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Sunday, 28 September 2014 22:00

Blockbuster deal for Elan positions Perrigo for global growth

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Perrigo plant in Mexico. Perrigo plant in Mexico. COURTESY PHOTO

Perrigo Co.’s blockbuster $8.6 billion deal for Elan Corp. took just six weeks to put together.

The deal began when investment bank Citigroup Global Markets, representing Elan, contacted Perrigo’s financial adviser, Barclays, and Chairman and CEO Joe Papa to invite the company to participate in a formal sale process.

The Dublin, Ireland-based Elan, after earlier rejecting a takeover proposal and receiving additional unsolicited inquiries, was up for sale. Perrigo was one of a dozen companies around the world that Elan’s representatives contacted between June 18 and June 20 of 2013.

Perrigo signed a nondisclosure agreement with Elan on June 21, as did four other potential bidders. A little more than a month later, Perrigo had won the auction. The two companies agreed to a deal where Perrigo would create a new corporation domiciled in Dublin — dubbed the “new Perrigo” — and acquire Elan.

Elan and Perrigo signed the deal July 28, 2013, and announced it the next day. Under the agreement, Elan shareholders received $16.50 in cash and stock in the “new Perrigo.”

Chris Roop, who led Perrigo’s corporate development team at the time of the transaction, recalls that the process went quickly as the company worked with its investment banks in the U.S. and Europe.

“We engaged with intent, I would say,” said Roop, who now runs Perrigo’s Animal Health division in Omaha, Neb. “Getting the organization and troops around performing the diligence, coming to a perspective on value, and developing the tactical plan to actually pull it off, we did on a very accelerated timeframe. It really was an achievement of the organization and the leadership team, of pulling together and having a common goal and running after it.

“It was that Midwest sensibility.”

The acquisition of Elan, which closed Dec. 18, 2013, gave Perrigo a base in Europe from which to grow globally and earned the company the MiBiz 2014 Deal of the Year Award in the more than $100 million category.

A regulatory filing last year with the U.S. Securities and Exchange Commission stated that Perrigo directors urged shareholders to approve the deal because it created “an industry-leading global health care company with the balance sheet liquidity and operational structure to accelerate Perrigo’s growth and capitalize on international market opportunities.”

The deal was expected to generate $150 million in cost savings, including the benefits of a lower tax rate by domiciling the new corporation in Ireland. It also brought to Perrigo increasing royalty payments for Elan’s Tysabri multiple sclerosis drug.

In the fourth quarter of the 2014 fiscal year that ended June 28, Perrigo attributed $112 million of its $1.14 billion in quarterly sales to the Elan acquisition. Of Perrigo’s $4.06 billion in sales for the fiscal year, $288 million was attributable to acquisitions, $146.7 million of which came from royalties on the global sale of Tysabri by Biogen Idec Inc., according to Perrigo’s annual financial report to federal securities regulators.

Biogen purchased Tysabri earlier in 2013 from Elan, which originally developed the drug and received royalties from its sale.

Elan was by far the largest of a string of acquisitions by Perrigo, and executives expect that dealmaking trend to continue.

In an August conference call with brokerage analysts to discuss quarterly results, CEO Papa said Perrigo’s appetite for further acquisitions remains strong.

“We continue to be very active. We think there are some great opportunities to build on the platform that we already have,” Papa said.

Perrigo prefers to target new product categories with “appropriate” regulatory burdens and hurdles for market entry where competitors “can’t replicate it overnight,” Roop said.

Perrigo’s acquisition strategy focuses on both geographic expansion around the world and expansion into adjacent product categories where it can sell additional store-brand products to national retailers. In recent years, Perrigo made acquisitions to move into pet care and infant nutrition to drive growth. The strategy leverages an extensive distribution network to major retailers and allows Perrigo to “put another item on the truck that’s heading down the road to a customer,” Roop said.

“We are very systematic from a process perspective,” Roop said in explaining the acquisition strategy. “Is this a category that is sizeable, that is growing and that is important to our customers? Is this an aisle in the store that matters to customers? And do we have something that we can leverage into it?”

Among Perrigo’s top customers for over-the-counter, store-brand medication and pet care products are Walmart, CVS, Walgreens, Kroger, Target, Meijer, Dollar General, Rite Aid, Sam’s Club, Costco, Petco and Petsmart.

Future acquisitions could take the company into ophthalmics, diabetes care and adult nutrition, Papa said.

“Those are all clearly things that we are very excited about to bolt-on some additional (acquisitions and) sell more products to our existing customers,” Papa said.

Consolidation in the pharmaceutical industry provides plenty of opportunity for Perrigo, which remains headquartered in Allegan. Papa told analysts that the present M&A market in the industry is “the most dynamic” he’s seen in his 31 years in the business.

“(T)here are a lot of things on the table from other companies who have placed themselves up for sale,” Papa said.

But with that increased activity, as well as the low cost of capital today, comes increased competition for deals that has driven up values and prices for acquisition targets, Roop said.

“It’s a very active and very fluid market, and by virtue of that, it’s difficult to transact at times,” Roop said. “It really is an ‘eat or be eaten’ kind of dynamic and asset values have escalated. Values are up and prices are up and the competition is fierce, and that’s driven both by a scarcity of high-quality assets and very accommodating financial markets where the cost of capital is just very cheap today.”

That dynamic requires Perrigo to stick with rigorous acquisition criteria that focus on return on investment capital and where a target fits strategically with long-term growth plans.

“So it’s really kind of stepping back and looking at situations and looking at the values that things trade for and coming to a perspective of whether to pay that value away or not, and how much of that value you’ve kept for yourself and the business,” Roop said.

Ultimately, he said, an acquisition needs to fit well with Perrigo’s core mission.

“At the end of the day, it has to pass the hurdle that we are delivering quality, affordable health care,” Roop said. 

Sidebar: Winner - More Than $100 Million

  • Company: Perrigo Co. PLC
  • Top executive: Joe Papa, CEO
  • Annual sales: $4.06 billion in FY 2014
  • Full-time West Michigan employees: About 4,000
  • Business description: Producer of generic and store-brand medications and active pharmaceutical ingredients
  • Best practices for effective deal-making: Perrigo looks at acquisitions that can add an adjacent product category, new geographic markets, or bring new capabilities to the company. But the companies must “have a strategic fit” and generate an appropriate return on investment capital, said Chris Roop, who led Perrigo’s corporate development team at the time of the transaction. “We have some very specific financial criteria and thresholds and hurdles that we have to feel comfortable the acquisition will meet in a very near timeline,” Roop said.

 

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