Perrigo Multiple Acquisitions Expected In Next 12 Months - CEO Gibbons

Perrigo is eyeing possible near-term acquisition candidates in three main areas - global operations, nutritionals and new delivery vehicles - as the private labeler comes closer to putting its recent operational woes behind it.

"I think you'll see some things come through over the next 12 months," President & CEO David Gibbons told analysts at the Banc of America Securities consumer conference in New York April 2-4. "I don't know how blockbuster they'll be, but they'll be a combination of things."

Gibbons highlighted all three areas as providing significant opportunities for expansion, assuming the candidate complements Perrigo's manufacturing and distribution strengths.

"We do not have a set game plan that says we only want to buy a company with a certain size, either larger or...small," he noted. "What we are looking for is to make strategic acquisitions."

On the global front, Perrigo is seeking a business that would allow the firm "to have an immediate base where our customers are putting their activity," Gibbons noted, pointing to Wal-Mart and Costco's increased activity in Europe. Wal-Mart accounted for 26% of Perrigo's net sales in FY 2000, the private labeler stated in its annual report.

Reflecting a more optimistic attitude from management, Perrigo's favorable view toward international M&A follows its decision in mid-2000 to close overseas offices in OTC-heavy markets Japan and Brazil.

The company announced its decision was based on a desire to focus on Western Europe (¹ (Also see "Perrigo New Product Program, Quality Control Back On Track In FY 2002" - Pink Sheet, 30 Oct, 2000.)).

Potential regulatory changes in European countries could lead to growth opportunities for store brand products, Gibbons stated. Noting many EU countries limit the sale of nonprescription items to certain retail channels, the exec predicted a "trend toward open distribution."

"We want to get over there now, be there with our retailers...as they expand...and be ready and poised as the marketplace changes...to be the expert in really creating the store brand business in OTCs, the same way we were able to do in the U.S."

With regard to nutritionals, which accounted for only about $30 mil. of Perrigo's fiscal 2000 sales of $738.6 mil., Gibbons said the firm sees potential down the road.

Despite falling sales industry-wide over the last year, "long-term, we think it's a great place to be...with a lot of growth opportunities," he maintained.

The chief exec pointed to the paucity of new ingredients on the market, adding Perrigo is "waiting for [the] next hot wave of new product ideas."

Perrigo could be well-positioned to take advantage of potential bargain prices in the dietary supplement market if pure-play supplement firms are unable to reverse their recent misfortunes. Analysts tracking the industry continue to predict substantial short-term consolidation (² (Also see "NBTY Resistance To Numico Dominance Cited By Analysts; Stock Rises 79%" - Pink Sheet, 9 Apr, 2001.)).

Finally, Perrigo would like to build upon its existing manufacturing capacities by adding new delivery form products or technologies, Gibbons stressed, listing chewable products or gelcaps as examples.

Asked by Banc of America Securities analyst William Steele whether Perrigo could envision acquiring a branded operation, Gibbons said the firm was not interested, adding: "I think that there is so much we can still do in the store brand area, I want us to focus on optimizing" those strengths.

From financial and operational standpoints, Perrigo looks to be in good shape to act when necessary. Following several years of debt, the firm reported cash flow from operating activities of $55.2 mil. for the fiscal 2001 first half ending Dec. 30, as well as $175 mil. in available unsecured credit.

The private labeler also appears to be on the verge of moving past its quality control problems.

The company has been working to correct a number of Good Manufacturing Practice deficiencies since receiving a warning letter from FDA last August (³ (Also see "Perrigo Extended-Release Acetaminophen Launch Delayed By QC Issues" - Pink Sheet, 11 Sep, 2000.)). The letter addressed the second of two OTC product recalls initiated by the firm in November 1999.

FDA completed its follow-up audit in early March, Gibbons reported. "We're waiting right now to hear the official results, but we have a lot of confidence in the job that we did." Perrigo expects feedback from the agency within a month.

The firm has employed "close to 100 additional people in all areas to focus on quality," Gibbons noted. "I think we've done a great job of turning it into a positive, because we will be the gold standard going forward in quality in this industry."

After dedicating its resources to correcting GMP issues, the firm now will turn its operational attention to improving production costs.

Perrigo currently has a 24.5% operating margin, but aims to increase that to 28%, Gibbons asserted. Although the quality issues have been an obstacle, the exec believes a 3.5 percentage point improvement is "possible over time."

The company aims to achieve the targeted production efficiencies by the end of FY 2002, and then will focus on "regular top-line sales growth, getting up to that double-digit level...by 2003," Gibbons said.

Fielding another analyst question regarding Perrigo's expectations for a vitamin price-fixing settlement, he noted the firm has "a good shot at additional substantial money coming in from vitamin settlements," adding "two major opportunities are still out there."

"We do not expect to settle them in the very short term, but at some point in time we would hope that they would settle as evidenced by some of the settlements already," he commented. Gibbons declined to speculate on timing or potential amounts involved.

Perrigo has been pursuing litigation on its own as one of many supplement manufacturers to opt out of the class action settlement approved by a Washington, D.C. federal judge in March 2000 (⁴ (Also see "Vitamin Price-Fixing $242 Mil. Class Settlement Fund Approved" - Pink Sheet, 3 Apr, 2000.)).

To date, the firm has entered into settlements with two "smaller" litigants: a $4.2 mil. payment recorded in FY 2000 and a $457,000 settlement in the firm's fiscal 2001 second quarter.