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Abbott, Mylan back generics deal, tweak terms after tax rule change

(Reuters) – Abbott Laboratories and Mylan Inc said on Wednesday they would go ahead with their $5.3 billion deal in which Mylan will buy part of Abbott’s overseas generics business and set up headquarters in the Netherlands, but they tweaked the terms of the transaction.

The move comes after the U.S. Treasury on Sept. 22 made changes to the corporate tax rules that govern such “inversion” merger deals, in which companies move their operations to countries with lower taxes than the United States. The new rules raise the bar for such tax treatment and make it harder to reap other tax benefits from inversions.

About 10 U.S. companies had deals pending when the Treasury changed the rules. Some, including Salix Pharmaceuticals and former Abbott business AbbVie, scrapped their own inversion-based deals, while others are moving ahead.

“The positive takeaway is that Abbott still plans to close its deal with Mylan in the first quarter of 2015, despite pressure on inversions from the U.S. Treasury, and some walking away by other companies from inversions,” said Edward Jones analyst Jeff Windau. “The (tax law) changes from Treasury are making people re-look at deal terms, and deals are not as favorable now. That’s what happened here, there had to be some tweaks.”

JPMorgan analyst Chris Schott said there is greater certainty now that Mylan’s branded generic drugs business will have “a competitive tax structure for future business development opportunities.”

Abbott plans to sell to Mylan its generics business in developed markets outside the United States, and to keep its generic brands in fast-growing emerging 
markets. Besides obtaining Abbott generics that have annual sales of almost $2 billion in developed markets, Mylan would cut its tax bill.

Provisions of the deal have been changed, Mylan said on Wednesday, to provide it better pricing terms at Abbott facilities that will make and supply products for Mylan. Mylan said it will issue 110 million shares in the newly formed company to Abbott, 5 million more than the original terms dictated.

Abbott plans to transfer generic drugs that it sells in Europe, Japan, Canada, Australia and New Zealand to a new company in the Netherlands that would also include Mylan’s existing businesses. Mylan shareholders will own 78 percent of the company and Abbott will own 22 percent.

Abbott plans to sell its shares soon after closing the transaction.

Abbott said the company’s third quarter sales, including generics to be sold to Mylan which are now considered discontinued products, rose 4.7 percent to $5.6 billion, which was in line with Wall Street expectations.

Strong sales of nutritional products offset weak sales of diabetes care products and medical devices.

The company now expects full-year earnings of $2.25 to $2.27 per share, excluding special items, compared with its earlier estimate of $2.19 to $2.29 per share.

Abbott shares fell 1 percent, while Mylan’s fell 2.8 percent, in afternoon trading.

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