DEAL REPORTER
Perrigo (NYSE:PRGO) has the capacity for significant M&A opportunities after rejecting an approach from Mylan (NASDAQ:MYL) and will not comment on speculation of other offers for the company, executives said Tuesday.
On the Creating Superior Value for Shareholders conference call, held to discuss its 3Q15 earnings and the unsolicited proposal from Mylan, CEO Joseph Papa said Perrigo expected to continue its successful approach to M&A.
“Our focus is on the acquisitions that add value, build our platform and increase operating leverage so we can generate solid returns for shareholders,” he said, noting the company’s purchase of Omega as an example.
Perrigo announced it would acquire Omega, a Belgium-based over-the-counter healthcare company, in November last year for USD 4.5bn. The deal closed last month.
In her prepared remarks on Tuesday’s conference call, CFO Judy Brown said Perrigo’s strong free cash flow was one of the most powerful aspects of its business.
“Our cash generation provides us the financial flexibility to continue to grow and invest in our business and allows us to pursue expansive inorganic opportunities,” she said.
In the Q&A session, Guggenheim analyst Louise Chen asked about the type of larger buys which interested Perrigo and when it would be ready to pursue a deal given its recent Omega acquisition. CEO Papa said Perrigo had historically shown a mid-teens growth rate, with about half of this generated via M&A, adding that the company believed it could maintain this going forward.
He noted that it expected to generate around USD 1.2bn to USD 1.3bn of cash per year which, when combined with its deleveraging ability, provided “significant” M&A opportunities.
“And importantly, with what we’ve now done in Europe with the Omega transaction, we now have a business in Germany that if we wanted to bolt something on into Germany or do something in Germany, that’s available, as well as obviously larger acquisitions that are more global in nature,” Papa said.
Mylan bid
Perrigo said Tuesday it had rejected Mylan’s unsolicited offer of USD 205 per share, stating that the bid substantially undervalued Perrigo and its future growth prospects.
In the Q&A session on the conference call, RBC analyst Randall Stanicky asked if Perrigo had engaged other possible buyers for the company. CEO Papa said the board believed it had a strong opportunity to build its business as an independent company.
“I can’t really make any further comments about potential speculation that we may be talking to other companies,” he said. “It wouldn’t be appropriate for me to make any further comments at this time.”
The CEO declined to comment when asked by Guggenheim analyst Chen about the potential synergies between itself and Mylan.
Later in the session, Deutsche Bank analyst Gregg Gilbert asked if the board’s rejection of Mylan’s offer was focused solely on price or if other factors were involved. Papa said the board’s belief that Perrigo was substantially undervalued by the offer took into account the company’s long-term CAGR goal of 5% to 10% and its opportunities for additional M&A.
“Now that we’ve built this global footprint, it really is a springboard for future opportunities,” the CEO said.
CFO Brown added that Mylan’s bid occurred alongside Perrigo’s intention to update its board and investors on its long-term strategic plan, which followed closely after the Omega completion. She said this had allowed Perrigo’s board to evaluate a refreshed set of numbers and base its decision upon this new information.
A report by this news service on 9 April said the offer could lead to a land grab in the specialty pharmaceuticals sectors with more bidders joining the fray. The article said Mylan’s bid for Perrigo could have been a defensive move to ward off Teva Pharmaceutical Industries (NYSE:TEVA), which had been viewed as taking an interest in buying Mylan.
The report named Actavis (NYSE:ACT), Novartis (NYSE:NVS), Valeant (NYSE:VRX) and Pfizer (NYSE:PFE) as those potentially interested in acquiring either Mylan or Perrigo, adding that Cardinal Health (NYSE:CAH), Sanofi (NYSE:SNY) and Abbot Laboratories (NYSE:ABT) could also take a look at Perrigo.
Mylan/Teva tie-up
On Tuesday, Israel-based Teva announced a proposal to acquire Mylan in a transaction valued at USD 82 per share. A published report that afternoon said a rejection by Perrigo of Mylan’s offer would leave the latter with no alternative to a takeover bid from Teva. The article noted that the latter’s bid for Mylan was contingent upon there being no Mylan-Perrigo deal or any alternative deal.
Later Tuesday, Perrigo announced it had rejected the proposal from Mylan, following a thorough review in conjunction with its financial and legal advisors.
A subsequent report by this news service, citing industry bankers and investors, said the unsolicited USD 40bn bid by Teva for Mylan could lead to a round of raised offers by Teva, and also by Mylan in its bid for Perrigo.
On Perrigo’s 21 April conference call, JPMorgan analyst Christopher Schott asked CEO Papa if Teva’s bid for Mylan would factor in Perrigo’s evaluation of potential further offers for the company from Mylan. Papa said he could not speculate on Mylan’s next move, noting that Perrigo had had not discussed the matter with the company.
“The last conversation I had with them [Mylan] was May of 2014, and then [we] received this letter and the phone call on 6 April,” the CEO said. “So there were no conversations between that time period with the company. So it was a surprise to me.”
Earlier on the call, Goldman Sachs analyst Jami Rubin asked Papa how a potential Teva-Mylan deal would affect Perrigo. The CEO said he strongly expected there to be further industry consolidation.
“And I think it plays to the strength of Perrigo,” he added, noting that the company had made around 23 M&A transactions in the past nine years. “We think that’s something that’s very exciting for the future of Perrigo and clearly something we’re going to continue to participate (in) based on my previous comments.”
Perrigo makes over-the-counter and generic prescription pharmaceuticals, infant formulas, nutritional products, animal health, dietary supplements, active pharmaceuticals ingredients and medical diagnostic products. Its realigned operating structure, which will take effect for the upcoming June ending quarter, will consist of four reporting segments: Consumer Healthcare, Branded Consumer Healthcare, Rx Pharmaceuticals and Specialty Sciences.
Morgan Stanley, Wachtell, Lipton, Rosen & Katz and A&L Goodbody are advisors to Perrigo on the Mylan bid. Goodbody was also used for Perrigo’s purchase of Omega, along with Barclays, JPMorgan and Freshfields Bruckhaus Deringer.
Morgan Lewis & Bockius has advised Perrigo on several US-based deals in the past decade, with in-country law firms also used on numerous acquisitions outside the US.
Perrigo has a market capitalization of USD 27.1b