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Still Neutral on Perrigo

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On Sep 19, we maintained our Neutral recommendation on Perrigo Company (PRGO - Free Report) . The company delivered a positive earnings surprise in the final quarter of fiscal 2013 (ended June 29, 2013) - its fourth straight earnings surprise. Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

On Aug 15, Perrigo reported higher-than-expected earnings in the fourth quarter of fiscal 2013. Net sales in the quarter climbed 16.3% to $967.2 million. Revenues, however, missed the Zacks consensus Estimate mainly due to soft Consumer HealthCare sales. Reduced sales of gastro and analgesic products contributed to lower-than-expected sales.

Perrigo’s Rx Pharmaceuticals segment performed encouragingly during the quarter with segmental net sales improving 24% to $195 million. We are impressed by the series of launches at the Rx Pharmaceuticals segment of Perrigo.

We are impressed by Perrigo’s strong pipeline. Perrigo expects to launch more than 75 new products in fiscal 2014 contributing approximately $190 million to fiscal 2014 revenues. The company expects revenues in fiscal 2014 to increase in the range of 12%-16% over fiscal 2013 levels. The projection excludes the impact of Perrigo’s impending acquisition of Elan Corporation .

The cash and stock deal ($8.6 billion), cleared by the boards of directors of both the companies, is expected to close by the end of calendar year 2013. On completion of the deal, Perrigo’s revenue stream would be boosted as it will receive significant royalties on multiple sclerosis drug Tysabri from Biogen Idec Inc. (BIIB - Free Report) . Management expects Elan’s acquisition, on closure, to boost the standalone Perrigo’s fiscal 2014 adjusted earnings by at least $0.10 per share. Fiscal 2015 adjusted earnings are expected to be boosted by $0.70-$0.80 per share, including synergies.

We expect investor focus to remain on updates of the deal. We prefer to remain on the sidelines until the acquisition materializes.

Another stock that warrants a look

While we expect Perrigo to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Gilead Sciences Inc. (GILD - Free Report) as a good buying opportunity. Gilead, sporting a Zacks Rank #1 (Strong Buy), has been performing encouragingly and the stock price has significant scope for appreciation.

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