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Hedge fund urges Perrigo to explore sale of non-core assets in bid to improve performance, stock price

BY Monday, September 12, 2016 10:19am

ALLEGAN — Less than a year after shareholders of Perrigo Co. plc turned down a $26 billion hostile takeover bid, a New York City hedge fund wants the company to look at the potential sale of its generic drug business and to get more aggressive in improving performance.

In a highly critical letter sent today to CEO John Hendrickson, Starboard Value PLC urged Perrigo to hire an investment bank to look at selling “non-core assets” and to turn around its stock price that trades at about half the price from when Mylan NV began pursuing the company last year. The letter also disclosed Stardboard Value’s 4.6 percent stake in Perrigo’s stock.

“We believe that Perrigo is deeply undervalued and significant opportunities exist to create value for the benefit of all shareholders based on actions that should be within the control of management and the Board of Directors,” Starboard Value managing member Jeffrey Smith wrote to Hendrickson. “We believe changes are needed to reverse the trajectory of poor operating and financial performance and reposition Perrigo for future success.”

Perrigo, which is based in Dublin, Ireland, and operated from Allegan, has twice lowered its earning guidance since November, when Mylan failed to get enough shareholders to tender their shares in support of the hostile takeover bid. Citing problems in the Rx Pharmaceuticals division that produces generic drugs, Perrigo in August reduced full-year 2016 earnings guidance to $6.85 to $7.15 per share from $8.20 to $8.60 per share.

Perrigo in a statement this morning acknowledged receipt of the hedge fund’s letter.

“Perrigo will review the letter carefully and looks forward to a constructive and productive dialogue with Starboard — as we do with all of our shareholders — while we execute on a number of strategic and operational initiatives,” the company said in a statement. “Perrigo also reiterates its commitment to disciplined execution; transparency with its shareholders, customers, and employees; and, above all, to delivering value for its shareholders.”

In its letter, Starboard Value urged Perrigo to hire an investment bank to look selling the Rx Pharmaceutical business and the rights to the multiple sclerosis drug Tysabri.

Selling the generic drug division that’s expected to generate $1 billion in sales for 2016 would allow Perrigo to better focus on its lead position globally in over-the-counter (OTC) medications produced by the Consumer Healthcare division.

“Despite the recent increase in both manufacturer competition and customer consolidation, this business maintains strong margins with proven innovation capabilities. We believe that there are limited synergies between the Rx Pharmaceuticals business and the core OTC businesses,” Smith wrote to Hendrickson. “We also believe this would be a valuable business to several strategic acquirers.”

Hendrickson took over as CEO earlier this year after the departure of Joe Papa, who led the charge against the Mylan hostile takeover attempt and later left to become chief executive at Valeant Pharmaceuticals International Inc.

Tysabri, which Perrigo picked up with the $8.6 billion acquisition of Dublin-based Elan Corp. plc in 2014, should generate an estimated $360 million in royalty payments to Perrigo this year, according to Starboard Value’s letter. Perrigo receives 18 percent royalty payments on annual sales of Tysabri up to $2 billion and 25 percent sales above $2 billion.

“As a result of Perrigo’s continued execution issues and operational missteps, shareholders have greatly suffered. Clearly, the status quo is unacceptable to shareholders and should be unacceptable to you and the Board,” Starboard stated in its letter. “We believe that Perrigo trades at a significant discount to fair value and that there is substantial value to be created at Perrigo for the benefit of all its shareholders. However, these are challenging times for Perrigo, and we strongly believe that material change is necessary. For the Company to approach its historical growth trajectory and regain its appropriate multiple, immediate and aggressive actions are required from management and the Board.”

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