Perrigo Co. actively plays the acquisition game, targeting
buys that build on its strong position as a generic prescription
and store-brand over-the-counter drugmaker.
Recent buyouts include last year's purchase of Sergeant's Pet
Care Products, focused on OTC animal health care, and the 2013
acquisition of a Fera Pharmaceuticals product portfolio of
prescription ophthalmic ointments and solutions.
These acquisitions fit in well withPerrigo 's (
) lineup. In addition to making and distributing OTC and generic
prescription pharmaceuticals, Perrigo also makes nutritionals
such as store-brand infant and toddler formula. Active
pharmaceutical ingredients are also a part of the company's
Perrigo is the world's largest maker of OTC pharmaceutical
products for the store-brand market, where its products carry the
names of customers such asWal-Mart Stores (
) andKroger Co. (
The latest deal on the table would take Perrigo into new
territory. In July, it agreed to buy Dublin-based biotechElan
) in a cash-and-stock transaction valued at approximately $8.6
billion, or $6.7 billion net of the $1.9 billion in cash Perrigo
will receive from the Elan balance sheet.
The deal brings a lot to the table: "It establishes a platform
for further international expansion, further diversifies our
business, and strengthens our financial profile," Perrigo CEO
Joseph Papa said on a conference call outlining the buy.
Elan's business portfolio includes royalties from the
blockbuster multiple sclerosis drug Tysabri, which is now
marketed and distributed by biotech drugmakerBiogen Idec
Perrigo will receive an escalating royalty stream from
Tysabri, a rapidly growing high-margin product with $1.6 billion
in annual revenue.
Tysabri Royalty Succession
Elan currently earns a 12% royalty on Tysabri global net
sales. From May 1, 2014, onward, the royalty increases to 18% on
annual net sales up to $2.0 billion and rises to 25% on annual
net sales above this amount.
Perrigo expects the acquisition to be at least 10 cents
accretive to the adjusted earnings per share of stand-alone
Perrigo in its current 2014 fiscal year, and between 70 cents and
80 cents accretive in fiscal 2015, including synergies.
The company estimates it will realize more than $150 million
annually in savings on after-tax operating expenses and taxes as
a result of this combination.
The proposed deal, which has been approved by both companies'
boards, is expected to close by the end of 2013 subject to
regulator approval. Perrigo will hold a shareholder meeting Nov.
18 to seek stockholders' OK.
At the close of the deal, the two companies will be combined
under a new company -- New Perrigo -- incorporated in Ireland. It
will be led by Perrigo's executive team.
Perrigo expects the Irish domicile to reduce its tax rate from
about 30% to the high teens, according to comments on the
company's fourth-quarter conference call.
Stifel Nicolaus analyst Annabel Samimy sees several deal
"The Elan acquisition offers Perrigo a good platform to
continue its strategy, and importantly, expand its geographies,"
she said. "It has an international presence, but it hasn't been
extensive. They want to take their formula that worked so well in
the U.S. and broaden it out to Europe."
Traveling For Taxes
Perrigo currently operates primarily in the U.S., U.K.,
Mexico, Israel and Australia, as well as certain other markets
including Canada, China and Latin America.
Once the deal is closed and the new company is domiciled in
Ireland, it gives Perrigo a "great new tax jurisdiction," Samimy
said. "From that point forward, whatever acquisition they make or
new product they file will be from the new Irish-domiciled entity
with a more favorable tax structure."
Elan also stands to bring a "sustainable revenue stream" from
Tysabri royalty contributions of $300 million to $400 million a
year, she says.
Elan also can serve as a "financial tool" for Perrigo, Samimy
added, where, if Perrigo finds a better investment letting it
generate a higher rate of return, the Elan royalty stream can be
Morningstar analyst Michael Waterhouse says Perrigo is
acquiring Elan for "financial structuring reasons to get a lower
"There are no inherent operational synergies between the
businesses," he said. "They're in completely different
industries. Elan has a royalty stream from Tysabri and two
products in the pipeline. If I had to guess, they would probably
divest most of the assets they receive from Elan once the deal
In a report, Waterhouse noted the acquisition follows a
"familiar strategy" used by other specialty drug companies, such
asValeant Pharmaceuticals (VRX) and Actavis, to lower tax
liabilities through tax restructuring deals.
"Following the transaction, Perrigo estimates its tax rate
will move to the high teens, and we estimate the majority of the
$150 million in annual cost synergies will stem primarily from
tax benefits," he wrote. "We expect Perrigo may eventually divest
the royalty streams it will receive from Elan. As a generic
pharmaceutical manufacturer, we doubt Perrigo will utilize Elan's
assets as a launching pad for future biotech drug
Meanwhile, Perrigo is faring well with its current lineup.
It's logged both double-digit sales and profit growth in all but
three of the past 14 quarters. In the most recently reported
quarter -- its first quarter of fiscal 2014 -- earnings rose 20%
to $1.52 a share. Sales popped 21% to $933.4 million. Both sales
and earnings beat analysts' views.
Every segment saw double-digit organic sales growth, with 13%
consolidated organic revenue growth, Papa said in a
Recent buys, including the Sergeant's deal, and new product
sales of $54 million contributed to the strong revenue
Analysts polled by Thomson Reuters see full-year earnings for
fiscal 2014 rising 18% to $6.60 a share. They forecast a 20%
increase in its 2015 fiscal year.
Perrigo is benefiting from the consumer's quest for value and
more affordable health care, analysts say. And Waterhouse notes
that the company is seeing benefits from acquisitions such as the
Sergeant buy and the 2010 purchase of PBM Holdings, the world's
largest manufacturer and marketer of infant formulas for the
Three Product Pillars
Perrigo's biggest revenue generator is its Consumer Healthcare
segment at close to 60% of sales, which includes Perrigo's OTC
store-brand lineup. Major product categories include analgesics,
gastrointestinal treatments and smoking cessation products.
Store brands sell for prices far less than national
The Rx Pharmaceuticals segment makes generic prescription
drugs primarily for the U.S. market. The portfolio is mainly
"extended topical" and "specialty," which encompasses a broad
array of topical dosage forms such as creams, ointments, lotions,
gels and shampoos.
The Nutritionals segment makes and distributes store-brand
infant and toddler formula products, including foods and
vitamins, which Perrigo sells to retailers primarily in the U.S.,
Canada, Mexico and China. This business markets store-brand
products that are comparable in quality and formulation to