We saw a bullish thesis for pharmaceutical company Perrigo Co. PLC (PRGO) on ValueInvestorsClub which we really liked as it is backed by solid data points. We like VIC because the ideas on their site are generally posted by aspiring analysts who produce quality research. Click here for the full article. Below we summarized the PRGO bullish thesis.

Perrigo, an American Irish-registered company founded in 1887, is one of the world’s leading manufacturers of global consumer self-care O-T-C healthcare products. The company sells more O-T-C version products than the big pharma’s branded names such as Advil and Tylenol.  Its trades on the NYSE and the TASA.

As a developer, manufacturer and distributor of quality affordable self-care products, the company’s dominant position and scope is currently being undermined by the following factors:

Misconception of decline in sales

As PRGO was divesting its less profitable businesses, especially Animal Health and VMS, its consolidated sales had declined. But on a disaggregate basis, the unit level saw a 4.5% volume growth across all major segments, and that too under the previous management’s short-sighted vision of neglecting product development and innovation. Another product-specific name, especially in North America, is Infant Nutritionals. Despite a $6 billion industry wide domestic annual sale and a unique bar to entry, PRGO failed to focus on innovation and ran into production capacity constraints. With improved operational output, this unit also can see significant sales growth over the next few years.

Investors’ disappointment over the generic pharmaceutical business

The Street presently views PRGO as pure healthcare company because it owns a generic pharmaceutical business. Continued “procrastination” over the sale of this unit has investors yawning over the past couple of years. The new CEO Murray Kessler has prudently decided to wait for this sale as generics industry is showing signs of growth in valuations. A better sale value will aid in the deleveraging of the balance sheet.

The company is turning the tide with following opportunities:

  • RX to OTC switches: PRGO is using its high cash generation to acquire rights to manufacture generics before the patent expiration of the branded names.
  • Innovative pricing strategy: PRGO’s misdirected focus had cost it the pricing power. It will now focus on national brands, which will not require an NDA, for better pricing.
  • Profit pool for growth acceleration: As part of PRGO’s revival of registering growth in the adjacent products, the company plans to enter adjacent profit pools via organic entry and exit for a full-fledged generic manufacturing upon acquisition.
  • Investment in technology: Lack of investment in technology is costing PRGO opportunities. This is being corrected now with investment in technology to capture data analytics and retail brand dynamics.

The analyst believes the company will divest the Rx business for $1.5-$2.0 billion and reduce the current total debt of $4.1 billion, while the remaining consumer health care business will generate $880 million in EBIT. Over the next three years PRGO will easily generate $900 million in cumulative free cash flow in addition to $1.45 billion of cash already on the balance sheet. In comparison to its peers trading closer to 22x PE, PRGO, after deleveraging, is hovering around <10x PE. That translates into a stock price of $97 or double the $48 price as of 10 September, 2020.