(Bloomberg) Mylan Inc. is buying Abbott Laboratories’ generic-drug business and forming a new company that will be incorporated in the Netherlands, allowing for a lower-cost tax base.
Abbott will get 21 percent of the new organization, a share valued at about $5.3 billion, the Abbott Park, Illinois-based company said today in a statement. Setting up in the Netherlands will drop Mylan’s tax rate below 21 percent in the first year, subsequently declining to the high teens. The company will be run by Mylan’s executive team from Pittsburgh, where Mylan’s headquarters are now located.
More than 15 U.S. companies since 2010 have sought or completed purchases of companies overseas and changed their addresses to gain lower tax rates, a move known as inversion. The Mylan deal is among the first of the so-called spinversions, when a portion of a company is joined with another in a transaction that allows both to relocate.
“This transaction, in our view, is a win for both companies,” said Michael Weinstein, an analyst at JPMorgan Chase & Co. in New York, in a note to clients today. Abbott will get cash for its eroding European drug business and raise the growth prospects of its remaining units, while Mylan will get a lower tax rate, he said.
$2 Billion Drugs
The sale includes more than 100 specialty and branded generic medicines to treat ailments ranging from heart and lung disease to infection and pain medicines. They generated about $2 billion in 2013 across Europe, Japan, Canada, Australia and New Zealand. The unit currently has about 3,800 employees, including a sales staff of 2,000 people.
In exchange for the medicines and manufacturing facilities in France and Japan, Abbott will receive 105 million shares, or about 21 percent, of the new company. The deal will at least double Mylan’s revenues in Europe, Canada and Japan and expand its geographic reach, the company said.
Abbott said it doesn’t plan to be a long-term shareholder in the new company, and will eventually sell the stock and use the proceeds for opportunities that would add to earnings. Abbott has been expanding the portion of its generic-drug business that operates in emerging markets, including the deal to buy Chile’s CFR Pharmaceuticals SA in May.
The announcement of the deal comes as AbbVie Inc., the company split off from Abbott last year, moved a step closer today to buying Shire Plc after the Dublin-based company said it’s willing to back a fifth offer of 31.4 billion pounds ($53.7 billion), which would be the biggest pharmaceutical takeover outside of the U.S. this year.
If that deal is completed, AbbVie, based in North Chicago, Illinois, has said it will change its legal address to the U.K. for tax purposes, an inversion that will potentially cut its rate to 13 percent from 22 percent. The acquisition would also allow Abbvie to add treatments for rare diseases and attention deficit disorder, easing its reliance on the arthritis injection Humira, which accounts for more than half of sales.
The Mylan and Abbott deal is expected to close in the first quarter of 2015. The new company will have sales of about $10 billion annually from more than 1,400 medicines, Mylan said.
“We have been actively looking at a wide range of opportunities, and the acquisition of this business is absolutely the right next strategic transaction for Mylan,” Executive Chairman Robert J. Coury said. The move “further diversifies our business in our largest markets outside of the U.S., and clearly positions Mylan for the next phase of growth through enhanced financial flexibility and a more competitive global tax structure.”
The deal will add 25 cents per share to earnings in the first year and generate $200 million in savings three years after it is concluded, Mylan said. It will give the company additional flexibility with its free cash, which it plans to use to fund future opportunities in the consolidating market, Coury said in a statement.
Abbott’s sale of drugs in the world’s established markets were expected to generate about 22 cents per share in net income in 2015. It will drop ongoing earnings per share from continuing operations by about that amount, the company said.
Abbott may boost its acquisition efforts after it divests the branded generic business outside the U.S., said Joanne Wuensch, an analyst with BMO Capital Markets in New York.
“We anticipate that with medtech in the consolidation phase, Abbott management can now turn its focus away from identifying carve-out opportunities, to other larger types of transactions,” she said in a note to clients. “The area that needs the most attention next, in our opinion, is its medical device segment,” including diabetes and optics, she said.
Mylan received financial advice from Centerview Partners and legal advice from Sravath, Swaine & Moore LLP. Morgan Stanley advised Abbott on the transaction.