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Move To Ireland Could Boost Questcor's M&A

NEW YORK (The Deal) -- Questcor Pharmaceuticals (QCOR) could be moving to Ireland in the next year to help it save cash that could be deployed for acquisitions, according to an industry analyst.

"Of course, the beauty of [a move to Ireland] is that they would have room to shell out for acquisitions," said Janney Montgomery Scott LLC analyst Jim Molloy by phone Wednesday.

Earlier in the day, Molloy had released a research note that said Janney Montgomery "believe[s] that moves still exist to quickly unlock shareholder value. One can point to a re-domicile to Ireland with its business-friendly 12.5% tax rate or even the purchasing of a late-stage asset to diversify revenue."

It was on Tuesday that Anaheim, Calif.-based Questcor said that it's looking at strategic alternatives, but didn't elaborate. The announcement was initially made at JPMorgan Chase & Co.'s 32nd Annual Healthcare Conference in January.

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The decision to explore its options comes after Questcor last year appointed some new faces to its board. On June 10, the company announced it had appointed Angus C. Russell, who had recently retired as CEO of Shire plc, to its board. Then, on Nov. 12, Questcor appointed G. Kelly Martin, the CEO of Elan Corp. plc as a director. Both men now head the special committee that is overseeing the review.

"I think these guys were brought on to help the company transition to Ireland," Molloy said.

The analyst said he believes a Nov. 5 announcement by Malvern, Pa.-based Endo Health Solutions (ENDP - Get Report) may best illustrate the benefit of a move to Ireland. Endo said it intended to buy Montreal-based Paladin Labs for $1.6 billion in stock and cash. As part of the deal, which won final regulatory approval Feb. 18, Endo set up a new company based in Ireland to own both Paladin and its legacy business.

"When you look at Endo, they avoided the 20% to 30% domestic tax by moving to Ireland," he said in the phone interview. "They added 30% to their bottom line without moving the top line at all."

In 2003, the government of Ireland approved a 12.5% tax rate for corporations, making the nation one of the most affordable corporate destinations in the world. That distinction led to a widespread migration to the island nation as U.S. companies, in particular, looked to avoid the 35% domestic tax rate for corporations.

Among the other U.S. companies to bolt to Ireland are industrial technology firm Eaton Corp., which moved its headquarters to Dublin after its 2012 acquisition of Cooper Industries for $11.8 billion, and oil firms Ensco International Inc. and Rowan Cos. Both Ensco and Rowan moved their operations in 2009 to avoid hefty domestic taxes.

If Questcor does make the move, it could free up cash to either expand its sales and marketing operations globally, or for acquisitions for its drug pipeline.

"We have been working with our committee and we will continue that program to investigate ways to diversify the revenue stream," said Questcor CFO Michael Mulroy on a Feb. 25 conference call with investors. "We're going to be a little careful in providing too much in terms of specifics as this process unfolds as it relates to specific candidates or therapeutic areas of direction."

Questcor clearly has switched gears when it comes to its product pipeline, moving away from treatments for nephrotic syndrome, which is a kidney disorder, and toward rheumatology, a much larger market that includes arthritis, autoimmune diseases, pain disorders affecting joints, and osteoporosis.

"Rheumatology looks likely to overtake Nephrotic Syndrome in 2014 as the largest revenue driver, which makes sense as the RA opportunity is almost 10x the size of the NS patient population," wrote Molloy about the two product areas. "With RA leading the charge, we project a 20% [compound annual growth rate] for both top and bottom lines from 2013-2016."

Molloy has a price target of $90 per share on Questcor, pinning its market value at about $5.4 billion based on its 60.42 million shares outstanding on Nasdaq. The bulk of the valuation is a $78 per share consideration for Questcor's lead drug, H.P. Acthar Gel, which is being developed to treat five diseases in the rheumatology space. Another $10 of that target is attributedto the cash Questcor is estimated to have at the end of 2014, with a final $2 per share representing the value of the company's technology and non-Acthar pipeline.

Shares of Questcor finished at $74.21 Wednesday, down 5.6%. Questcor didn't respond to calls or e-mails.

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