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Biotech Takeover Investing

Written By Brian Hicks

Posted July 30, 2013

This could be biotech’s big moment. Just yesterday, Michigan-based Perrigo (NYSE: PRGO) announced it reached an agreement to buy out Irish Elan Corp. (NYSE: ELN) in a cash-and-stock deal worth $8.6 billion.

Forbes reports that Perrigo will pay Elan’s shareholders $16.50 in cash and stock, which represents a premium of 11 percent over Elan’s closing price last Friday.

pillsThis is a pretty major deal, since it allows Perrigo to move to Ireland and thus take advantage of that country’s much lower corporate tax rate of 12.5 percent (currently, Perrigo pays about 30 percent). The company stands to save some $150 million annually.

Besides a smaller tax bill, Perrigo will now have access to royalties from Elan’s multiple sclerosis drug, Tysabri. Tysabri has proved a major hit worldwide. Elan had previously sold Tysabri to Biogen Idec (NASDAQ: BIIB) back in February.

On news of the deal, Perrigo was up 1.4 percent at $134.23 before the markets opened, while Elan’s New York-listed shares were up 6.6 percent at $15.92.

If nothing else, this deal brings an end to the recent spate of speculation and rumors regarding Elan’s potential takeover. The company had previously rebuffed a hostile takeover bid from British Royalty Pharma, instead putting itself up for sale.

That came after the CEO of Elan, Kelly Martin, appeared to have either spun off or otherwise disposed of nearly all of the company’s assets following accounting drama, the net result of which was to leave Elan with just its Tysabri royalties.

Perrigo is in the business of producing private-label drugs for colds and allergies, as well as infant formula for various retailers including Wal-Mart (NYSE: WMT) and Walgreens (NYSE: WAG). It is the largest such manufacturer, and since 2005, it has expanded its operations internationally with various acquisitions in Israel, Britain, Mexico, and Australia.

Of course, the deal will mean that Perrigo will likely expand its royalty stream significantly thanks to Tysabri, and this should help the company’s immediate growth prospects.

According to the Washington Post, Perrigo and Elan have indicated that an interim company, New Perrigo, will be created and registered in Ireland, with trading going on over at the New York and Israeli stock exchanges. Existing Perrigo investors would own 71 percent of this new company, with the rest going to Elan’s investors.

Really, though, the interest factor in this deal lies in its broader implications. The Wall Street Journal lays it out nicely. Consider that Perrigo’s final bid bests Royalty Pharma’s offer of $13 per share plus about $2.50 in performance-based payouts.

But more than that, this is Perrigo’s move to strengthen its position, not only by shifting to a drastically lower tax framework, but also through opening up access to a star drug and an international base. Elan’s share of Tysabri brings in some $300 million a year, which will certainly prove useful for Perrigo’s future plans.

A Major Year for Biotech

The Biogen deal for Elan’s Tysabri had previously represented a milestone for the troubled company. That deal was worth $3.25 billion, and Elan was to receive 12 percent of sales in royalties for the first year, followed by 18 percent of all sales up to $2 billion as well as 25 percent of sales exceeding that.

Last year alone, Tysabri racked up sales worth $1.6 billion. The drug hasn’t been without its problems, though. After its 2005 launch, the drug was found to be linked to a fatal brain-inflammation disease which, although rare, provided enough negative publicity to seriously endanger Tysabri’s future.

Nonetheless, Elan and Biogen were able to persuade regulators both in the U.S. and in Europe to put the drug back onto the market in 2006 with extensive regulatory rules and risk guidance. Since then, Tysabri took off and is now considered a leading treatment for MS.

The new deal between Perrigo and Elan is presently undergoing the usual formalities. All regulatory approval is expected to be finalized both in the U.S. and in Ireland by the end of this year.

You should be paying close attention to the biotech sector in general right now. This has been an extremely good year so far. The ETF that tracks the sector, the iShares Nasdaq Biotechnology (NASDAQ: IBB), is soaring to all-time highs. Nearly 38 percent of the growth since the stock market began recovering in 2009 has occurred over the past 7 months alone.

Some good areas of focus include synthetic vaccines, affordable genetic sequencing (the recent Myriad Genetics case has opened this area up wide), and remote patient monitoring.


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