July 29 (Bloomberg) -- Perrigo Co., a U.S. maker of over-the-counter medicines, agreed to buy Irish drug company Elan Corp. for $8.6 billion, gaining a low-tax base for international expansion.
Holders of Dublin-based Elan’s American depositary receipts will receive $16.50 per ADR in cash and stock based on the July 26 closing price for Perrigo, the companies said in a statement today. The price is 11 percent more than the July 26 close for the ADRs and compares with an earlier offer of as much as $15.50 per ADR by Royalty Pharma.
The purchase allows Perrigo, based in Allegan, Michigan, to move its domicile to Ireland, where the corporate income-tax rate is 12.5 percent. It also gives the acquirer royalties on the multiple sclerosis drug Tysabri, which Elan discovered and sold to Biogen Idec Inc. on Feb. 6. Analysts questioned whether Perrigo was shifting away from non-prescription and generic medicines to riskier patented pharmaceuticals.
“Time will tell if this deal makes sense but this shifts Perrigo from its original focus,” said Jonathan Kreizman, an analyst at Clal Finance Batucha Brokerage Ltd. in Tel Aviv. “Perrigo is taking a big step forward and some associated risks of moving out of a sweet spot it was playing in.”
Perrigo sells non-prescription products for conditions such as acid indigestion and nasal congestion, as well as generic drugs, nutritional supplements and animal treatments, according to its website. The company makes lower-priced, store-brand versions of products such as Johnson & Johnson’s Tylenol pain reliever for customers including Wal-Mart Stores Inc.
The acquisition will result in more than $150 million of recurring after-tax annual operating expense and tax savings, the company said.
“Through this transaction, Perrigo establishes a diversified platform for further international expansion,” Chairman and Chief Executive Officer Joseph C. Papa said in the statement.
Elan’s ADRs rose 3.6 percent to $15.46 at the close in New York. Perrigo fell 6.8 percent to $125.17. The shares have advanced 20 percent this year, giving Perrigo a market value of $11.7 billion.
Bloomberg News reported yesterday that Perrigo was the frontrunner to buy Elan.
The combined company will list shares on the New York Stock Exchange and the Tel Aviv Stock Exchange, according to the statement. Perrigo shares are traded in Israel because the company in 2005 acquired Israeli generic-drug maker Agis Industries Ltd. Moshe Arkin, Agis’s former CEO, owns 4.8 percent of Perrigo’s shares, according to data compiled by Bloomberg.
“A lower tax rate could put it in a much stronger position to grow inorganically going forward,” Ami Fadia, a UBS AG analyst in New York, said in a note to investors.
A buyer also gains access to more than $2 billion in tax deductions, almost all in Ireland, Elan Chief Financial Officer Nigel Clerkin said on a July 24 conference call.
A sale of Elan, founded in 1969, marks the end of a rollercoaster ride for the Irish drugmaker and its shareholders.
Chief Executive Officer Kelly Martin, a former Merrill Lynch banker, was hired in 2003 to turn Elan around after an accounting scandal led to the ouster of his predecessor. Following the failure of an experimental Alzheimer’s drug, bapineuzumab, he sold or spun off most of the company’s operations, leaving it with royalties from Tysabri sales, an experimental drug for neuropsychiatric symptoms in Alzheimer’s, ELND005, and minority investments.
Elan began a formal sale process on June 15 after New York-based Royalty Pharma tried to acquire it.
Royalty Pharma, a firm that invests in the income streams from existing drugs, spent four months this year trying to acquire Elan. Its most recent offer on June 7 valued each Elan share at as much as $15.50 if Tysabri met certain sales and development goals.
Royalty was also exploring ways to partner with an eventual acquirer of Elan, allowing it to take on royalty streams while the buyer uses the Irish company’s corporate shell, people familiar with the matter said in June.
Tom Buchanan, a spokesman for Royalty Pharma, declined to comment.
Elan holders will receive $6.25 in cash and 0.07636 of a Perrigo share for each ADR.
Allergan Inc., Mylan Inc. and Forest Laboratories Inc. are among the drugmakers that considered a purchase of Elan, people with knowledge of the matter said.
In February, Biogen, based in Weston, Massachusetts, agreed to buy Elan’s stake in Tysabri for $3.25 billion in cash plus future royalties.
The deal has been approved by both companies’ boards and should close by the end of the year, Perrigo and Elan said.
Citibank, Davy Securities, Morgan Stanley and Ondra Partners advised Elan, and Barclays Plc advised Perrigo.
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