A patented drug is a cash cow for drug manufacturers. There are two ways to have a patented cash generating drug on a pharmaceutical company’s pipeline. Either conduct research and organically develop the medicine, or acquire a company with a strong pipeline. The latter option is what Perrigo Company (NYSE:PRGO) recently opted for by acquiring Elan Corporation, plc (ADR) (NYSE:ELN). Additionally, Perrigo Company (NYSE:PRGO) looks forward to increasing its international presence with this acquisition.
Why did Perrigo pay a 10.5% premium for Elan?
Being situated in Ireland, Elan Corporation, plc (ADR) (NYSE:ELN) offers a great international expansion platform to Perrigo as the new company will be incorporated in Ireland. This would provide Perrigo Company (NYSE:PRGO) cross selling opportunities, resulting in a higher global market share and total revenue. The combined company can also capture the untapped market opportunities. This geographical diversification is likely to strengthen the revenue stream and financial base of the company as it reduces the dependency on a particular market.
A major addition to Perrigo Company (NYSE:PRGO)’s business is the royalty stream of $1.6 million from Elan Corporation, plc (ADR) (NYSE:ELN)’s Tysabri, which has been a mega hit product on the market. Revenue has been growing at an annual rate of 19% in the last few years. The medicine treats Multiple Sclerosis, which is a chronic autoimmune disease of the central nervous system that increases overtime. It has been approved by the FDA in the U.S. and in the European Union.
Every year, 400-500,000 patients are being treated for this disease in the U.S. and more than 2.5 million on a worldwide basis. The worldwide MS market stood at $13.9 billion in 2012 and is expected to grow at a rate of 3.5% in the upcoming years, to reach approximately $16.4 billion by 2017.
The current royalty charged represents 12% of net revenue, based on the sales of Tysabri. It is forecasted to increase to 18% of net revenue in 2014, when the revenue generated from this medicine will surpass $2 billion. This will trigger the higher royalty rate of 25% on net sales for sales above $2 billion. This is a major asset for the new company with sustainable future cash flows as multiple barriers to entry exist. Further upside potential exists if Tysabri is approved for Secondary Progressive MS.
Revenue from Tysabri is expected to rise at a rate ranging between 11%-16%. The absolute revenue has been forecast to rise from $1.6 million in 2012 to $3 million in 2016.
The royalty per share is expected to rise from $1.10 in 2013 to $4.10 in 2016, based on 133.59 million shares issued by Perrigo. Based on these estimates, this acquisition will prove to be immediately accretive to Perrigo Company (NYSE:PRGO)’s earnings per share.
Another major benefit derived from this acquisition is the substantial tax savings resulting from operating in Ireland. Ireland has a tax base of 12.5%, which will significantly reduce Perrigo Company (NYSE:PRGO)’s tax costs. The company is currently paying a tax rate of 30%. Perrigo expects to save more than $150 million per annum i.e. an addition of $1.12 to the earnings per share on an annual basis.
Other players in the game
Actavis Inc (NYSE:ACT) is a key competitor of Perrigo. The company recently received approval from the FDA for its Lamotrigine Orally Disintegrating tablets for the treatment of epilepsy and bipolar disorder. These tablets relieve moderate to severe chronic pain in adults. The medicine will be on the market quite soon. The company may also get market exclusivity for 180 days. It is generically the same as GlaxoSmithKline’s Lamictal ODT. It has a current market of $51 million, as per data released by IMS Health data.
The company has also received an approval for Oxymorphone Hydrochloride extended-release tablets for the treatment of moderate to severe pain in opioid patients. Opanatablets have a U.S. market of nearly $461 million, according to IMS Health data.
Last month, Health Canada approved Actavis Inc (NYSE:ACT)’s application to sell FIBRISTAL for the relief of moderate to severe signs and symptoms of uterine fibroids in adult women of reproductive age. The breakthrough oral treatment provides a new option for Canada females with uterine fibroids. It is the first approved medication to reduce fibroid size and control symptoms. This will boost the revenue of Actavis Inc (NYSE:ACT) as it reaps the first mover advantage. This will also increase the company’s worldwide market share.
Conclusion
Tysabri is expected to add immensely to Perrigo Company (NYSE:PRGO)’s existing pipeline, as it is a valuable product with attractive margins. This will guarantee a healthy return to shareholders, as it is patent protected until 2024. Based on the 20% dividend pass through policy for Tysabri, the expected dividend in 2013 will be $0.22 per share and will rise to 0.82 per share by 2016, at a growth rate of 55%. In the light of the market dynamics, I would recommend buying this stock.
In the light of the regulatory approvals recently received by Actavis for some of its medicine and its entry into the therapeutic area is likely to increase its revenue multiple folds in the coming years. Hence, I would advise buying the stock.
The article Is This Acquisition a Game Changer? originally appeared on Fool.com and is written by Awais Iqbal.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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