When I interviewed Alkermes' (NASDAQ: ALKS ) CEO Richard Pops last year, he described the relocation of the company's headquarters to Ireland where taxes are lower after buying Elan's (UNKNOWN: ELN.DL2 ) drug technology business as a "secondary feature of the transaction." The extended-release technology, which complements Alkermes' own platform, was what Alkermes was really after.
Fast forward to yesterday with the rest of Elan on the auction block, Perrigo (NYSE: PRGO ) pulled the trigger for $16.50 in a cash plus stock deal. Unlike the Alkermes-Elan deal, Perrigo -- which sells generic over-the-counter medications, as well as some generic prescription drugs and pet medications -- seems to have nothing in common with Elan, which has essentially become a holding company for royalties from Biogen Idec's (NASDAQ: BIIB ) Tysabri after Elan spun off its research and development into Prothena.
But there's that tempting Ireland-based headquarters with its corporate tax of just 12.5%.
Perrigo said it believes that the combined companies can save $150 million annually. Some of that will come from cutting salaries of the people left at Elan, but much of it will come from tax savings from being located outside the U.S.
The new headquarters also gives Perrigo a place to launch an international expansion. Moving into internal markets makes a lot of sense for generic drugs, where margins are much tighter than they are for branded drugs. Increasing scale can help expand margins since some costs are fixed. I'm not sure Perrigo needed to buy a whole company just to get a global presence, but it's certainly a shorter means to an end.
To justify the deal, Perrigo needs more than just the Ireland headquarters. The royalties from Tysabri need to increase to justify the $8.6 billion price tag. You can go through the potential valuations, but I'm guessing that the fine folks at Royalty Pharma spent more time on it than you and I ever would and the fund was only willing to pay $15.50 per share, and that came with conditions of Tysabri reaching certain sales and development goals.
Admittedly, Royalty Pharma probably couldn't get as much value (if any) from the Ireland headquarters as Perrigo can, but it certainly doesn't look like Perrigo is getting a steal here.
Perrigo's investors seem less than enthralled with the deal, sending shares down 7% yesterday. I really can't blame them. The acquisition makes Perrigo more diversified, which can be a good thing, but in this case it also increases the risk. Perrigo is putting a lot of faith in what should be the primary feature of the transaction: Tysabri and Biogen's ability to continue increasing sales of the drug.