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Perrigo at Record in Tel Aviv on M&A Outlook Amid Tax Rate

Perrigo Co. (PRGO), the largest maker of generic over-the-counter medicines in the U.S., climbed to a record on prospects the company will push for more acquisitions after the purchase of Elan Corp. reduced its tax rate.

Shares of Perrigo, which joined Israel’s benchmark TA-25 Index after purchasing B’nei Brak, Israel-based Agis Industries Ltd. in 2005, gained 2.3 percent to 565 shekels, or $162.19, at the close in Tel Aviv. The gauge advanced 0.5 percent. The company’s New York-traded stock advanced to $161.70 last week, the highest level since its 1991 debut.

Perrigo has rallied as health-care acquisitions by companies from General Electric Co. to Forest Laboratories Inc. fuel speculation the Dublin-based company will look to further expand. The stock has gained 21 percent since the drugmaker said in July that it would buy Irish drug company Elan for $8.6 billion. The merger reduced its tax rate by about 10 percentage points, Royal Bank of Canada said on Jan. 10, adding that Perrigo is a top pick for 2014.

“The lowering of their tax rate puts them in a position to go out and make a lot of acquisitions, which is how they’re going to grow,” Marc Goodman, a research analyst with UBS AG in New York, said in a Dec. 9 telephone interview. “What you’re seeing is the ripple effect of the excitement going on, that’s why Perrigo’s going up.”

Consolidation in the pharmaceutical industry last year spurred a 66 percent rally in the Nasdaq Biotechnology Index, the most since 1999.

Lower Rate

Forest Laboratories Inc., maker of the Alzheimer’s drug Namenda, rose the most in 33 years on Jan. 8 after announcing it will buy Aptalis Pharma for $2.9 billion.

Endo Health Solutions Inc. acquired Canadian drugmaker Paladin Labs Inc. in November, allowing the company to reincorporate in Ireland with a lower tax rate. A similar move also helped Valeant Pharmaceuticals International make more acquisitions than any of its peers in the past three years through November.

Perrigo’s tax rate should fall to under 20 percent from a current rate of near 30 percent after its relocation to Ireland, Stanicky said. Bradley Joseph, director for global communications at Perrigo in Allegan, Michigan, declined to comment.

Non-Prescription Products

Perrigo expanded into pet care products in 2012 and acquired Velcera Inc., an animal health provider, last year for $160 million. The company has said it’s interested in making more U.S. acquisitions in the areas of ophthalmology, animal nutrition, diabetes and pet care, as well as expansion overseas, Randall Stanicky, an analyst at RBC Capital Markets, said by phone from New York on Jan. 10.

Perrigo sells non-prescription products as well as generic drugs, nutritional supplements and animal treatments, according to its website. The company makes lower-priced, store-brand versions of products such as Johnson & Johnson’s Tylenol pain reliever for customers including Wal-Mart Stores Inc.

Perrigo is likely to wait as much as six months to pursue new acquisitions because it wants to reduce leverage, said Charles Jones, an analyst at Barrington Research Associates Inc. in Chicago.

“They want to be able to do what they said they’re going to do from a reduction of debt perspective; that’s going to take priority over acquisitions,” Jones said in a Jan. 9 telephone interview.

Earnings Growth

Perrigo is rated Baa3 by Moody’s Investors Service, the lowest level of investment grade with a stable outlook, and BBB by Standard & Poor’s.

Earnings growth should allow Perrigo to reduce its ratio of debt to earnings before interest, taxes, depreciation and amortization from 3.2 times at the end of September 2013 to a “mid 2 range” by the end of 2014, according to a Nov. 5 Moody’s report.

Even without acquisitions, RBC expects Perrigo’s earnings to rise 17 percent from a year ago to $1.59 per share in the second quarter as more prescription drugs are approved to be sold over the counter. That’s in line with the $1.60 average of 15 analyst estimates compiled by Bloomberg. Revenue will rise to a record $4.2 billion in 2014, according to the estimates.

“Perrigo’s earnings power is something we think is underappreciated, and as that becomes better understood, the stock is likely to move with it,” Stanicky said. “Our forecast reflects organic growth, and we think there’s potential for more accretive deal action.”

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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