Why Perrigo Is Divesting Rights To The Best Multiple Sclerosis Drug

Perrigo Company plc Ordinary Shares PRGO announced on Monday it would divest its rights to the royalty stream from the global net sales of multiple sclerosis drug Tysabri in favor of privately-held Royalty Pharma.

Tysabri is a drug used to treat multiple sclerosis, or MS, a neurodegenerative disease affecting young adults, primarily women.

Financial Terms

The total value of the transaction was $2.85 billion, with the split at $2.2 billion in cash at closing and up to $650 million in potential milestone payments based on future global net sales of Tysabri in 2018 and 2020. Perrigo said it expects the deal is expected to close within 30 business days.

Deutsche Bank said in a note Monday the sales price for Tysabri was somewhat below its expectations.

Related Link: Multiple Sclerosis Forecast in 18 Major Markets 2017-2027 - Research and Markets

Tysabri And Perrigo

Tysabri royalty stream was acquired by Perrigo as part of its acquisition of Elan Corp. for $9.5 billion in cash and stock in December 2013. The deal to buy Elan helped Perrigo to be domiciled in Ireland, when then had a corporate tax rate of 12.5 percent. Along with Elan, came the tax advantage and ownership of royalty stream to its famed MS drug, which it had developed and licensed to Biogen Inc BIIB. Ironically, Royalty Pharma had bid for Elan way back.

Perrigo said in its 10-K filing for the fiscal year 2015 Specialty Sciences, comprised primarily of Tysabri royalty, accounted for in 2013. Seven (7) percent or $322.27 million of its consolidated net sales in 2015.

Buckling Under Pressure

The decision to divest was taken based on a review of strategic alternatives for the Tysabri royalty stream by Perrigo announced in November 2016. Tysabri is considered to be non-core asset for Perrigo, as it strives to increase its focus on its consumer-facing and Rx businesses.

On another count, the decision was a forced move. Activist investor Starboard Value has been breathing down the company's neck since last September, asking it to divest its generic and specialty pharma products as well as it royalty interest in Tysabri. Earlier this month, Starboard forced Perrigo to add five of its nominees to the board.

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Monday's announcement is not without logic. Perrigo's strength lies in generics, over-the-counter drugs, supplements, consumer goods and animal medicines. The company apparently deemed the near-term cash flow from the divestment was greater than the carrying value of the product.

Perrigo expects the transaction to be dilutive to its adjusted earnings per share. However, the company expects the cash from divestiture to help it de-lever its balance sheet.

Deutsche Bank thinks execution against the company's own goals in the coming quarters will be critical. Meanwhile, a Fierce Pharma report, quoting RBC Capital Markets said, "Perrigo's core OTC business and its pharma segment are "heavily integrated" and a Tysabri divestment would take a toll on earning."

At last check, the shares of Perrigo were up 1.16 percent at $75.84.