A Changing of the Guard: The Implications of Perrigo’s Executive Moves

The departure of Perrigo chairman and CEO Joseph Papa comes six months after the company successfully defended a $26 billion takeover bid by Mylan. With a changing of the guard at Perrigo, what might be in store for the company?

Perrigo has named John T. Hendrickson, formerly president of Perrigo, as CEO and also separated the chairman and CEO positions, naming Laurie Brlas as chairman. Meanwhile, Joseph Papa has taken the helm of Valeant Pharmaceuticals International and will assume the post of CEO and chairman in early May. So what are the implications for these executive moves? DCAT Value Chain Insights (VCI) takes an inside look.

Perrigo: a changing of the guard  
Perrigo appointed John T. Hendrickson as CEO, effective immediately, following the resignation and departure of Joseph C. Papa, who resigned from Perrigo to become chairman and CEO of Valeant Pharmaceuticals International. Papa resigned from Perrigo on April 24, 2016, and Valeant announced his appointment on April 25, 2016. Papa will join Valeant in early May and will also join the company’s board of directors. He will succeed J. Michael Pearson, who is expected to remain as CEO and a director until Mr. Papa arrives at Valeant.

Mr. Hendrickson has served as president of the Perrigo Company since October 2015. He was formerly executive vice president, global operations & supply chain between 2006 and 2015 and has held numerous other management and operational leadership roles at Perrigo since he joined the company in 1989, including leading the US Consumer Healthcare business from 2003 to 2006.

In addition, on April 24, 2016, Perrigo’s board of directors approved the recommendation of the Nominating & Governance Committee to withdraw Marc Coucke’s nomination for re-election to the board. Furthermore, the board is also separating the roles of CEO and chairman of the board and, in doing so, elected independent director Laurie Brlas to the role of chairman of the board.

In joining Valeant, Papa brings more than 35 years of experience in the pharmaceutical, healthcare services and specialty pharmaceutical industries, including 20 years of branded prescription drug experience. Papa has been CEO of Perrigo since 2006 and was appointed as chairman of the board of directors of Perrigo in 2007. Prior to Perrigo, Mr. Papa served from December 2004 to October 2006 as chairman and CEO of the Pharmaceutical and Technologies Services segment of Cardinal Health, Inc. From 2001 to 2004, he served as president and chief operating officer of Watson Pharmaceuticals, Inc.

Perrigo: recent moves and a look ahead 
One of the chief recent moves by Papa in his tenure was rebuffing Mylan’s approximate $26 billion takeover bid of Perrigo, when in November 2015, Mylan lost its seven-month effort to acquire Perrigo after failing to secure at least 50% of the shares in its tender offer for Perrigo. Mylan’s efforts to acquire Perrigo came in the midst of a move by Teva Pharmaceutical Industries to acquire Mylan, a move that Mylan opposed and that Teva later terminated after working out a $40.5 billion deal to acquire the global generics business of Allergan (the new corporate name of the combined Actavis and Allergan) in a friendly acquisition proposal. The deal, announced in July 2015, was approved by the boards of both companies, would cement Teva’s position as the number one global generics company and position Allergan as an almost nearly pure-play specialty pharma company. The transaction was unanimously approved by the boards of directors of Teva and Allergan and is expected to close later this year.

Perrigo develops, manufactures, and markets over-the-counter (OTC) and prescription generic and specialty pharmaceuticals, nutritional products, and active pharmaceutical ingredients and has a specialty sciences business comprised of assets focused predominantly on the treatment of multiple sclerosis (Tysabri (natalizumab)), from which it receives royalties on in-market sales from Biogen as part of Perrigo’s $9.5 billion acquisition of Elan in 2013. Perrigo posted net sales for calendar year 2015 of $5.35 billion, an increase of 28% on a reported basis. On a constant currency basis, net sales for the year increased 30% over calendar year 2014, attributable primarily to $1.03 billion related to the inclusion of the branded consumer healthcare segment and 14% growth in the prescription segment on a constant currency basis. Consumer healthcare is its largest segment with 2015 sales of $2.82 billion and closely followed by prescription drugs at $1.07 billion and branded consumer healthcare (which is composed of Omega Pharma, which Perrigo acquired in 2015) at $1.03 billion. It specialty science business accounted for $334 million in 2015 revenues and other revenues were $98 million.

Chief to the success of Perrigo is the performance of its OTC business, the largest piece of the company. The consumer healthcare segment currently markets more than 4,900 store brand and other products, with over 17,800 stock-keeping units in multiple combinations of package size, flavor, formulation, strength and dosage form (tablet, liquid, softgel, etc.). Major product categories include analgesics, cough/cold/allergy/sinus, gastrointestinal, smoking cessation, and animal health; secondary product categories include feminine hygiene, diabetes care, and dermatological care. The branded consumer healthcare segment, which consists of the former Omega Pharma, which Perrigo acquired in 2015, develops, manufactures, markets, and distributes OTC brands in the natural health and vitamins, minerals and supplements in Europe. In March 2015, Perrigo completed the acquisition of Belgian-based Omega Pharma Invest N.V. in a deal valued at approximately $4.4 billion, which further enhanced Perrigo’s position in the OTC market, particularly the European OTC market.

Perrigo followed that acquisition with two other acquisitions in 2015 to build its OTC business: the acquisition of a portfolio of well-established OTC brands primarily in Europe from GlaxoSmithKline Consumer Healthcare and an agreement to acquire Naturwohl Pharma, GmbH with its leading German dietary supplement brand, Yokebe. Also in 2015, Perrigo acquired Gelcaps Exportadora de Mexico, S.A. de C.V., the Mexican operations of Durham, North Carolina-based Patheon Inc. for $35.8 million, which strengthened its supply chain and added softgel manufacturing technology capabilities to its business. Also in 2015, Perrigo agreed to acquire Entocort (budesonide) capsules as well as the authorized generic capsules marketed by Par Pharmaceuticals within the US from AstraZeneca plc for $380 million. Entocort is a gastroenterology medicine for patients with mild to moderate Crohn’s disease.

Perrigo also made smaller acquisitions in 2014. It acquired a portfolio of women’s healthcare products from Lumara Health, Inc., a privately held, Chesterfield, Missouri-based specialty pharmaceutical company, for $82 million in cash. The acquired portfolio generated more than $15 million in net revenues during the twelve months ended March 31, 2014. Also, in 2014, the company acquired a basket of value-brand OTC products sold in Australia and New Zealand from Aspen Global for $53.7 million in cash to broaden the company’s OTC position in Australia and New Zealand.

Perrigo’s primary manufacturing facilities are located in the US and Israel. The company also has secondary manufacturing facilities in the UK, Belgium, France, Germany, Mexico, Australia, and India, along with a joint venture in China. It also has Ilogistics facilities in the US, Israel, Mexico, Australia, and numerous locations throughout Europe. In October 2015, Perrigo announced plans to consolidate its global supply-chain activities in Ireland, make strategic portfolio refinements, and reduce its global workforce by 800 employees or 6% of its global workforce. Perrigo is also accelerating the realization of the benefits from its shared service model and improving operational efficiency by streamlining its organizational structure and eliminating redundant administrative functions. These actions are expected to deliver $35 million in annualized operating benefits. In February 2016, the company announced that a number of positions will also be added to its Dublin headquarters across a range of corporate functions, including supply chain/global operations, procurement, enterprise risk management and corporate finance and information technology.

In taking the helm of Valeant, Papa is inheriting a specialty pharmaceutical company with some recent issues, including with respect to accounting practices. Valeant is also facing issues regarding its debt with respect to its bondholders after delaying filing its annual report. Valeant initiated a search to identify a candidate to succeed J. Michael Pearson as CEO earlier this year. Pearson had returned to his position of CEO in late February 2016 following his recovery from severe pneumonia and other health complications.

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