Facing Activist, Perrigo CEO Says Generics Unit Is Integral

(Bloomberg) -- Perrigo Co. Chief Executive Officer John Hendrickson says an activist investor’s proposal to sell off the drugmaker’s generics unit, which last year generated 20 percent of its $5.35 billion in revenue, isn’t as simple as it sounds.

“It ties into everything we do -- the production, the supply, the shipping, the materials, the bottles, the caps,” he said Thursday in an interview at the company’s Allegan, Michigan, operating headquarters. “We share plants” with the consumer health business.  

Hendrickson, 53, is reviewing Perrigo’s portfolio as he settles into his seventh month on the job. Already he’s is under pressure from the activist investor, Starboard Value LP, which disclosed last month that it held a 4.6 percent stake. The hedge fund criticized the company for mistakes made since the drugmaker rebuffed Mylan NV’s takeover bid almost a year ago and urged it to consider a sale of its prescription medicine unit as well as a royalty interest in multiple sclerosis therapy Tysabri.

Hendrickson, who’s trying to boost Perrigo shares that have plummeted 55 percent since their April 2015 peak, hasn’t decided whether generics will remain. Pricing pressures that have made the business challenging in the past two years aren’t likely to get easier, he acknowledged. Yet he also likes the business because generics are profitable. 

“Do we have to get it bigger to survive? Can we compete?” he asked. “Those are the challenges.”

Activist Investor

Hendrickson declined to comment on Starboard’s demands, though he said company executives met with the fund managers, as they would with any stockholder. 

“We’ve had those conversations, but it’s been the same sort of discussions that we’ve had with the broad base of our shareholder group.”

Speaking Thursday on Bloomberg TV, Starboard’s Jeff Smith said, “We have had discussions as it relates to the prescription business, and whether that really does fit or does not fit. We do want to understand the operational elements. Our view is that it is something that probably could be separated and create value for shareholders.”

Smith later said, “I don’t think they are over-levered, but I do think there is an opportunity to be able to take down some of the debt.”

Hendrickson said his review of the company’s operations inevitably overlaps with Starboard’s take. He’s also acknowledged that Tysabri isn’t part of its core business. He doesn’t agree with everything in Starboard’s letter, but “there wasn’t an ‘Oh wow, we didn’t think about looking at that one.’” He also said Perrigo has enough cash to meet its $5.5 billion in debt obligations.

Over-the-Counter Drugs

Perrigo, which keeps a legal address far from small-town Allegan, in Dublin, is the world’s largest producer of over-the-counter drugs and mostly makes store-brand versions of cold and allergy medicines. From 2009 to 2014 it more than doubled annual revenue to $4.17 billion. Its $13 billion market valuation has dropped from $23.3 billion two years ago but dwarfs the $1.5 billion it was worth in 2006, when Joe Papa became CEO.

Hendrickson began his career at Procter & Gamble and joined Perrigo in 1989. He rose through the ranks, running operations and supply chain for eight years before becoming president late last year. When he walks through the company’s plants on its 2-million-square-foot campus, he greets workers by their first names, bumps fists to say hello and can explain the manufacturing process in as much detail as a white-coated engineer.

Serial Acquirer

The company was a acquisition machine under Papa, gobbling up at least a dozen companies. From March 2009 to April 2015, the shares soared 10-fold. In 2013, the company acquired Elan Corp. for $8.6 billion, gaining a lower tax rate and the Tysabri revenue. A $4.5 billion acquisition of Omega Pharma NV in 2014 allowed Perrigo to expand its international presence and grow its over-the-counter sales in Europe. Still, Hendrickson has no plans to resurrect Perrigo’s reputation as a serial buyer. 

“My vision is we have a lot of good operating solid parts,” he said. “We’re a good business. We’ve got to focus on operating them, delivering value from all of those parts, making sure they’re clicking with high precision across the board.”

Speaking in the company’s boardroom, Hendrickson said he’s interested in buying companies that align with its existing divisions and likely cost about $1 billion or less. Perrigo isn’t planning to “buy the next $10 billion thing” and plans to leave or downsize in some European markets, not expand into new ones.

He’s also running Omega differently, better integrating it into the business. In his first week, he replaced two top managers in Europe.

“It’s going to take a lot of work to get it to perform the way we have it set up in the U.S.,” which generates higher profit margins.

Doesn’t Blame Papa

In August, Perrigo lowered its full-year sales guidance as the company struggled, sending its stock plummeting. Hendrickson said at the time that Perrigo would set “realistic” forecasts, though he said Thursday that Papa isn’t responsible for its current condition. 

“I personally don’t blame Joe for where we’re at. There’s been a lot of circumstantial changes that have impacted it,” he said.

He said that the reduced 2016 guidance includes a drop in operating income of about $250 million because of price erosion in generics.

“I don’t know where to get that $250 million of earnings overnight,” he said. “There’s not this slam dunk that says boy, now you’re there.”

To contact the reporter on this story: Jared S. Hopkins in New York at jhopkins38@bloomberg.net. To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Stephen West