Many market-watchers are scratching their heads about the pharmaceutical industry’s latest blockbuster deal. Although it had been expected to make such a move for some time, Perrigo Company (NYSE:PRGO) is not regarded as the “ideal” buyer for Dublin-based Elan Corporation, plc (ADR) (NYSE:ELN). Both firms operate as generic drug-makers, but the synergies between the two are not immediately obvious.
Moreover, Elan Corporation, plc (ADR) (NYSE:ELN) is coming off of a long, painful battle to defend itself against a hostile takeover bid. Although it is heartening that the company was able to punch back against an offer that probably would not have been in its shareholders’ best interests, Perrigo’s enthusiasm for a far more expensive bid is questionable. It is possible that Elan’s management team was financially and emotionally exhausted after the recent tussle and chose to accept a somewhat undervalued offer as a result. In any event, this deal offers some interesting opportunities that investors would do well to examine further.
About Perrigo, Elan, and the competition
Perrigo Company (NYSE:PRGO)’s interest in Elan Corporation, plc (ADR) (NYSE:ELN) probably lies in the broad-market promise of the latter company’s development-stage drugs. Ultimately, it may wish to turn these compounds into widely available, relatively affordable generic treatments.
These two companies compete with Parsippany, New Jersey-based Actavis Inc (NYSE:ACT). Operationally, Actavis has much more in common with Perrigo Company (NYSE:PRGO). Indeed, it will be on the shortlist of potential bidders in the event that the Perrigo-Elan Corporation, plc (ADR) (NYSE:ELN) deal falls through. Like Perrigo, Actavis has a robust portfolio of generic and “biosimilar” drugs that mimic the effects of brand-name products. The deal with Elan could give the slightly smaller Perrigo a leg up in its ongoing battle with Actavis.
With a market cap of $18.2 billion, Actavis Inc (NYSE:ACT) is nearly 50% larger than Perrigo Company (NYSE:PRGO) and more than double the size of Elan Corporation, plc (ADR) (NYSE:ELN). However, it is significantly less profitable than its Midwestern competitor: In 2012, Actavis lost $563 million on total revenue of just under $7 billion. By comparison, Perrigo earned $430.5 million on roughly half of Actavis’ revenue. As a more “experimental” firm that recently gave up much of its marketable portfolio, Elan lost $532 million on just $57 million in revenue. With $2 billion in cash on hand, it will soon run into a liquidity shortage. Meanwhile, Actavis is burdened with $6.4 billion in debt. Perrigo has just $1.3 billion in long-term obligations.
How the deal is structured
This cash-and-stock deal values Elan Corporation, plc (ADR) (NYSE:ELN) at roughly $8.6 billion. Under its terms, Perrigo Company (NYSE:PRGO) will issue cash payments of $6.25 per share in addition to .07636 Perrigo share for every Elan share that it acquires. At Perrigo’s current price, this represents a total offer of about $16 per share. Relative to Elan’s current share price, it provides a premium of just under 2%. Of course, this is subject to change.
Synergies and benefits
This deal will provide a massive short-term boost to Perrigo Company (NYSE:PRGO)’s bottom line: As part of the transaction, Perrigo will move its headquarters to Dublin and reap millions of dollars in annual tax savings as a result. While it will maintain its U.S. presence, the residence change could provide Perrigo with the cash flow that it needs to develop Elan Corporation, plc (ADR) (NYSE:ELN)’s promising pipeline.
In addition to the “tax residence” move, Perrigo Company (NYSE:PRGO)’s pickup could offer some long-term synergies. For starters, it will gain access to a 12% royalty stream from Elan’s Tysabri drug. Elan Corporation, plc (ADR) (NYSE:ELN)’s revenue from this former blockbuster have been greatly reduced by cash-raising equity sales, but the multiple sclerosis treatment remains one of the best drugs in its category.
Additionally, Tysabri and the other compounds in Elan Corporation, plc (ADR) (NYSE:ELN)’s pipeline are naturally synergistic with Perrigo Company (NYSE:PRGO)’s existing basket of neurological and psychiatric drugs. In the long run, the combination could produce cost savings that approach $100 million per year.
