Why I'm Not Convinced by This Pharma Company's Latest Presentation

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The JP Morgan Healthcare conference is the most important event on the industry's calendar and helps set the tone for the rest of the investing year. Typically the pharma/biotech companies outline the key pipeline events of the year or how they plan to expand existing product sales while the medical technology and services companies discuss their prospects for the coming year. I thought I’d help investors compress their research of the event and the sector by providing a brief overview of some of the presentations. I’ll start with Perrigo (NYSE: PRGO).

Key Questions for Perrigo

Perrigo is a company that I have discussed in a previous article linked here. The key questions from that article were:

  • Whether Perrigo could hit its forecast of 12-16% revenue growth when it had only reported 6% in the last quarter and had disappointed in the last two quarters with its core consumer health division.
  • How will it generate growth in the Nutritionals segment following a weak quarter last time around?
  • How sustainable are its (already high) margins in its generic pharma division.

The presentation highlighted the favorable long term trends for Perrigo and contained a few specifics on how the company plans to achieve its aims. Essentially the idea is to continue to benefit from the consumer trends towards in-store brands from national brands. In addition, increasing numbers of drugs are moving from prescription to over the counter (OTC). Both are good trends for Perrigo in its consumer health division.

I like these trends and note that whenever CVS (NYSE: CVS) or Walgreen (NYSE: WAG) give presentations they stress the growth potential in expanding their in-store brands. Along with Wal-Mart (NYSE: WMT), they are key customers for Perrigo. All three companies would love to increase in-store brand sales in order to drive customer traffic by offering consumers lower prices for drugs. It reduces revenues, as I pointed out here, but it increases profits thanks to sharply increased margins. The ‘victim’ here is the branded pharmaceutical company.  

There are no arguments over these long term drivers, but what of Perrigo’s mid-term growth strategy?

Perrigo Outlines its Growth Strategy

As for the growth strategy, more than 60 new products will be released this year and the company believes it can continue its impressive record of increasing operating margins thanks to scale. Perrigo outlined some growth opportunities in areas like diabetes and pet care, but my key takeaway from the presentation was the emphasis on its belief in its marketing capability to differentiate itself from the competition. The idea is that it can use marketing nous to help retailers sell more of its products even when competing with other companies offering similar products.

Indeed, this theme was continued in the idea that it could drive sales in the nutrition division through its new plastic infant formulation container because it imitated the look of an existing national brand, a tactic that the company believes tends to produce a step up in sales. This is all very well, but readers should take a look at what Mead Johnson has had to say recently about the intensity of competition in infant formula in the US and elsewhere. It is a highly competitive market which is suffering, at least in the Western world, from declining birth rates.

The Bottom Line

Putting all these things together, I must confess I am somewhat unconvinced that my earlier questions were answered. There wasn’t much new in Perrigo’s presentation, and as much as I like the stock and sector I can’t help thinking that things like marketing nous aren’t the usual things that investors rely on for the long term. It has much to do to hit its 12-16% revenue growth target and history is littered with companies that promised a better second half and then failed to deliver. Throw in Perrigo’s high evaluation, and I think the risk/reward calculus doesn’t suggest a buy right now.

The market seems to be willing to give it the benefit of the doubt for now. However, if there are any further disappointments going forward then I would expect the stock to get hit hard.  If so, it would become very interesting because its long term trends are very good.


SaintGermain has a position in Walgreen. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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