INVESTMENT THESIS
Our rating on Perrigo Company plc (NYSE: PRGO) is HOLD. The company, a longtime leader in OTC generics, has faced pressure in recent years from industry-wide price erosion and reduced FDA approvals, which have in turn led to fewer generic products. Management has embarked on a transformative restructuring and is realigning the company’s business portfolio. The goal of the restructuring is consistent low single-digit sales growth and mid-single-digit EPS growth. The pandemic is slowing the transformation.
RECENT DEVELOPMENTS
The beta on PRGO shares is about 1.20.
On a pro forma basis that excludes acquisitions, divestitures and currency effects, organic sales rose 1.7%.
It continues to project 2020 net sales growth of 6%-7% and organic net sales growth of approximately 3%. Consistent with previous guidance despite an expected $0.12-$0.15 negative impact from COVID-19, a $0.14 negative impact from a product recall (generic albuterol sulfate), and a $0.06 impact from the divested Rosemont Rx business. Management said that its estimates did not assume a ‘second wave’ of COVID-19 later this year.
Perrigo is working to become a consumer-focused self-care company. As part of this effort, it divested its U.K. generic prescription pharmaceuticals business in June 2020 and acquired the oral self-care assets of High Ridge Brands in April. It is now the fastest-growing value-brand player in the children’s oral care market. Perrigo also acquired Ranir Global Holdings, the largest private-label global oral care company, in July 2019 for $750 million in cash. During the quarter, PRGO completed the sale of the Rosemont Rx business for $195 million.
Perrigo has also relied on its ability to develop new generic versions of branded drugs. Products launched in 2020 include Pilocarpine Tablets (generic version of Salagen); Sumatriptan Nasal Spray 5mg and 20mg (generic version of Imitrex); and Calcipotriene-Betamethasone Dipropionate Suspension (generic version of Taclonex). The company is also working on generic versions of Duobril, Qbrexza, BryHali and Aczone.
EARNINGS & GROWTH ANALYSIS
Consumer Self-Care Americas (CSCA), with 52% of 3Q revenue; Consumer Self-Care International (CSCI), with 26%; and Prescription Pharmaceuticals (RX), with 22%. We review recent results in these segments below.
The CSCA segment reported 3Q net sales that were up 7% from the prior year on a reported basis. The increase reflected a $24 million contribution from the new oral self-care portfolio, and strong OTC e-commerce growth. This was partly offset by $3 million of unfavorable currency movements and normal pricing pressure. Organic sales rose 4%.
The CSCI segment reported 3Q20 net sales that were down 3% from the prior year on a reported basis. The results reflected a decline of $15 million related to divested businesses and $3 million related to discontinued products, lower sell-in activities in the upper respiratory category, and lower demand in the skincare and personal hygiene category. Organic sales fell 3%.
The RX segment posted 3Q20 net sales that were down 9% from the prior year on a reported basis. The decrease was driven by a $31 million reserve for the estimated impact of the recall of generic albuterol sulfate, and $9 million in discontinued lower-margin products. During the quarter, the RX base business saw a faster-than-anticipated recovery in dermatology prescriptions from 2Q20. The adjusted operating margin narrowed by 330 basis points to 20.7%.
FINANCIAL STRENGTH & DIVIDEND
The company had $849.4 million, and $3.54 billion in long-term debt.
The company has a $1.0 billion stock buyback plan with no expiration date, authorized in October 2018.
MANAGEMENT & RISKS
Murray Kessler is Perrigo’s president and CEO, having served in the role since October 2018. Mr. Kessler was previously president and CEO of Lorillard, and oversaw its sale to Reynolds American in 2015. He was previously the CFO of INW Holdings, a contract packer of vitamins, minerals, and supplements. Rolf A. Classon is the company’s chairman.
The company is implementing a strategic transformation program. The first steps have been to reconfigure the portfolio and achieve the base plan (including managing through COVID-19). Management also plans to invest in repeatable growth platforms, drive organizational effectiveness and build capabilities, fund growth sustainably, and ultimately deliver consistent and sustainable results.
Management’s growth targets include 3% for revenue, 5% for operating income, and 7% for adjusted EPS.
Investors in PRGO shares face risks, including competition, patent cliff expiration, pricing pressures in generic prescriptions, and the integration of new businesses.
Perrigo faces legal risks. It was recently named in a lawsuit filed by multiple state attorneys general alleging price fixing by generic manufacturers of topical skin treatments. Litigation related to generic price fixing began in 2016, though this is the first lawsuit in which Perrigo has been named as a defendant.
COMPANY DESCRIPTION
Perrigo’s private-label consumer products encompass a variety of cold/allergy, gastrointestinal, first-aid, motion sickness, vitamin, smoking cessation and other remedies. The company has a market cap of approximately $7.6 billion and is headquartered in Dublin, Ireland. Perrigo has 11,000 employees.
VALUATION
PRGO’s price/sales ratio of 1.2 is below the industry average of 2.0, and its yield of 1.8% is above the industry average of 1.2%. We are reiterating our HOLD rating, but would consider an upgrade on signs of successful new product launches, progress with acquisitions and partnerships, or the achievement of more consistent results, in line with management’s plan.
On November 10, HOLD-rated PRGO closed at $48.51, up $2.48.
Source: Argus
