Perrigo Pharmaceuticals

Perrigo Company (NASDAQ: PRGO), the world’s largest manufacturer of over-the-counter pharmaceutical products, has soared since acquiring Israeli pharmaceutical maker Agis Industries in 2005. Its stock has more than doubled, it has gotten new products into the pipeline quickly, and has grown so much that it’s picking up employees from other drugmakers that are scaling back.

In fact, Perrigo’s recent success (it was trading near its 52-week high of about $36 a share in early February) echoes the upbeat story of Israeli pharma giant Teva. At the moment, generic drugs from Agis (now a Perrigo subsidiary) make up 10% of Perrigo’s sales, but its initial impetus for the acquisition was to get into a new market away from the cutthroat, low-margin OTC generics business.

In 2008, Perrigo is continuing in the strong vein it mined last year. In its first quarter fiscal 2008 (third quarter calendar 2007), operating income rose 79% from the year before, and its net rose 102%. Second quarter 2008 results announced in early February showed EPS reached 36 cents on net sales of $435.5 million. Net income rose 80% to $68.3 million and marked a positive surprise of almost 6% above analysts’ consensus, while revenue jumped 17%.

As a result, the company raised its earnings per share guidance for the full year in early February to between $1.50 and $1.60, a growth of 69% to 80% over the previous year. A company release at the time said the new outlook reflected continued strong performance of its existing portfolio of products, along with additional volume gains from ongoing quality issues at a competitor. The projected rise in EPS caused the company’s stock to jump from $30 to its 52-week high of $36.86.

The company’s earnings guidance didn’t even mention an early 2008 acquisition of a privately held U.K. OTC generic supplier, Galpharm, for $86 million, which is expected to add $55 million in sales and will boost earnings this year.

In mid-February, Perrigo announced that it had become the first company to receive FDA approval via its Abbreviated New Drug Application process and that it would have market exclusivity for the first approved generic form of a popular OTC product—Johnson & Johnson-Merck Consumer Pharmaceuticals’ Pepcid Complete chewable antacid tablet, which has annual sales of about $95 million. The new product is expected to begin shipping in the third quarter of calendar 2008.

That announcement followed the December 2007 FDA approval for Perrigo’s generic version of heartburn reliever Prilosec OTC. That product, which the company projects will generate about $200 million in revenue this year, brought about an earlier increase in 2008 earning projections to $1.47 a share, a 20% increase.

All this good news has led to analysts taking a positive view of the once-stodgy company. “We’re modestly raising Perrigo’s fair-value estimate to reflect a better-than-expected first-half performance in the consumer segment,” Brian Laegeler of Morningstar wrote recently. Goldman Sachs, while indicating some caution from potential competition, didn’t change its stand from “neutral.”

OTC generics aside, the company is not ignoring its other focus, prescription generics, and perhaps even more important, active pharmaceutical ingredients, a key product of Perrigo Israel. Perrigo’s wholly owned subsidiary is one of Israel’s 25 largest industrial companies, with more than 1,600 highly trained staff members, including doctors and life-science professionals, with manufacturing plants in the United States, Germany, and Israel.

More than two-thirds of Agis’ sales are generated by international operations, the area where the company sees the most potential for further growth. The company is focusing on supplying leading global pharmaceutical companies with API’s used in making pharmaceutical products. Perrigo Israel’s API sales rose 10.3% to $122 million in 2007.

Perrigo’s U.S. customers are major wholesalers such as Cardinal Health, McKesson, and AmerisourceBergen, as well as national and regional retail drug, supermarket, and mass-merchandise chains, such as Wal-Mart, CVS, Rite Aid, Walgreens, Albertsons, Kroger, Safeway, and Brooks. Perrigo Israel also makes some over-the-counter creams and has signed contracts with multinational drug companies including Bayer and Schering-Plough. It is the second-largest pharmaceutical company in Israel, after Teva.

— By Alan D. Abbey