Perrigo 'Unlocks Value' But Weak 2017 Outlook Impedes Revelry

Perrigo bows to pressure from activist investor to 'unlock value' by selling Tysabri royalty stream and laying off 750 staff, but still provides a weak outlook for 2017, prompting analysts to question the wisdom of the strategy.

Perrigo Co. PLC is selling its royalty stream in multiple sclerosis drug Tysabri (natalizumab) to Royalty Pharma for up to $2.85bn, following pressure from hedge fund Starboard. The deal comprises $2.2bn in cash at closing and up to $650m in potential milestone payments.

Starboard has highlighted the fact that Perrigo's share value has dropped since the firm convinced shareholders to reject a takeover offer from Mylan NV in 2015. It has been pushing for a sale of Perrigo's Tysabri stake and its prescription generic specialty topicals business to help turn around the firm's plummeting share price.

However, while analysts are broadly positive about the Tysabri deal, they are not convinced Perrigo is solving its problems effectively.

"Five new board members have recently joined, Tysabri has been sold, and management has found $130M in synergies," wrote Jefferies' David Steinberg in a research note dated Feb.28. The potential sale of the prescription business is still an unknown, but it's clear Perrigo's management is working hard to create more value. "However, has anything actually changed except reducing leverage and shrinking the earnings base? It's early but we'd say not really. The hope is that management can improve margins at BCH (branded consumer healthcare) and a floor on generic pricing can be reached. The reality is that the consumer business needs to improve – and there are few positive signs. New launches should be stronger in 2018, but the size of the OTC pipeline remains unclear and it's uncertain if pricing headwinds will abate any time soon."

Morningstar Equity Research analyst Michael Waterhouse in a research note dated Feb. 28 wrote that he "applaud[ed]" the decision to divest the Tysabri royalty stream, but warned that "this does little to solve the firm's more critical problems in its international consumer health and prescription segments." In particular, the high-margin prescription topicals business remains a "troubling spot for the firm as increased competition on key products, like Entocort, and the lack of major new product launches saps growth." Perrigo anticipates 9%-11% price erosion in this segment for 2017.

Perrigo also provided 2017 revenue and EPS guidance lower than expected. The specific reasons cited include lower new product sales (e.g. a shelved 2017 ProAir launch), more revenue cuts at BCH, and continued pricing headwinds. "Four weeks ago we had thought that earnings growth would be 'flattish, but on an 'apples to apples' basis FY17 EPS will now be 9% below 2016 figures," said Jefferies' Steinberg.

Perrigo also announced that it was postponing release of its full financial statements for 2016, and that it would lay off 750 employees, about 14% of its non-production workforce. In an additional development, the company's CFO Judy Brown has resigned to take a position with Amgen.

Perrigo CEO John Hendrickson said the Tysabri sale, "furthers our stated strategy to enhance our portfolio and focus on our consumer-facing and Rx businesses."

Perrigo acquired the rights to the Tysabri royalty stream through its 2013 acquisition of Elan Corp. PLC Starboard holds 6.7% of Perrigo.