American pharmas buying into Ireland for 12½% tax rate

After two drug industry suitors already won a 12.5 per cent tax rate through Irish acquisitions, investors are speculating that Jazz Pharmaceuticals and Alkermes may draw the next bids.

Elan and Warner Chilcott this year found buyers motivated in part to cut their tax bill. The latest agreement, Perrigo’s purchase of Elan on July 29th, helped drive shares of Jazz and Alkermes to a record and 12- year high, respectively.

With Ireland emerging as a favourite base of operations for drug companies, narcolepsy medication producer Jazz looks like it has takeover potential, Brean Capital says.

Leerink Swann 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, said in an interview. “I think some companies have just been screening for anything that has an Irish corporate tax structure. It’s been front and centre on investors’ minds.”

Laurie Hurley, a spokeswoman for Jazz, declined to comment on the company’s takeover prospects. Representatives for Alkermes did not respond to requests for comment.

Elan became a target after Biogen Idec 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 February agreement, Royalty Pharma started an unsuccessful campaign to purchase Elan.

While Perrigo won, Elan lured suitors such as Allergan, Mylan and Forest Laboratories.

Perrigo, of Allegan, Michigan, will save more than $150 million a year from lower taxes and other expense cuts due to the purchase.

Actavis agreed to buy Dublin-based Warner Chilcott in May, letting the company shift its domicile to Ireland from the US and reduce its tax rate to about 17 per cent.

There are 23 Irish-domiciled corporations valued at more than $1 billion that trade in the US, data compiled by Bloomberg show. Eight are healthcare companies, the data show.

Jazz won its Irish domicile through a takeover, buying Azur Pharma last year. Azur was founded by Séamus 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 – 31 per cent more than last week’s close. Not only could the tax rate lure suitors, but Jazz’s narcolepsy drug, Xyrem, also had value, he said.

A Jazz takeover might be delayed until after its patent lawsuit against generic drugmaker Roxane Laboratories over Xyrem wrapped up, he added.

While Jazz would probably win the case, “it would be very unusual for an acquirer to step in front of that litigation”. 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 was finding reasons beyond the low tax rate to justify offers, said David Amsellem, a New York-based analyst at Piper Jaffray. “A deal that is solely driven by tax purposes could be a slippery slope,” he added.

Mr Mack said the tax rate provides a strong incentive for more takeovers. “You’ve got a classic inefficiency in the tax rate market,” he said. “I think everybody is trying to find a synergy in the Irish tax rate right now.” – (Bloomberg)