Perrigo to Acquire Paddock's Assets - Analyst Blog

Perrigo Company (PRGO) recently entered into a definitive agreement to acquire substantially all the assets of Paddock Laboratories Inc. for a cash consideration of $540 million. The deal would boost the company's generic business.

Paddock Labs is a privately owned, Minneapolis based company that focuses on the manufacturing and marketing of generic prescription specialty products. The transaction is expected to close in the fourth quarter of fiscal 2011, pending regulatory approval. Perrigo's fiscal year ends on June 26.

Perrigo will receive a cash tax benefit of $95 million, for over 15 years, associated with the transaction. The value of the transaction is approximately 8.5 times EBITDA taking into consideration the aforementioned tax benefit.

Paddock Labs brings with it a portfolio of 90 products (including 35 major products) already commercialized, 20 products in development and approximately 25 Abbreviated New Drug Applications (ANDA) pending approval with the US Food and Drug Administration (FDA). The acquisition is expected to expand Perrigo's generic Rx business, particularly through its extended topical creams and gels, which fit nicely with Perrigo's existing business.

The transaction will fetch more than $200 million in annual revenues in fiscal 2012. It is also expected to add 25 cents to adjusted earnings per share in fiscal 2012. It is also expected to be accretive to return on invested capital (ROIC) in fiscal 2013. Paddock Labs enjoys a slightly higher gross margin but lower operating margins than Perrigo's generic segment.

Perrigo expects the transaction to generate synergies of at most $10 million by fiscal 2013. The transaction is expected to be accretive to earnings even beyond 2012 driven by organic growth and synergies and reduced expenses associated with the deal. The transaction will also boost Perrigo's balance sheet and operating cash flows.

Perrigo plans to finance the transaction with $80 million of cash on hand and $460 million in debt.

Our Recommendation

We currently have a Neutral recommendation on Perrigo, which is supported by a Zacks #3 Rank translating into a short-term Neutral rating. We are bullish about the Paddock Labs acquisition that would expand the company's generic prescription business at a reasonable valuation.

Moreover, we are encouraged by Perrigo's strong position in the brand over-the-counter (OTC) pharmaceutical market and its growing generics and active pharmaceutical ingredient (API) businesses.  We nevertheless prefer to remain on the sidelines until the resolution of the pending FDA warning letter for its Michigan facility.