Already Up 438%, This 'Secret' Health Care Giant Could Still Double

At the risk of sounding like a broken record, I've found that companies you've never heard of often make the best investments.

Unlike high-profile names such as Starbucks (Nasdaq: SBUX ) , Twitter (NYSE: TWTR ) , Apple (Nasdaq: AAPL ) , and others, lesser-known stocks tend to sink or swim mainly because of their fundamentals, with hype and speculation playing a much smaller role in their price movements.

Frequently, these lesser-known names are in some of the most unglamorous businesses you can imagine. But they're so good and dominant they almost can't help but to put up big stock returns.

One such company is a top health care products firm most investors probably don't know about -- even though it's the world's largest producer of less expensive but equally effective over-the-counter (OTC) medications sold as store brands. This company's stock more than quintupled during the past five years, posting a 438% gain that would have turned $2,500 into nearly $14,000.

I'm referring to Perrigo Corp. (NYSE: PRGO ) , a large-growth firm with an $18.6 billion market cap, three-quarters of the store brand OTC drug market and nearly 22,000 OTC products (allergy pills, pain relievers, cough/cold medicines and antacids, to name a few). The OTC product segment is by far the company's largest, generating around 60% of annual revenue.

However, Perrigo is also a major player in several other profitable fields, including more affordable generic prescription drugs, which currently account for approximately 20% of sales. The nutritionals segment contributes about 15% of revenue through the sale of things like infant formula and vitamins. Perrigo generates roughly 5% of revenue by providing ingredients used in the manufacture of generic and branded pharmaceuticals.

The firm has around 700 customers and is a key supplier of most of the retail giants. This includes Wal-Mart (NYSE: WMT ) , Target (NYSE: TGT ) , CVS Caremark (NYSE: CVS ) , Costco Wholesale (Nadasq: COST) , and others.

While Perrigo's businesses are definitely unglamorous, they're a big part of daily life. So it's no wonder this market leader has been able to keep revenues growing nearly 16% a year, from $2 billion in fiscal 2009 to $3.9 billion currently. From fiscal 2009 through fiscal 2013, earnings per share ( EPS ) tripled from $1.54 to $4.68.

The firm's a good bet to sustain similar or maybe even somewhat better growth, according to CEO Joseph Papa. He recently told that Perrigo could raise revenues 5% to 10% a year organically, plus another 5% to 10% annually through mergers and acquisitions (M&A).

I think this is feasible, especially because of Perrigo's strong history of new product launches and solid acquisitions.

On May 12, for instance, the firm announced the FDA's approval of its generic version of Astepro, a prescription seasonal allergy medication with annual sales of nearly $100 million. On April 1, Perrigo and Sandoz Pharmaceuticals together launched a generic version of Taclonex, a topical psoriasis treatment also with nearly $100 million in annual sales. A year and a half ago, Perrigo received approval for its Nicotine Polacrilex Mini Lozenge, a generic version of the popular Nicorette lozenge made by GlaxoSmithKline (NYSE: GSK ) to help smokers quit.

A potentially sizable future opportunity involves Pfizer's (NYSE: PFE ) well-known prescription cholesterol-lowering drug Lipitor, with annual sales still exceeding $2 billion a year (versus a $13 billion peak around 2006) despite the availability of cheaper generics. For Perrigo, the opportunity would be to supply the store brand version of OTC Lipitor, which is in Phase III trials to determine if patients can handle taking the drug without a doctor's supervision. If approved, OTC Lipitor could see $1 billion a year in sales, say analysts at Goldman Sachs.

Last December, Perrigo completed an $8.6 billion acquisition of Irish pharmaceutical firm Elan Corp., a deal with some particularly attractive financial benefits in addition to a $1.9 billion cash hoard. For instance, the purchase enabled Perrigo to become domiciled in Ireland, which has a top corporate income tax rate of 13.5% versus 35% in the U.S.

The acquisition also came with some hefty royalties on Tysabri, a blockbuster multiple sclerosis drug made by Biogen Idec (Nasdaq: BIIB ) , which I profiled on June 9 . As of May 1, Perrigo is entitled to 18% of up to $2 billion in Tysabri's annual sales (the drug currently generates revenue of more than $1.5 billion a year). A 25% royalty applies to all sales above $2 billion.

Besides the company-specific factors I've described, a couple megatrends should contribute to Perrigo's future growth.

First, the typical consumer is increasingly cost-conscious, particularly with health-related expenditures, since health care costs have been rising much faster than overall inflation. Thus, cheaper store brands and generics like Perrigo's are likely to hold increasing appeal. The graying of the population should also lead to greater OTC and generic drug sales since people's pharmaceutical use typically almost triples after age 60.

Risks to Consider: Operating in the generic drugs business comes with an elevated risk of patent-related lawsuits. Last summer, for example, Teva Pharmaceuticals (NYSE: TEVA ) filed a suit against Perrigo alleging infringement of several patents for Teva's asthma inhaler ProAir, which could result in a costly settlement or high court-awarded damages against Perrigo.

Action to Take --> For fiscal 2014 and 2015, analysts are projecting EPS of $6.20 and $7.59, which would be good for year-over-year gains of 33% and 22%, respectively. With a projected long-term growth rate of about 13% a year, EPS could reach $11.42 in fiscal 2019. This implies the potential for more than a 130% jump in the stock price to $331 by that time, from about $142 currently, based on a price-to-earnings (P/E) ratio in the historic range of 29.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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