Perrigo Co. PLC finds a buyer for its dietary supplements business, International Vitamin Corp. Inc., a year after saying the segment would be on the block if it continued weighing down earnings.

The cash deal announced June 20, with terms undisclosed, will make IVC the largest US private label nutritional product manufacturer while slimming Perrigo, better positioning it to continue on its own or making it even more attractive as a takeover target.

Dublin-based Perrigo, which repelled Mylan NV's hostile takeover bid in 2015 and again is rumored to be an acquisition target, said it reached an agreement to sell its US vitamins, minerals and supplements business to IVC in a transaction expected to close by early August.

The segment does not include Perrigo's infant formula and adult nutritional beverage products. The deal also does not include Perrigo's branded nutritional product and OTC drug business in Europe, the cause of a recent earnings dip.

However, despite the European business slump, Perrigo prioritized divesting the US VMS business to improve margins. According to a Securities and Exchange Commission filing for its most recent quarter, Perrigo's VMS sales business totaled sales of $47.1m for the three months ended April 2, and $37.5m for the three-month period ending March 28.

In a release about the IVC deal, CEO John Hendrickson said the firm's decision in late 2015 to divest the VMS business was part of an "ongoing portfolio assessment and ensures that we remain focused on our most profitable and strategic businesses." Hendrickson also noted that the more than 300 employees working in the business, which is in Greenville, S.C., will move to IVC.

Perrigo's former chairman and CEO, Joseph Papa, in June 2015 said the firm would consider divesting the VMS business unless it generated higher return on investment capital and began taking market share from major firms operating only in the nutritional products space.

By the time the firm acknowledged in October it was looking for a buyer for the business, the move was part of broader changes at Perrigo as it attempted to sway shareholders against accepting Mylan's tender ([A#05151026013]).

The OTC private label giant also said it would look at selling its India active pharmaceutical ingredients business and reducing its current global headcount by 6%. Its plans to reduce costs and increase margins also included consolidating its global supply chain in Ireland and a $2bn share repurchase plan through 2018.

Hendrickson moved from executive vice president for global operations and supply chain to the firm’s new president post as part of the organizational changes before he was sent in February to Europe to direct changes to the firm's branded consumer health products business there after a downturn in revenues after Perrigo put the business together with three acquisitions over the previous year ([A#05160222010]).

The firm has found, though, that competing in Europe's consumer products market differs from dominating the US private label OTC space. Shipping the same OTC formulation in different packaging for different retailers across the largely homogenous US market is not like providing different product formulations under different brands in diverse retail environments across European countries.

Hendrickson, appointed CEO in April when former Chairman and CEO Joseph Papa resigned, in May said the outlook for sales growth in Europe was not promising for 2016.

According to the firm's SEC filing, the European branded product business segment "has established a brand prioritization strategy … with an objective to balance the cost of advertising and promotion investments with expected contributions from category sales."

On the other hand, Hendrickson said the firm's private label OTC business remained a reliably strong revenue driver and the adult and infant nutritional product sales and Rx specialty generic revenues would continue growing as problems were corrected at the European branded business.

Perrigo A Fixer-Upper?

While Perrigo looked internally, external pressure emerged again with rumors that a UK firm was considering a $20bn takeover bid. Perrigo stated it has not received an offer and no other firm has reported making an offer.

The rumor sent Perrigo shares up more than 9% on June 14 before they dropped by around the same level two days later. Perrigo's share price varied from as high as around $200 in 2015 before starting a steady slide that reached $146.90 when Mylan's tender failed in November and has continued falling since, closing down slightly at $96.75 June 20 despite the VMS sales announcement.

In a June 17 research note, BTIG LLC analyst Timothy Chiang said a buyer would realize what Perrigo already knows.

"While we do think Perrigo’s core business in over-the-counter products (private label in the US and branded in Europe via its Omega acquisition in 2015) could attract offers, we think Perrigo is facing challenges within its generic prescription and branded consumer health" segments, Chiang added.

"The number of potential acquirers would be limited given the fact that Perrigo is in a 'fixing-up' mode, which we think will take some time," he said.

Chiang also noted that as a large UK consumer health care product player, RB, formerly Reckitt Benckiser Group PLC, had been mentioned as a potential Perrigo suitor. RB, however, already is among the top five sellers of European OTCs and "would have a greater interest in branded consumer assets, especially in the US."

Leerink Partners LLC analysts, in a note posted before the takeover rumor surfaced, suggested Perrigo could boost its value to shareholders not by divesting the VMS business, but its rights to royalties from sales of the multiple sclerosis and Crohn's disease treatment Tysabri (natalizumab), which it gained in 2013 when it became an Irish firm with the acquisition of specialty pharma Elan Corp. PLC, and its Rx generic topicals segment.

The Leerink analysts identify three Perrigo business sectors and say consumer products has the largest value, around $12bn, while its Rx generics have around $5bn value and the Tysabri revenues are around $4bn.

They say "there is some value that can be unlocked by separating the three segments," and a "pure-play consumer scenario offers greatest upside, but is also the most speculative."

The Leerink June 13 report added that while the odds of Perrigo divesting its Rx operations entirely are low, the analysts "believe another difficult quarter or two would likely escalate shareholder pressure to create value through restructuring options."

Warner Norcross & Judd LLP was Perrigo's legal advisor and Houlihan Lokey was its exclusive financial advisor on the transaction with IVC.

IVC Diversifies

The deal is Freehold, N.J.-based IVC's second in two years, after acquiring nutraceuticals contract manufacturer Adam Nutrition Inc., of Mira Loma, Calif., in June 2014. It also acquired Inverness Medical Nutritionals, of Waltham, Mass., for $63.4m cash in 2010, bringing brands including Stresstabs vitamins, Posture-D calcium supplements and Ferro-Sequels iron supplements.

“Other recent acquisitions have helped IVC expand our business into high growth powders and sports nutrition. While our organic growth remains high, I expect additional acquisitions to help us enter new product categories, new channels and new geographies, said IVC President and CEO Steven Dai in a separate release.

IVC's other products include gummy multivitamins with Teenage Mutant Ninja Turtles and SpongeBob SquarePants cartoon character brands; SpongeBob Probiotic + Prebiotic; Cran-Max cranberry supplement; Fast Acting B12 methylcobalamin in a cherry tablet; Protegra multivitamin with antioxidants aimed at supporting cardiovascular health; Ironman Endurance Optimized Whey Protein; Soy Care soy isoflavones to help relieve menopause symptoms; and Allbee and Z-Bec B-complex supplements.

IVC does not add any brands with Perrigo's VMS business, but it ups its ante in the supplement private label and contract manufacturing space, a problem area for US firms that both manufacture and market vitamins and supplements ([A#05150518007]).

"Retailers will have access to even more innovation, a more efficient supply chain and greater manufacturing capabilities, while consumers will benefit from continued high quality standards and maximum value,” Dai stated.

IVC expands its presence in private label and contract manufacturing with a clean record at FDA, which does not have in its database a record of a warning letter or other enforcement action against the firm. A mark on its record came in June 2015 when the Consumer Product Safety Commission announced a recall of 17,000 units of Well at Walgreens Multivitamin Women 50+ vitamins, made by IVC, because the packaging is not child-resistant and senior-friendly; no adverse events were linked to the recalled items ([A#05150615006]).

Perrigo Out From Under VMS Weight As IVC Lifts Private Label Profile

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