Look up and down any cough and cold aisle at your local CVS (CVS), Walgreen's (WAG) or Rite-Aid (RAD) and you'll see some of Perrigo's (PRGO) store branded products positioned neatly next to expensive national brands.
Sales of store branded medicines account for over 60% of Perrigo's sales.
The market for store brand medicines and vitamins is growing nearly three times faster than the category overall, rising 4.6% in the year ending April versus 1.3% for the broader basket.
Not only are consumers demanding more low priced generics in the aisle, retailers are happy to give it to them given their margin friendly nature.
Growth is likely to continue too. Perrigo sees an addressable $10 billion in total OTC opportunities coming over the next five years across allergy, heartburn, colds and disease management.
Some brand opportunities include expanding the company's market leading position in Zyrtec across Allegra and Clarinex. And the company's generic Prevacid, a two billion dollar drug used to treat heart burn, has already started shipping to stores following FDA approval in May. Additionally, future growth could come from expanding into adjacent markets such as skin care and dieting.
Perrigo also benefits from the shift to generics behind-the-counter.
Last month, the FDA approved Perrigo's generic Duac Gel, an acne treatment with $130 million in annual sales. This marked another win in a string which has helped generic Rx sales grow to $344 million in FY2011, up from $238 million in FY2010.
As sales have grown, the company has leveraged scale and mix for margin upside too. Last fiscal year, segment operating margins clocked in at 38.2%, up from 33% the year before.
Given the company has 37 ANDA's in the pipeline across $4 billion in branded drug sales, there's plenty of growth to come.
A good time to be long.
The company also gets another $500 million in sales from nutritional products and $156 million in revenue from active pharmaceutical ingredients. All in, sales were $2.75 billion in FY2011, up from $2.27 billion in FY2010 and just $1.37 billion in FY2007. Operating margins have grown to 19.6% from 18% in FY2010 and a mere 9% in FY2007.
Such strength has the Street expecting earnings per share increasing 23% this fiscal year to $4.95 and 9% next year to $5.42.
Despite the strong outlook, short sellers are sitting on nearly 6 days to cover, suggesting positive news could force covering.
Additionally, investors can take comfort knowing Q3 is historically a good time to own shares.
According to data from The Seasonal Investor, shares have finished higher in 5 of the past 5 and 8 of the past 10 Q3's, generating average returns of 14.5% and 5.3%, respectively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.