Perrigo Entering Generic Rx Market

February 20, 2004
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ALLEGAN — Perrigo Co. moved one step closer to entering the generic prescription drug market Feb. 13 when it acquired an option to purchase the controlling interest in Philadelphia-based Lannett Co. Inc. for nearly $198 million.

Lannett manufactures and distributes generic prescription drugs throughout the United States and reported fiscal 2003 sales of $42.5 million.

Earlier this month, Lannett Chairman and CEO William Farber and his wife Audrey granted Perrigo an irrevocable option to acquire nearly 13.6 million, or approximately 67 percent, of Lannett’s outstanding common shares.

The move would launch Perrigo immediately into the generic prescription drug business via Lannett’s present line of 23 generic drug products.

If Perrigo decides to exercise the option, which expires Aug. 6, it will pay the Farbers approximately $197.8 million in cash, or approximately $14.56 per share, “plus additional contingent consideration.”

Within 90 days of purchasing the Farbers’ stock, Perrigo would be obligated to offer Lannett’s remaining shareholders either a tender offer of $17.84 per share or a merger agreement, said Ernest Schenk, Perrigo’s manager of investor relations and communications.

“If the additional contingent consideration works out to be greater than $17.84, the remaining shareholders would get the higher of the contingency.”

There’s a possibility Perrigo won’t exercise the option, he said, and the decision could take several months.

“This is a bit of an unusual type of acquisition in the way it has unfolded. We are very early in the due diligence stage,” Schenk explained.

“This is a new industry for us so I would guess that our due diligence would go rather thoroughly and methodically. We’re going to look very hard at understanding the existing product line and how sustainable that is, and also looking very hard at the future drug pipeline and try to value what that is.”

The potential acquisition of Lannett is in line with Perrigo’s previously announced plan to tap into the $15 billion generic prescription drug industry, said President and CEO David T. Gibbons.

“Perrigo’s drug development capabilities, retailer relationships and manufacturing assets, if combined with Lannett’s product portfolio, pipeline and complementary marketing channels, would give Perrigo an earlier product pipeline and accelerate our entry into the generic drug market.”

The company originally announced the strategy during its fourth quarter and year-end 2003 financial report to shareholders in August.

Schenk said Perrigo’s first step down that road was committing $5 million to $7 million to additional research and development this year for the internal development of generic drugs.

The second step the company took, he said, was extending a $10 million loan to a contract R&D company for development of 10 to 12 generic prescription drugs over the next two years.

The option to purchase majority interest in Lannett was the third and probably most important strategic step in the sequence, he said.

“It would open some doors for us with our existing retail customers, and as we get some approvals on some of our internal R&D development and we get some approvals on the contract R&D, those products could be added to the Lannett portfolio.

“Our intention is to move forward as fast as we can to build a product line and build that future pipeline,” Schenk said.

Gibbons said the move is in sync with the company’s mission to provide affordable consumer health-care options.

“We see generic prescription drugs as a natural progression that will enhance our already strong position in the over-the-counter (OTC) pharmaceutical market and will provide substantial new growth.”

In the company’s 2003 annual report, Gibbons pointed to the following factors as the “compelling logic” behind Perrigo’s decision to enter that market:

  • The generic Rx drug market is $15 billion and growing at a rate of more than 10 percent a year.

  • Generic Rx margins are significantly better than store brand margins.

  • Perrigo currently has good existing business relationships with more than 70 percent of the generic Rx market through its food, drug, mass merchandise and wholesale channels.

  • Generic Rx drugs follow the same research and development and Food and Drug Administration filing and approval paths as prescription-to-OTC “switch” products, which represents the core of Perrigo’s existing business.

  • Perrigo has the manufacturing capability and capacity available today to make generic Rx drugs without the need for significant capital expenditures.

The objective, Gibbons noted, is to build a product line and future pipeline of generic prescription products as soon as possible, while continuing to build Perrigo’s core OTC drug business.

Mark Olesnavage, vice president and general manager of Perrigo Pharmaceuticals, is overseeing planning, development and implementation of the company’s generic prescription drug initiative.    

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