Perrigo Company plc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Perrigo is a leading provider of over-the-counter (OTC) health and wellness solutions with a focus on developing, manufacturing, and supplying affordable self-care products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Perrigo operates primarily in the consumer self-care market, offering a diverse portfolio of products including:

  • Skin Care: Products like anti-itch creams, acne treatments, and anti-fungal solutions.
  • Upper Respiratory: Cough, cold, and allergy remedies.
  • Digestive Health: Antacids, laxatives, and anti-diarrheal medications.
  • Nutrition: Prenatal vitamins and minerals, and supplements.
  • Healthy Lifestyle: Products focused on weight management, smoking cessation, and sleep aids.
  • Oral Care: Products such as toothpastes, mouthwashes, and other dental aids.
  • Women’s Health: Feminine hygiene and products related to pregnancy, fertility, and women’s wellness.

The company’s business model focuses on providing quality, affordable self-care products that can be bought without needing to see a doctor or have a prescription for.

Geographic Distribution:

  • Consumer Self-Care Americas (CSCA): Primarily the U.S., Canada, and Mexico.
  • Consumer Self-Care International (CSCI): Europe and Australia.

Moat Analysis: 2/5

Perrigo’s moat is narrow and relatively weak. The company does benefit from some intangible assets, such as brand recognition for some of its products, and economies of scale through its large-scale manufacturing and distribution. There are switching costs associated with some of its over the counter medications because if a user finds a treatment that works, they are unlikely to change it. However, these competitive advantages are weak, and don’t provide significant protection against competitors in the markets they operate in. Here is a detailed breakdown on each of the sources of moats:

  • Intangible Assets: While Perrigo owns several well-known brands (e.g., Nicorette, Prevacid, GoodSense), their brand strength isn’t as powerful as to give them a significant pricing power over competitors. It does help with brand loyalty, but customers are easily able to switch for similar generic alternatives. Because the majority of their products are OTC and can be sold in generic form, brands do not create a moat.
  • Switching Costs: Customers may be loyal to products that have worked in the past, but there are many alternative options and switching costs are very low. The time needed to find a new product is also low. However some customers are more inclined to a certain brand, so brand recognition still makes somewhat of a moat.
  • Network Effect: The business is in no way benefited from the network effect. The more products they sell do not increase the value of the business.
  • Cost Advantages: Perrigo does have some cost advantages from its manufacturing scale and distribution network that allow it to offer products at competitive prices. However, these aren’t large enough to create a very strong moat, as other large OTC pharmaceutical companies or contract manufacturers have similar or better costs.

Because of their relatively weak moats, the company may find it difficult to consistently generate high returns on capital and can be subjected to price competition from other companies.

Moat Risks and Resilience

Despite not having a large moat, the company has some business resilience:

  • Regulation: Their business may be affected by new regulations from the FDA or other health authorities, however, because they are experienced in adapting to new regulation they have some experience. Also, regulations such as FDA clearance might create a barrier to entry for competitors who have not taken that path.

  • Financial Health: Their financial health is fine, and will probably not face a risk of bankruptcy soon, which gives time to adapt to any problems.

  • The risks include high inflation causing a decline in consumer confidence, supply chain problems and price and currency fluctuations. A recession could hurt demand.

Financial Analysis

Perrigo has a stable financial position, but struggles with profitability, which is related to its business model which focuses on selling low-priced products. This makes it vulnerable to competition from companies with lower costs of operation. Here is a deep dive into its financials:

  • Revenue: Net sales were $1,009.5 million for the quarter ended September 30, 2024, representing a 2.8% decrease compared to the same period last year. Organic net sales decreased by 1.2%, while net acquisitions and currency translations each had a positive effect. In general, revenues for the company have seen modest growth over the past few years with some periods of slight decline. There is no trend in sales.
  • Gross Profit: For the quarter ended September 30, 2024, gross profit was 36.8%, compared to 37.2% in the prior year. This is driven by the fact that they had to reduce prices of some products and face higher costs. They had to increase supply chain costs in the previous quarters due to the ongoing impact of inflation, and this continues to hurt them.
  • Operating Expenses: Operating expenses for the three months ended September 2024, was $406.3 million compared to $382.5 million in the same period the previous year. The increase is mainly attributable to higher employee related expenses, supply chain investments, and some restructuring costs. It is common that these type of costs will fluctuate from period to period, so it is nothing to be overly worried about.
  • Operating Income: Operating income for the three months ended September 30, 2024 was $67.1 million, a decline from the $70 million in the prior year. This was caused by decreased gross profit and increased expenses.
  • Net Income: For the three months ended September 30, 2024, the company reported a net loss of -$11.8 million. Compared to $14.5 million of the prior year. Again, this is due to decline in revenue, gross profits and an increase in operating expenses.
  • Cash Flow: The business has a healthy enough amount of cash, to operate comfortably. However, the company does not make a lot of excess cash and re-investments and acquisitions, which could cause problems in the long term. For the three months ended September 30, 2024, net cash from operations was $194.6 million, this means that they still generate a considerable amount of cash from the business. This shows resilience in their business operations.
  • Balance Sheet: The company has $1.6 billion in cash and marketable securities and $4.2 billion in total assets. The company has a total debt of $4.3 billion. Their current assets (assets that will be converted to cash in a short period of time) are $2.3 billion while their current liabilities are $1.4 billion, this makes the balance sheet healthy overall. They also have around $2.6 billion in other non current liabilities such as pensions and deferred payments, which means that their debt burden is pretty large.

Overall the company’s financial results were weak for the last three quarters, they have faced increasing costs and less revenues which lead to losses instead of profits. This is a sign that their competitive position is weak, and might affect the long-term viability of the company.

Understandability: 3/5

Perrigo’s business is moderately complex to understand due to:

  1. Variety of Products: While the core concept of OTC health products is straightforward, the vast array of different product categories and subcategories could make it harder to understand for someone who is new to the business or the pharmaceutical industry.
  2. Complex Operations: They operate globally with different regulatory requirements in different countries. Also, their acquisition based strategies make it harder to analyze the balance sheets.
  3. Intangible Assets: They have a lot of investments in intangible assets, but it is hard to determine the real value of these assets.
  4. Pharmaceutical Industry: The pharmaceutical industry is generally complex and requires some technical knowledge. There is also regulatory uncertainty for drug producers, which adds another layer of complexity to understanding.
  5. Acquisition Strategies: As mentioned above, the company likes to acquire new businesses to expand, this requires a deep understanding of the M&A aspect of a company.

Balance Sheet Health: 4/5

Perrigo has a healthy balance sheet due to the following:

  1. Adequate Liquidity: The company has plenty of cash and marketable securities to operate in the short term, and their current ratio (current assets over current liabilities) is above 1. Also, their operation generates decent cash flow to help them survive any crisis.
  2. High Debt: Although their debt is not too large and is managed reasonably, their debt to equity ratio is still a bit high. A better balance sheet would have a better debt to equity ratio.
  3. Manageable Debt Maturities: They do have good amounts of cash, but a large amount of their debt will be due in the future, so there is some uncertainty associated with it.
  4. Financial Stability: Company has been operating for a long time and has a fairly stable business model.

Overall, the balance sheet is strong and has the resources needed to operate and grow the business, but the debt should be kept in check and is something to note for long term evaluation.

Recent Concerns / Controversies and Management Perspective

Perrigo has experienced headwinds, which include a recall of some infant formula products, labor costs, inventory related problems, a decrease in gross margins, and a lower profitability compared to the last year. Despite those headwinds, management still believes in the long term value of the company.

Specifically:

  • Supply Chain: They are now reorganizing their supply chain and hope to find more stability in the future. They have been focusing on diversifying their manufacturing plants and reducing their reliance on single sourced supply. This gives them a more diversified and secure method for obtaining materials.
  • Profit Margins: Their margins are still under pressure and there is still room for improvement. The management acknowledged that they were not pricing correctly and are trying to make improvements. They plan to do this by offering higher quality products and focusing on growth and efficiency.
  • Acquisition: They have completed and are now focusing on integrating the newly acquired businesses. They believe that this integration will help them grow and create a stronger business in the long-term.

Overall, the management acknowledges the poor performance in the recent quarters, but are focusing on improving margins and revenue through their strategy, and believe in long term future of the company. The risks are still there, and should be monitored.