A tax inversion plan among large U.S. companies has grown evident as they attempt to find lower tax rates and higher profits via relocation into various countries within Europe. Already, Elan, AstraZeneca plc, Alliance Boots, and now Covidien plc have either been attempted or successfully acquired. Yet, the most surprising might be a lack of action surrounding Jazz Pharmaceuticals plc (NASDAQ: JAZZ ) -- Why is this biotech being avoided?
The offers come rolling in
AstraZeneca shares have soared 25% this year. These gains were tied directly to Pfizer's failed bid for the company..
AstraZeneca surprisingly rejected the offer despite stagnant growth and concerns of an impending Crestor patent expiration. England's 21% corporate tax rate, which compares favorably to the U.S. tax rate of 35%, was a key driver behind Pfizer's attempt to buy Astra.
However, if you thought a 21% tax rate was good, then check out Ireland where the corporate tax rate is only 12.5%. Over the last weekend news hit of a $40 billion Covidien takeover offer, making it another large attempt at a European company. Unlike AstraZeneca, Covidien does have some anticipated growth, as revenue is expected by analysts to increase in the low-to-mid single digits over the next couple of years.
AstraZeneca and Covidien are two extremely large companies to receive buyout offers, showing a sense of urgency on behalf of large U.S. companies to relocate.
Looking at the acquisitions and those already attempted we can clearly see where the greatest risks lie, and also assume that the companies with the most value have already received a bid or have been acquired. This certainly brings up the question of Jazz Pharmaceuticals, an Ireland-based biotech.
Jazz markets about a dozen products across a variety of industries with annual revenue of $923 million, and analysts are estimating revenue growth of 30% and 20%, respectively, in 2014 and 2015. With a market capitalization of $8.4 billion it would seem the tax benefit alone would be enough to attract a larger pharma company, yet still no offers.
For 2014 Jazz expects revenue of $1.13 billion with its narcolepsy drug Xyrem accounting for around $765 million of that. Its top three drugs are expected to account for nearly 90% of total sales, meaning its remaining drugs have little impact fundamentally.
Why avoid Jazz?
So why would a company looking to lower its tax rate avoid Jazz Pharmaceuticals? The most obvious reason is potential competition to Xyrem both generic and from pipeline development. So far no generics have been approved, and Jazz now has a phase 3-ready candidate called JZP-110 that produced solid clinical results in treating narcolepsy. The drug performed well in a phase 2b trial, giving Jazz additional opportunities in the narcolepsy space even if generics eventually attack Xyrem.
The other concern revolves around Jazz's $1 billion purchase of Gentium. With this acquisition Jazz gained Defibrotide, a drug that treats an orphan disease called veno occlusive disease that's expected to generate $50 million in sales this year. The hope is that Defibrotide proves successful in treating larger indications such as Graft-vs-Host disease and multiple myeloma. If so, sales could eventually reach $500 million, but Jazz needs a lot of data to fall in its favor.
With that said, if Jazz were to lose patent protection on Xyrem or if the Gentium acquisition turns out to be a flop then the company would appear significantly overvalued. While its pipeline is not the largest, Jazz does have a number of intriguing assets like JZP-110 that could hopefully help counter any potential revenue losses.
I like Jazz's pipeline, and I think it's got some exciting growth opportunities over the next few years. It's hard to imagine that Jazz isn't on someone's radar given the big potential benefits of revenue growth and a potential tax inversion in Ireland. Nonetheless, as many investors learned earlier this year, it's important to invest in a company based on its growth drivers and not takeover speculation. I would encourage biotech-savvy investors to dig deeper into Jazz, and stay tuned for more news -- maybe health care's buyout bonanza isn't done yet!
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