Starboard Gives Perrigo Needed Urgency

New management has been strangely slow to act.

Starboard, the activist investor that has locked horns with Yahoo and Olive Garden operator Darden, has taken a 4.6 percent stake in embattled drugmaker Perrigo. That company's recent history makes it as ripe for change as Olive Garden's unsalted pasta water.

Perrigo's leaders fought tooth and nail to fend off a then-rich takeover offer from Mylan in 2015, using ambitious sales forecasts to justify the rejection. Several forecast cuts later, investors are questioning whether the company's disparate set of businesses should be dismantled. The share price has been nearly cut in half over the past year and is down 28 percent since new management took over in April. And yet there has been relatively little action from that new management to change course. 

With Starboard taking an interest, inertia will no longer be an option. Perrigo shares rose 6 percent on Monday on news of Starboard's involvement. 

Time to Get Active

Perrigo's horrible year has attracted the notice of Starboard Value, an activist hedge fund.

Source: Bloomberg

Perrigo's core business, selling store-brand versions of over-the-counter drugs, is doing just fine. But its acquisition of a branded European consumer product company called Omega in 2014 has been a disappointment. And its prescription generics business has been something of a disaster this year due to unexpected competition. The company's sales expectations for the generics business fell by $200 million, or 17 percent, over the course of just a few months this year. Perrigo also gets royalty revenue from the multiple sclerosis therapy Tysabri, which brings in cash, but has no discernible strategic fit with the rest of the business. 

Work on the Core

Perrigo's core business, store-brand drugs, has been solid; but its generic and branded consumer businesses have led to guidance cuts and writedowns

Source: Bloomberg

Starboard wants Perrigo to sell off the prescription generics business and its Tysabri royalties. That could help the company focus on what's working, pay down its substantial debt and (Starboard hopes) unlock value. Perrigo's total debt is 4.19 times Ebitda, according to Bloomberg data, compared with an average among its peers of 3.09.

Starboard's modus operandi includes shaking up a company's governance and management. It's a little unfair to heap too many of Perrigo's woes at the feet of new CEO John Hendrickson. Former CEO and Chairman Joe Papa, who bailed on the company to go run Valeant, was arguably the architect of this group of businesses and the unrealistic expectations surrounding it. Perrigo's new leader has been forced to repeatedly cut forecasts that the board (which is mostly unchanged) endorsed as it worked to fight off Mylan.

The Cutting Room

After former CEO Joe Papa's departure, Perrigo's business has deteriorated and it has substantially cut his guidance for 2016 earnings. Each of the company's guidance updates are charted below

Source: Bloomberg

Hendrickson was dealt a rough hand. But in the face of deteriorating businesses and investor trust, he has not taken aggressive action. He has changed up some things organizationally, shifted operational leaders and divested a couple of small units, such as a small part of the business that makes vitamins. He mulled bigger moves on Monday when speaking at a Morgan Stanley conference, but he's been mulling for months.  

In the face of a share-price collapse, that's simply not enough. So enter Starboard and, hopefully, a much-needed sense of urgency.

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

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