Perrigo keeps Tysabri strategy behind a veil

If there is any question as to what Perrigo plans to do with its significant interest in Tysabri, a possible answer lies in a bullet point buried deep in its 177-page analyst presentation last week: “Perrigo is not becoming a ‘branded pharma’ company.” The remaining question is who will buy the royalty stream acquired with the takeout of Elan.

Expectations were that the failed Elan suitor Royalty Pharma would snap up a revenue stream valued at $1.7bn, but such a transaction has not emerged (Perrigo uses strong shares to engineer a handy tax deal, July 29, 2013). Executives of the Michigan-based company acknowledged that they had discussed parcelling out the interest, although they are in no hurry to raise the wodge of cash that a complete sell-off would bring. However, Perrigo is foremost an acquisitive speciality pharma company, and in spite of its chief executive’s insistence that “Tysabri is a great asset” it seems unlikely that the MS drug will stay in the fold long-term.

Piecing it out?

The chief executive, Joseph Papa, said there was “outside interest” in the Tysabri stream, Perrigo’s single biggest asset at a forecast $388m in revenue in 2018, according to EvaluatePharma. No attractive terms have emerged yet, however – discussions so far have focused on monetising a portion of the royalties, either as a percentage or as a “horizontal” slice of the royalty structure, which escalates from 12% to 25% on sales over $2bn.

That $2bn level looks achievable in 2016 now that Tysabri’s risks are more clearly understood (Tysabri benefits and Gilenya suffers at the hands of regulators, January 23, 2012).

Mr Papa’s enthusiasm and rhetoric about keeping Tysabri sound almost exactly the same as they did when the deal was first announced last summer – but it was no secret that Elan’s sought-after low-tax Irish domicile was the most important factor in pursuing what was a cash shell.

As if to underscore what Perrigo is all about, Mr Papa also announced what can only be taken as a de-Elanisation of Perrigo when it handed rights to Elan's only significant R&D asset, ELND005 (scyllo-inositol), back to its originator, Transition Therapeutics. The reduction in R&D costs will be worth “several cents” to earnings per share in 2014, according to Mr Papa.

At the same time, Perrigo said it was spending $51m to buy a range of over-the-counter products in Australia and New Zealand sold by Aspen Pharmacare, reinforcing the message that it is not interested in becoming an innovative big pharma group.

Not if, but when

Although Tysabri, an intravenous biological infused in physician offices, is well outside Perrigo’s focus of consumer health, it makes sense to hold on to it.

For one, it is a rather low-cost revenue generator if one puts aside the more than $3bn cash outlay of the Elan takeout. That is, of course, assumed to be income with a pretty long duration, given that biologicals do not face the same generic erosion as their small-molecule counterparts – and that Tysabri is a higher-risk asset that copycat drugmakers might want to avoid.

But its more important role is probably as a strategic card when pursuing takeout targets. Perrigo’s game is one of a constant need to look at M&A to generate growth – and since it is as leveraged as many other speciality pharma companies, financing from balance sheets will always be preferable to debt.

So when Mr Papa talks up Tysabri’s virtues, he seems to be begging prospective buyers not to make him sell – a tactic to run up the price. Have no doubt that Tysabri is on the block – especially if Perrigo is a billion dollars short in a transformative deal.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @JonEPVantage on Twitter

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