New Perrigo activist Starboard slams 'woeful' performance, lobbies for a slimdown

Perrigo has a new major shareholder--one that has its own ideas about how to turn the struggling business around.

On Monday, activist investor Starboard Value disclosed a 4.6% stake in the company and pressed Perrigo’s CEO to shed assets and home in on its key consumer health business.

Ever since management swatted down a Mylan takeover attempt last year, “results have gone decidedly in the wrong direction, and management’s promises have been woefully unfulfilled,” Starboard managing member Jeffrey Smith wrote in a letter to Perrigo chief John Hendrickson, who recently took the helm when longtime CEO Joseph Papa departed for Valeant.

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And the way Smith sees it, if Perrigo wants to stage a turnaround, hiving off its generic and specialty pharma products--as well as its royalty interest in Biogen’s Tysabri--is the place to start.

“We believe the company could benefit from outside advice from a reputable investment bank or advisor on non-core asset divestitures or other broader strategic alternatives,” he wrote.

Perrigo, for its part, said in a statement that it "looks forward to a constructive and productive dialogue with Starboard … while we execute on a number of strategic and operational initiatives."

At least one analyst isn’t sure that making those castoffs would be all that easy--or lucrative. Perrigo’s OTC business--the “core” piece of its consumer portfolio--and its pharmaceuticals segment are “heavily integrated” when it comes to manufacturing and, to some degree, distribution and API share services, RBC Capital Markets’ Randall Stanicky wrote in a note to clients on Monday. And while “divesting Tysabri makes sense,” as he figures, the “dilutive impact is material” and will take a toll on earnings.

That’s not to say there’s no advantage to slimming down, though. Selling off pharmaceuticals and Tysabri “could then lead to a strategic interest in standalone Consumer, as we think a buyer for the entire business is less likely.”

Starboard, though, doesn’t think Perrigo should stop at the divestments. It has room to improve its consumer unit, too, Smith wrote, noting that sinking operating margins illustrate “a clear lack of focus and execution in the core business.” Once Perrigo follows Starboard’s blueprints, though? The portfolio changes and better execution would spur renewed confidence in management, he predicts, sending shares upward.

Starboard isn’t the only investor that’s taken issue with the Dublin drugmaker’s recent performance. In July, a group of shareholders sued the company for allegedly making “false and misleading” statements about its financial condition that persuaded them to nix Mylan’s offer--an offer they now believe they’d have been better off accepting.

Meanwhile, Starboard is making waves elsewhere in the pharma industry. It’s currently locked in a battle for control of Depomed, which Starboard contends is “egregiously manipulating the corporate machinery to entrench management and the board.”

- read the letter
- read Perrigo's statement

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