Perrigo recently announced a promising new partnership with generics rival Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) to launch a generic version of Temodar, a brain cancer drug from Merck. Temodar generated $423 million in U.S. sales for Merck in 2012, and would be a valuable addition to both Perrigo and Teva’s drug portfolios.
Teva might need that sales boost more than Perrigo, however, based on Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s mediocre sales growth last quarter. During the second quarter, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s generic businesses in the United States and Europe respectively declined 8% and 5% from the prior year quarter. Teva blamed lower sales of generic Lexapro, an antidepressant, and Avapro, a high blood pressure medication, for its top line decline in the United States. It stated that macro problems caused sales to decline in Europe.
Although Perrigo’s 24% growth in generics is impressive by comparison, it still pales in comparison to Actavis, which reported a 58% increase in generic sales last quarter, thanks to strong sales of generic Zovirax (treatment for herpes), Yaz (birth control) and Viagra (treatment for erectile dysfunction).
Source: YCharts.
Other businesses and the road ahead
Sales at Perrigo’s other two smaller business segments — nutritional products and active pharmaceutical ingredients — rose 11% and 6%, respectively. The company reported strong sales of vitamins, minerals, and supplements in the former and a favorable product mix in the latter.
Perrigo investors are anticipating big gains from its acquisition of Elan Corporation, plc (ADR) (NYSE:ELN), which will reduce its corporate tax rate from 35% to 12.5%. In addition, it will gain royalties from Elan Corporation, plc (ADR) (NYSE:ELN)’s multiple sclerosis drug Tysabri. In February, Elan sold off most of its rights to Tysabri, which is marketed by Biogen Idec, back to Biogen for $3.25 billion, but it still retains 25% of the rights to future royalties of the drug, which generated $1.6 billion in sales last year.
Those two factors are expected to boost Perrigo Company (NYSE:PRGO)’s adjusted fiscal 2014 earnings by at least $0.10 per share, and its 2015 earnings by $0.70 to $0.80 per share. With the Elan Corporation, plc (ADR) (NYSE:ELN) acquisition factored in, the company expects to earn $6.35 to $6.60 per share for fiscal 2014, a 13% to 18% year-on-year gain that still falls short of the consensus estimate of $6.67 per share.
The Foolish bottom line
Perrigo Company (NYSE:PRGO) is a fairly strong investment on its own, even without factoring in the controversial Elan Corporation, plc (ADR) (NYSE:ELN) acquisition. The company’s revenue growth in consumer health care is outpacing its much larger rivals, and it is performing admirably in the generics business. Although the company is coming in a bit light in terms of quarterly revenue growth and full year earnings, its top line will likely continue growing in the double digits as its industry peers struggle to even hit the high single digits.
The article Is This Health Care Stock Underrated? originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson.
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