Shareholders can be a testy bunch. Just ask Perrigo, which announced its plan to split off its prescription generics division last year after investor agitation. But with its over-the-counter business treading water, Perrigo has chosen to back away from its promise—for now.
The drugmaker will delay its prescription unit split after a strong sales quarter. Meanwhile, pricing pressure is threatening to upend a branded OTC business that's been left behind.
The plan, which Perrigo once said could lead to a sale or merger, was originally expected to go into action by the end of 2019 or early 2020, but that deadline is now indefinite, Perrigo said.
In a second-quarter earnings call with investors Friday, president and CEO Murray Kessler said Perrigo remained committed to a sale or spinoff but felt less pressure now that the drugmaker’s prescription drugs were showing promising growth.
“This is a business that's a good business, it's differentiated, that doesn't have the same exposure as others and this is a challenging time to be separating,” Kessler said. “So I—we need to do it because it's the right thing to do. And I believe we have a little bit of time as the business has stabilized.”
On the whole, Perrigo pulled in $1.15 billion in net sales, a 3.1% decrease from the same time last year. The drugmaker’s prescription generics nabbed $239 million in the quarter, a modest 3.4% increase from the previous year.
In August 2018, Perrigo’s board OK’d the plan to split off its prescription business after a contingent of activist investors pushed the drugmaker to focus more on its OTC offerings.
Activist Starboard Value, which Perrigo handed five board spots in February 2017, was one of the loudest voices in the room calling for “strategic alternatives” to the struggling drugmaker’s business.
On the heels of Friday’s news, analysts showed some tempered optimism about the drugmaker’s future following a flurry of dysfunction in recent years, including back-to-back CEO departures, a shareholder lawsuit, guidance cuts and more.
Wells Fargo analyst David Maris said the split-off delay was likely an indicator of the strength of Perrigo’s prescription drug unit, showing “incremental” promise for the future.
“We think this is progress and better than where (Perrigo) was in recent quarters, but still not robust growth or improvements deserving a consumer multiple,” he said in a note to investors. “We do not think investors were expecting an immediate turnaround, so incremental progress still a positive development in our view.”
And RBC Capital Markets analysts said the decision to delay the split-off wasn’t all that surprising given the lack of potential suitors.
“Holding off on the Rx ‘separation’ shouldn't be a surprise and we had been skeptical a deal could be done at all,” they wrote. “(Perrigo) is weighing several options. One of those now appears to be holding on to the business until conditions improve. That is understandable and we do not see a unique reason other than current conditions.”
Perrigo’s delay mirrors other drugmakers’ recent split-off moves: most recently, Mallinckrodt decided to postpone its own specialty generics spinoff after national opioid litigation threatened the to-be-independent-business’ cash flow.
Mallinckrodt's spinoff plan, announced in December, would create a new company under the Mallinckrodt name consisting of its specialty generics products, including oxycodone; active pharmaceutical ingredients; and the constipation drug Amitiza.
What's left over—the company's specialty brands, including H.P. Acthar Gel—would operate under a new, as-yet-undetermined name and without the burden of potentially hefty opioid liabilities.