Goldman Sachs has downgraded its recommendation for generic and over-the-counter drug company Perrigo Company (Nasdaq:PRGO; TASE:PRGO) from "Neutral" to "Sell" on Friday, and cut its target from $117 to $110, with a zero return potential. Goldman Sachs analyst Jami Rubin cites a further slowdown in the company's growth rate compared with its peers and high comparative multiples, which are becoming more difficult to justify.
Perrigo's share price fell 6.3% by midday on the TASE today to NIS 387.90, after falling 5.8% on Nasdaq to $103.85, giving a market cap of $9.75 billion.
Rubin says, "While we view Perrigo as uniquely positioned in a fast-growing niche OTC store brand market, we expect slowing growth going forward, particularly within the consumer healthcare and nutritional divisions, which are the key drivers of Perrigo's premium valuation. We believe that sustaining growth in the consumer healthcare division will require major Rx brands going OTC, including statins and asthma drugs, which we continue to believe is unlikely.
"In the near term, we await visibility on the timing of the Mucinex launch and the recovery of nutritionals. Failure to execute on both of those drivers could lead to downward estimate revisions this year, though the robust and early flu season and recent accretive deal (Cobrek Pharmaceuticals) should help to ameliorate these pressures."
Perrigo's nutritionals business includes store-brand infant formula, a business that the company acquired through the acquisition of PBM Holdings Inc. for $800 million in 2010.
Rubin says that, after the delayed launch of generic anti-congestion Mucinex in the third quarter of the fiscal year, Perrigo will see single-digit growth in consumer healthcare until the launch of Nexium in 2017. "For Nutritionals, execution will be put to test as we have yet to see meaningful growth in store brand infant formulas, and growth in China will require significant investments," he adds.
Rubin concludes, "Perrigo has been the darling of the generic space with both revenues and margins historically growing faster than peers (accordingly Perrigo shares have outperformed in the past three years, up 160%. vs. generic peers up 44% and the S&P 28%)." He adds that although the company has had double-digit revenue and profit growth, its revenue is now in line with its peers.
Rubin cut his earnings per share estimate for 2013 from $5.56 to $5.50, and cut his revenue estimate from $3.6 billion to $3.53 billion, with most of the earnings in the second half of the year, based on the timing of drug launches.
Published by Globes [online], Israel business news - www.globes-online.com - on January 13, 2013
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