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We have maintained our Neutral rating on Perrigo Company (PRGO - Analyst Report) with a target price of $100.00 following appraisal of second quarter of fiscal 2012 results.

Perrigo reported second quarter EPS of $1.20, beating the Zacks Consensus Estimate of $1.16 and the year-earlier earnings of $1.05 per share. A robust top-line performance boosted earnings in the quarter. Strong performance by Rx Pharmaceuticals and new products led to the sales growth. (Read our full coverage of the earnings report at: Perrigo Beats EPS, Top Line Solid).

Perrigo is a dominant player in the store brand over the counter (OTC) drug market. We believe that Perrigo’s strong position in the brand OTC pharmaceutical market and growing generics and API businesses will help it deliver solid top- and bottom-line growth in the coming years.

In the OTC pharmaceutical market, products are sold due to changes in product status from prescription (Rx) only to non-prescription (OTC). Management estimates that $10 billion in branded prescription sales will move to OTC status in the next five years, thus resulting in significant switch opportunities for Perrigo in the years to come.

Perrigo has exclusive sales and distribution rights to its OTC store brand version of generics of Sanofi’s (SNY - Analyst Report) Allegra (for seasonal allergies) and Allegra D-12 from Teva Pharmaceuticals (TEVA - Analyst Report). The OTC version of generic Allegra was launched in April 2011 while Allegra D-12 is expected to be launched in the second half of fiscal 2012.

Allegra is off to a strong start and Perrigo has captured more than 50% of the store brand market share. This is an important product launch for Perrigo and will benefit sales, going forward.

Perrigo also has an impressive pipeline which could drive growth in fiscal 2012 and beyond. The company expects to launch more than 45 new products in fiscal 2012 worth $190 million in revenues. The pace of product releases is as torrid as one new product scheduled for launch every week.

Important product launches in the CHC segment in the second half of fiscal 2012 include generic store-brand versions of Prevacid, Mucinex, Delsym, Allegra D-12 and Rogaine Foam. In the Rx segment Perrigo expects to launch generic versions of Duac and Clobex lotion.

On the flip side, we are concerned about the nagging below-par performance of the CHC segment which accounts for a substantial chunk of the company’s revenues. Management is expecting this segment to record a growth of 12–14% in fiscal 2012. Given the slow start to the year, the target seems a little too optimistic.

Perrigo’s strong results in the immediately preceding quarters have benefited from external events rather than emanating from its core business. For example, the CHC segment has benefited from product recalls by competitors like Johnson & Johnson (JNJ - Analyst Report).

These external events are unlikely to recur every quarter and benefit Perrigo’s top-line. J&J is in the process of returning to the market and the recalled products are expected to be fully back by mid-2012. Though Perrigo hopes to retain some of the incremental sales even after J&J’s return, there is always a risk that J&J with its brand appeal will win back all of its lost business.

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