'Outperform' Perrigo better off without Mylan, says analyst report
Mylan announced it was looking to acquire consumer healthcare giant Perrigo for $29bn (€27bn) in April and later increased its bid, but BMO Capital Markets remains unconvinced that a merger would be beneficial to either parties in the consumer healthcare category.
Whether or not Mylan’s bid will eventually be successful, “the market is already sceptical of a deal being completed given the 29% spread between MYL’s offer and the current price,” the financial group said in a sector report in which it initiated coverage of Perrigo.
“We do not see the logic of a Mylan-Perrigo combination, as we do not see how the combined company is better positioned than the independent companies,” the report continued.
Furthermore, “we are not sure the annual pretax operational synergies suggested by Mylan of $800m by year four are achievable given the lack of broad overlap between the companies,”
Concurrently, Mylan is involved in an ongoing spat with Teva which is hoping to buy its fellow Generics Giant: “While we do not believe that Teva should buy Mylan for a variety of reasons, mainly price and strategy, we do think that Mylan shareholders should welcome the deal,” BMO said.
Highly competitive sector
BMO has initiated coverage of the Ireland-headquartered firm Perrigo with an ‘outperfom’ rating.
While Perrigo makes APIs and generic prescription drugs, its core business is in consumer healthcare with a share of over 70% of the US store brand market, translating into sales of OTCs of around $2.2bn in FY2014.
While BMO does “not believe this market is poised to accelerate dramatically any time soon,” the firm describes the sector as “highly competitive” and Perrigo’s position is dependent on the development of more complex topicals, liquids, creams, and controlled-release products.
“While the larger generic players have the capital and resources to compete more directly with Perrigo, we don’t think Perrigo will lose substantial share in the near term as they have a very broad and diversified portfolio,” the report said.
“The specialized manufacturing, the custom labelling, and the complexity of the process make broad-scale competition unlikely.”
Furthermore, the ever-increasing specialised and complex manufacturing needed has created higher barriers to entry in the OTC market, BMO added.