Innovation
Perrigo's Elan buy is another blow to Ireland's knowledge economy project
By Michael Hennigan, Finfacts founder and editor
Jul 30, 2013 - 6:33 AM

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Perrigo, the US drug maker, which has agreed to buy Elan, the faded Irish biotech star that in recent years had been reduced to a shell, has been partly motivated by the low Irish corporate tax rate that will provide a current saving of $150m, mainly from tax shopping,  by locating a holding company in Dublin where the corporate tax rate ids 12.5% and there is no tax on patent income, but Ireland may gain little from the deal. The disposal of the remnants of the indigenous firm that was once the twentieth most valuable in the world, is a hammer-blow to Ireland's floundering  knowledge / 'smart' economy project.

Perrigo, founded in 1887, produces private-label cold remedies, allergy treatments and infant formula for retailers including giants such Wal-Mart and Walgreen. It agreed to acquire Elan for $8.6bn (€6.5bn). The $16.50 price equates to a 10.5% premium over Elan's closing price last Friday and on Monday in Dublin, Elan shares rose 3.68% to €11.55 ($15.33).

The deal provides for $6.25 per share in cash and $10.25 per share in stock and Perrigo also gets Elan's $1.9bn in cash, royalties on the blockbuster Tysabri multiple sclerosis drug.

Last April. Elan sold its half stake in Tysabri to Biogen Idec, its US partner, for $3.25bn plus a royalty on sales, for the full rights to Tysabri. Tysabri has $1.6bn in annual sales currently. Royalties, now 12% and increasing to 18% next May, could surge to as much as 25% if the drug's sales exceed $2bn, Joseph Papa, Perrigo  CEO, said.

Papa said by locating a holding company in Dublin, it expects to cut its tax rate from about 30% to about 17%.

In recent years, Ireland's GNP (gross national product) and current account balance have been boosted by large foreign companies with little or no activities in Ireland, establishing their headquarters there.

The combined company under Perrigo's name will list shares on the New York Stock Exchange and the Tel Aviv Stock Exchange, according to a statement.

Elan had $56.5m in revenue from continuing operations in H1 2013 while Perrigo had $3.2bn in revenue in fiscal year 2012.

We outlined In May how Elan, which was once Ireland's most valuable company had been reduced to a shell investment operation in recent years with les than 100 jobs in Ireland. In 2012 it began discussions with Royalty Pharma, which was founded in 1996 by Pablo Legorreta, a Mexican-born banker, who had worked at Lazard in its mergers and acquisitions division.

Royalty built up its business by buying rights to drug royalties and the company moved its headquarters from Bermuda to Dublin in 2003.

Also in 2003, Kelly Martin, a debt markets and private-client banker at Merrill Lynch, became Elan's CEO following charges of accounting fraud made by the US Securities and Exchange Commission and problems discovered in test results of Tysabri, Elan's key multiple sclerosis drug.

Finfacts: Elan: Most valuable Irish firm becomes cash/ royalty shell

Bloomberg said Elan’s 2013 revenues will total about $204m, according to the average of four analyst estimates compiled by it.

Legorreta pioneered the drug royalty business in 1996 with the founding of Royalty Pharma, which now has $1.4bn in revenue and a 96% profit margin. It has $10.2bn in total assets.

In February, Royalty Pharma launched a bid for Elan, increasing its formal offer twice.  The final bid from Royalty Pharma was for $13 a share in cash and a further contingent value right, worth up to $2.50 a share.

Elan then began a series of defensive moves to thwart the bid including an announcement of a share buyback, guaranteed dividends, a $1bn deal to buy a portion of the royalties of four respiratory drugs that US company Theravance Therapeutics is developing with GlaxoSmithKline, the UK drugs giant. It also purchased two small firms and raised $850m in a bond issue.

The Sunday Independent has calculated that Kelly Martin would get €5m  from a sale - - three times his salary and bonus as a lump sum on exit. Piled on to that are the proceeds of his various generous stock options, which tots up to a €47m total windfall.

For the Irish economy, these two companies maintain their headquarters in Dublin with small staff levels to avail of tax haven facilities and their economic contribution is negligible.

In November 2011, Elan moved its primary stock exchange listing from Dublin to New York.

The company said in October 2011: "Based on the most recent shareholder analysis prepared by Capital Precision Limited for the company, approximately 75% of its shares are owned by holders in North America and over 20% are held by European holders."

The demise of Elan does have implications for Ireland's so-called 'smart economy' strategy and what can happen when an indigenous company no longer is effectively Irish when it internationalises.

Finfacts Update, Aug 2013: Irish Innovation: Evidence of science policy failure mounts

Finfacts: Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013

There will of course be no lessons learned by delusional Irish policy makers!

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