EUR 850.00 For Business Accounts Only

Morningstar | Perrigo Reports Surprisingly Weak 3Q on Animal Health and Prescription Topicals

We plan to lower our fair value estimate for Perrigo as the company posted weakness in its animal health franchise and the prescription topical segment in the third quarter. Management lowered its year-end outlook to nearly $4.7 billion in revenue and adjusted EPS of $4.45-$4.65, both meaningfully below our estimates. While we’re surprised by the magnitude of the pressure Perrigo faced this quarter, our no-moat and negative trend ratings reflect our belief that the intensifying competition we’ve seen in the generics industry over the last couple of years is not likely to dissipate.

Except for the animal health and prescription topicals operations, Perrigo’s other businesses continue to post decent underlying performance. Perrigo recognized a $213 million impairment on a 50% revenue reduction in animal health sales on the loss of a partner product. The remainder of the consumer health business, however, reported positive 3% growth and a relatively stable margin, by our estimate. Meanwhile, the international division posted encouraging 1% organic growth excluding divestitures and currency effects as well as an adjusted operating margin of 18.7%, which shows evidence of management’s ongoing improvement efforts.

Perrigo’s prescription segment witnessed a meaningful decline in sales and profitability thanks to increased competition on existing products combined with a lack of new product launches. Sales fell 28.5% and adjusted operating margin declined over 1,000 basis points to 31.9%, which was below our expectations even though our model already incorporated margin erosion in this segment. The company continues to have some compelling limited-competition products, like ProAir, in the pipeline. However, while Perrigo’s topicals business has been a slightly more insulated, niche portion of the market, this quarter’s results suggest many of these complex categories will face similar competitive headwinds to the broader generics industry.

New CEO Murray Kessler seems likely to focus Perrigo on tangential self-care categories in the broader private-label market. He also seemed to emphasize organic growth opportunities rather than the need for acquisitions. We tend to agree that Perrigo’s primarily private-label drug business has limited opportunities for growth, so widening the scope of the business could be favorable. On the other hand, we have concerns about competing in lower-barrier-to-entry markets where Perrigo might not be as well established. Additionally, Perrigo has had a mixed record in new areas. From our perspective, the company’s entry into infant nutrition has been mostly positive while it has struggled in animal health, for example.