Perrigo Company (PRGO) reported earnings per share of $1.02 for the fourth quarter of fiscal 2011, beating the Zacks Consensus Estimate of 99 cents and the year-earlier earnings of 77 cents per share. Lower-than-expected sales were mitigated by effective cost management and a lower tax rate to drive the earnings beat. Fiscal 2011 earnings were $4.01 per share, also beating the Zacks Consensus Estimate of $3.98 as well as the year-ago earnings of $3.03 per share.
Fourth quarter revenues increased approximately 14% over the prior year to $705 million. Total revenues were however below the Zacks Consensus Estimate of $708 million. Strong performances by the Consumer Healthcare and Rx Pharmaceuticals segments were offset by light revenues from the company’s Nutritional and Active Pharmaceutical Ingredient (API) businesses. Fiscal 2011 revenue was $2.76 billion, up 21.5% over the prior year. Revenues were, however, in line with the Zacks Consensus Estimate.
The Fourth Quarter in Detail
The revenue performance in the quarter from four of the company’s businesses is detailed below.
Consumer Healthcare (CHC): Perrigo reported CHC revenue of $434 million in the fourth quarter, up 9% over the prior year driven by new product sales, volume growth and positive foreign currency impact. All product category witnessed growth in the quarter, particularly cough/cold products. While adjusted CHC gross margins declined, operating margin was flat year over year due to lower operating expenses. The segment continues to benefit from competitor recalls.
Nutritional: Perrigo reported Nutritional quarterly revenue of $123 million, up 47% over the prior year. The growth rate was boosted by a complete quarter of revenues from PBM Holdings Inc. acquired in April last year. It should be noted, however, that revenues were down almost 1% sequentially as sales of vitamin, mineral and supplement products decreased. The segment witnessed an increase in adjusted gross margins due to volume growth for nutrition products as well as increased profitability in oral electrolytes.
Rx Pharmaceuticals: Perrigo reported Rx Pharmaceuticals revenue of $92 million in the fourth quarter of fiscal 2011, up 12% over the prior year driven by higher sales of new products and reduced pricing pressure from less competition.
Active Pharmaceutical Ingredients (API): The company reported API sales of $37 million in the reported quarter, down 5% over the prior year. Revenues were also down almost 20% sequentially due to lower volume growth. Improved sales of Temodar in Europe were offset by decreased dossier sales and lower sales of existing products. Perrigo has an agreement to supply Teva Pharmaceuticals (TEVA) with the API of its generic version of Merck’s (MRK) Temodar in the US market. Perrigo is already selling the API in Europe and will provide Teva with the API in the domestic market once the latter launches the generic in August 2013.
Perrigo closed the acquisition of Paddock Labs in July 2011. The deal is expected to add at least 25 cents to adjusted earnings in fiscal 2012. Paddock brings with it more than 25 abbreviated new drug applications (ANDA), thus boosting Perrigo’s pipeline. Paddock Labs is expected to add more than $200 million in annual sales with over 35 products.
Perrigo declared intentions to issue $350 million in notes during the first half of 2012. The proceeds will be used for general corporate purposes including paying down debt.
Fiscal 2012 Guidance
Perrigo issued fiscal 2012 adjusted earnings per share outlook of $4.50–$4.65, which implies a growth of 12–16% from the comparable fiscal 2011 figure of $4.01. The Zacks Consensus Estimate for 2011 of $4.59 is within the guidance range. The second half of the fiscal year is expected to generate more earnings than the first half.
The top line is expected to grow in the range of 15% to 18% over fiscal 2011, driven primarily by new product launches. In fiscal 2012, Perrigo hopes to launch 45 new products that will add $190 million in revenue. In the CHC segment, Perrigo plans to launch the generic version of Johnson and Johnson’s (JNJ) Prevacid and generic Mucinex. In the Nutritional business, it is expecting to launch a store brand version of Align, a digestive supplement. In the API segment, Perrigo will begin selling the API of actracurium.
Cash flow from operating activities is expected in the range of $470 million to $500 million in fiscal 2012.
Our Recommendation
We have a Neutral recommendation on Perrigo Company. The stock carries a Zacks #2 Rank (Buy rating) in the short run.
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. Perrigo also has an impressive pipeline capable of driving growth in fiscal 2012 and beyond. The FDA’s resolution of quality issues at Allegan should also come as a major relief for the company. However, Perrigo’s strong results in the last few quarters have benefited from external events like product recalls at competitors rather than being propelled by its core business. These external events are unlikely to recur every quarter and benefit Perrigo’s top line. Moreover, we are concerned about intense competition to Perrigo’s products. We therefore prefer to remain on the sidelines.
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