Health

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Valeant Pharmaceuticals, desperately trying to revive its anemic stock, is now sucking the life out of another big drugmaker -- Perrigo.

The embattled company has stolen Joseph Papa away from Perrigo as a replacement for its own outgoing CEO Mike Pearson -- the person who gets credit and blame for Valeant's M&A-fueled rise and fall. Valeant needs a CEO that can stomach and hopefully solve its myriad problems, and investors are supporting this pick. The company's shares surged Monday to their highest price in more than a month. Meanwhile, Perrigo extended the drop that started last week.

Poached
Perrigo plunged about 12 percent as of Monday morning after its CEO was hired by Valeant
Source: Bloomberg

Papa is a highly regarded industry executive whose career stops also include Cardinal Health and Watson Pharmaceuticals (which through a series of mergers became Actavis, then Allergan and almost Pfizer). He led Perrigo's 2013 tax-inversion deal with Ireland's Elan, the benefits of which helped drive Perrigo's market value above $20 billion in early 2015 and attracted takeover interest from Mylan. He's a great choice for Valeant as it grapples with not only a massive debt burden, drug-pricing scandal and weakened profit outlook, but also general loss of faith from investors. Elliot Wilbur, an analyst for Raymond James, called Papa the "nice guy to counter Valeant's bad boy reputation." 

For Perrigo, though, Papa's departure comes at an inopportune time. The investment community is also less familiar with Papa's replacement, John Hendrickson, even though he has worked at Perrigo since 1989, most recently serving as president. Spewing all its bad news at once, Perrigo on Monday also announced preliminary first-quarter sales that came in below analysts' estimates. And it cut its 2016 earnings forecast, citing pricing challenges, heightened competition, and tempered expectations for new product launches. The company also thinks it might need to write down assets from last year's Omega Pharma acquisition.  

Perrigo's share price has suffered since it fended off Mylan's hostile bid in November, but the Papa news has dragged it down even further. On Monday, the stock hit a more than three-year low of around $105. For perspective, Mylan's cash-and-stock takeover offer was worth more than $175 a share just before shareholders spurned it.

So what happens now? Well, first, investors need to remember that Perrigo still has two strong leaders -- Hendrickson, who is clearly no stranger to the business and its transformation over the years; and Judy Brown, going on 10 years as Perrigo's chief financial officer. Along with Papa and the board, they didn't buckle under pressure last year to do a defensive merger as way to avert a sale to Mylan. Shareholders mostly supported their approach. In hindsight, maybe Perrigo should have tried to come to an agreement with Mylan, but the strategic merit of the deal was questionable and the situation contentious. It's hard to look back and say coulda, shoulda.

That said, Mylan may reemerge. (Although under Irish takeover rules, it may have to wait several months before it's allowed to bid again.) With Perrigo's stock down, it will be much easier for Mylan to make its case for a deal. Or, given Perrigo's diverse assets, it could shed pieces and surely find interested buyers. For instance, it could sell the lucrative royalty stream it gets from multiple sclerosis treatment Tysabri, which was gained through the Elan acquisition. The drug, marketed by Biogen, is expected to generate nearly $2 billion of revenue this year, and Perrigo gets 18 percent of that (25 percent for anything above $2 billion). Perrigo also manufactures store-brand over-the-counter products (e.g. cough syrup), prescription women's health products and medicines for skin conditions such as eczema.

Perrigo's Parts
Now valued at about 5 times last year's sales, Perrigo is among some of the cheaper stocks in the industry. Here's where its 2015 revenue came from:
Source: Company's 10-K filing
*Includes Tysabri royalties

In an interview following the Mylan saga, Perrigo's Brown said the rout in drug stocks that began last year could spur "dialogues with companies that perhaps had different views of value in the past." (Read more here.) The same could be said for Perrigo now.

Whether Perrigo is in play or not, Hendrickson needs to immediately address investors' concerns. And if they can't be allayed, an activist shareholder could try to force action from the company. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Also, recall that Perrigo was said to have held talks last summer with Endo International, which focuses on pain and urology therapies. Neither Perrigo nor Endo are necessarily in a position to do a large merger right now -- Endo's stock has fallen about 50 percent this year -- but it's worth noting. Some analysts have said recently that Endo's now-cheap valuation could make it a takeover candidate. 

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net