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Mylan's Big Merger Prize: Lower Taxes, More Generic Drug Sales

18 July 2014 in Trading Ideas

This week opened with one of healthcare’s biggest mergers of the year: Abbott Laboratories announced on Monday that it had agreed to sell its established generic drug business outside the US to generic drugmaker Mylan for about $5.3 billion.1

Under the deal, Abbott will take a 21% stake in a new company that combines Mylan’s existing business with Abbott’s developed markets pharmaceuticals operations in Europe, Japan, Canada, Australia and New Zealand.

Make no mistake – a large part of the appeal of this combination is the opportunity to engage in an increasingly used business technique called “inversion,” which will allow Pennsylvania-based Mylan to reincorporate in the Netherlands to lower its corporate taxes and to free up cash held in overseas entities.


As the New York Times pointed out, inversions have spurred a series of mergers this year, particularly in the pharmaceutical sector.

Also on Monday, Irish drug maker Shire said its board, pending further discussions, was willing to recommend a $53 billion takeover offer from AbbVie, which spun off from Abbott last year. AbbVie would reincorporate in Ireland as part of the merger.

As Ed Silverman noted in his Pharmalot blog on WSJ.com, the term “established” is used to describe older medicines that, for different reasons, are seen to have staying power, though with limited growth potential. “The move comes as drug makers look to rejigger their portfolios and redeploy assets – and horse trading older medicines has been an oft-mentioned strategy in recent months,” Silverman wrote.2

But that’s not to say the acquisition isn’t key for Mylan. The business has a portfolio of more than 100 specialty and branded generic pharmaceutical products in five therapeutic areas, including cardiovascular and gastrointestinal treatments, according to the Times.

The deal, which is expected to close in the first quarter of 2015, would roughly double Mylan’s revenue in Europe and generate additional annual revenue of about $1.9 billion, Mylan said in its announcement.

The deal is “a logical move,” Sanford Bernstein analyst Ronny Gal writes in an investor note cited by Silverman.

“Mylan got both the tax rate it needed and commercial infrastructure in the European Union,” he writes. He adds that, with its balance sheet and infrastructure, Mylan is now in a position to join what he calls the “roll-up crowd,” a reference to companies that buy assets from big pharma.

For its part, Abbott didn’t give away its growth assets. The company will retain its generic pharmaceutical business in emerging markets and other businesses in developed markets.

After the transaction, Abbott said it would focus its generic drug business on emerging markets where there is a greater opportunity for growth, the Times reported. The business that remains with Abbott had revenue of about $2.9 billion in 2013.

The growing popularity and usage of generic drugs has also translated to higher stock prices for publicly traded drug makers. The Drug-Patent Cliffs motif has gained 54.5% in the past 12 months. In that same period, the S&P 500 has increased 19.7%.

Over the past month, the motif is up 6.4%; the S&P 500 has risen 2%.

1Chad Bray, “Mylan to Buy Abbott’s Generic Drug Business Outside the U.S. for $5.3 Billion,” nytimes.com, July 14, 2014, http://dealbook.nytimes.com/2014/07/14/mylan-to-buy-generics-drugs-business-outside-u-s-from-abbott-for-5-3-billion.

2Ed Silverman, “Mylan and Abbott Strike a Big Deal: And the Consensus Is…”, wsj.com, July 14, 2014.

  1. Theodore
    23 Oct at 6:43 pm

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