Perrigo Company plc (PRGO-NYSE)

Transcription

1 March 20, 2015 Perrigo Company plc (PRGO-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 09/02/2012 Current Price (03/19/15) $ Target Price $ SUMMARY Perrigo Company s second-quarter fiscal 2015 earnings of $1.82 per share beat the Zacks Consensus Estimate of $1.78. Net sales in the quarter increased 9% to $1.1 billion in line with the Zacks Consensus Estimate. We are pleased with the performance of the Specialty Sciences and Rx Pharmaceuticals segments. However, continued disappointing performance of the CHC and Nutritional segments is concerning. We are positive on the Omega Pharma acquisition, which is in line with Perrigo's strategy of expanding internationally. In view of these factors, we maintain our Neutral recommendation on the stock with a target price of $ per share. SUMMARY DATA 52-Week High $ Week Low $ One-Year Return (%) 4.18 Beta 0.37 Average Daily Volume (sh) 1,102,593 Shares Outstanding (mil) 141 Market Capitalization ($mil) $24,022 Short Interest Ratio (days) 2.14 Institutional Ownership (%) 77 Insider Ownership (%) 1 Annual Cash Dividend $0.50 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 14.5 Earnings Per Share (%) 20.6 Dividend (%) 12.6 using TTM EPS 27.2 using 2015 Estimate 23.2 using 2016 Estimate 19.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Average Type of Stock Large-Blend Industry Med Products Zacks Industry Rank * 109 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) A 883 A 920 A 967 A 3,540 A A 979 A 1,004 A 1,144 A 4,061 A A 1,072 A 1,138 E 1,400 E 4,562 E ,639 E Note: Quarterly numbers may not add up to annual numbers due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $1.27 A $1.36 A $1.42 A $1.57 A $5.61 A 2014 $1.52 A $1.87 A $1.31 A $1.74 A $6.39 A 2015 $1.40 A $1.82 A $1.78 E $2.35 E $7.35 E 2016 $8.56 E Note: Quarterly numbers may not add up to annual numbers due to rounding off Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Dublin, Ireland-based Perrigo Company plc was formed following the Dec 2013 merger of Allegan, MI based Perrigo Company and Elan Corporation. The merged entity, with a diversified revenue stream, is a global healthcare company with an attractive growth profile. Currently, Perrigo reports revenues from five major segments: Consumer HealthCare This segment offers a broad line of store brand OTC pharmaceutical products across several categories including analgesics, cough/cold/allergy/sinus, gastrointestinal and smoking cessation products. The bulk of revenues at Perrigo are derived from this segment. Important products include the store brand versions of Prilosec OTC (for gastro esophageal reflux disease), MiraLax (for bowel cleansing), Zyrtec (for cold) and Nicorette gum (for smoking cessation). Rx Pharmaceuticals This segment manufactures, develops and markets a portfolio of generic prescription drugs in the U.S., in particular topical products including creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquid suspensions, solutions, injectables and powders. Nutritionals This segment manufactures infant formulas, toddler and baby food, vitamins, minerals and supplements (VMS), as well as oral electrolyte solutions. Following the PBM Holdings acquisition, the company started reporting Nutritionals as a separate segment from the first quarter of fiscal Active Pharmaceutical Ingredients This segment develops, manufactures and markets APIs used worldwide by the generic drug industry and branded pharmaceutical companies. Specialty Sciences The segment was the result of Perrigo s acquisition of Elan. Segmental revenues include royalties received by Perrigo on multiple sclerosis drug Tysabri from Biogen Idec. In Sep 2014, Perrigo transferred some of the early stage assets gained from the Elan acquisition to Imago Pharmaceuticals. Perrigo said that the assets transferred included intellectual property, candidates in preclinical development and a 500,000 compound, CNS-focused, diversity-driven, small-molecule library. In fiscal 2014, the Consumer HealthCare, Rx Pharmaceuticals, Nutritionals, Active Pharmaceutical Ingredients and Specialty Sciences segments contributed 54.6%, 22.8%, 13.6%, 3.4% and 3.9% respectively to the company s total revenues of $4.06 billion. Others accounted for the balance. The company s fiscal year ends on the last Saturday of June every year. REASONS TO BUY Acquisitions to Drive Growth: Perrigo announced in Nov 2014 that it has entered into an agreement to acquire Omega Pharma, a leading over-the-counter health care company in Europe, in a transaction valued at 3.6 billion ($4.5 billion), which includes the assumption of 1.1 billion in debt. We are positive on the Omega Pharma acquisition, which is in line with Perrigo's strategy of expanding internationally. The company is constantly making acquisitions to expand its business and drive growth. We are impressed by Perrigo s growth-by-acquisition strategy. In Sep 2014, Perrigo inked a deal with Lumara Health to acquire the latter s Women's Healthcare products for $82 million. The acquisition added products like Clindesse (vaginal cream), Gynazole-1 (vaginal cream) and Evamist (estradiol transdermal spray) to Perrigo s Specialty Rx portfolio. The acquisition is expected to be modestly Equity Research PRGO Page 2

3 accretive to adjusted earnings per share in fiscal In Mar 2014, Perrigo announced that it has inked a partnership deal with KanPak in which Golden State Foods, one of the largest diversified food processors and distributors in the U.S., has a controlling interest. According to the deal, the Nutritionals unit will manufacture store brand versions of nutritional drinks for adults which are comparable to offerings under the Ensure product line. In Dec 2013, Perrigo completed the acquisition of Elan for approximately $8.6 billion in a bid to boost its revenue stream and save taxes. Following the completion of the deal, Perrigo s revenue stream has been boosted as it now receives significant royalties on Tysabri from Biogen. In Jun 2013, Perrigo acquired an ophthalmic product portfolio from privately held Fera Pharmaceuticals for an upfront payment of $93 million. The deal added nine generic prescription drugs to Perrigo s portfolio. Also in 2013, Perrigo acquired companion animal health company, Velcera, Inc. for approximately $160 million in cash. In Dec 2012, Perrigo acquired privately held Cobrek Pharmaceuticals, Inc. for approximately $45 million in cash. In Jan 2012, Perrigo inked a deal to acquire the assets of Georgia-based private company CanAm Care, thereby expanding its presence in the diabetes care market. In Jul 2011, Perrigo acquired Paddock Labs to expand its generic Rx business. Prudent acquisitions like these should drive growth at Perrigo in the coming quarters. Focus on the OTC Market: Perrigo is a dominant player in the store brand OTC drug market. The OTC market offers significant commercial potential. Management estimates that branded prescription products worth $10 billion will become OTC in the next five years, thus resulting in significant switch opportunities for Perrigo in the coming years. We are also impressed by Perrigo s strong pipeline. REASONS TO SELL RECENT NEWS Below-Par Performances of Certain Segments Concerning: We are concerned about the lackluster performance of Perrigo s Nutritionals and API segments in the second quarter of fiscal Revenues from the Nutritionals segment declined 7% year over year to $130.6 million in the quarter due to below par sales of products in the infant/toddler food and VMS units. API sales were flat year over year as increase in sales of existing products was fully offset by negative foreign exchange translation impact. Consumer healthcare sales were below expectations in the reported quarter. Lower-than-expected performance of these segments will hurt the stock. Competition: Perrigo s store brand products face competition from nationally advertised brand-name products of companies that have stronger financial resources. Some of the company s competitors are Dr. Reddy s Laboratories, Ltd., Actavis, Mead Johnson Nutrition Company, Nestle and others. The market for OTC pharmaceutical, generic prescription drugs and nutritional products is also highly competitive. Perrigo Beats on Earnings Feb 5, 2015 Perrigo Company s second-quarter fiscal 2015 (ended Dec 27, 2014) earnings of $1.82 per share beat the Zacks Consensus Estimate of $1.78. Reported quarter earnings were 3% below the year-ago figure. Net sales in the quarter increased 9% to $1.1 billion. Revenues increased $79 million due to contributions from Elan Corporation (acquired in Dec 2013). Newly launched products boosted revenues by $54 million. Lower year-over-year volume in contract manufacturing and Animal Health in the Consumer Healthcare (CHC) segment and disappointing sales in the Nutritional segment affected revenues negatively. Foreign exchange translations negatively impacted revenues by $7 million. Revenues were in line with the Zacks Consensus Estimate. Equity Research PRGO Page 3

4 Fiscal Second Quarter in Detail Perrigo reports revenues primarily from the following segments: CHC, Nutritionals, Rx Pharmaceuticals, Active Pharmaceutical Ingredients (API) and Specialty Sciences. The Specialty Sciences unit came into existence following the Elan Corporation acquisition. Consumer Healthcare: Perrigo reported CHC revenues of $529.6 million in the quarter, down 1%. Revenues fell primarily due to disappointing performance from contract manufacturing and Animal Health categories. Nutritional: Perrigo reported revenues of $130.6 million, down 7%. Below par sales of products in the infant/toddler food and VMS units hurt segmental sales. Rx Pharmaceuticals: The Rx Pharmaceuticals segment performed encouragingly during the quarter with net sales rising 12% to $276.6 million. Absence of revenues from discontinued products was more than offset by higher volumes. Active Pharmaceutical Ingredients: The company reported API sales of $30 million, flat year over year as increase in sales of existing products was fully offset by negative foreign exchange translation impact. Specialty Sciences: Segmental revenues came in at $86.6 million due to royalties received by Perrigo on multiple sclerosis drug Tysabri from Biogen Idec. Others accounted for the remaining revenues. Fiscal 2015 Guidance Perrigo provided a guidance for fiscal The company expects adjusted earnings per share in the range of $7.25 to $7.45, up 13% to 17% over fiscal 2014 levels. However, the guidance excludes all impacts related to the Omega Pharma acquisition. A negative impact of $0.44 per share related to debt and equity financing costs and additional shares issued related to the Omega Pharma acquisition is not reflected in the guidance. Perrigo is set to acquire Omega Pharma, a leading over-the-counter health care company in Europe, in a transaction valued at 3.6 billion ($4.5 billion), which includes the assumption of 1.1 billion in debt. VALUATION Perrigo Company s second-quarter fiscal 2015 earnings of $1.82 per share beat the Zacks Consensus Estimate of $1.78. Net sales in the quarter increased 9% to $1.1 billion, in line with the Zacks Consensus Estimate. We are pleased with the performance of the Specialty Sciences and Rx Pharmaceuticals segments. However, continued disappointing performance of the CHC and Nutritional segments is concerning. We are positive on the Omega Pharma acquisition, which is in line with Perrigo's strategy of expanding internationally. In view of these factors, we maintain our Neutral recommendation on the stock. Perrigo s current trailing 12-month earnings multiple is 27.2 compared to the S&P 500 average of Over the last five years, Perrigo s shares have traded in a range of 18.7x 26.7x trailing 12-month Equity Research PRGO Page 4

5 earnings. Our target price of $ is based on 24.4x our fiscal 2015 earnings per share estimate of $7.35. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Perrigo Company plc (PRGO) Industry Average S&P Mead Johnson Nutrition Company (MJN) Hospira Inc. (HSP) CareFusion Corporation (CFN) Alere Inc. (ALR) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Perrigo Company plc (PRGO) Industry Average S&P Equity Research PRGO Page 5

6 Earnings Surprise and Estimate Revision History Equity Research PRGO Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of PRGO. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Lopamudra Bhattacharya Editor Last Updated By QCA Reason for Update Pushpanjali Banerjee Lopamudra Bhattacharya Arpita Dutt Earnigns update Equity Research PRGO Page 7