Tax leverage helps make Irish pharma a popular target

NEW YORK Mon Jun 10, 2013 2:59pm EDT

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NEW YORK (Reuters) - Irish pharmaceutical companies are becoming increasingly popular takeover targets as buyers compete for benefits seen in the country's lower tax rates.

On Monday, Dublin-based drugmaker Elan ELN.I announced that it had received unsolicited inquiries from potential buyers, as it seeks to fend off a hostile takeover from Royalty Pharma. Specifically, a number of mid-sized pharmaceutical companies are potentially interested in buying the company, sources told Reuters.

Last month, generic drugmaker Actavis announced a $5 billion acquisition of Dublin-based Warner Chilcott WCRX.O, effectively allowing it to lower its tax rate from 28 percent to 17 percent. Some analysts predict it could end up even lower.

Other potential Irish pharma targets include Shire PLC SHIRE.I and Jazz Pharmaceuticals, industry bankers, who wished to remain anonymous because they are not permitted to speak to the media, told Reuters.

Irish companies have long been attractive acquisition targets for buyers that can easily move their headquarters abroad because of the very low 12.5 percent corporate tax rate, compared to 35 percent in the United States.

For specialty pharmaceutical companies, which tend to be small and mid-sized firms that primarily rely on acquisitions to grow, getting a lower tax rate has become an increasingly important competitive advantage.

By achieving a lower tax rate through deals, these companies can come out as more attractive buyers for future transactions.

"Companies that have done these deals now have an additional synergy that allows them to be a little bit more aggressive in what they can pay for an asset they want to acquire," said Robert Steininger, managing director, healthcare investment banking at Jefferies LLC Ltd.

Since 2010, Canada-based Valeant Pharmaceuticals International (VRX.TO) and Palo Alto, California-based Jazz Pharmaceuticals (JAZZ.O), have obtained tax advantages through deals. That in turn can pressure rival U.S.-based pharmaceutical companies to look at similar transactions so they can better compete.

"I presume that board members now challenge their management teams about what Jazz, Valeant and most recently Actavis did and note how successful they were and are asking their management teams if they're looking for similar opportunities," he said.

LOWERING TAXES THROUGH DEALS

Ireland is a particularly attractive target country because its corporate tax rate is among the lowest of developed countries. With its English speaking, educated workforce, Ireland can act as a good gateway for companies to expand into Europe, said Ziemowit Smulkowski, a partner in the tax department of the law firm Paul Hastings.

U.S. companies, which have among the highest corporate tax rates in the world, can realize the tax benefits in several other countries so long as the deal can be structured to allow the corporate parent to move abroad, bankers and attorneys say.

But once one company has a lower tax rate, it puts pressure on peers to do the same, especially if that company is an aggressive acquirer like Valeant.

When Toronto-based Biovail Corp took over what was the U.S.-based Valeant in 2010, the new company kept the Valeant name but became based in Biovail's Canadian headquarters. The combined company's tax rate is between 10 to 15 percent. Because of its lower tax rate, Valeant already has an edge over U.S. companies when bidding for an asset, bankers told Reuters.

That edge is evident. Since that deal, Valeant has been on a buying spree, acquiring over 30 companies, according to the firm. Just last week, the company announced an $8.7 billion purchase of Bausch & Lomb Holdings from Warburg Pincus LLC.

Palo Alto, California-based Jazz Pharmaceuticals made a similar move in 2011 when it acquired Dublin-based Azur Pharma, and became an Ireland-domiciled company.

While none of these companies made their acquisitions solely for the tax advantages, the tax benefits did make the deals more attractive, executives at the firms have said.

In the Elan situation, the company is hopeful that a third party comes in to save it from the hostile takeover bid from U.S.-based investment group Royalty Pharma.

A handful of institutional shareholders have told Reuters that the one thing that could put Royalty's efforts in jeopardy would be if Elan were to find a rival bidder that offers other advantages, particularly a potential tax benefit.

Since Royalty Pharma already is domiciled in Ireland, it would not achieve a lower tax rate through an Elan acquisition. But if another U.S. company came in and bought it, it would realize the tax benefits and the deal would be more accretive to shareholders.

But under U.S. rules, if shareholders of the U.S. company own 80 percent or more of shares of the new foreign parent company, and that foreign parent company has insufficient business activities in its home jurisdiction, the new parent will be taxed as a U.S. corporation.

Despite this, companies and their bankers are continually looking at possible deals that could work.

"You have three companies in the space that have done this with great success," said one of the industry bankers. "Every single company that doesn't have some kind of efficient tax structure is thinking about how to do this."

(Reporting By Jessica Toonkel; Editing by Michele Gershberg, Bernard Orr)

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