Medtronic (MDT), one of the largest US based medical device makers, acquired Ireland-based rival Covidien (COV) for nearly $43B. Medtronic will pay $35.19B in cash and 0.956 of its own share for each Covidien share, which translates to a premium of 29%. As a result, Covidien shares are up nearly 20% and Medtronic down 3%.
Ireland’s corporate tax rate of 12.5% is substantially lower than the 35% Medtronic would pay to the US. By “moving” to an Irish address (acquiring legal address abroad), Medtronic would lower its corporate taxes as well as save an expected $850M annually by end of 2018. As investors have seen with the Pfizer & AstraZeneca discussions and other deals (Horizon Pharma/ Vidara), the corporate inversion strategy is becoming trendy amongst US companies, who pay the highest corporate rates in developed world.
Irish Buyout Targets
An Irish address has become valuable due to the tax discrepancy. Most companies achieve inversion by acquiring a foreign company at least 25 percent their size.
Alkermes, headquartered in Dublin, Ireland, is an attractive acquisition candidate due to its legal address and promising pipeline. The company is targeting central nervous system (CNS) diseases such as schizophrenia with their leading Phase III candidate, Aripiprazole Lauroxil. With a current market cap of roughly ~$7B, Alkermes could prove to be a strategic acquisition for a pharma sized as large as $28B.
Also headquartered in Dublin, Amarin could be attractive to a smaller (about $1B) acquirer looking to avoid the US taxman. Its relatively cheap valuation (market cap $260M) is due to the FDA label expansion issues Amarin has had with its triglyceride drug Vascepa. The FDA voted against label expansion, which greatly limited Vascepa to target only those with severe hypertriglyceridemia. With Vascepa prescriptions capped, Amarin’s address carries the majority of the company’s value.