Just months after closing a $5.3 billion purchase of the non-U.S. and generics businesses of Abbott Laboratories, which shifted its tax headquarters to the Netherlands, drug maker Mylan is offering to buy competitor Perrigo for $205 a share in a cash and stock takeover.
The prospective deal is reflective of a merger and acquisition craze in the healthcare and pharmaceutical sector as companies look to wrench out cost synergies through consolidation, and find benefits from moving their corporate headquarters to low tax jurisdictions. Those bottom-line focused M&A efforts are seen by investors as a way for drugmakers to mitigate the potential impact of a slowing in the relentless rise of healthcare costs, after decades of out-of-control inflation.
Mylan closed its purchase of Abbott Labs non-U.S. and generics business on February 27, a deal it said “creates significantly enhanced financial flexibility and more competitive global tax structure for future opportunities.” As a result of the deal, Mylan shifted its tax headquarters from Pittsburgh to the Netherlands.
Heather Bresch, chief executive officer of drugmaker Mylan Inc., smiles during an interview in New York
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Now, with its tax advantage in hand, Mylan is making its most ambitious deal-making move yet, offering up a takeover of Perrigo. Both Mylan and Perrigo have seen their tax rates fall as a result of recent acquisitions. Mylan’s tax rate is projected to fall to 21% this year and into the high teens in coming years, while Perrigo saw its effective tax rate fall from nearly 24% to 17.1% over the past six months through its acquisition of Irish-domiciled drugmaker Elan, a deal that closed at the end of 2013.
Wednesday’s deal also comes just days after Perrigo closed its EUR3.8 billion takeover of Omega Pharmaceuticals, underscoring just how hot pharma M&A markets are.
In 2015 alone, Pfizer, Valeant Pharmaceuticals, Shire Pharmaceuticals, AbbVie and now Mylan have large, multi-billion dollar takeover deals, leading to $126 billion in M&A in the first quarter, according to data provider Dealogic. That comes on the heels of a banner year for healthcare M&A, even as a Department of Treasury freeze on so-called inversion transactions cancelled some of the year’s biggest merger efforts.
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Chris Pultz, portfolio manager of the Kellner Merger Fund, said Mylan’s deal “continues the trend of an arms race in the sector. Large pharma companies are getting together to pick up the last, best assets.”
Pultz added, in a telephone interview, consolidation is now being cut at very high prices, and estimated it might take another 10%-to-15% premium for Mylan to turn the unsolicited offer into a negotiated deal.
Mylan said on Wednesday it would pay $205 a share in cash and stock for Perrigo, without specifying an exact formula for its unsolicited takeover offer. As of midday trading, Mylan had a market capitalization in excess of $32 billion, while Perrigo had a market cap of over $24 billion. The offer, Mylan said, would amount to a 25% premium to Perrigo’s closing price on April 3.
With Perrigo in hand, Mylan said it will reach a critical mass in specialty brands, generics, over-the-counter (OTC) and nutritional products. Mylan didn’t specify any potential synergy estimates from the deal, either through added tax savings or through scaled operations, however, it did say the deal would “deliver significant immediate and long-term value and benefits for shareholders and the other stakeholders of both companies.”
Had they been combined, Mylan and Perrigo would have generate $15.3 billion in revenue last year.
“This proposal is the culmination of a number of prior discussions between Mylan and Perrigo about the compelling strategic and financial logic of this combination,” Robert J. Coury, Mylan’s executive chairman said in a statement. “We look forward in the weeks ahead to working with them to capitalize on this tremendous opportunity and working together to create a unique leader with a one-of-a-kind profile in our industry,” he added.
As part of the proposed deal, Coury said he’d continue to serve in a same role, while Heather Bresch and Rajiv Malik would serve as CEO and president, respectively. Mylan, citing respect for Perrigo’s business, offered roles to top executives Judy Brown and Todd Kingma, in addition to roles for members of Omega Pharma’s team.
Mylan has retained Goldman Sachs as a financial advisor and Cravath, Swaine & Moore as a legal advisor.
Shares in Mylan spiked over 14% in afternoon trading, indicating investors continued enthusiasm with pharmaceutical M&A. Perrigo shares spiked over 22%.
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