Perrigo sold the rights to the royalty stream for one of its best drugs and investors hated the decision.
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PRGO - Perrigo Plc - Company Profile
Perrigo Company plc, together with its subsidiaries, develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. The company operates through Consumer Healthcare (CHC), Branded Consumer Healthcare (BCH), Prescription Pharmaceuticals (Rx), Specialty Sciences, and Other segments. The CHC segment offers OTC products in various categories, including analgesics, cough/cold/allergy/sinus, gastrointestinal, infant nutritional, smoking cessation, animal health, feminine hygiene, diabetes and dermatological care, diagnostic, scar management, and other healthcare products, as well as vitamins, minerals, and dietary supplements (VMS); and contract manufacturing services. It serves retail drug, supermarket, mass merchandise chains, and wholesalers through sales force and industry brokers. The BCH segment provides branded OTC products in the natural health and VMS; cough, cold, flu, and allergy; personal care and derma-therapeutics; lifestyle; pain relief, nasal decongestants, and cold sore management; and anti-parasite areas, as well as offers generic pharmaceutical products. It serves pharmacies, drug, and grocery stores through pharmacy sales force, as well as a network of pharmacists. The Rx segment offers generic and specialty pharmaceutical prescription drugs in various dosage forms, such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, powders, controlled substances, injectables, hormones, women's health products, oral solid dosage forms, and oral liquid formulations; and ORx products. It serves wholesalers; retail drug, supermarket, and mass merchandise chains; hospitals; and pharmacies. The Specialty Sciences segment offers Tysabri to treat multiple sclerosis. The Other segment offers active pharmaceutical ingredients used by generic and branded pharmaceutical companies. Company description from FinViz.com.
Perrigo was already in trouble with investors for not filing its 10K and the Nasdaq had issued a default notice and posted them for delisting. The company said it was "investigating" revenue recognition practices for royalties derived from the drug Tysabri. Strike one for the stock.
In the middle of this revenue recognition problem they announced they had sold their royalty stream to RPI Finance Trust for $2.2 billion and some incentive bonuses to be paid later on December 31st 2018 and December 31st 2020. Investors did not like that either. Strike two for the stock.
There are valid reasons for selling a royalty stream. Companies spending a lot of money on research and marketing can sell royalties to fund that research. However, nobody buys anything unless they feel like they are going to make money on the deal and that means the seller is offering a large discount. When you are talking as much as $2.8 billion over the next three years, that discount had to be large in order to get a finance company to cough up the cash. Investors thought Perrigo was giving up too much to raise cash quickly. They also did not explain what they were going to do with the cash. That always makes investors nervous.
At the same time they announced the sale of the royalties, they said the CFO had resigned, effective immediately. That is never good.
The combination of no financials and the rush job to sell the royalties while they are in the middle of an investigation on those same royalties, smells bad. Shares closed at a 6-year low on Friday after they announced they closed the sale on Thursday.
They did not report earnings as scheduled on February 27th and there is no current schedule. That is strike three for the stock.
You may remember they were offered $195 per share by Mylan in 2015 and turned it down.
Buy May $65 put, currently $2.95, Initial stop loss $70.25.