(PRGO) Perrigo Beats Earnings Forecast – Sales Miss

Perrigo Company (PRGO) reported earnings per share of $1.10 for the first quarter of fiscal 2012, beating the Zacks Consensus Estimate of $1.03 and the year-earlier earnings of 87 cents per share. Light sales performance was offset by a lower tax rate to drive earnings growth.

First quarter revenues increased approximately 13% over the prior year to $725.3 million. Total revenues were, however, below the Zacks Consensus Estimate of $748 million. Strong performances by the Active Pharmaceutical Ingredients (API) and Rx Pharmaceuticals segments were offset by sluggish revenues from the company’s Nutritional and Consumer Healthcare businesses due to competitive pressures.

The First Quarter of Fiscal 2012 in Detail

The revenue performance in the quarter from four of the company’s businesses is detailed below.

Consumer Healthcare (CHC): Perrigo reported CHC revenue of $412 million in the first quarter, up only 4% over the prior year.  CHC revenue was down sequentially from $434 million in the fourth quarter of fiscal 2011 as growth in the cough/cold and smoking cessation products was offset by weakness in gastrointestinal products due to increased competition. The segment however witnessed new product sales growth, particularly the OTC store brand version of generics of Sanofi Aventis’ (SNY) Allegra (for seasonal allergies) and Allegra D which is off to a strong start. Foreign currency also had a positive impact on revenue. Both adjusted gross as well as operating margins declined due to increased competition in the gastrointestinal categories as well as increased spending on promotion of new products.

Nutritional: Perrigo reported Nutritional quarterly revenue of $120 million which declined both sequentially and from the prior-year quarter as sales of vitamin, mineral and supplement products decreased due to additional competitive pressures. Market slowdown due to a decline in birth rates also affected revenues at the segment. The segment witnessed a decrease in adjusted operating income due to increased R&D expenses and higher commodity costs for infant formula.

Rx Pharmaceuticals: Perrigo reported strong Rx Pharmaceuticals revenue of $128 million in first quarter of fiscal 2012, up 84% over the prior year driven by higher sales of new products, acquisition of Paddock Labs (July 2011) and reduced pricing pressure due to light competition. The segment’s adjusted gross as well as operating margins were also up from prior-year levels driven by new products and production leverage.

Active Pharmaceutical Ingredients (API):  The company reported API sales of $48 million in the reported quarter, up approximately 30% over the prior year driven by growth in sales of existing as well as new products. Improved sales of Temodar in Europe and increased sales of Flonase led to an expansion in adjusted gross margins while controlled expenses boosted operating margins. Perrigo has an agreement to supply Teva Pharmaceuticals (TEVA) with the API of its generic version of Merck’s (MRK) Temodar in the US market. Perrigo is already selling the API in Europe and will provide the API in US on launch of Teva’s generic in August 2013.

Fiscal 2012 Guidance Revised

Perrigo upped fiscal 2012 adjusted earnings per share outlook from $4.50–$4.65 to $4.65–$4.80, which implies a growth of 16%–20% from the comparable fiscal 2011 earnings per share of $4.01. The guidance was increased due to strong pipeline and production efficiency gains. The Zacks Consensus earnings estimate for 2012 of $4.66 is within the guidance range.

The top line is now expected to grow in the range of 17% to 20% over fiscal 2011, up from prior expectations of 15% to 18% to be driven by new product launches. In fiscal 2012, Perrigo hopes to launch 45 new products that will add $190 million in revenue. In the CHC segment, Perrigo hopes to launch 4 new products every month. Important product launches in this segment will be the generic version of Johnson and Johnson’s (JNJ) Prevacid and generic Mucinex. In the Rx segment Perrigo hopes to launch generic versions of Duac, Xyzal, Cenestin, and Clobex lotion. The segment is also expected to benefit from inclusion of Paddock Labs. In the Nutritional business, it is expecting to launch a store brand version of Align, a digestive supplement as well as introduce a private label version of Gerber Gentle.

Consolidated adjusted gross margin is expected to remain in the band of 35%–38%, and adjusted consolidated operating margin will range between 20%–22%. The tax rate guidance was reduced from 29%–31% to 27%–29% due to a one-time tax benefit of $0.08 per share in the reported quarter.

Cash flow from operating activities is now expected in the range of $500 million to $530 million, up from the prior expectation of $470 million to $500 million in fiscal 2012. Capital expenditures are expected between $90 million and $110 million.

Our Recommendation

We have a Neutral recommendation on Perrigo Company. The stock carries a Zacks #2 Rank (Buy rating) in the short run.

We believe that Perrigo’s strong position in the brand OTC pharmaceutical market and growing generics and API businesses can help it deliver solid top- and bottom-line growth in the coming years. Perrigo also has a very strong and impressive pipeline which could drive growth in fiscal 2012 and beyond. However, we prefer to remain on the sidelines due to competitive pressures at its two important segments, CHC and Nutritional.

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

MERCK & CO INC (MRK): Free Stock Analysis Report

PERRIGO COMPANY (PRGO): Free Stock Analysis Report

SANOFI-AVENTIS (SNY): Free Stock Analysis Report

TEVA PHARM ADR (TEVA): Free Stock Analysis Report

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