Perrigo Americas Segment Struggles with Nutrition Issues, but International Business Remains Strong

Equity Analyst

Keonhee Kim

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. While we believe the retailer often wields more negotiation leverage in a fragmented OTC market due to a number of manufacturers competing for the same set of retailers, we expect Perrigo’s market share to be stable thanks to the company’s long-standing record for reliability, large-volume manufacturing capacity, and expertise in shelf space management. 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. Perrigo recently made a number of acquisitions to bolster its branded portfolio, including HRA Pharma (2022; $1.9 billion) and Dr. Fresh (2020; $113 million). 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 now expect Perrigo, after a period of robust acquisitions, to focus on internal investments, supply chain improvements, and new innovations. The firm has also voiced its intention of optimizing its private-label offerings to 1) divest margin-dilutive items and 2) lower product variation by discontinuing nonstrategic count sizes and packaging configurations. While this could adversely impact its relationship with some retailers, we also expect these reduced changeovers to increase manufacturing utilization and overall productivity.

Business Strategy & Outlook

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.

Perrigo’s business can be broken down to two major segments: store brands (private label) and national brands. We believe Perrigo’s store brand business, which generates more than half the company’s total sales, lacks material competitive advantages over other players to warrant a moat rating. In consumer health, real product differentiation is low but perceived product differentiation is high, so pricing power is earned through brand reputation. While this is certainly achievable in the industry as we clearly see from players like Kenvue and Haleon, we believe Perrigo is not able to build brand reputation with its private-label business due to a multitude of reasons. The most obvious reason, in our opinion, is that 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. Furthermore, Perrigo’s private-label products have a specific retailer’s branding on their packaging, so Perrigo’s ability to earn recognition from consumers is little to none. Lastly, private label is largely seen as value offerings—Perrigo’s store brands are priced on average 30% lower compared with their branded counterparts. We believe the combination of these reasons provide minimal opportunities for Perrigo’s private-label business to boast meaningful competitive advantages and to earn excess returns. 

The remaining portion of Perrigo’s sales is generated from its branded consumer health products. While the company boasts a wide product portfolio that plays in various categories, including oral care, nutrition, digestive health, and women’s health, we believe the company possesses brands with neither significant market share nor strong pricing power to earn a moat rating. We identified Dr. Fresh and Firefly as Perrigo’s key brands in North America and Compeed, Coldrex, Solpadein, and Niquitin in international markets. Data from Euromonitor shows that these brands rarely possess any meaningful share and are overshadowed by bigger and more recognizable brands. Furthermore, we fail to see any example from Perrigo’s brands that boasts a meaningful pricing premium over its competition. While Perrigo has tried to improve its branded business by divesting nonstrategic brands and purchasing bigger names—added Compeed and Mederma through the HRA acquisition and acquired GoodStart from Nestle—we still believe Perrigo lags other major players in the industry in having a moatworthy portfolio.

None

Economic Moat

Perrigo

Perrigo Co. Plc engages in the provision of self-care products and over-the-counter (OTC) health and wellness solutions. It enhances individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. It operates through the following segments: Consumer Self-Care Americas (CSCA) and Consumer Self-Care International (CSCI). The CSCA segment offers OTC solutions, infant formula, oral care, and contract manufacturing in the U.S, Mexico, and Canada. The CSCI segment includes the self-care business branded in Europe, Australia, the United Kingdom, and parts of Europe and Asia. The company was founded by Luther Perrigo in 1887 and is headquartered in Dublin, Ireland.

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Perrigo Co. Plc engages in the provision of self-care products and over the counter health and wellness solutions. It enhances individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. It operates through the Consumer Self-Care Americas and Consumer Self-Care International segments. The Consumer Self-Care Americas segment offers OTC solutions, infant formula, oral care, and contract manufacturing in the U.S, Mexico, and Canada. The Consumer Self-Care International segment includes the self-care business branded in Europe, Australia, the United Kingdom, and parts of Europe and Asia. The company was founded by Luther Perrigo in 1887 and is headquartered in Dublin, Ireland.

DUBLIN, Oct. 29, 2020 /PRNewswire/ -- Perrigo Company plc (NYSE; TASE: PRGO), a leading provider of Quality, Affordable Self-Care Products, today announced that it has been advised by the Irish High Court that the Court's decision on our pending Judicial Review case on whether to...

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DUBLIN, Oct. 14, 2020 /PRNewswire/ -- Perrigo Company plc (NYSE; TASE: PRGO), a leading provider of Quality, Affordable Self-Care Products, today announced that it will release its third quarter financial results on Wednesday, November 4, 2020. The Company will also host a conference call...

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