Why Mylan Still Has Upside After Perrigo

On April 6, Mylan announced a non-binding proposal to acquire Perrigo for $205 per share. The $205 price represents a 25% premium to Perrigo’s trading price as of the close of business on April 3, and a 29% premium to Perrigo’s 60-day average share price.

The combined company is expected to have $15.3 billion in annual sales. Mylan management contends that the new company will be able to expand margins and that the deal will be accretive to Mylan’s earnings per share (EPS).

Now the independent research firm Argus has weighed in on these companies prior to the acquisition. Argus issued a Buy rating for Mylan with a price target of $80, up from $66. The firm also downgraded Perrigo to a Hold rating from Buy, with a fair value price near $200.

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Argus believes that generic drug companies are on track to benefit from the public’s increased focus on cost-effective health care. Mylan’s management has established aggressive growth targets over the next six years and has achieved early milestones.

Mylan is growing organically and also via attractive acquisitions, including the recently acquired assets from Abbott Laboratories for $5.3 billion and its current plan to acquire Perrigo.

Note that Mylan and Perrigo have little overlapping businesses. Mylan is focused on generic and specialty branded pharmaceuticals, and Perrigo is focused on over-the-counter health care products and nutritionals.

If the deal falls through, and another suitor does not emerge, the shares may drop back to the $160 to $170 level.

Mylan shares have outperformed over the past quarter, advancing 26% while the S&P 500 has risen 3%. At the same time, Perrigo shares have outperformed over the past quarter, with a gain of 17%.

Shares of Mylan were down 2% Friday, at $68.72 in a 52-week trading range of $44.74 to $72.62. The stock has a consensus analyst price target of $62.93.

Perrigo shares were up 0.7% to $200.01. The 52-week trading range is $125.37 to $215.73 and the consensus price target is $182.75.

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According to Argus we could expect to see more M&A come from this sector:

It is doubtful that Mylan/Perrigo will be the last in this series of Pharmaceutical industry M&A activities. For one thing, industry CEOs in many cases are playing with house money, thanks to the strong sector returns over the past two years. For another, several assets remain on the block, including Glaxo’s anti-infectives business and Pfizer’s mature pharma operations, among others. We would not be surprised if the new management team at Teva Pharmaceuticals took even more aggressive steps to dismantle that diversified company. And Mylan made a point that it is looking to bolt on additional businesses, even as it integrates