Two deals this year have propelled the Irish pharmaceuticals sector back into the spotlight
At the start of this year Irish pharmaceutical company Elan forged the first link in a chain of events that would lead to one of the most bitterly fought takeover bids the country has seen for years. The company, which is one of Ireland’s largest indigenous healthcare businesses, sold its stake in a multiple sclerosis drug – Tysabri – to joint venture partner Biogen.
Within weeks the move prompted a hostile takeover bid by US pharmaceutical investment company Royalty Pharma (see Timeline, below). Although the bid eventually failed it was the launchpad for an acquisition of Elan by drug manufacturer Perrigo, valued at $8.5bn (£5.4bn).
Meanwhile, another big pharmaceutical acquisition was ongoing, as Actavis bought Warner Chilcott – the latter, while listed on the New York Stock Exchange, being an Irish-incorporated company. That deal was also valued at $8.5bn.
The two transactions are part of a long-running story of pharmaceuticals in Ireland. Some of the industry’s biggest names, including GlaxoSmithKline and Pfizer, have been present in Ireland for decades. Elan, which was set up in 1969, is one of the more successful of the country’s indigenous companies and has been the source of several spin-offs that are doing well in their own right.
One of those was Azur, which was bought in 2012 by US company Jazz Pharmaceuticals. According to Bloomberg, eight of the 23 Irish-domiciled corporations valued at over $1bn that trade in the US are in the healthcare sector – Alkermes, Covidien, Elan, Icon, Jazz, Mallinckrodt, Shire and Warner Chilcott.
“It has been a focus of government over the past 20 years or so to attract foreign direct investment and that’s come in the guise of mainly the tech industry and the pharmaceutical industry,” says A&L Goodbody partner John Whelan.
Lawyers explain that the industry began with fairly low-level manufacturing before becoming more sophisticated over the years. Pharmaceutical companies in Ireland now produce hi-tech products and carry out research and development (R&D) in the country, as well as churning out generic drugs.
“Over the past 10 to 20 years Ireland has developed the confidence to be the place where you cannot only house your manufacturing and R&D, but also very successfully house your headquarters for pharmaceutical companies,” adds fellow A&L Goodbody partner Alan Casey.
Whelan believes this evolution came about as a result of continuing investment in the sector in Ireland, with businesses wanting to build on the presence they had developed in the jurisdiction. He says Ireland is high up the global pharmaceutical league table when it comes to producing sophisticated products, offering statistics such as the fact that companies based in Ireland manufacture half of all the ventilation machines used in acute hospital departments as well as five of the world’s top 12 medicines.
McCann FitzGerald partner David Lydon says one of the drivers in recent years has been the reduction in manufacturing costs as well as positive moves on R&D tax credits. In 2008 a new Finance Act raised the rate of credit for R&D activities to 25 per cent from 20 per cent – on top of the country’s traditionally low corporation tax rate of 12.5 per cent.
Tax was clearly an early driver of pharmaceutical companies to Ireland, but not the only reason for bringing the sector there.
“Clients are sophisticated,” says Maples and Calder tax partner William Fogarty. “The decision where to base an operation is multi-faceted, although there’s no doubt that tax is an important component. But is anyone coming to Ireland just for that? I don’t think so.”
He cites other draws such as the country’s well-educated workforce, its proximity to Europe and membership of the EU, and low labour costs as additional attractions.
Matheson head of corporate Patrick Spicer agrees, saying companies also pick Irish takeover targets because of the opportunity to expand their offering more generally.
“Tax is a factor, but it’s not the only factor,” he says. “If the product line wasn’t attractive I assume it wouldn’t have been acquired. That’s why these entities were targets.”
Nevertheless, tax rates – and, indeed, the whole of Ireland’s fiscal regime – are attractive.
“Structures can be put in place to give you quite effective rates of tax on your patent and IP income,” points out Whelan. “A lot of countries are focusing on these types of tax benefits for job creation and to attract foreign investment.”
“This is a mature business in Ireland and it’s become mature not over five years but over 20 to 30. The reality is if these companies weren’t in Ireland they would probably be based in other jurisdictions that maintain efficient tax regimes,” adds McCann FitzGerald chair John Cronin.
Depth and taxes
All these factors combined are helping to make pharmaceutical companies with an Irish link highly attractive, mostly to US investors. There has been a steady stream of acquisitions over the years, with the Elan and Warner Chilcott deals just the latest.
“It would be relatively unusual to have a takeover of that nature in Ireland,” says Lydon of the Elan deal. “What distinguished Elan was that it was an Irish corporate.”
The other distinguishing feature of the Elan deal was the company’s decision to sell off its Tysabri stake. It was not the drug itself that attracted Royalty’s bid but the chance to take advantage of the Tysabri royalty stream.
“It’s that revenue stream that was really going to feed the group going forward,” Fogarty notes. “It perhaps changed the focus of the Elan group. It was a specific issue to them. That was a pretty unique thing for Elan to do and having done it, it changed how people viewed the group.”
Casey, who acted for Elan, agrees that the Tysabri aspect of the deal was unusual, but says it made sense.
“In the long run the board’s decision was vindicated,” he says. “They felt the time was right to monetise their interest in Tysabri and this was in line with the strategy of the board.”
Others point out that the sale of Tysabri was really what put Elan “in play” as a business for sale – even before it formally announced it was inviting offers. Tysabri was the company’s last marketed product, although other products are under development.
The hostile bid by Royalty was also unusual, with transactions in Ireland being more commonly amicable. Other than the Royalty bid, the only other major hostile bids in recent years in Ireland are the ongoing bid for Aer Lingus by Ryanair, which has run on for over five years, and the 2009 bid for carbon credit company EcoSecurities by Dutch investment outfit Guanabara.
However, most pharmaceutical deals are amicable, as in the case of Azur and Jass, Actavis and Warner Chilcott, and, ultimately, Perrigo and Elan. In all three cases the US company was the acquiring party but the resulting merged companies have been (or will be) established as Irish-incorporated plcs and then listed in the US.
Casey says these “inversion transactions” are proof that Ireland has successfully sold itself as a location for pharmaceutical companies.
“All these transactions are buying into the cluster effect – that Ireland is a place where pharmaceutical can headquarter itself,” he adds. “You don’t need to be US-incorporated to have a successful US listing. Each of the companies that have inverted into Ireland in recent years have seen significant share price appreciations.”
Lawyers are confident the trend towards big pharmaceutical deals will continue as there remain plenty of attractive targets.
“There’s a lot of consolidation going on, with a lot of big-ticket drugs companies coming off-patent,” explains Spicer. “Pharma companies are looking for other drugs and, with the time it takes to develop a drug, sometimes it’s quicker to
buy somebody else’s pipeline than develop it yourself.”
“The largest market for pharma is the US so on that basis we’d expect most of the companies looking to acquire Irish companies to be US-based,” says Mason Hayes & Curran life sciences head Martin Kelleher.
Fogarty agrees, suggesting the Jazz-Azur deal was a ground-breaking transaction, proving how successful US-Irish M&A can be.
“In the wake of Elan-Perrigo there was a lot of comment about other Irish-domiciled pharmaceutical companies being attractive to those looking to do broadly what Perrigo is,” he notes. “I’m not sure Elan is the high-water mark here.”
Kelleher points out that while Elan-Perrigo and Actavis-Warner Chilcott are big deals, they are not enormous in a global context.
He also sees a future for pharmaceutical M&A.
“What may be driving some of the transactions in recent years is that the generic companies are looking to diversify their portfolios,” he adds.
Another thing attracting companies to Ireland is the country’s regulatory regime, which lawyers describe as robust, especially in terms of IP. The government is putting money into the development of IP in other ways and is establishing an ‘IP Protocol’. Kelleher, who is advising the government on the protocol, explains it will apply to all research collaborations between research-performing organisations such as universities and industry.
Meanwhile, through Science Foundation Ireland (SFI), the government is investing €200m (£170m) in seven research centres, that are also being funded with more than €100m from industry.
“These transactions are the result of all of that investment,” notes Kelleher.
Rule it in
Regulation has also supported the retail pharmaceutical industry in Ireland. This is an area where the big law firms are less involved but it provides work for some smaller Irish practices. At Whitney Moore, partner Mark Ryan advises the retail pharmacy industry on corporate and regulatory issues.
He explains that recent changes to regulation, notably the Pharmacy Act 2007, have been a little slow to kick in. A significant development was the establishment of the industry regulator, the Pharmaceutical Society of Ireland.
“It took the Pharmaceutical Society a couple of years to get going, but it’s now going with vim and vigour,” Ryan says.
Another major piece of regulation the industry is grappling with is the Health (Pricing and Supply of Medical Goods) Act 2013, enacted in May.
“Already there are some issues about how that’s going to work,” says Ryan.” A lot of pharmacists believe that it’s just a charge for generic substitutions, which it’s not.”
Ryan adds that the industry is also well-regulated when it comes to managing pharmacists themselves and Whitney Moore has a number of fitness to practice cases ongoing at present.
The big corporate pharmaceutical deals have little impact on the retail market and the recent changes in regulation have to some extent slowed M&A in this part of the industry. But Ryan predicts that this sector too could see an uptick in corporate activity now there are no more regulatory changes on the table.
Drugs is the drug
Across the whole legal market there is an awareness that the pharmaceutical industry has been good to Ireland and is an area to focus on. Most firms are aiming to maintain or build up a multi-disciplinary team able to advise healthcare clients on all areas of law.
Whelan says pharmaceuticals is “undoubtedly a specialist sector”, while Lydon notes that having a strong IP practice is important too, on top of being able to give corporate and restructuring advice.
“Bringing that all together is important – it’s about having depth and expertise,” Lydon adds.
“You need regulatory expertise as well as the usual expertise,” agrees Spicer. “Understanding the regulatory environment is important.”
The healthcare industry will remain key for Ireland, along with its equally strong and similar technology sector, and lawyers are confident this will keep them and their clients busy for some time yet.
Key figures: Ireland
GDP (2012): $210.3bn
Annual inflation: 0.2%
Life expectancy at birth: 80
Unemployment : 13.4%
Source: World Bank, Central Statistics Office Ireland