Perrigo's Rx Business Looks Ready To Sell, Says Hedge Fund Investor

Starboard Value states says Perrigo "severely mismanaged" its entry into branded consumer health through the acquisition of a German firm and showed "misguided confidence" in encouraging shareholders to reject Mylan's tender.

Perrigo Co. PLC sees its Rx generic business as part of its core, but a hedge fund with 4.6% stake in the OTC private label giant recommends divesting the business along with Perrigo's Tysabri royalty license to help turn around the firm's plummeting share value.

Starboard Value LP states in a Sept. 12 letter to Perrigo that the firm's problems began before its management convinced shareholders to reject a takeover offer they should have embraced from Mylan NV.

Perrigo "severely mismanaged" its entry into the branded consumer health space through the acquisition of European businesses and brands and showed "misguided confidence" in its future as an independent firm, Starboard managing member Jeffrey Smith said in the letter to Perrigo CEO John Hendrickson.

Perrigo executives and the firm's board "were far from prescient" in encouraging shareholders in November 2015 to reject Mylan's tender of $75 cash and 2.3 shares – equal to more than $200 for each Perrigo share – and the firm has lost more than half of its value since Mylan abandoned its tender offer, according to Starboard.

While Perrigo management and the board "made aggressive promises of drastic improvements in both financial and stock price performance" to sway shareholders from accepting Mylan's tender, "since that time, results have gone decidedly in the wrong direction," Smith said in the seven-page letter stocked with eight charts and graphs to buttress Starboard's points.

"As a result of Perrigo’s continued execution issues and operational missteps, shareholders have greatly suffered. Clearly, the status quo is unacceptable to shareholders and should be unacceptable to you and the board," he added.

Despite Starboard's concerns, Perrigo shares in same-day trading jumped 7.5% to $95.23.

However, that is still well short of the gains seen around the potential acquisition by Mylan. Perrigo's share price increased nearly 24% to $216 when Mylan announced its offer in April 2015, but fell more than 6% to $146.90 on the day the tender failed and have largely continued falling, although a rumored offer for the firm prompted an uptick in June.

Hendrickson, promoted to Perrigo's helm after Joseph Papa left to head Valeant Pharmaceuticals International Inc. in April, made a previously scheduled presentation at an investor conference in New York and said he would not discuss Starboard's letter, though his comments largely covered the hedge fund's argument.

While Starboard sees "limited synergies" between Perrigo's Rx generic topicals, ophthalmic and asthma products and its consumer health product businesses, Perrigo sees each as part of its core.

"It links in with our other consumer businesses from an operating side, supply side, all of those things. And so, there are some reasons for it to coexist with the rest of our pharma business that is sold over-the-counter," Hendrickson said at the Morgan Stanley Global Health Care Conference.

He acknowledged the Rx topical segment's growth has slowed over the past year largely due to pricing pressure across the nonprescription generic space, but said the business delivers about a 40% operating margin and a good return on invested capital.

Tysabri, on the other hand, is a "non-core asset," Hendrickson said, and the firm would consider selling its royalty license from Biogen Inc. for sales of the multiple sclerosis treatment; Perrigo gained the Tysabri (natalizumab) license in 2013 when it acquired Elan Corp. PLC and became an Ireland-incorporated firm.

"We're not a biotech company by ourselves. So we do receive royalties … but it is clearly not core to us," he said.

Perrigo is considering its options for Tysabri along with other decisions on possible changes. It recently sold its vitamins, minerals and supplements business – not including its infant and adult nutritionals – to International Vitamin Corp. Inc., a year after saying the segment would be on the block if it continued weighing down earnings.

"In our minds we need to take action on those kinds of core things relatively soon, but we haven't established a definitive timeline of when that needs to be," Hendrickson said.

'Challenging Times' Acknowledged

The absence of a definitive timeline for changes might not sit well with Starboard, which says it is one of Perrigo's largest shareholders.

"These are challenging times for Perrigo, and we strongly believe that material change is necessary. For the [firm] to approach its historical growth trajectory and regain its appropriate multiple, immediate and aggressive actions are required from management and the Board," Smith said in the letter.

Smith asserted that Mylan's unsolicited proposal to acquire Perrigo for cash and stock was at more than a 25% premium on Perrigo's share price at the time and, using Mylan's current share price, Perrigo's shares would have a value of around $167, or 88% more than its stock price before Starboard's letter sparked an uptick.

"We believe that Perrigo is deeply undervalued and significant opportunities exist to create value for the benefit of all shareholders based on actions that should be within the control of management and the Board of Directors," he said.

Smith also noted that with the letter, Starboard expects to "begin what will hopefully be a constructive engagement with the goal of driving value creation for the benefit of all shareholders."

Perrigo lowered its 2016 earnings guidance following its first- and second-quarter earnings reports. The Dublin-based firm, which maintains its primary operations in the Allegan, Mich., area, in August lowered its forecast for 2016 adjusted earnings per diluted share to a range of $6.85 to $7.15 after previously targeting $8.20 to $8.60. (Also see "Perrigo Hopes Esomeprazole Helps Make Private Label OTCs A Bright Spot" - Pink Sheet, 10 Aug, 2016.)

Starboard's recommendations to Perrigo come after shareholders filed two class action complaints in US District Court for the New Jersey District alleging that the firm made false or misleading statements and failed to disclose material adverse facts about the business starting when Mylan made its offer and continuing through a majority of shareholders in November rejecting the tender. (Also see "Perrigo Shareholder Lawsuits Claim Joining Mylan Was A Better Idea" - Pink Sheet, 25 Jul, 2016.)

Perrigo also is overhauling the European branded OTC and nutritional products business it cobbled together in deals made in 2014 and 2015 and that provided an initial boost to overall sales before distribution and marketing problems impeded further growth. The firm still was taking stock of problems in Europe when Papa resigned.