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Perrigo Values Elan at $16.50 Per Share; Offers $8.6B Cash, as Well as Stock

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By Cormac Sheridan
Staff Writer

DUBLIN – With a $16.50-per-share cash and stock offer, Perrigo Co. is the latest contender bid for Elan Corp. plc.

The offer, which values Dublin-based Elan at $8.6 billion, comprises about $3.26 billion, or $6.25 per share, in cash plus 0.07636 shares of Perrigo, valued at $10.25. Net of Elan's $1.9 billion in cash, the deal values Elan at $6.7 billion.

The crucial difference between Perrigo's offer and the rejected $13-per-share cash offer, plus $2.50 per share in contingent value rights, from New York-based Royalty Pharma LLC, is that it has the unanimous backing of Elan's board.

Assuming Perrigo's share price does not dip too drastically on the news, the offer price gets Elan's management above the $15.50-per-share threshold it determined as being the minimum of the company's fair value. Shares of Allegan, Mich.-based Perrigo (NYSE:PRGO) closed Monday at $125.17, valuing the Elan bid at about $15.795 per share.

A spokesman for Elan confirmed the share-exchange ratio will not be adjusted to take account of any share price movements between the announcement of the transaction and the closing of the deal at the end of the calendar year.

If they vote in favor of the transaction, Elan shareholders would hold approximately 29 percent of the enlarged company's stock, while Perrigo shareholders would hold the remainder. The deal requires acceptances from 75 percent of Elan's stockholders, however, and the big question is whether they would be willing to embrace ownership of a company that specializes in over-the-counter drugs, generic pharmaceuticals and infant formula.

Elan shareholders already have demonstrated a fractious streak in voting down a series of defensive acquisitions and asset disposals proposed by Elan's management in response to Royalty Pharma's hostile bid for the company. (See BioWorld Today, June 18, 2013.)

At this stage, however, there appears to be no other options available. "We think no other bidders will likely seek a higher bid given it was an organized bidding process," wrote analyst Michael Yee, of RBC Capital Markets.

Elan shareholders would, in effect, be helping to finance the transaction, as the company's $1 .9 billion in cash would be used to pay off in part a $4.35 billion bridge financing Perrigo has obtained to help it to fund the transaction. Perrigo already has $1 .3 billion in long-term debt on its balance sheet.

It would have a net debt position of $3.25 billion at closing, which is around 3.2 times its earnings before interest depreciation and taxes, Perrigo's chief financial officer, Judy Brown, told analysts. "Our comfort zone is 2.2 times, which is where we are today," she said. Its strong cashflow would enable the enlarged company to regain that position quickly, she added.

Even without the cashflow from the Tysabri royalty, Perrigo is performing solidly. It reported net income of $401.6 million on revenues of $3.2 billion – an increase of 15 percent – for the fiscal year that ended on June 30, 2012. For the quarter ended May 30, revenues rose 18 percent to $919.8 million, while net income reached $112 million. Its share price also has performed well. It reached a 52-week high of $134.31 during trading Friday, before ending the day on $134.23, the price used to calculate the share-exchange ratio underlying the terms of the transaction.

The executive leadership underpinning Perrigo's performance was one of Elan's considerations in weighing the offers it received, Elan CEO Kelly Martin told analysts on a conference call. "They've executed almost flawlessly," he said. That performance offers growth opportunities to shareholders of the combined company, he added.

The deal would give Perrigo ownership of Elan's royalty position in the multiple sclerosis drug Tysabri (natalizumab). "This transaction allows Perrigo to meaningfully participate in the economics of a highly successful blockbuster drug, with an escalating royalty stream," said Perrigo Chairman and CEO Joe Papa. The deal, which would be earnings accretive from the latter half of 2014, would enable the company to diversify its revenue streams and build a global business from an Irish hub.

Perrigo would also gain ownership of ELND005 (scyllo-inositol), a drug undergoing Phase II trials in bipolar depresssion and for treating aggression or agitation in patients with Alzheimer's disease. It would gain equity stakes in several other firms, including Dubai-based Newbridge Pharmaceuticals FZ-LLC, Dublin-based Prothena Corp. plc and Cambridge, Mass.-based Proteostasis Therapeutics Inc. It also would take on Elan's 49.9 percent stake in the Janssen Alzheimer Immunotherapy, the vehicle by which Johnson & Johnson, of New Brunswick, N.J., structured its Alzheimer's alliance with Elan.

Despite the lack of any substantial overlaps between the two companies, the deal is expected to yield $150 million in annual tax and operational savings. What the companies are calling "New Perrigo" would follow the now well-worn path of relocating its headquarters to Ireland to avail of the country's 12.5 percent corporate tax rate.

That will enable it to "migrate" it effective corporate tax rate from its present level, which is close to 30 percent.

Although a drastically smaller outfit now compared to its heyday, Elan still racked up $54.8 million in the second quarter, while it also spent another $90.8 million on defending itself against the Royalty Pharma takeover attempt and on its M&A activity, which, with the exception of its Newbridge deal, was unconsummated.

Deutsche Bank analysts Richard Parkes and Tom Race said they expected the deal to be accepted. "The proposed offer is a significant premium to our $12 per share [net present value estimate] of Elan's assets – Tysabri plus cash, reflecting strategic value attributed Elan's to low tax infrastructure and the potential for Perrigo to lower its current and future tax obligations," they wrote in a research note. "Importantly, the deal is a 27 percent premium to the last offer from Royalty Pharma (excluding value for the CVR) and a 21 percent premium to our valuation of Royalty's last offer."

Berenberg analysts, who valued Elan at $14 per share, also recommend accepting the offer, particularly as Tysabri underperformed the bank's own estimates during the second quarter. "We think Elan has uncovered an excellent offer for its shareholders, substantially ahead of the level Royalty Pharma could achieve. We expect shareholders to accept this offer," they wrote. Shares of Elan (NYSE:ELN) gained 53 cents to close Monday at $15.46.