Perrigo Under Pressure to Look for Alternative to Mylan's Offer

Shareholders are pressuring the pharmaceuticals manufacturer to find a different buyer after Mylan's $25 billion hostile bid.

Hadar Cohen

REUTERS - Some of Perrigo’s top shareholders are asking the generic drugmaker to explore options for selling itself, hoping an alternative buyer to Mylan and its roughly $25-billion hostile bid will emerge, people familiar with the matter told Reuters this week.

The calls, which have been made by shareholders representing at least 6% of Perrigo’s equity capital, represent a challenge to the company’s defense tactics, which have been limited to trying to convince investors of the merits of its stand-alone strategy.

The campaign for a broad sale process also shows how many investors are keen to ride the tide of deal-making sweeping the health care sector. The industry has seen a record $460 billion in mergers and acquisitions so far this year, an increase of 80% over the last year, according to Thomson Reuters data.

“The board is not opposed to completing a deal or further maximizing value for our shareholders, but it is opposed to supporting this bad deal,” Perrigo CEO Joseph Papa told Reuters in an interview. He would not comment on whether Perrigo, a U.S. company that is traded on the Tel Aviv Stock Exchange, would explore a sale. Mylan declined to comment.

Perrigo shares rose 2.3% to end at 629 shekels ($160.38) in TASE trading yesterday.

Some of Perrigo’s shareholders view Novartis, Sanofi, Procter & Gamble and Colgate-Palmolive as potential suitors for Perrigo, according to the sources. Mylan, Novartis, Procter & Gamble and Sanofi declined to comment. Colgate-Palmolive did not respond to a request for comment.

For Mylan, the deal is an opportunity to become one of the largest purveyors of generic and over-the-counter drugs, with annual revenues in excess of $15 billion, at a time when consolidation among insurers and pharmacy benefit managers is putting pressure on the prices of generics.

Mylan launched a tender offer last month to purchase Perrigo stock directly from shareholders in exchange for $75 in cash and 2.3 Mylan shares for every share they tender.

The offer has declined significantly in value since Mylan’s initial April 8 proposal. Mylan’s share price has dropped by more than 30% since late July, partly due to its rejection of a $40-billion bid from Teva Pharmaceutical Industries, which went on to buy Allergan’s generic drug business for $40.5 billion.

Perrigo’s board has recommended shareholders do not tender their shares to Mylan, but it is restricted by the laws of Ireland, where it is headquartered, from blocking the offer. In response to the offer, Perrigo’s management team has embarked on extensive road shows, meeting with shareholders to convince them not to tender, the sources said.

During these meetings, Perrigo has claimed that it has received interest from potential buyers other than Mylan, the sources added. The company has not disclosed any step so far that would indicate it is exploring such an interest.

Perrigo has primarily stressed its view that the Mylan offer fails to adequately compensate shareholders for its “exceptional” stand-alone growth prospects, including $1 billion in new product launches over the next three years, a growing European consumer health care platform and potential upside from future acquisitions.

To be sure, some Perrigo shareholders, including a number who plan to tender if Perrigo does not offer an alternative, have reservations about becoming Mylan shareholders, the sources said, citing corporate governance concerns raised by Mylan’s rejection of Teva. But according to the sources, a number of shareholders feel the structure of Mylan’s proposal could compel even hesitant shareholders to tender, in order to avoid becoming a marginalized minority in a Mylan-controlled company.

Shortly before the bid, Mylan relaxed its conditions for closing the deal, from the 80% majority threshold that is customary in Ireland to a simple majority, which could potentially lead to a situation in which Mylan is the controlling shareholder of an independent Perrigo.

About 20% of Perrigo’s shareholder base is comprised of hedge funds with shorter time horizons, which may be more likely to tender, according to one of the sources. This would give Mylan a head start as it tries to reach the 50% threshold.