Mylan to Buy Abbott Generic Drug Unit

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In a bid to further strengthen its portfolio, enhance geographical reach and save taxes, Mylan (MYL) inked an all stock deal with Abbott Laboratories (ABT) to buy the latter’s branded specialty and generics business in developed ex-U.S. markets for $5.3 billion (based on Mylan’s closing price of $50.20 per share last Friday). The all stock deal, which has been cleared by Mylan’s board of directors, is expected to close in the first quarter of 2015. The news impacted Mylan’s stock price positively.

Deal Structure

According to the terms of the deal, Abbott will receive 105 million shares of the merged entity following the closure of the deal and own approximately 21% of the new company. Post merger, the new company will comprise Mylan’s existing business and the generic pharmaceuticals business of Abbott in all developed ex-U.S. markets such as Europe, Japan, Canada, Australia and New Zealand.  

Financials to Get a Boost

The new company, organized in the Netherlands, will be headed by Mylan’s present leadership group. The move to organize the combined company in the Netherlands is aimed at reducing its tax liability.

Mylan stated in its press release that in the first full year following closure, its tax rate will be in the range of 20% to 21% and decline further (high teens), going forward. The formation of the combined entity is expected to result in more than $200 million in pre-tax operational efficiencies by the end of the third year. The company will be headquartered in Pittsburgh, where Mylan is currently based.  

The deal is expected to boost Mylan’s adjusted earnings per share immediately following closure (by 25 cents in the first year and increase further). Following the completion of the deal, the achievement of Mylan’s previously stated financial targets for 2018 (EPS of at least $6.00) will likely be expedited. The strengthened balance sheet, as a result of this deal, should enable Mylan to pursue similar acquisitions in the future.

 Deal to Expand Mylan’s Product Portfolio Significantly

The transfer of the offerings by Abbott to the new company following the deal closure should boost Mylan’s revenues by approximately $1.9 billion. Mylan’s presence in ex-U.S. markets would be boosted significantly. For example, European revenues at Mylan will almost double as the deal will strengthen the company’s position in key markets in Europe such as Italy, the U.K, Germany, France, Spain and Portugal. The specialty and branded generics business of Mylan in Central and Eastern Europe will grow significantly following the transaction.

Moreover, revenues from the Canadian and Japanese markets are expected to more than double. Mylan’s presence in Australia and New Zealand will also increase in the event of the deal materializing.

Mylan’s specialty and branded generic pharmaceutical business will be strengthened by the addition of more than 100 such offerings spanning across five major therapeutic areas (cardio/metabolic, gastrointestinal, anti-infective/respiratory, CNS/pain and women's and men's health).

A Prevalent Way of Saving Taxes

Mylan becomes the latest U.S. company, looking to save taxes by way of an acquisition that provides a legal home abroad in a low-tax regime. The merger of Auxilium Pharma (AUXL) and Canadian company QLT (QLTI) announced last month was also driven primarily by tax saving attractions. The acquisition of Warner Chilcott by Actavis in 2013, leading to the formation of Ireland-based Actavis plc (ACT), was also similarly motivated.

Mylan carries a Zacks Rank #4 (Sell). A better ranked stock in the healthcare space is Mallinckrodt (MNK) sporting a Zacks Rank #1 (Strong Buy).

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