Perrigo Company (PRGO) reported earnings per share of $1.05 for the second quarter of fiscal 2011, easily beating the Zacks Consensus Estimate of 95 cents and the year-earlier earnings of 73 cents per share. Results were driven by a solid top-line and gross margin performance.
Second quarter revenues increased 23% over the prior year to $718 million. Total revenues were also above the Zacks Consensus Estimate of $708 million. The year-over-year revenue growth was aided by strong performances by the company’s nutritional and generic prescription businesses. Recent acquisitions and new products also added to revenues.
Quarter in Detail
Consumer Healthcare (CHC): Perrigo reported CHC revenue of $430 million in the second quarter, up 3% over the prior year despite a tough comparison from a strong flu season in the corresponding prior-year period. Revenue growth was driven by growth of analgesic, smoking cessation, and feminine hygiene products as well as new product sales. The company stood to benefit from major competitor product recalls in the consumer health care markets.
However, cough/cold and gastrointestinal product sales and contract manufacturing were weak in the quarter. Sales, particularly of cough and cold products, suffered somewhat from production constraints following the remediation of the issues raised by the US Food and Drug Administration (FDA) warning letter received in April last year. The company expects production to normalize, going forward.
Nutritional: Perrigo reported Nutritional quarterly revenue of $133.5 million, up 119% over the prior year. The growth rate was boosted by revenues worth $86 million from PBM Holdings Inc. (PBM), acquired in April last year, coupled with a strong performance of the infant formula business.
Rx Pharmaceuticals: The company reported Rx Pharmaceuticals revenue of $97.5 million in second quarter of fiscal 2011, up 72% over the prior year driven by increased sales volume and higher sales of new products like Imiquimod cream (generic version of Aldara) and levocetirizine tablets, a generic version of Xyzal, for allergies.
Active Pharmaceutical Ingredients (API): The company reported API sales of $40.3 million in the reported quarter, up 14% over the prior year. Improved sales of Temodar in Europe were partly offset by decreased sales of existing products and a negative foreign exchange impact.
The company reported an overall adjusted gross margin of 35.8%, up solidly by 100 basis points from the prior year driven by contributions from the PBM acquisition and a healthy top-line.
The company reported an overall operating margin of 20.2% versus 17.9% in the second quarter of the prior year as it expanded its gross margin and leveraged operating expenses.
Promising 2011 Guidance
Perrigo raised its fiscal 2011 earnings per share outlook to $3.75–$3.90 from $3.60–$3.75, which implies year-over-year growth of 24–26%. The Zacks Consensus Estimate for 2011 of $3.84 is within the guidance range.
The company raised its outlook thanks to confidence from the second-quarter results backed by an increasing demand for its products. The guidance does not include the launch of Perrigo’s OTC versions of Allegra and Allegra D12.
Perrigo maintained its total revenue growth guidance of 20%–23% over fiscal 2010. The company reiterated its revenue guidance for the Nutritionals segment (near 100% growth); increased guidance for the RX business (35%+ growth versus 30%+ expected previously) as well as API (slight growth over 2010 levels versus a decline expected earlier) and reduced the CHC growth outlook (to the lower end of the previously forecast 7–9% range).
The company expects to launch more than 50 new products in fiscal 2011, which are expected to add revenues worth $180 million.
In fiscal 2011, Perrigo expects approximately 35%–36% overall gross margin, excluding amortization, slightly above the prior guidance. Operating margin guidance, however, was raised to 19–20% from 18%–19% earlier excluding amortization.
Cash flow from operations is expected to be between $350 million and $380 million for the fiscal year.
Product and Pipeline Update
The company launched Naproxen Sodium Soft Gels, a generic equivalent of Aleve Liquid Gels, in November 2010.
Perrigo holds exclusive sales and distribution rights to OTC store brand versions of Sanofi’s (SNY) Allegra and Allegra D. Sanofi expects to launch its OTC version of Allegra in March 2011 and the company expects to launch its store brand version of Allegra OTC between March and May, 2011.
Our Recommendation
Currently, we have an Outperform recommendation on Perrigo, which is supported by a Zacks #2 Rank (short “Buy” rating). We find the company’s second quarter execution highly encouraging. We believe that Perrigo’s strong position in the brand OTC pharmaceutical market and growing generics and API businesses will help it deliver solid top- and bottom-line growth in the coming years.
We also expect the company to benefit from over-the-counter switches from branded products in the next five years. Moreover, management’s policy of pursuing smart strategic deals should help drive growth for the company. Perrigo also has a very strong and impressive pipeline.
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