Takeover of Elan the perfect fit in Perrigo’s prescription for growth

For Perrigo chief Joe Papa, the acquisition of Ireland’s largest indigenous drug company was a ‘perfect gateway’ in its plans to expand internationally

Joe Papa: “It has never been my game to be active, outspoken; 
in fact I would say
Perrigo as a company 
has made tremendous progress 
as a company
and one of the things we said is to be low profile.” Photograph: Brenda Fitzsimons

Joe Papa: “It has never been my game to be active, outspoken; in fact I would say Perrigo as a company that has made tremendous progress as a company and one of the things we said is to be low profile.” Photograph: Brenda Fitzsimons

Fri, Feb 7, 2014, 01:00

The signs on the walls say Elan but Perrigo boss Joe Papa is very much in charge at what was, until recently, Ireland’s largest indigenous drug company.

The unheralded Michigan-based pharma business was first out of the blocks when Elan put itself on the market last year as part of its defence against a hostile approach from patent revenue business Royalty Pharma.

Its $8.6 billion cash and stock offer was enough to close the deal at a time when rival drugmaker Forest Labs and generics group Mylan, among others, were reported to the circling.

For all three, availing of Ireland’s lower corporation tax rate was a key attraction of the deal. Perrigo plays corporation tax of 35 per cent in its home US market and, before the Elan deal, about 30 per cent on group profits, including international business.

In his first comments on the deal, which closed last December, Papa said he hoped the new Irish-headquartered group would cut that nearly in half – providing a large portion of the $150 million in savings it projects from the acquisition.

Grabbing first-mover advantage is something on which Perrigo prides itself. It has made a business of targeting first-mover advantage in its generics business where the first company to file a generic equivalent of a drug secures a 180-day exclusivity period during which generic rivals are frozen out of the market as it establishes itself.

But tax, though important, wasn’t the sole attraction for Perrigo. A guaranteed long-term royalty income stream from Elan’s former multiple sclerosis drug, Tysabri, following its sale to Biogen will significantly boost Perrigo’s income and cashflow, while its $1.9 billion cash pile took much of the pain out of the cash element of the deal.

From Papa’s point of view, however, all the advantages are measured in the context of the opportunity for Perrigo to expand its international presence.

“As we sit here, about 80 per cent of my business is in the US and only about 20 per cent [is] outside the US,” Papa says. “But I would argue that the needs for healthcare, what we refer to as quality affordable healthcare, are prevalent not only in the US but globally so we have been on a path to expand and consider international expansion for some time.

New markets
“As we thought about Elan, we said what a perfect gateway it would be in our expansion plans to come in, be a much stronger organisation outside the US and we felt the Irish domicile would help us tremendously with that.”

Papa has been instrumental in driving the company’s expansion. In his seven years at the helm of Perrigo, he has radically reshaped the business which had been headquartered in the small Michigan town of Allegan since 1887 until the Elan takeover.

In that period, he has driven 17 acquisitions that have moved Perrigo into new geographic markets and product areas.

But, if the Elan deal is such a game changer for Perrigo, how come it sat back and allowed Royalty Pharma a clear run at taking over the company.

“I would say we were in the background following very closely. It has never been my game to be active, outspoken; Perrigo as a company has made tremendous progress and one of the things we said is to be low profile.”

Low profile indeed. It may not be a household name but Perrigo is among the top five pharmaceutical companies worldwide in terms of the number of tablets and capsules produced annually.

“Our sales [revenue] numbers aren’t anywhere close to the big pharma, mostly because we don’t get as much per tablet as they do. But in terms of actual tablets and capsules manufacture, we do 47 billion tablets, and additional liquids. Right now, every second of every day somewhere in the world, 1,500 people take one of our product.”

Most of those are in over the counter (OTC) remedies for colds and allergies as well as vitamin and nutritional supplements, delivered as store brands for retail chains such as WalMart – which accounts for around 20 per cent of group sales – Walgreen, CVS and others.

Its consumer health division last year accounted for almost 60 per cent of group revenues, producing 2,700 different items, but as most are store brands.

And it wasn’t as though Elan was an unknown quantity for Perrigo. In fact, the companies’ connections go back 15 years and involve the product for which Elan first made a name for itself – the transdermal nicotine patch.

The patch was the brainchild of Elan founder, the Irish-American Don Panoz. His initial struggles to get it developed in the US were behind his decision to establish a drug-delivery business in Athlone when he first arrived in the country to found Elan.