Perrigo: Initiating Coverage on OTC Private-Label and Branded Healthcare Player; Shares Look Cheap

We are initiating coverage on Perrigo PRGO with a fair value estimate of $40 per share. Our forecast model has a five-year top-line compound annual growth rate of 4.4% and a moderate year-over-year margin expansion from 2022.

Once a company with presence in various industries, including generic pharmaceuticals and animal health, Perrigo spent the last few years divesting noncore businesses to simplify its operation and fully focus on consumer healthcare products. Perrigo is now a pure-play consumer healthcare player and is the largest private-label over-the-counter, or OTC, consumer healthcare manufacturer in the U.S., supplying over 50% of the market on a volume basis. We expect Perrigo’s private-label business to grow low single digits over the next five years from both price actions and modest volume growth.

By contrast, Perrigo’s sales in international markets are largely driven from branded products. These offerings fall under the traditional OTC generics category (in cough, cold, allergy, and pain) in addition to skin care, oral care, digestive health, and personal hygiene. We appreciate the firm’s efforts to increase its presence in the branded market because branded products post a materially higher margin compared with private label and make up the lion’s share of Perrigo’s operating income.

We assign Perrigo a no-moat rating because we do not believe the company possess any structural advantages sufficient to generate excess returns over the next 10 years. In the OTC private-label market, we believe a retailer has more leverage in the retailer/supplier relationship. Since contracts aren’t long term in nature—usually renegotiated every 12 months—retailers can shift their manufacturing partners over time to secure the best price/terms. And major stores, pharmacies, and online retailers have substantial scale and negotiation leverage in the supply chain, leaving little economic profit to be captured upstream.