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Two’s company; three’s a crowd?
May 2015
by Kelsey Kaustinen & Jeff Bouley  |  Email the author
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POTTERS BAR, England—Usually when we cover unsolicited acquisition attempts in the pharma and biotech space and three companies are involved, it’s because one company made a play for another company, and then a third company decides to up the ante to get that same company. What’s happened in recent weeks, however, is that we’ve seen English company Mylan N.V. make an offer to acquire Irish company Perrigo Company plc, prompting Israeli company Teva Pharmaceutical Industries Ltd. not to go after Perrigo, but instead to make an unsolicited bid for Mylan. As of press time for this issue of DDNews, both Perrigo and Mylan had rejected the latest offers by their respective suitors.
 
It all started in early April, when Mylan made a non-binding proposal to acquire Perrigo in a cash-and-stock transaction for a total deal value of about $29 billion.
 
“This proposal is the culmination of a number of prior discussions between Mylan and Perrigo about the compelling strategic and financial logic of this combination,” Robert J. Coury, executive chairman for Mylan, noted in a statement. “This combination would result in meaningful immediate and long-term value creation, and our proposal is designed to deliver that value to shareholders and other stakeholders of both companies.”
 
In a letter to Joseph C. Papa, chairman, president and CEO of Perrigo, Coury commented that “This is the right time for our two companies to move forward together, and Mylan and our board are firmly committed to making this combination a reality,” adding that the combination “offers clear and compelling strategic and financial benefits, has sound industrial logic and would create a global leader with a unique and one-of-a-kind profile,” given the companies’ complementary operations.
 
Also, Coury noted, the combined company would have a diversified portfolio with “critical mass across generics, OTC, specialty brands and nutritionals,” a strong commercial platform, strong R&D capabilities and a “world-class operating platform, including an unrivaled combined manufacturing platform, renowned supply chain capabilities, vertical integration and global sourcing excellence.”
 
About two weeks later, Perrigo turned down Mylan, saying that the proposal “would deny Perrigo shareholders the full benefits of Perrigo’s durable competitive position and compelling growth strategy, which is reflected in the company’s three-year organic net sales compound annual growth rate goal for calendar 2014 to 2017 of 5 to 10 percent.” Perrigo also noted that the proposal doesn’t account for the full benefits of its Omega Pharma acquisition, which closed on March 30 and which Papa said makes Perrigo “a top-five global OTC company with a diversified portfolio, a leading market position in key franchises and a strong and established global distribution platform.” The proposal doesn’t account for Perrigo’s pipeline either, which it expects to generate roughly $1 billion in net sales over the next three years, the company noted.
 
“Perrigo’s board believes that the company has a strong independent future and is well positioned to continue to drive superior growth and shareholder value,” said Papa. “The board’s confidence is built upon the company’s durable competitive position, compelling growth strategy and strong and consistent track record of delivering results for shareholders under its experienced management team. Since fiscal 2007, we have delivered compound annual sales growth of 16 percent, increased adjusted operating margin by over 1,600 basis points and generated total shareholder returns of over 970 percent.”
 
Perrigo’s reluctance might also have a lot to do with its own acquisition activity in recent years.
 
The earliest of those deals was Perrigo’s February 2013 acquisition of Rosemont Pharmaceuticals Ltd., a specialty and generic prescription pharmaceutical company focused on the manufacturing and marketing of oral liquid formulations, for $283 million. Just five months later, in what ended up being one of the largest M&A price tags for the year, Perrigo announced a definitive agreement under which it would acquire Elan Corp. plc for a total price that came to roughly $8.6 billion. A little more than a year after that, in November 2014, Perrigo made headlines with another multibillion-dollar deal, this time paying $4.5 billion to acquire Omega Pharma NV, one of the largest OTC healthcare companies in Europe.
 
Interestingly, the Perrigo rejection of Mylan came just a day after Teva made its unsolicited bid for Mylan.
 
In that offer, Teva proposed to acquire all of Mylan’s outstanding shares for $82 per share, to be paid in a mixture of approximately 50 percent cash and 50 percent stock, for a total deal value of nearly $40 billion.
 
“Our companies share years of experience and success leading the generic industry and building strong presences in specialty and biologics,” Erez Vigodman, president and CEO of Teva, said in a press release. “Both Teva and Mylan have achieved their respective goals through innovation, vision and a commitment to quality. Mylan’s business is a natural fit with our own and is highly complementary to it—and bringing together our two companies would not only deliver the greatest value for our financial stakeholders, but also enable us to better serve patients, customers and healthcare systems throughout the world.”
 
According to Teva, the combination would result in “an industry-leading company well positioned to transform the generics spaces,” one with an expanded, efficient global footprint and operations, sales and R&D platforms. It would have what Teva deems “the broadest portfolio in the industry, with a combined pipeline of over 400 pending ANDAs and over 80 first-to-files in the U.S.”
 
Mylan announced on April 27 that its board of directors unanimously rejected Teva’s unsolicited expression of interest, concluding after a review of the proposal that “the approach did not meet any of the key criteria that would cause the Mylan board to depart from the company’s successful and longstanding standalone strategy and consider engaging in discussions to sell the company.”
 
Coury noted in the rejection that while his company is open to consider all paths in the interest of shareholders, “that does not mean we will entertain offers that grossly undervalue the company and leave our shareholders and other stakeholders exposed to serious risk. After thorough consideration, Mylan’s board unanimously determined that Teva’s proposal grossly undervalues Mylan and would require Mylan’s shareholders to accept what we believe are low- quality Teva shares in exchange for their high-quality Mylan shares in a transaction that lacks industrial logic and carries significant global antitrust risk. In addition, we also believe that the proposal does not address the serious challenges of integrating two fundamentally different and conflicting cultures under a Teva board and leadership team with a poor record of delivering sustainable shareholder value.”
 
However, while emphasizing that Mylan isn’t for sale, Coury did note that Mylan’s board “will certainly not consider engaging in discussions to sell the company unless the starting point of the discussions is significantly in excess of $100 per share.” Whether this was meant to keep the doors open for negotiation or close them entirely—some analysts have noted that such a price is unlikely to be met by Teva—is unclear.
 
What is interesting, as FiercePharma.com noted, is that Mylan noted in a filing with the U.S. Securities and Exchange Commission that if it can hit $73.33 per share by the end of 2018, it would be an “extraordinary achievement by our leadership team in such a short period of time.” The Teva offer, of course, exceeds that mark at $82 per share.
 
In response to Mylan’s rejection, Teva issued a press release reiterating its commitment to the combination at the stated proposal price, with Vigodman saying that “While we are disappointed that Mylan has formally rejected our proposal, the Teva board and management team are fully committed to completing the combination of Teva and Mylan, and we stand ready to quickly complete a transaction that is compelling for both Teva and Mylan stockholders.”
 
Around the same time, Mylan increased its offer for Perrigo to roughly $32.7 billion. Perrigo’s leadership promptly rejected that offer as well.
 
Leerink Partners asserted in an investor’s note that despite the rejection of Mylan’s overtures, a company sale may be in Perrigo’s best interests, writing, “With the recent share appreciation stemming from the Mylan bid, Perrigo made its case for valuation upside, although we remain skeptical in view of more recent quarterly performance. We view Perrigo’s best option as a friendly sale to Mylan or another suitor.”
 
As for the Teva-Mylan dynamic, analyst Gianfranco Zeppetelli at GlobalData pointed out Teva’s prediction “that there would be opportunities for substantial cost synergies and tax savings, which are estimated to be approximately $2 billion annually.” Zeppetelli also noted that while Mylan had expressed concerns that the deal would be unlikely to pass antitrust regulatory scrutiny, GlobalData expects that Teva could divest operations to obtain regulatory clearance.
 
However, while making these points, Zeppetelli doesn’t make as much a case for Mylan’s benefit as for Teva’s needs, noting, “Teva’s new management has been looking for transactions that will put the company back on track for sustainable growth. Teva initiated its acquisition strategy in March with the purchase of California-based Auspex Pharmaceuticals in a deal worth $3.5 billion. While the Auspex tender bolstered Teva’s central nervous system portfolio, the transaction does not address the imminent threat from the loss of patent protection for Teva’s flagship multiple sclerosis therapy, Copaxone.”
 
Zeppetelli points out that Mylan would immediately allow Teva to grow and reduce its exposure to an impending drop in Copaxone sales, as Mylan is also developing its own generic version of Copaxone. Obtaining sales of the off-patent treatment would go a long way in reinforcing Teva’s financial future, he concluded.
 
Code: E051524

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