Perrigo Elan: Markets not happy with Papa 
Posted by Carlos on Aug 06, 2013

 

 

We don’t normally comment on stock activity, but the market response to the Perrigo Elan announcement caught our eye:

Perrigo

As was pointed out in The Guardian:

Perrigo, which makes over-the-counter medicines and vitamins, said it would make annual savings of more than $150m (£98m) in taxes and operating costs by moving its headquarters to Ireland, where corporation tax is 12.5% compared with the US rate of 35%.

Joe Papa, Perrigo chief executive, described the deal as “financially compelling” and said it would mean the combined company would pay a corporate tax rate in “the high teens”.

“We’re excited by what it means for the international expansion. We think it’s financially compelling and when you put it together with an Irish domicile that has operational tax synergies, we think it’s a really compelling story.”

If this all sounds familiar, it’s because Alkermes performed a similar transaction when they merged with Elan Drug  Technologies in 2011.

This raises a few points in our minds:

1. Elan was once the poster child of drug delivery innovation. What happened? Did they simply run out of ideas? Or is this simply a normal, return of capital to shareholders.

2. The tax savings for a multinational company domiciled in Ireland are incredibly compelling. It’s hard to argue with a 12.5% tax rate compared to a 35% tax rate in the US. Valeant and Watson have executed similar maneuvers in order to reduce liabilities.

3. Negative investor reactions were summarized nicely here. An interesting quote from Perrigo’s Papa is:

“We’re excited about the Tysabri asset,” he [Papa] said. “I think we clearly always will continue to look at maximizing shareholder value, but for right now, we think it’s a great asset and one that we think is important to us for the future.”

Nonetheless, he added, “I don’t want anyone to think that we’re going to start spending billions of dollars in R&D,” and said the company would decide about how to deal with the one Elan product in the pipeline, ELND-005, after its next clinical-trial milestone.

4. Other comments from Perrigo management suggest that Perrigo will use Elan as a springboard for international expansion. We suppose their new Irish bank accounts could be used for international acquisitions in the generics space.

Perhaps our favorite comment is from Adam Feuerstein:

The only part of Perrigo actually moving to Ireland post the Elan deal is its bank account…

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