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Perrigo Company(PRGO-N)

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With a Big Catalyst in Hand, Is Perrigo Company a Buy?

Motley Fool - Fri Jul 21, 2023

On July 13, Perrigo Company (NYSE: PRGO) announced that regulators at the U.S. Food and Drug Administration (FDA) had given the green light for its Opill birth control pill to be sold over the counter (OTC). The OTC-approved formulation will hit the shelves sometime in 2024, so after the first quarter of next year is the earliest that investors might see the boost to its earnings.

But will that boost be enough to warrant investors buying Perrigo's stock? Let's investigate what the approval might actually do for this company's financial performance to find out.

Opill is sitting in one of the market's sweet spots

In Q1, Perrigo generated $1.1 billion in sales from its collection of OTC consumer health products like sleep aids, allergy pills, and non-steroidal painkillers. $41 million of that sum came from its existing sales in the women's health segment, which grew by around 95% on a constant currency basis compared to a year prior.

For OTC sales of Opill to make a significant dent in the top line, it'd need to bring in roughly $110 million per quarter. That's quite unlikely to happen overnight or even in 2024. Still, in 2011, the market for OTC female contraceptives in the U.S. was $216 million, and in 2022 it was $664 million.

Birth control pills are the largest single segment of the market for contraception in the U.S., with a share of 37%, per Grand View Research. And they're also extremely reliable for preventing pregnancy when used properly -- far more so than any of the OTC methods. But, with the exception of Opill, birth control pills require a prescription, which means that people would need to visit their doctors to get them, leading to significant friction in onboarding.

So think of it this way: This is a rapidly growing market, and Perrigo just showed up with a product that's seemingly superior to its non-prescription competitors while also being easier to start taking than all of the other products in the birth control market's single largest segment. Opill is positioned to steal market share from other OTC birth control methods and from all prescription birth control products. So, given the above, it is plausible that Opill could be a smash hit and eventually make enough money to be a driver of the company's earnings growth.

This is only an opportunity for those who are patient

Don't expect the growth from sales of Opill to start stacking up right away. While going OTC might start to attract buyers soon enough, the product will need to be priced competitively if it's going to steal market share from other OTC methods. As for stealing market share from prescription methods, that might take time too. People will likely be reluctant to switch methods simply because a new one is available unless they're unhappy with their current choice.

Nonetheless, over a long enough timescale, it's likely that Opill will find a home in the market, as marketing campaigns and word of mouth have time to direct people toward a purchase for a trial period. It's uncertain whether the growth it drives will be enough to send Perrigo's stock upward, given its long-running struggles with being consistently profitable. And investors should recognize that the company competes in the consumer health market, where margins are more or less destined to be narrow and where there is little hope of rapid, broad-based growth.

If you're comfortable with that, not to mention comfortable with collecting Perrigo's dividend that yields 3.2% while you wait, it could be worth buying a few shares. If you end up waiting a long time, you'll likely see your dividend payments grow. Over the last 10 years, the company hiked its payout by an admirable 203%, with more on the way. Just remember that this isn't a growth stock, and keep your expectations in check accordingly.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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