Mylan anti-chain action as good as confirms Teva interest
Yet another takeover attempt in the wacky world of speciality pharma hardly qualifies as news nowadays, so a much more important consideration is how much of a deal's rationale lies in strategy and how much in pure financial engineering.
In the case of Mylan, which yesterday formalised its pursuit of Perrigo, the scope for tax inversion is actually rather limited. Rather, the takeover bid serves to suggest strongly that Teva had been targeting Mylan, and is surely the latter’s attempt to buy to prevent it from being bought – a perfect example of an M&A anti-chain.
The M&A anti-chain, a concept coined by the UK fund manager Andy Smith, is the process by which companies seek to fend off opportunistic takeover approaches by bulking up via smaller acquisitions that render their own businesses either less palatable or more expensive or both.
This is designed to put pressure on a hostile bidder either to back off or to pay more, and in a world of frenzied consolidation this chain-breaking poison pill approach has become increasingly common (With an eye on Allergan and Valeant, Shire bulks up, May 13, 2014).
Need to acquire
That Teva was in acquisition mode should come as no surprise; it desperately needs to offset the looming patent expiry on its best seller, Copaxone, and its recent $3.5bn takeover of Auspex Pharmaceuticals barely scratched the surface of investor expectations.
Rather, the Israeli company was widely expected to move on Mylan, which was rumoured to have hired advisers to consider a sale or other strategic options. Now that the offer for Perrigo has materialised, “there was clearly a very real bid out there for Mylan”, said Umer Raffat, an analyst at Evercore ISI.
It does not take much of a stretch to conclude that this interest had come from Teva. In the past seven days Mylan had put into place a shareholder poison pill defence, and sent a proposal letter to Perrigo’s chief executive, Joseph Papa, on Monday.
Interestingly, little is disclosed about the proposed takeover beyond its value – around $30bn, pricing Perrigo at 25% above its Friday close – in an undisclosed mix of cash and stock. This lack of clarity seems to be the result of Irish takeover rules, which are strict as to when disclosures are made and what they must comprise.
Indeed, it is not clear whether this constitutes a hostile approach, and thus investors do not know the chances of Perrigo holding out for a higher price. Perrigo has confirmed that it received an “unsolicited” proposal from Mylan, and its stock is trading some 5% below the $205-per-share indicative bid value.
Beyond batting off Teva, Mylan’s move does have an operating logic, and might see as much as 60% slashed off Perrigo’s admin and perhaps a third off the R&D spend, Mr Raffat estimated.
There might not be much of a tax break, however, Perrigo already being Irish-domiciled via its acquisition of Elan, and Mylan having a UK tax base through last year’s purchase of Abbott’s generics business.
Still, while the potential for further tax inversions in general is diminishing, there is no sign that speciality pharma M&A activity will slow any time soon. This has recently seen Actavis beat Valeant to acquire Allergan, Valeant beat Endo to buy Salix, and Endo purchase Auxilium.
Of course, if Perrigo has scope to push for a higher price one of the most important bargaining chips might be its royalty stream on Biogen’s multiple sclerosis drug Tysabri, acquired along with Elan. With the royalty being pure profit taxed at just 1% this could turn into a very valuable asset indeed.
And what better way than for Perrigo to find an M&A chain breaker of its own? Step forward Endo, a group that must be seen as vulnerable after its failed attempt to buy Salix.
True, there might be little operating logic to a marriage between Perrigo and Endo, but in a deal-hungry environment where debt is cheap nothing should be ruled out.