On November 13, 2015, Perrigo’s (PRGO) shareholders conclusively rejected Mylan’s (MYL) tender offer. Perrigo’s management had strongly believed that a combination with Mylan would result in at least three years of substantial earnings per share (or EPS) dilution.
This projection is a best-case scenario, where it was assumed that Mylan would be able to realize $800 million in synergies from the deal. The scenario also didn’t include the negative impact of product divestments as well as potential changes in supplier contracts.
Dilution of growth
Perrigo’s management had projected that the Perrigo-Mylan combination would dilute the Perrigo’s growth as well as its valuations. According to Thomson Consensus Estimates, Perrigo’s revenues and operating income are expected to grow at compounded average growth rate (or CAGR) of 6.5% and 8.5%, respectively, from 2016 to 2019. However, Mylan’s revenues and operating income have been estimated to grow at the lower rates of 4.1% and 5.6%, respectively, in the same time frame.
Mylan also trades at lower price-to-earnings multiples than Perrigo. This held true even when Mylan’s share price rose after Teva Pharmaceuticals (TEVA) expressed interest in the company on April 29, 2015.
Mylan’s risk profile
Compared to Perrigo, Mylan has a concentrated product portfolio as well as a research pipeline with a small number of key products such as Copaxone and Advair. The company faces substantial competition for its products from other generic companies. This, coupled with Mylan’s acquisition of the established pharmaceuticals division (or EPD) from Abbot Laboratories (ABT), considered to be a falling asset, has substantially raised Mylan’s risk profile.
Perrigo’s share reaction
After the rejection of the tender offer, Perrigo’s share price fell by about 6.1% from $156.5 on November 12 to $146.9 on November 13. This fall can be considered as a gradual correction of the stock to its unaffected value prior to acquisition announcements by Mylan.
Perrigo accounts for about 0.8% of the Health Care Select Sector SPDR ETF’s (XLV) total holdings.