Recently, Elan Corporation ended the fight against bids from Royalty Pharma. Previously, Royalty Pharma had raised its all-cash offer from $5.7 billion to $6.4 billion.
Elan still thinks that Royalty Pharma’s offer continued to “grossly undervalue” its current business platform and its future prospects, however. Instead, Elan went for an $8.6 billion offer of Perrigo Company (NYSE: PRGO).
Perrigo’s business snapshot
Perrigo has a long operating history dating back to 1887. It is a global leader in healthcare, manufacturing over-the-counter (OTC) and generic prescription pharmaceuticals in the U.S., Mexico, the U.K., Australia, and New Zealand. The company focuses largely on its Consumer Healthcare segment, with Consumer Healthcare accounting for 57% of its total sales in the 2012 fiscal year. By contrast, its Rx Pharmaceuticals segment accounted for 19.5% of the total sales. The Nutritionals segment ranked third with more than $500 million in 2012 revenue. Interestingly, the Rx Pharmaceuticals segment enjoyed the highest profitability with an operating income of 36.2% while the Consumer Healthcare’s operating margin was only 16.3%. Its biggest customer, Wal-Mart, accounted for 20% of its total 2012 sales.
Elan’s agreement with Biogen
An Irish biotechnology company, Elan has restructured its business in the past year. It entered into an asset purchase agreement with Biogen Idec (NASDAQ: BIIB) in February to transfer all Tysabri IP to Biogen as a means of terminating its existing collaboration arrangements with the company for an upfront payment of $3.25 billion. Elan could also receive continuing royalties on Tysabri’s sales to the market. The royalty percentage would be 12% in the first twelve months. Afterwards, it will receive 18% of global net sales up to $2 billion, and a 25% royalty if global net sales were more than $2 billion.
Tysabri, a blockbuster multiple sclerosis treatment, has experienced a strong compounded annual growth of 19% in the past four years. It is expected to continue growing significantly with the growing number of multiple sclerosis patients. In 2012, the worldwide market for multiple sclerosis treatments was as much as $13.9 billion and is estimated to reach $16.4 billion in 2017, with an annual growth of 3.5%.
For Biogen, Tysabri’s revenue has been growing consistently, from $280 million in the second quarter 2012 to $387 million in the same period in 2013. Tysabri’s year-over-year revenue growth reaches 38%, the highest growth in all of its product sales.
Biogen has risen its full-year guidance for 2013. The revenue growth guidance increased from 16%-18% to 22%-23% due to the strength in its Tecfidera launch. Its GAAP earnings per share is estimated to come in at around $7.28 - $7.53 per share.
A deal to create a global healthcare leader
The Elan acquisition will create an industry leader in the global healthcare industry, with a solid platform for international expansion. With the deal, Perrigo will receive a growing royalty stream on Tysabri, $1.9 billion in cash from Elan’s balance sheet and the opportunity for international expansion via Elan’s Irish domicile. Perrigo could realize annual operating synergies and tax savings of more than $150 million annually. For Elan, it could enjoy the market leadership position in store brand OTC pharmaceuticals, its growing specialty generic business and infant formula.
In terms of valuation, Elan is valued at as much as 153 times its sales at $16.50 per share; this is a much higher valuation than Perrigo. Perrigo is trading at $128.40 per share, with a total market cap of around $12.1 billion. The market values Perrigo at around 3.5 times its sales. Biogen has a much higher valuation than Perrigo. At $227.80 per share, Biogen is worth $54.20 billion. The market values Biogen at more than 8.8 times its sales.
Interestingly, Elan’s first six month profits is much higher than its operating revenue. While its revenue from continuing operations were only $56.5 million, its profits came in at as much as $2.4 billion, including Tysabri’s payment.
My Foolish take
The Elan acquisition seems to be quite strategic for Perrigo. The U.S. company could effectively reduce its tax rate from around 30% to somewhere around the high teens as the Irish corporate tax rate is only around 12.5%. Moreover, it also benefits from Elan’s $1.9 billion in cash and consistent royalties on the Tysabri products. Last but not least, the acquisition allows Perrigo to expand the company’s footprint in Europe and diversify Perrigo’s business using Elan's Irish domicile. Looking forward, Perrigo expects to deliver decent returns to their shareholders with Elan’s deal.
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