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Morningstar | Despite Competitive Pressures, Perrigo Should Drive Long-Term Growth

Perrigo continues to post mixed results following weakness stemming from Omega integration issues, the return of branded competitors like Johnson & Johnson to store shelves, and competitive pressure in the company's prescription topicals business. While we previously considered Perrigo’s store-brand market share gains from competitor manufacturing issues and consumers seeking lower-cost options during the recession as unsustainable, we think Perrigo's operations can sustain reasonable growth. Executive turnover remains a concern, but we think Perrigo's more resilient consumer health business can retain stable performance. In August 2018, management announced plans to separate the prescription topicals business, which will make Perrigo a nearly pure play on private-label and branded over-the-counter drugs. Long term, we think Perrigo’s consumer health business can support steady growth with little risk from reimbursement, but concerns about new entrants have increased with peers like Teva and Mylan becoming more focused on the space. Ongoing market penetration of private-label products, international portfolio expansion, and OTC approvals for existing prescription drugs should help bolster growth. Divesting the prescription business will remove Perrigo's exposure to the more volatile retail pharmacy market.The Omega deal's underperformance has tarnished management's merger and acquisition streak, but we still think most of the company's capital-allocation decisions have enhanced long-term growth opportunities. The recent Omega acquisition made Perrigo a major player in the European OTC market and provides the necessary brand portfolio and salesforce to compete among the more fragmented customer base of retailers in the region. Through the PBM Holdings acquisition, Perrigo is the only Food and Drug Administration-approved private-label infant formula manufacturer. Unlike OTC drugs, store-brand penetration in some product categories remains relatively small, and Perrigo will likely seek to leverage its store-brand retailing expertise to expand into new markets.