This medicine stock is healthier than it seems.
Drugstore supplier Perrigo, which sells store brand over-the-counter drugs in the U.S. and Europe as well as prescription generic medicines in the U.S., has had a tough few years. That disappointment culminated earlier this month when Perrigo slashed full-year guidance, largely due to weakness in its generic drugs business. Prices for manufacturers are falling throughout the generics industry and Perrigo also has delayed the launch of some new products. Shares are down 14% so far this year and more than 60% since 2015.
But those problems can be fixed, and there is reason to believe that the news at Perrigo will start to turn in investors’ favor. For starters, Perrigo announced last month that it will separate the generics business, either by sale or spinoff. That is a good idea, even in a poor market for generic drug assets. The business, primarily focused on topical products, earned an operating margin of 40% in the second quarter. That is fairly high, even after years of weak industry conditions.
There is no reason that the two business lines must be housed under the same roof. The consumer health unit is a strong, stable business that should command a higher earnings multiple than a generic drugs business. The latter must contend with constant price pressure.
Wall Street’s expectations for Perrigo overall are modest. Analysts expect sales this year of $4.8 billion, down slightly from the past year’s total. In years to come, those analysts are penciling in sales growth of about 2.5%, according to FactSet.
That goal seems achievable even absent some possible catalysts for additional sales. In contrast to most U.S. health-care businesses, possible regulatory changes offer opportunity instead of risk for Perrigo’s business. The Food and Drug Administration has issued draft guidance that would relax some labeling requirements for over-the-counter drugs. Those changes could help make it easier for certain prescription drugs to be sold over the counter, opening up significant sales opportunities from new product launches.
For instance, Perrigo recently announced a licensing deal with Merck & Co. for the right to sell the over-the-counter version of Nasonex nasal spray in the U.S., granting Perrigo access to a roughly $200 million a year market.
Taking a chance on Perrigo isn’t an expensive proposition. It trades at about 15 times those recently lowered forward earnings estimates, well below its five-year average. At that price, consumers and investors can both find good value at the drugstore.
Write to Charley Grant at [email protected]