There is nothing new about speciality pharma companies buying Irish-domiciled assets to reduce their tax rates, but Horizon Pharma’s acquisition of Vidara Therapeutics certainly pushes the boundaries of this, one of the hottest current trends.
While it was clear that the availability of cheap debt made this possible, Horizon shows that you can pull off the trick with expensive debt, too. With Vidara owners getting a nice payoff, Horizon stock rising 9% on the news, and the loan providers Deerfield Management collecting 12.25% annual interest, it seems everybody is happy.
Horizon has worked hard to present the acquisition as a means of speeding its path to profitability, giving it a fourth marketed product and diversifying revenue. But, make no mistake, there is one main driver behind the deal: reducing Horizon’s tax rate.
This is why the move has been structured as a reverse merger with Horizon – a set-up that should allow the bigger company to cut its tax bill from the high 30% to the low 20% level thanks to Vidara’s Irish domicile. The tax benefit should kick in after the takeover closes in mid-2014.
As such the acquisition follows in the footsteps of numerous speciality pharma groups that have beaten a path to the low-tax haven of Ireland (JP Morgan Healthcare Conference 2014 – Valeant’s success sees others copy the tax trick, January 17, 2014).
It is curious, however, that Horizon’s investors have been so ready to overlook the price their company is paying to get there. The 12.25% interest rate on the five-year $250m loan facility from Deerfield is phenomenally high, considering that central bank interest rates are around the 0.5% mark.
Indeed, one way of looking at this is that the loan’s interest rate will wipe out any tax benefit that might accrue to Horizon in the near term. Even if the group has the means to settle the loan early it will be hit by punitive one-off premiums of between 3% and 6% of its face value.
Still, this is a smart move by Horizon, which has put to good use a share price that had climbed more than 400% over the past six months. The Deerfield loan will help cover the $200m cash element of the $660m acquisition, with Horizon stock issued to Vidara’s owners accounting for the remainder.
Moreover, Horizon is on the verge of profitability, having in the past two years launched its first three products: the anti-inflammatories Duexis and Vimovo, and the anti-rheumatic Rayos. Analysts had expected it to go into the black this year on a standalone basis.
Vidara should boost this further, says Horizon, since it is already profitable. It does not reveal the extent of the profitability, and since Vidara is private no information is available. However, Vidara’s only marketed drug, Actimmune, sold $59m last year for chronic granulomatous disease and severe osteopetrosis.
It will be interesting to see how quickly Horizon moves to pay down debt on its balance sheet as it enters profitability, and investment bankers will no doubt be keen for it to keep its foot on the M&A pedal.
Last year, the group raised $150m of convertible debt, which carries a 5% coupon and matures in 2018. Interestingly, structuring the Vidara move as a reverse merger does not appear to trigger immediate repayment of the convertible under its change-of-control provisions.
Horizon posted $103m of sales in 2013, and expects this year’s revenue to amount to $250-265m, including Actimmune. Vidara does have a small pipeline of gastrointestinal projects, but it is clear that Horizon has paid its owners a huge multiple of earnings.
That said, with interest rates at historic lows this deal really has only one immediate winner. Step forward Deerfield Management.