Perrigo Company (NYSE:PRGO)’s acquisition of Elan Corporation, plc (ADR) (NYSE:ELN) for $8.6 billion has been widely criticized by many as a way for Perrigo to avoid paying a high U.S. corporate tax rate. Analysts believe that Perrigo’s acquisition represents a shift where companies are seeking assets in low taxed countries to increase profitability. According to analysts, there were several companies that were bidding to acquire Elan, but with Elan acquired, which Irish company might be next?
Why is Ireland attractive?
Perrigo Company (NYSE:PRGO) is a $12 billion company that has increased 260% over the last five years. The company generated $3.4 billion in sales over the last 12 months and has an operating margin of 19.7%. The company is based in the U.S., therefore pays a 35% corporate tax rate. However, with the acquisition of Ireland’s Elan Corporation, plc (ADR) (NYSE:ELN), the company’s tax rate drops to 12.5%, and earnings could increase more than $700 million annually over a course of several years — due to the tax savings.
Looking at Perrigo Company (NYSE:PRGO) as a company, the benefit of tax savings plus the top line benefit from Tysabri makes the acquisition of Elan Corporation, plc (ADR) (NYSE:ELN) a wise long-term move. In fact, with other opportunities in Ireland, this one acquisition could lead to more just like it.
The best available target
In my opinion, while there are several acquisition opportunities based in Ireland, including Alkermes Plc (NASDAQ:ALKS), but I think that Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) is the most intriguing.
Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) is a company that should be on your radar as a potential takeover target. Unlike Elan Corporation, plc (ADR) (NYSE:ELN), Jazz markets its own drugs, including 10 total and a large pipeline. During Jazz’s last quarter, revenue grew 91.4% year-over-year as its narcolepsy drug Xyrem continues to grow: Xyrem accounted for 60% of the company’s $196 million in quarterly sales.
Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) has annual sales of $680 million and trades with a market cap of $4.6 billion. To the naked eye, its 6.6 times sales valuation might appear pricey, but with an operating margin of 39.5%, Jazz trades at just 10 times next year’s earnings.
The reason that Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) produces such great profits is because it is based in Ireland. Therefore, Jazz enjoys the same 12.5% tax rate that made Elan Corporation, plc (ADR) (NYSE:ELN) so attractive, and also has explosive growth and a bright future with its pipeline.
If you consider that Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) could likely be acquired for far less than $8.6 billion, I think it would be a better buy than Elan. With Elan, Perrigo Company (NYSE:PRGO) has to wait for sales of Tysabri to exceed $2.5 billion to earn its 25% royalty, which could be five more years. Until then, Perrigo receives about 15% of sales. Therefore, Jazz’s $680 million in revenue produces significantly more top-line performance than Elan’s Tysabri, and provides the same tax benefit. Furthermore, Jazz’s pipeline should add greater top-line performance over the next several years.
Final thoughts
So, who will purchase Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ)? Fortunately, I think any mid or large cap biotech company based in the U.S. might be interested. Royalty Pharma initially comes to mind due to its attempt to purchase Elan. However, Forest Laboratories, Inc. (NYSE:FRX), with an operating margin of (2.75%) and $3.1 billion in revenue, was also considered in the Elan bidding war. Moreover, Mylan Inc. (NASDAQ:MYL) could also seek Jazz to jump-start growth and increase profitability.
Overall, there are countless companies that might find Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ)’s 12.5% tax rate and its product line to be attractive. Over the last five years, Jazz has increased by 1,000%, and in my opinion, that performance will increase in the coming months as speculation might lead to an eventual acquisition.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Will This Be the Next Irish Biotech Acquisition? originally appeared on Fool.com.
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