When you see the smoke of an M&A rumor, best to look for a fog machine before hitting the buy button.
Perrigo soared Tuesday on a report from StreetInsider that a U.K.-based company was close to buying the consumer and generic drug firm.
But there isn't an obvious candidate to shell out the rumored $20 billion on struggling Perrigo right now, particularly in Britain. Shares were up 9 percent Tuesday, but after everyone had a night to calm down, the stock fell 6 percent on Wednesday.
The company isn't the most attractive takeout; it's firmly in turnaround mode. Shares are down nearly 30 percent year-to-date, with most of the drop coming in April after the company's then-CEO Joe Papa decamped to take over Valeant. As Papa bailed, the company cut its EPS forecast for the year due to underperformance in its consumer business and pricing pressure on generic drugs.
On Perrigo's May earnings call, analysts questioned the strategic rationale of its global mix of generics, branded over-the-counter drugs, store brands (the drugstore-branded versions of NyQuil or Sudafed, for example), and specialty products. Valeant's collapse has tarnished the idea of mixing disparate businesses together under a low tax rate (Perrigo netted an Irish tax domicile with its 2013 acquisition of Elan). Perrigo's lack of focus may make it less desirable as an acquisition target.
The idea that a U.K. business might be interested is also unlikely. The list of U.K. health-care companies that could do this deal is short, and a closer look at those companies should discourage any Perrigo deal rumors.
The first is AstraZeneca, which wouldn't be a good fit. The company gets essentially all its revenue from branded prescription drugs. Recent acquisitions such as Acerta and ZS Pharma have stuck to that focus. The company actually sold an older drug, Entocort, to Perrigo last year for $380 million. Buying it back doesn't make much sense.
The second is GlaxoSmithKline, which at least has a consumer business, making it a better fit. But GSK just sold some over-the-counter drugs to Perrigo last summer. And Perrigo at $14.7 billion would be the biggest purchase GSK has done since the $72 billion deal that added SmithKline to Glaxo. Investors complain most about GSK's weak pipeline of new drugs; any deals will likely focus on replenishing that. And GSK probably won't do such a large transaction in the middle of a CEO transition; Sir Andrew Witty is scheduled to step down next spring.
As Raymond James analyst Elliot Wilbur pointed out in a research note on Wednesday, Perrigo is generally a strange fit for any large global firm with established consumer brands (think GSK, Johnson & Johnson, or Unilever). Perrigo has some branded consumer products. But its consumer health-care unit, which mostly sells store-brand over-the-counter drugs that compete with established brands, is by far its largest, providing 50.6 percent of its revenue last quarter.
Mylan made a protracted, failed attempt to buy Perrigo last year and could conceivably take a second crack. It is most similar to Perrigo in its mix of generic, consumer, and specialty products. But it's suffering from pricing pressure of its own and just bought Meda for nearly $10 billion at a 92 percent premium. It probably doesn't want to immediately splurge again.
Perrigo is more than $10 billion cheaper than when Mylan pursued it -- one thing acquisition rumors have going for them. But there's little to suggest any deal is imminent.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Max Nisen in New York at email@example.com
To contact the editor responsible for this story:
Mark Gongloff at firstname.lastname@example.org