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Drug Deals Surge to New High With Mallinckrodt: Real M&A

Mergers and acquisitions in the specialty pharmaceuticals industry just reached a new high.

Mallinckrodt (MNK) Plc said yesterday that it will buy Questcor Pharmaceuticals Inc. for $5.6 billion. That propelled the amount spent on specialty drugmaker deals in the past year to almost $60 billion, the most for a 12-month period since December 2009, according to data compiled by Bloomberg. Drugmakers from Actavis Plc to Valeant Pharmaceuticals International Inc. (VRX) -- and now Mallinckrodt -- are broadening their suites of drugs through takeovers that immediately boost earnings with the help of lower corporate tax rates in countries such as Ireland.

“We’ve seen so many deals in specialty pharma, and a number of companies have been very aggressively buying,” Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a phone interview. “It’s tougher to stay in the pharma business if you’re so heavily reliant on just a handful of products; you have to become sort of a one-stop shop.”

With Questcor (QCOR), Mallinckrodt gains an injectable treatment for autoimmune diseases, helping it expand beyond medical imaging and pain drugs. The pace of dealmaking for drugmakers isn’t likely to slow as the companies aim for broader portfolios, said Argent Capital Management LLC. Even Mallinckrodt, whose shares fell 2.5 percent yesterday, may seek more takeovers after it integrates Questcor, Argent said.

Questcor Details

Mallinckrodt is offering cash and stock in a deal that values Questcor at about $5.6 billion, not including its net cash. Mallinckrodt said the tax rate on Anaheim, California-based Questcor’s business will drop as a result of it becoming part of the Dublin-based company.

Cutting tax bills has been a major reason for the surge in specialty pharmaceutical deals, said David Heupel, a Minneapolis-based fund manager at Thrivent Financial for Lutherans.

Transactions that lower tax costs “are incredibly accretive usually,” said Heupel, whose firm oversees about $90 billion. “You’re becoming a significantly larger company and growing your earnings number at a significantly higher rate from these deals.”

Without accounting for potential synergies, the Questcor takeover will boost Mallinckrodt’s earnings per share by about 70 percent, according to data compiled by Bloomberg.

Second Takeover

Questcor is Mallinckrodt’s second acquisition this year. The company last month completed a takeover of Cadence Pharmaceuticals Inc. to add an intravenous form of acetaminophen for pain. When asked on a conference call with analysts yesterday whether it’s planning any more transactions, Mallinckrodt executives said they wouldn’t rule out licensing deals, company takeovers or asset purchases.

A representative for Mallinckrodt declined to comment on any future takeover plans.

Other companies that have the potential to participate in deals within the industry include Jazz Pharmaceuticals Plc and Alkermes Plc, both domiciled in Ireland, according to analysts. A representative for Jazz said the company doesn’t comment on speculation. Representatives for Alkermes didn’t respond to a request for comment.

The Questcor deal brought the volume to $57.8 billion, data compiled by Bloomberg show. That’s the highest since $70 billion of deals were struck in the 12 months ending December 2009, the data show.

Foreign Deals

Among the more recent transactions were Actavis (ACT)’s bid in February for Forest Laboratories Inc., which will add brand-name medicines to the Irish-domiciled company’s lineup of generics. Valeant, the most acquisitive drugmaker in North America in the last five years, has been expanding into niche areas, such as eye care with its purchase of Bausch & Lomb Holdings Inc. Valeant also has tax advantages because it’s based in Canada.

Such acquirers have generally been rewarded for diversifying and adding scale, said Scott Harrison, a fund manager at St. Louis-based Argent Capital, which oversees about $2.5 billion including Mallinckrodt stock. Mylan Inc. rallied 1.5 percent on April 4 after news it may be interested in acquiring Meda AB. The positive stock performance may provide an incentive for companies to continue buying, he said.

Mallinckrodt shares climbed 5.4 percent to $64.23 today.

Valeant, which has announced 17 deals in the last two years, has more than doubled its stock price in that time. Shares of Actavis almost tripled after announcing about $35 billion on deals since April 2012.

Under Pressure

There is “investor pressure on companies as others in the space have been driving significant gains by doing deals,” Harrison said in a phone interview. “Scale is becoming much more important and it’s really leading to kind of an acceleration in M&A activity.”

For Mallinckrodt, it’s about branching out into higher-margin, branded specialty drugs, according to David Amsellem, a New York-based analyst at Piper Jaffray Cos. Questcor makes H.P. Acthar Gel for disorders such as multiple sclerosis and infantile spasms.

Mallinckrodt will probably hold off on takeovers until it has integrated Questcor, though it may eventually seek more deals to help achieve its goal of becoming more diversified, said Harrison of Argent Capital. Or Mallinckrodt could become a target for suitors seeking an Irish tax domicile, he said.

The Questcor deal has so far disappointed shareholders. While the stock rose 12 percent in pre-market trading yesterday when the transaction was announced, it slid 2.5 percent at the close.

Part of the skepticism is that it’s a lot of money to bet on one product, especially a product that doesn’t seem to fit within Mallinckrodt’s expertise, said Chiang of CRT Capital.

“The market’s still trying to decide if this is a good deal or not, and there are pros and cons,” he said. But making acquisitions like these “seems to be the calling card for a lot of these companies to a large extent right now.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling

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