Bloomberg News

Perrigo’s 349% Surge Not Over Yet to Bullish CEO: Israel Markets

November 11, 2013

Perrigo Facility

Signage stands at the Perrigo Co. facility in Allegan, Michigan. Photographer: Adam Bird/Bloomberg

The five-year, 349 percent rally in Perrigo Co. (PRGO:US), the largest maker of generic over-the-counter drugs in the U.S., is doing nothing to undermine its executives’ bullish outlook on the stock.

Top officials at Perrigo, from Chief Executive Officer Joseph Papa to Chief Financial Officer Judy Brown, have sold the fewest shares since 2005 this year, according to data compiled by Bloomberg. The stock, which entered the Tel Aviv benchmark index after buying B’nei Brak, Israel-based Agis Industries Ltd. in 2005, has jumped 44 percent so far in 2013 and reached a record $149.61 yesterday.

Perrigo, whose products include store-brand versions of Johnson & Johnson’s Tylenol pain reliever, posted the fastest revenue growth since 2011 and will gain a base for international expansion after the acquisition of Irish drugmaker Elan Corp. closes. Sales of generic pharmaceuticals increased 2.6 percent last year, while branded-drug revenue in the U.S. fell 8.4 percent last year, according to data compiled by Bloomberg Industries.

“They have an excellent manufacturing system that allows them to go between different products,” Charles Jones, an analyst at Barrington Research Associates Inc., said by phone from Chicago on Nov. 6. “They have done a nice job through acquisitions.”

Management stock sales this year have slowed to 175,379 shares from more than 5 million shares in 2008. Perrigo’s jump this year exceeds the 33 percent gain in the Standard & Poor’s Health Care Index.

The company doesn’t comment on insider trading, Arthur Shannon, vice president of investor relations and global communications for Perrigo, said by phone from Allegan, Michigan yesterday.

Investors, Analysts

Holdings by institutional investors grew 47 percent from a year ago, the fourth-largest increase in the S&P 500, according to data compiled by Bloomberg. Ten out of the sixteen analysts tracked by Bloomberg recommend buying Perrigo’s shares, while six have a hold rating.

Elan’s purchase allows Perrigo to move its domicile to Ireland, where the corporate income-tax rate is 12.5 percent. The acquisition will result in more than $150 million of recurring after-tax annual operating expense and tax savings, the company said in July. It also gives the acquirer royalties on the multiple sclerosis drug Tysabri (BIIB:US), which Elan discovered and sold to Biogen Idec Inc. on Feb. 6.

“Today as Perrigo standalone, our tax rate is ballpark 30 percent,” CEO Papa said on a conference (PRGO:US) Sept. 11. “As we think about the day we close the transaction, Perrigo’s tax rate will drop to” around 17 percent. Papa said last month the company expects to complete Elan’s acquisition by year-end.

Tax Rate

Perrigo reported an effective tax rate of 29 percent on Oct. 31, according to data compiled by Bloomberg based on the most recent quarterly filing. The rate was higher than the 24 percent average of 123 companies in the generic pharmaceutical industry, the data showed.

Perrigo plans to use proceeds from last week’s $2.3 billion bond sale to partially fund Elan’s acquisition, the company said in a Nov. 5 statement. The company is “acquisitive” and that creates “event risk,” John Puchalla, an analyst at Moody’s Investors Service Inc., said in a note last week. The New York-based firm assigned a Baa3 rating for the notes, which is the lowest investment grade.

Global Peers

This year’s surge in Perrigo’s shares was more than double the advance in the Bloomberg Israel-US Equity Index and analysts (PRGO:US) predict an average gain of 3 percent over the next 12 months, according to data compiled by Bloomberg. The stock trades at 21 times estimated earnings, or 22 percent above the average of global peers, the data showed.

“We see limited upside potential from current levels, and hence retain our neutral view on the stock,” Chicago-based Zacks Investment Research said in a Nov. 1 note to clients. “We expect investor focus to remain on Perrigo’s impending acquisition of Elan.”

Perrigo’s consumer health-care segment, which accounted for 59 percent of last year’s revenue, increased by an annual rate of 3.3 percent in the last four years, according to data compiled by Bloomberg. That’s slower than the 13 percent growth rate of the prior four years, the data showed. The company said in a slideshow (PRGO:US) on Oct. 31 that it expects consumer health-care sales to increase as much as 14 percent next year.

Margin Expansion

The company’s margin increased to 38.2 percent in fiscal first-quarter and is forecast to grow to 41.6 percent for the year, the highest on record, according to data compiled by Bloomberg based on the average of eight analysts estimates. The margin expansion has happened as the company brings new products to market, CFO Brown said on a conference call on Oct. 31.

“It appears that investors had been overly pessimistic about the threat posed to Perrigo’s consumer business revenues,” Jami Rubin, a New York-based analyst at Goldman Sachs Group Inc. said in a note to clients on Oct. 31. “We were comfortable with management’s guidance for margin expansion in the back half of the fiscal year.”

To contact the reporter on this story: Matthew Kanterman in New York at mkanterman2@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net


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Companies Mentioned

  • PRGO
    (Perrigo Co PLC)
    • $150.16 USD
    • 1.69
    • 1.13%
  • BIIB
    (Biogen Idec Inc)
    • $326.77 USD
    • 15.36
    • 4.7%
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