Perrigo cited as acquisition target for inversion strategy

US health-care companies may seek to purchase acquirer of Elan to find tax relief abroad

Blister packs of over-the-counter allergy medicines, manufactured by Perrigo. Perrigo agreed to buy Irish drug company Elan for $8.6 billion in 2013, thereby gaining a low-tax base for international expansion. Now it is being cited as a potential acquisition target for larger companies looking to pursue a similar strategy. Photograph: Andrew Harrer/Bloomberg

Blister packs of over-the-counter allergy medicines, manufactured by Perrigo. Perrigo agreed to buy Irish drug company Elan for $8.6 billion in 2013, thereby gaining a low-tax base for international expansion. Now it is being cited as a potential acquisition target for larger companies looking to pursue a similar strategy. Photograph: Andrew Harrer/Bloomberg

 

Dublin based drugmaker Perrigo may join Swiss based Actelion and UK-based medical device company Smith and Nephew as acquisition targets for US health-care companies racing to find tax relief abroad before the US government curbs the option.

Deals for these companies would be smaller than AbbVie’s $54.8 billion Shire 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 per cent US 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 18th may have upped the ante for the remaining US health companies to make a move before US 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 US company acquires a foreign company at least 25 per cent 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 US rate.

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 15th note to clients.

Perrigo moved its tax domicile to Dublin last year by purchasing Elan Corp. Globes, an Israeli business paper, reported on July 14th that Perrigo had hired an investment bank to consider a sale, sending Perrigo shares up as much as 9.9 per cent.

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 and Co., said by telephone.

AbbVie itself could also become the next inversion target once it redomiciles in the UK, 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.

Bloomberg