Diminished Confidence on Perrigo

Although we’re encouraged by Perrigo’s decision to sell Tysabri and efforts to improve its international branded consumer health business, we’re leaving our no-moat rating in place as increasing competition in the U.S. generics business and past poor capital-allocation decisions diminish our confidence in future economic profits.

We remain most concerned about Perrigo’s generic prescription segment as its U.S.- and Europe-based consumer health businesses continue to mostly track our expectations. When adjusting for asset sales and currency headwinds, 1% and 2% revenue declines in the U.S. and European consumer health divisions look a bit concerning, but we still think these segments can squeeze out low-single-digit growth going forward thanks to store-brand penetration and new product launches, such as store-brand Nexium later this year. European segment adjusted operating margin improved nearly 130 basis points to 13.8%, and we project it to eventually return to the high teens. Operating margin in the U.S. consumer health business was relatively unchanged from last year.

Pricing pressure and the increased competition on Entocort continues to weigh on the prescription segment, which posted a 12% revenue decline and nearly 610 basis points in adjusted operating margin erosion. Uncertainty persists about the trajectory of this division in 2018, but we still anticipate greater revenue and margin stability in 2018 with potential help from limited-competition product launches like generic ProAir. Management anticipates a potential ProAir launch in 2018 following a recent response to the Food and Drug Administration's complete response letter.

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