We have maintained our Outperform recommendation on Perrigo Company (PRGO) with a target price of $87.00 on the back of impressive second quarter 2011 financial results.
Perrigo reported earnings per share of $1.05 for the second quarter of fiscal 2011, easily beating the Zacks Consensus Estimate of 95 cents and the year-earlier earnings of 73 cents. Results were driven by a solid top-line and gross margin performance.
Second quarter revenues increased 23% over the prior year to $718 million. Total revenues were also above the Zacks Consensus Estimate of $708 million. The year-over-year revenue growth was aided by strong performances by the company’s nutritional and generic prescription businesses. Recent acquisitions and new products also added to revenues.
Perrigo Company is one of the largest store brand manufacturer of over-the-counter (OTC) pharmaceutical products and infant formulas. Perrigo’s broad line of store brand pharmaceutical products has the same active ingredients and comparable quality and efficacy as the higher-priced national brands. This has helped the company become the dominant player in the store brand OTC drug market.
In the OTC pharmaceutical market, some products are sold due to changes in product status from prescription only (Rx) to non-prescription (OTC). This process is called Rx-to-OTC switch, and 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. The most important near-term opportunity for Perrigo is the expected launch of its OTC version of Sanofi Aventis’ (SNY) Allegra and Allegra D between March to May this year. Perrigo's partner Teva Pharmaceuticals (TEVA) is currently working to secure a switch approval.
Perrigo has a very strong pipeline and expects to launch more than 50 new products in fiscal 2011, which are expected to add revenues worth $180 million.
Management’s strategic acquisitions are driving inorganic growth. In January 2011, Perrigo acquired Paddock Laboratories, which is expected to expand Perrigo’s generic prescription business, particularly through its extended topical creams and gels. These products fit nicely with Perrigo’s existing business. Perrigo also expanded into the infant formula category through its acquisition of PBM in April 2010. Other important acquisitions include Galpharm, Diba, and Orion Laboratories. Management is looking for further inorganic growth that can be achieved through expansion into adjacent products, product categories and channels, as well as new geographic markets.
In April 2010, the FDA sent a warning letter to Perrigo raising questions on quality control at its Allegan, Michigan, facility which manufactures its store brand OTC products constituting almost 80% of its business. The FDA commenced a re-inspection of the facility in early March 2011. The final resolution of the letter, which the company expects in the near term, depends on the outcome of the inspection. Any negative outcome of the inspection could lead us to revisit our Outperform recommendation.