in Europe was Actelion, although one would argue that a tax inversion in Switzerland is a bit more difficult,” van Renterghem said in a telephone interview. “Actelion has a lot of upside on sales. One would argue that with a smarter approach to business development you could get something out of it.”

Amgen Inc., based in Thousand Oaks, California, considered a takeover offer for Actelion in 2010. Jean-Paul Clozel, Chief Executive Officer of the Allschwil, Switzerland-based company, has argued for Actelion to remain independent after results from a lung medicine study beat expectations.

AbbVie itself could also become the next inversion target once it redomiciles in the U.K., Jefferies analyst Jeffrey Holford wrote in a note. Such a move, though, would require substantial financial resources as the new company may have a market value of $137 billion, according to AbbVie.

Medical Devices

Options for medical device makers are sparser. London-based Smith & Nephew, with orthopedic and wound management products, is “the only candidate that comes to mind when one thinks of med-tech in Europe,” said Micky Jagirdar, an analyst at Chicago-based Ariel Investments LLC.

“Management has talked about focusing on the wound care division more so than the implant division and currently views the implant division as a cash cow,” he said. “There’s no organic plan to change the competitive position of the division. They’re happy with where it is today. So it tends to make for a willing transaction.”

While U.S. medical device firms are certainly considering a tax inversion, the deal has to make strategic sense, said Raj Denhoy, a New York-based analyst at Jefferies LLC.

“The consideration of Smith & Nephew is, does it make sense for one of these cardiovascular-focused companies to buy an orthopedic-focused company?” he said by telephone.

Priorities

Stryker Corp. (SYK:US), rumored as a potential acquirer for Smith & Nephew, said in May it didn’t plan to make an offer after the U.K. Takeover Panel asked for a statement. The Kalamazoo, Michigan-based company is now subject to a cooling-off period, which usually lasts for six months.

Lowering tax rates is not the first priority for med-tech companies, according to CRT Capital Group LLC analyst Shagun Chadha. Besides the fact that there few attractive foreign assets, “the factors driving M&A are technology and increasing the depth and breadth of the company’s product portfolio,” she said in a telephone interview.

Medtronic Inc.’s acquisition of Dublin-based Covidien Plc (COV:US) last month “makes sense not only from a financial but also from a strategic standpoint, as it improves their competitive positioning and increase their bargaining power with hospital customers,” according to CRT Capital Group LLC analyst Shagun Chadha.

Additionally, Pfizer (PFE:US) Inc, whose takeover bid for AstraZeneca would have been the largest in industry history, may come back for a second attempt after the cool-off period dictated by U.K. Takeover Panel, according to BMO Capital Markets Corp. analyst Alex Arfaei.

Pfizer Revival

If Pfizer revives its failed $117 billion bid for London-based AstraZeneca Plc, then “it becomes even more important” for Merck (MRK:US) & Co., Eli Lilly & Co., and Bristol-Myers (BMY:US) Squibb Co. to do their own deals quickly, said Vamil Divan, an analyst with Credit Suisse Group AG in New York.

“There’s a great deal of expectation that Pfizer will try again,” Arfaei said by telephone. “That will raise a lot of concerns again in Washington, and ironically, that could be the inversion that closes the window.”

Bristol-Myers, based in New York, had been rumored as interested in Shire, but it wouldn’t have been as good a fit strategically, said Arfaei.

“It would have diluted their dependence on immune-oncology, and they might have experienced a contraction because Shire’s business is not expected to grow as fast as immune-oncology,” he said.

Merck’s Chief Executive Officer Ken Frazier said in a May interview that Whitehouse Station, New Jersey-based Merck isn’t ready to leave the U.S.

“Given the fact that the U.S. government is their largest customer, inverting could have negative consequences for them,” Arfaei said.

Representatives for Perrigo, Actelion, Bristol-Myers, Abbott and Pfizer declined to comment. Spokesmen for Merck and Smith & Nephew did not immediately respond to calls and e-mails requesting comment.

To contact the reporter on this story: Caroline Chen in New York at cchen509@bloomberg.net

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net; Drew Armstrong at darmstrong17@bloomberg.net Drew Armstrong, Angela Zimm


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Companies Mentioned

  • PRGO
    (Perrigo Co PLC)
    • $145.26 USD
    • 1.58
    • 1.09%
  • ABBV
    (AbbVie Inc)
    • $58.6 USD
    • 0.67
    • 1.14%
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