With drugmakers on the prowl for targets in Ireland because of the lower corporate tax rate, investors have been speculating that Dublin-based Jazz may be among the next companies to draw bids.
Jazz’s enviable tax base is only part of the appeal as the $7.3bn (€5.34bn) firm bolsters its product lineup with the $1bn purchase of rare-disease drug developer Gentium.
Gentium, which won European approval in October to treat a disease that can occur after stem cell transplants, may quadruple its revenue over the next three years, according to analysts’ estimates compiled by Bloomberg. Sales for Jazz’s own treatments, including Xyrem for narcolepsy, are projected to rise 62%, and the company is already more profitable than most of its peers, data compiled by Bloomberg show. &
“With the addition of Gentium, Jazz has further diversified the revenue base,” said Difei Yang, a New York-based analyst at RF Lafferty. “It’s a positive addition and a positive step forward for Jazz. This makes them a more attractive target.”
Jazz jumped 8% on Dec 20 after announcing the acquisition of Villa Guardia, Italy-based Gentium. The shares closed at a record $126.79 on Dec 30 and more than doubled in 2013 as the company won a federal judge’s support in a patent dispute over its best-selling medicine Xyrem and as industry acquirers pursued Irish targets to help lower their tax bills.
Actavis, of Parsippany, New Jersey, bought Dublin-based Warner Chilcott last year, allowing the company to shift its domicile to Ireland and reduce its tax rate to 17% from about 37%.
Also last year, Michigan- based Perrigo bought Dublin-based Elan. Perrigo said the purchase will help it save more than $150m a year because of lower taxes and cost cuts.
It’s been a “feeding frenzy”, Timothy Chiang, an analyst at CRT Capital Group, said in August, when investors began speculating that Jazz may be among the next Ireland- based pharmaceutical targets after the takeovers of Elan and Warner Chilcott.
Yang of RF Lafferty said generic-drug manufacturers such as Mylan and Teva Pharmaceutical Industries Ltd are possible suitors for Jazz if they want to make a push into so-called orphan drugs. Medicines for rare diseases can qualify for orphan-drug status, which gives drugmakers exclusive marketing rights as an incentive to develop products that may benefit only a small patient population.
Jazz’s 38% operating margin in the most recently reported 12 months and profit margin of 44% both top 96% of specialty pharmaceutical companies that have market values exceeding $1bn, data compiled by Bloomberg show.
Jazz also offers a growing and diversified revenue stream from its treatments for rare diseases, especially following its purchase of Gentium, Yang said. With Gentium, Jazz will get Defitelio, the treatment for a disease that can occur after stem cell transplants.
Xyrem, Jazz’s narcolepsy drug, accounted for about 65% of the company’s sales in 2012, down from 86% the prior year.
In 2012, Jazz purchased EUSA Pharma, the maker of leukemia drug Erwinaze. Jazz also sells Prialt, a chronic pain medicine inherited from the takeover of Azur Pharma two years ago, the same deal that gave Jazz its Irish domicile.
Jazz is more likely to continue buying under-valued assets than to sell itself, according to Gene Mack, analyst at Brean Capital. For buyers, tax benefits alone probably wouldn’t offset the price it would take to buy Jazz, he said. Its $7.3bn market value as of Dec 31 is up from just $1.6bn two years ago.
“It’s not as simple as it seems,” Mack said. “You’ve got to see other synergies, some other fundamental benefit. It can’t just be for the Irish tax rate.”
Beyond the favourable tax rate, Jazz’s product portfolio, growth and margins are appealing for buyers, Irina Rivkind, a New York-based analyst at Cantor Fitzgerald, said. Gentium’s Defitelio “is a young orphan drug with attractive pricing, label expansion opportunities, and strong growth potential.
“This should increase the attractiveness of Jazz as a takeover candidate.”