We recently moved to a Neutral rating on Perrigo Company (PRGO) from Outperform. Our target price on the stock is $94.00.
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, some products are sold due to changes in product status from prescription (Rx) only to non-prescription (OTC). This process is called Rx-to-OTC switch and it requires FDA approval.
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. In April 2011, Perrigo's partner Teva Pharmaceuticals (TEVA) received approval to sell its OTC version of Sanofi Aventis’ (SNY) generic Allegra and Allegra D and launched the product immediately.
The branded product is off to a strong start and management believes that it could reach annual sales in the range of $500 million to $600 million. 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 50 new products in fiscal 2011 which are expected to add revenues worth $180 million.
The FDA’s resolution of quality issues at Perrigo’s Allegan facility is also a major relief for the company. The FDA concluded that the Allegan facility now meets the regulatory standards, thus removing a major overhang on Perrigo. Perrigo can now look for approval of any export license or generic drug applications for products manufactured in the facility.
Approval of products, due to be manufactured at the Allegan facility, like the generic version of Mucinex was being held up due to the FDA warning letter. Following the resolution of the letter, we believe that approval of such generics will be expedited.
On the flip side, however, 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. Moreover, we are concerned about strong competition to Perrigo’s products. We are therefore moving to a Neutral rating on the company.
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