We re-established an investment in Perrigo Company Plc (NYSE:PRGO) during the quarter. Perrigo is a leading global over-the-counter (OTC) consumer goods and specialty pharmaceutical manufacturer. The company is the world’s largest manufacturer of store brand OTC health care products (such as store brand ibuprofen, the active ingredient in Advil), which are sold in virtually all leading U.S. drug retailers, including Walgreens and CVS. We previously owned Perrigo in the Fund. In early 2015, the company became the subject of a hostile takeover bid by Mylan N.V., a large manufacturer of generic pharmaceuticals. After Perrigo shareholders rejected Mylan’s proposal, Perrigo’s stock fell to a price that we believed was attractive in light of the company’s growth potential, competitive advantages and impressive management team.
We think Perrigo can generate sustainable mid-to-high single digit organic revenue growth, driven by a trend favoring store brand OTC drugs over national brands. Perrigo management estimates its business saves consumers more than $7.5 billion annually in their health care spending ($1 savings for every person in the world). This is because store brand OTC drugs are comparable in quality and effectiveness to the national brands but cost significantly less. Store brand OTC drugs also generate higher gross margins for retailers.
We think Perrigo’s business should also benefit as more prescription drugs move to OTC status. This trend is being driven by branded drug manufacturers seeking to capture ongoing product sales after the products lose patent protection. Perrigo has dominant market share in the store brand OTC drug business. We believe the company’s competitive advantages include long-standing customer relationships, low cost manufacturing and an ability to mass customize thousands of products and support retailers in marketing their store brands.
Perrigo’s management team has a strong record of creating shareholder value. They have a disciplined approach to deploying capital with a focus on meeting return on invested capital hurdles. We think management will continue to pursue acquisitions which should add to the company’s growth. These acquisitions could include products that Perrigo could add to its distribution network at high incremental margin, products in new categories, or companies in new geographies. In addition, in its defense against the Mylan hostile takeover attempt, Perrigo management committed to several shareholder value creating initiatives that are expected to add to earnings over the next few years.
From Baron Funds' Baron Asset Fund commentary for fourth quarter 2015.
