We have downgraded our rating on Perrigo Company (PRGO) from Outperform to Neutral with a target price of $100.00.
Perrigo’s broad line of store brand pharmaceutical products has the same active ingredients and comparable quality and efficacy as the national brands. This has helped the company become a dominant player in the store brand over the counter (OTC) drug market. We believe that Perrigo’s strong position in the brand OTC pharmaceutical market and growing generics and API businesses will help it deliver solid top- and bottom-line growth in the coming years.
In the OTC pharmaceutical market, products are sold due to changes in product status from prescription (Rx) only to non-prescription (OTC). Management estimates that $10 billion in branded prescription sales will move to OTC status in the next five years, thus resulting in significant switch opportunities for Perrigo in the years to come. Perrigo acquired exclusive sales and distribution rights to its OTC store brand version of generics of Sanofi Aventis’ (SNY) Allegra (for seasonal allergies) and Allegra D, from Teva Pharmaceuticals (TEVA), in June 2010. Perrigo's partner Teva received approval to sell its OTC version of generic Allegra and Allegra D in April 2011 and launched the product immediately. The branded product is off to a strong start. Management estimates that store brands account for approximately 40% of the Allegra OTC market and Perrigo has captured the majority of the store brand share. This is an important product launch for Perrigo and will benefit sales, going forward.
Perrigo also has an impressive pipeline which could drive growth in fiscal 2012 and beyond. The company expects to launch more than 45 new products in fiscal 2012 which are expected to add revenues worth $190 million.
On the flip side, however, we are concerned about the competitive pressures faced by the Consumer Healthcare (CHC) segment which accounts for a substantial chunk of the company’s revenues. The performance of the CHC segment has been below par since the last few quarters despite benefits from competitor recalls and significant new product launches. In the first quarter of fiscal 2012, the segment witnessed a growth of only 4% due to increased competitive pressures in the gastrointestinal category and a delay in shipment of a new analgesic suspension product. Management is expecting this segment to record a growth of 12–14% in fiscal 2012. Given the slow start to the year, the target seems a little too optimistic.
Perrigo’s strong results in the last few quarters have benefited from external events rather than emanating from its core business. For example, the Consumer HealthCare segment has benefited from product recalls by competitors like Johnson & Johnson (JNJ) in the past few quarters. These external events are unlikely to recur every quarter and benefit Perrigo’s top-line. Recalled products from J&J are expected to be back in the market in early 2012. Though Perrigo hopes to retain some of the incremental sales even after J&J’s return, there is always a risk that J&J with its brand appeal will win back all its lost business. We prefer to remain on the sidelines until we have better visibility on how the J&J return impacts CHC’s performance.
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
PERRIGO COMPANY (PRGO): Free Stock Analysis Report
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TEVA PHARM ADR (TEVA): Free Stock Analysis Report
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