Perrigo Company

views updated May 18 2018

Perrigo Company

515 Eastern Avenue
Allegan, Michigan 49010-9070
U.S.A.
Telephone: (269) 673-8451
Toll Free: (800) 253-3606
Fax: (269) 673-7535
Web site: http://www.perrigo.com

Public Company
Incorporated: 1892
Employees: 3,983
Sales: $826.0 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: PRGO
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325413 In-Vitro Diagnostic Substance Manufacturing

Perrigo Company is the largest manufacturer of over-the-counter (OTC) pharmaceuticals and nutritional products for store brands in the United States. The company estimates that it holds more than 50 percent of the store brand market. Perrigo produces more than 30 billion pills per year and manufactures about 1,200 products. Most of these are pharmaceuticals—such as analgesics, cough and cold remedies, and gastrointestinal and feminine hygiene products—which account for about four-fifths of the company's sales. Perrigo ranks as the largest producer of aspirin in the United States. The remaining 20 percent of revenues come from the sale of nutritional products, including vitamins and nutritional supplements and drinks. Perrigo supplies 300 different retailers with these products under the retailer's own label so that they can be promoted as house brands. These customers include major drugstore chains (CVS, Eckerd, Walgreens), grocery chains (Albertson's, Kroger, Safeway), mass discounters (Kmart, Target, Wal-Mart), and major wholesalers (McKesson, Supervalu). Perhaps not surprisingly, the largest Perrigo customer by far is retailing giant Wal-Mart, which accounted for 27 percent of net sales for fiscal 2003. The company also markets certain products under its own brand name, Good Sense, although such products account for only a small percentage of sales. Two non-U.S. subsidiaries generate a little more than 9 percent of revenues. Wrafton Laboratories Ltd. supplies store brand products to major grocery and drug retailers in the United Kingdom, while the Mexican firm Química y Farmacia, S.A. de C.V. produces mainly OTC and prescription pharmaceuticals for retail, wholesale, and government customers. Perrigo Company operates 11 manufacturing plants in Michigan, South Carolina, Mexico, and the United Kingdom. Perrigo has enjoyed nearly continuous growth since the end of World War II. This growth can be partly attributed to the mass acceptance of generic and store brand pharmaceutical products.

Early Years

The company was founded by Luther and Charles Perrigo in 1887. The Perrigo brothers had moved to Allegan County, Michigan, a few years earlier from New York. Once in Michigan the brothers established a modest business. Luther Perrigo ran a country general store and apple drying business, while Charles helped with sales. Luther decided to package generic home remedies and sell them to other small country stores like his own. The first packaging plant for these medicines was run out of Charles Perrigo's home, but Charles soon moved to Ohio, leaving the business entirely to his brother. Luther became president of the firm when it incorporated in 1892. Perrigo remained a family-owned business for 90 years. Five of the company's seven presidents were descendants of Luther Perrigo, who died in 1902. His son Harry became president at that time, holding the position for the next 49 years.

During the 1920s the company turned to the private label concept in order to build customer loyalty. Stores ordering a certain minimum number could have their own names imprinted on the labels. Products of the era that were the subject of such deals included aspirin, bay rum, epsom salts, sweet oil, and zinc oxide. In the mid-1930s Perrigo gained its first major private label customer, the K & W group, a buying organization that evolved into the People's Drug Store chain. The second such customer was Sam's, a major Detroit area drug chain. At the same time the company's customer base was shifting from small general stores to large regional and national drug chains.

Post–World War II Shift from Packager to Manufacturer

Harry Perrigo turned over the reins to his brother Ray in 1951. It was in the 1950s that the company, while still under the leadership of Ray Perrigo and future President William L. Tripp, Sr., made a crucial decision. Perrigo shifted its focus from that of a repackager of generic drugs to a manufacturer of quality drugs and beauty aids.

William L. Tripp, one of Luther Perrigo's grandchildren, became president in 1967. During Tripp's tenure as president the company began to reap the rewards of the change from repackager to manufacturer. The company's income and the number of Perrigo employees quadrupled. When Tripp died in 1969 his son Bill Tripp, Jr., took over the presidency. During the 1970s Perrigo's base of customers expanded with the addition of grocery chains and mass merchandisers to the core drugstore chains. By the time of his death in a boating accident in 1980 at the age of 45, Perrigo was the leading private label manufacturer of health and beauty products in the United States. William C. Swaney had been named president of the company two years before the accident, becoming the first leader of the company who was not a member of the Perrigo family.

End of Family Ownership: Early 1980s

Swaney's presidency lasted from 1978 until 1983. In those five years Perrigo sales tripled and the company became a much larger operation all around. Swaney acquired new companies, set up distribution centers in three states, and expanded and refurbished existing plants. Before leaving as president Swaney oversaw the sale of the company from the Perrigo family to the management. After almost 100 years of family operation the company was sold.

Michael Jandernoa, who had joined the company in 1979 as vice-president for finance, became the seventh president of Perrigo in 1984, while Swaney took over as chairman of the board and CEO. Swaney instituted a style of management at Perrigo that his successor Jandernoa admitted he probably would have tried to block had he been in a position to do so at the time. Yet Jandernoa came to appreciate the open style of administration that Swaney initiated. The company contended that the different disciplines interacted in the decision-making process much more than in traditional American businesses.

Part of the Grow Group, 1986–88

Jandernoa continued the policy of expansion started by Swaney. Perrigo acquired Bell Pharmacal Labs of South Carolina in 1984. Early in the Jandernoa presidency, however, the board of directors began entertaining offers from larger companies that might want to acquire Perrigo itself. In 1986 Perrigo became the largest single company in Grow Group, Inc., a publicly held group of 23 manufacturing companies that bought Perrigo for $45 million. Jandernoa was named CEO of Perrigo; he continued to serve as president. Perrigo represented about a third of Grow Group. As the largest component in a conglomerate with access to funds through the New York Stock Exchange, Perrigo was able to raise new funds for more expansion.

Perrigo celebrated the company's centenary with two ambitious building projects. It built a $1.5 million plant for the manufacture of effervescent tablets and a $3.5 million graphics art complex to house all of the company's printing needs. Because Perrigo supplied many different retailers with the same house brand product, their printing facilities were an important part of their production system. The graphics and printing department employed about 290 people and produced almost 70 percent of the company's labels and 44 percent of their cartons in the early 1990s. The construction of the graphics department, coupled with other expenses, totaled approximately $12.6 million in outlays to the company's printing and graphics department since the Grow purchase in 1986.

Back to Management Ownership and Then Taken Public: Late 1980s to Early 1990s

After only two years as a part of Grow Group, however, Perrigo was sold back to its management in 1988 in a $106 million deal. That year the company posted sales of $146 million, but by 1994 company sales had ballooned to $669 million. Three years after the sale by Grow to Perrigo management, Jandernoa took the company public. The stock proved popular, though the value fell and rose significantly over time. The market value of the company in July 1994 based on a closing price of $14 a share was $1 billion, for instance. But this price was down from a value of $32 a share in January 1994.

The drop in the value of Perrigo shares was attributed to a drop in sales growth. The company, in fact, had another year of record sales and continued to expand, but stock speculators felt that the market had overreacted to the Perrigo stock offering and had inflated the value beyond its true market worth. Some analysts predicted that the drop in growth was a sign that the national brands would win back bargain-hunting customers in a healthy economy.

Company Perspectives:

At Perrigo, our commitment to quality is the lynchpin of our success. That's why Perrigo is building a pharmaceutical operating culture throughout our company. We're also using our financial strength to improve the quality of our products and every system that goes into producing them. Doing so reinforces our position as the nation's largest manufacturer of store brand OTC pharmaceuticals and nutritional products.

Other problems that Perrigo faced in its competition with national brands in the early 1990s concerned finding the right price range for its products. While Perrigo had long wielded its ability to offer lower prices than national brand competitors, sometimes the price difference could be so dramatic—more than 50 percent in some cases—that it could have a reverse effect on the consumer. The consumer weighed the relative cost savings with a judgment on efficacy equivalence. If the price difference was too dramatic, some observers contended, the consumer became suspicious of the Perrigo brand and turned to the national brand. Perrigo therefore developed a system whereby some of the money that it saved from advertising was spent on market research to determine exactly how its products were accepted by the consumer, which products were worth developing, and which had limited potential because of brand allegiance.

One reason for Perrigo's enormous dominance over the store brand market was its ability to work closely with retailers to promote consumer allegiance to store brands. Beginning in the 1980s Perrigo began a major campaign to help retailers design labels, manage inventory, and develop promotions. Perrigo used its house printing and graphics department to ensure accuracy and reliability in labeling and packaging, permitting rapid new product introductions. Perrigo also enjoyed an advantage over many of its competitors because retail stores had a real incentive to give Perrigo's product prominence on their shelves. Profit margins for store brand products were considerably greater than for national brands. The store's public image could be enhanced as well, provided the product sold under their name was satisfactory.

Most of Perrigo's products were packaged to be readily identifiable with the national brand equivalents. There was a fine line between taking advantage of the competitor's advertising and carving out a niche that was independently recognized by the consumer. The OTC Market Report disclosed in 1995 that the company was threatened with lawsuits "once or twice a year," but the vast majority of them were settled in a short period of time. Most of the disputes focused on product dress rather than the actual content of the product. While Perrigo management had become accustomed to lawsuits from competitor companies, in July 1994 Perrigo found itself faced with a lawsuit from closer to home. Its former parent company, Grow Group, filed suit against the company. The Grow Group, valued at less than half of Perrigo, demanded the return of Perrigo stock or a sizable settlement in lieu thereof. Grow claimed that Perrigo management did not act in good faith at the time of the 1988 sale, particularly alleging that they did not reveal a pending agreement to supply products to Wal-Mart, and asked for $2 billion in actual damages and $2 billion in punitive damages. Perrigo contended that the suit was wholly without merit.

One of the company's strengths was that it faced little legitimate competition. In December 1994 the company purchased Vi-Jon Laboratories, Inc., a leading manufacturer of store brand personal care products, thereby expanding Perrigo's sales and eliminating a potential competitor at the same time. The purchase price was about $33 million. A similar acquisition occurred earlier, in January 1992, when Cumberland-Swan, Inc., a Tennessee-based maker of store brand personal care products and vitamins, was bought for $35 million.

As the patents on dozens of major prescription drugs began to run out in the mid-1990s, Perrigo began to aggressively go after these lucrative new sources of revenue. Once a prescription drug was reclassified as OTC, the patent holder had two years of exclusivity. At that point generic versions of brand-name OTC products could be produced. An example of this process was Tavist-D, a decongestant and antihistamine that switched from prescription-only to OTC status in 1992. Two years later, Perrigo reached an agreement with the drug's maker, Sandoz Pharmaceuticals Corp., to begin making a store brand version of Tavist-D in 1995. In subsequent years, Perrigo increasingly turned to such joint ventures to develop new products.

Also in the mid-1990s, Perrigo began looking to the international market for growth, forming subsidiary Perrigo International, Inc. to lead this effort. Among the initially targeted countries were Canada, Japan, Mexico, and Russia.

Late 1990s Travails

With the Grow Group lawsuit still pending, Perrigo received another legal headache in early 1995 when it was the subject of a class-action lawsuit initiated by shareholders. The investors had purchased company stock through an October 1993 secondary offering, in which mostly shares held by company officials were sold. Only a few months later the stock price plunged after its stellar earnings growth began to fade. The plaintiffs claimed that company officials inflated the stock's offering price by withholding critical information indicating potential problems facing Perrigo. By the late 1990s, however, both this suit and the one brought by the Grow Group had been dismissed, but not before Perrigo had spent about $27 million defending itself against the suits, which also served as a major distraction.

Key Dates:

1887:: Luther and Charles Perrigo begin packaging generic home remedies and selling them at their own and to other general stores.
1892:: Company is incorporated.
1920s:: Perrigo begins offering private label products.
1930s:: Customer base begins to shift from general stores to large regional and national drug chains.
1950s:: Company shifts from a repackager of generic drugs to a manufacturer of quality drugs and beauty aids.
1970s:: Grocery chains and mass merchandisers are added to the customer base.
1980:: Perrigo is now the nation's largest private label manufacturer of health and beauty products.
Early 1980s:: Perrigo family ownership ends with the sale of the company to management.
1986:: Company is sold to Grow Group, Inc. for $45 million.
1988:: Grow Group sells the company back to management for $106 million.
1991:: Perrigo is taken public.
1997:: Controlling stake in Mexican pharmaceutical firm Química y Farmacia, S.A. de C.V. is acquired.
1998:: Perrigo posts a net loss of $51.6 million thanks to a restructuring of its personal care business.
1999:: The personal care business is divested to focus the company on OTC drugs and nutritional products.
2001:: Perrigo acquires Wrafton Laboratories Ltd., a U.K. maker of store brand pharmaceuticals.

Revenue growth slowed and profits fell in both fiscal 1995 and 1996 thanks to a number of factors: stiffer competition, including surging sales of the pain reliever Aleve, which switched to OTC status in 1994 and cut into Perrigo's analgesic sales; difficulties with the personal care product lines that had been acquired from Vi-Jon Laboratories; and two unusually weak cold and flu seasons in a row. Perrigo responded in June 1995 with a restructuring involving 180 job cuts, a reduction in distribution centers from seven to four, and a merger of sales and marketing functions across all of the company's product lines.

Results for fiscal 1997 were better with both revenues and profits on the upswing. Aiding this performance was the launch of additional store brand products for former prescription drugs that had switched to OTC status. These included Aleve and the hair-restoration product Rogaine. In late 1997 Perrigo purchased an 88 percent stake in Química y Farmacia, S.A. de C.V. (Quífa) for $17 million. Based in Monterrey, Mexico, Quífa was a producer of both OTC and prescription products. The purchase provided Perrigo with its first manufacturing capacity outside of the United States.

Perrigo also spent $14 million to acquire a minority stake in Sagmel, Inc., the biggest distributor of pharmaceutical products in Russia and the Ukraine, in 1997. This move soon turned disastrous, however, when the Russian economic crisis erupted, and the subsequent devaluation of the ruble cost the company millions—and ended its Russian venture. Compounding the company's difficulties was the continuing poor performance of its personal care business. In June 1998 Perrigo announced that it would sell this unit, which included baby care items, toothpaste, deodorants, and other products, in order to focus on its higher-margin OTC drug and nutritional product lines. Two plants in California and Missouri were closed, eliminating about 160 jobs from the workforce, and an $86.9 million restructuring charge was taken, resulting in a net loss for the year of $51.6 million.

Yet more difficulties cropped up following the extremely botched implementation of a new companywide computer system. Installation of the system began in September 1998, and it would take 18 months before all of the problems were ironed out. Perrigo suffered tens of millions of dollars in lost revenues because products could not be shipped to its customers. New product development was largely put on hold as company officials had to concentrate on the computer fiasco. The company did manage to sell its personal care business, offloading it in August 1999 to a Nashville investor group calling itself Cumberland Swan Holdings Inc. A further cost-cutting move in 1999 involved the elimination of another 130 jobs from the company payroll, a measure aimed at saving as much as $6 million a year.

Effecting a Turnaround Under New Leadership in the Early 2000s

In May 2000 David T. Gibbons was brought onboard as president and CEO; Jandernoa remained chairman. Reputed to be a turnaround artist, Gibbons had more than three decades of experience at two major consumer goods companies, Minnesota Mining & Manufacturing Company and Rubbermaid Incorporated. Gibbons joined Perrigo at a particularly dark time; investors had pummeled the stock, sending it down to just over $5 per share.

Within months of taking his post, the new leader had to grapple with two more challenges. In August 2000 the Food and Drug Administration (FDA) issued a warning letter to the company because it had mislabeled 500-mg acetaminophen as 200-mg ibuprofen. Perrigo voluntarily stopped production of the product, and the FDA said that it would not approve any new Perrigo products until the quality-control issue was fixed. Gibbons soon had 130 people working on this issue, and when the FDA revisited the plant in question in May 2001, it received a clean bill of health. The company was then able within the next couple of months to rush to market two new products, private-label versions of Pepcid AC, an acid reducer, and Advil Cold and Sinus. Perrigo was now placing an increasing emphasis on being the first to market, particularly with products switching from prescription to OTC status, because a new FDA incentive gave the first to market with such a "switch" drug a 180-day period of exclusivity before competitors could join the fray—a keen advantage. In the early 2000s, Perrigo succeeded in being first to market on 80 percent of the switch products it sold; in fact, with one-third of such products, Perrigo remained the only supplier of a store brand equivalent.

In November 2000, meanwhile, the FDA recommended that phenylpropanolamine (PPA), a key ingredient in many cough and cold remedies, no longer be considered safe because it was believed to cause hemorrhagic stroke. Perrigo used PPA in ten of its product formulas, resulting in a huge recall that cost the company about $21 million. Despite these latest difficulties, Perrigo managed to achieve a profit of $27.7 million in fiscal 2001, which was a 43 percent increase over the prior year. In June 2001, at the end of that fiscal year, Perrigo paid $44 million to acquire Wrafton Laboratories Ltd., a manufacturer of store brand products for grocery and pharmacy retailers in the United Kingdom.

During fiscal 2002 and 2003 Perrigo achieved steadily increasing profits and made numerous new product introductions. In fiscal 2002 these included store brand equivalents of Excedrin Migraine and Centrum Performance, a multivitamin. Perrigo that year began an expansion of its research and development lab in Allegan to bolster its ability to develop new products. In addition, the Mexican subsidiary Quífa, now wholly owned by Perrigo, was restructured in order to build its store brand business and deemphasize its prescription drug activities. In January 2003 Perrigo's recovery had proceeded to the point where it could count on ongoing cash flow—and could begin paying a dividend for the first time. That same month, the company signed an agreement with Andrx Corporation whereby Andrx would manufacture and Perrigo would package and resell several versions of Claritin. A blockbuster as a prescription allergy drug, Claritin was the latest brand-name drug to make the switch to an OTC product—and it was potentially one of the most lucrative for the likes of Perrigo. In June 2003 the company began shipping a store brand version of Claritin-D 24 Hour. Two months later, Gibbons was rewarded for his turnaround efforts by being named to the additional post of chairman; Jandernoa relinquished the post but remained on the board of directors. A newly confident Perrigo also announced at this same time that it would spend $5 million to $7 million over the following year in an attempt to capture a share of the rapidly growing generic prescription drug market. It appeared that a resurgently formidable player in the pharmaceutical industry—the undisputed leader in the store brand OTC sector—was about to take on some new competition.

Principal Subsidiaries

L. Perrigo Company; Perrigo Company of South Carolina, Inc.; Perrigo de México S.A. de C.V.; Química y Farmacia, S.A. de C.V. (Mexico); Wrafton Laboratories Ltd. (U.K.).

Principal Competitors

Johnson & Johnson; Novartis AG; Bayer AG; Pfizer Inc.; Wyeth; GlaxoSmithKline plc; Alpharma Inc.; Bristol-Myers Squibb Company; Johnson & Johnson - Merck Consumer Pharmaceuticals Co.; Leiner Health Products LLC; Schering-Plough Corporation.

Perrigo Company

views updated Jun 08 2018

Perrigo Company

117 Water Street
Allegan, Michigan 49010
U.S.A.
(616) 673-8451
Fax: (616) 673-9122

Public Company
Incorporated: 1892
Employees: 3,879
Sales: $669 million
Stock Exchanges: NASDAQ
SICs: 2844 Toilet Preparations; 2834 Pharmaceutical
Preparations

The Perrigo Company is the largest manufacturer of over-the-counter Pharmaceuticals and personal care products for store brands in the United States. Perrigo produces approximately 15 billion pills per year and manufactures more than 850 products—most of them Pharmaceuticals such as analgesics, cough and cold remedies, antacids, and laxatives, or personal products such as toothpaste, mouthwash, deodorants, and anti-perspir-ants. Perrigo supplies 2,200 different retailers with these products under the retailer’s own label so that they can be promoted as house brands.

Perrigo has enjoyed continuous growth since the end of World War II. The company’s stock was one of the hottest items on the market when Perrigo went public in 1991; it increased in value by 100 percent by 1993. Perrigo’s growth can be partly attributed to the mass acceptance of generic and store brand pharmaceutical and personal care products. Perrigo has become the leading supplier of these products to such large drug store chains as Walgreen, Eckerd, CVS, Perry, and Arbor. Other key customers include grocery chains such as Kroger, Albertson’s, and Food Lion, and bulk retail outlets such as Wal-Mart, Target, and K-Mart. Perrigo also has its own labels—Swan and Good Sense—but these have historically accounted for less than five percent of all company sales.

The company was founded by Luther and Charles Perrigo in 1887. The Perrigo brothers had moved to Allegan County, Michigan, a few years earlier from New York. Once in Michigan the brothers established a modest business. Luther Perrigo ran a country general store and apple drying business, while Charles helped with sales. Luther decided to package generic home remedies and sell them to other small country stores like his own. The first packaging plant for these medicines was run out of Charles Perrigo’s home, but Charles soon moved to Ohio, leaving the business entirely to his brother. Luther became president of the firm when it incorporated in 1892. Perrigo remained a family-owned business for 90 years. Five of the company’s seven presidents were descendants of Luther Perrigo, who died in 1902. His son Harry became president at that time. He held the position for the next 49 years before handing over the reins to his brother Ray.

After World War II, while still under the leadership of Ray Perrigo and future president William L. Tripp Sr., management made a crucial decision. The company shifted its focus from that of a repackager of generic drugs and supplier to mainly small country stores to a manufacturer of quality drugs and beauty aids.

William L. Tripp, one of Luther Perrigo’s grandchildren, became president in 1967. During Tripp’s tenure as president the company began to reap the rewards of the change from repackager to manufacturer. The company’s income and the number of Perrigo employees quadrupled. When Tripp died in 1969 his son Bill Tripp Jr. took over the presidency. By the time of his death in a boating accident in 1980 at the age of 45, Perrigo was the leading private label manufacturer of health and beauty products in the United States. William C. Swaney had been named president of the company two years before the accident, becoming the first leader of the company who was not a member of the Perrigo family.

Swaney’s presidency lasted from 1978 until 1983. In those five years Perrigo sales tripled and the company became a much larger operation all around. Swaney acquired new companies, set up distribution centers in three states, and expanded and refurbished existing plants. Before leaving as president Swaney oversaw the sale of the company from the Perrigo family to the management. After almost 100 years of family operation the company was sold.

Michael Jandernoa, who had joined the company in 1979 as vice-president for finance, became the seventh president of Perrigo in 1984, while Swaney took over as chairman of the board and chief executive officer. Swaney instituted a style of management at Perrigo that his successor Jandernoa admitted he probably would have tried to block had he been in a position to do so at the time. Yet Jandernoa came to appreciate the open style of administration that Swaney initiated. The company contends that the different disciplines interact in the decision-making process much more than in traditional American businesses.

Jandernoa continued the policy of expansion started by Swaney. Perrigo acquired Bell Pharmacal Labs of South Carolina in 1984. Early in the Jandernoa presidency, however, the board of directors began entertaining offers from larger companies that might want to acquire Perrigo itself. In 1986 Perrigo became the largest single company in Grow Group, Inc., a publicly held group of 23 manufacturing companies. Jandernoa was named chief executive officer of Perrigo; he continued to serve as president. Perrigo represented about a third of Grow Group, Inc. As the largest component in a conglomerate with access to funds through the New York Stock Exchange (NYSE), Perrigo was able to raise new funds for more expansion.

Perrigo celebrated the company’s centenary with two ambitious building projects. It built a $1.5 million plant for the manufacture of effervescent tablets and a $3.5 million graphics art complex to house all of the company’s printing needs. Since Perrigo supply many different retailers with the same house brand product, their printing facilities are an important part of their production system. The graphics and printing department employed about 290 people and produced almost 70 percent of the company’s labels and 44 percent of their cartons in the early 1990s. The construction of the graphics department, coupled with other expenses, totals approximately $12.6 million in outlays to the company’s printing and graphics department since the Grow purchase in 1986.

After only two years as a part of Grow Group, Inc., however, Perrigo was sold back to its management in 1988. That year the company posted sales of $146 million, but by 1994 company sales had ballooned to $669 million. Three years after the sale by Grow to Perrigo management, Jandernoa took the company public. The stock proved popular, though the value has dropped and risen significantly over time. The market value of the company in July 1994 based on a closing price of $14 a share was $1 billion, for instance. But this price was down from a value of $32 a share in January 1994.

The drop in the value of Perrigo shares was attributed to a drop in sales growth. The company, in fact, had another year of record sales and continued to expand, but stock speculators felt that the market had overreacted to the Perrigo stock offering and had inflated the value beyond its true market worth. Some analysts have predicted that the drop in growth is a sign that the national brands will win back bargain-hunting customers in a healthy economy.

Other problems that Perrigo faced in its competition with national brands in the mid-1990s concerned finding the right price range for its products. While Perrigo has long wielded its ability to offer lower prices than national brand competitors, sometimes the price difference can be so dramatic—more than 50 percent in some cases—that it may have a reverse effect on the consumer. The consumer weighs the relative cost savings with a judgment on efficacy equivalence. If the price difference is too dramatic, some observers contend, the consumer becomes suspicious of the Perrigo brand and turns to the national brand. Perrigo therefore developed a system whereby some of the money that it saved from advertising was spent on market research to determine exactly how its products are accepted by the consumer, which products are worth developing, and which have limited potential due to brand allegiance.

One reason for Perrigo’s enormous dominance over the store brand market was its ability to work closely with retailers to promote consumer allegiance to store brands. Beginning in the 1980s Perrigo began a major campaign to help retailers design labels, manage inventory, and develop promotions. Perrigo utilized its’ house printing and graphics department to ensure accuracy and reliability in labeling and packaging, permitting rapid new product introductions. Perrigo also enjoys an advantage over many of its competitors because retail stores have a real incentive to give Perrigo’s product prominence on their shelves. Profit margins for store brand products are considerably greater than for national brands. The store’s public image can be enhanced as well, provided the product sold under their name is satisfactory.

Most of Perrigo’s products are packaged to be readily identifiable with the national brand equivalents. There is a fine line between taking advantage of the competitor’s advertising and carving out a niche that is independently recognized by the consumer. As reported in the OTC Market Report in 1995, the company is threatened with lawsuits “once or twice a year,” but the vast majority of them are settled in a short period of time. Most of the disputes focus on product dress rather than the actual content of the product. While Perrigo management has become accustomed to lawsuits from competitor companies, in July 1994 Perrigo found itself faced with a lawsuit from closer to home. Their former parent company, Grow Group, Inc., filed suit against the company. The Grow Group, valued at less than half of Perrigo, demanded the return of Perrigo stock or a sizable settlement in lieu thereof. Grow claimed that Perrigo management did not act in good faith at the time of the 1988 sale and asked for $2 billion in actual damages and $2 billion in punitive damages. Perrigo’s response to the summons from their previous partners was sanguine. They reported the news of the summons to shareholders in the 1994 annual report saying that “based on the limited information set forth in the summons, the outcome of this matter is not currently determina-ble,” but that “the Company believes the allegations are totally without merit and intends to oppose the action vigorously.”

One of the reasons that many analysts believe that Perrigo is a safe bet for future growth regardless of recession is the fact that the company faces little legitimate competition. In December 1994 the company purchased VI-Jon Laboratories, Inc., a leading manufacturer of store brand personal care products, thereby expanding Perrigo’s sales and eliminating a potential competitor at the same time. Perrigo’s own assessment of their competition is that it is fragmented both geographically and in terms of product categories. Perrigo is less concerned with competitors who presently manufacture store brand products than the national brands. Those companies still have substantially greater resources than Perrigo. If they decided to offer their products at a drastically lower price, or offered their products to retailers as store brands themselves, the threat to Perrigo would be significant. Companies with national brands have eschewed this strategy entering the mid-1990s, however, preferring to keep their national brand image intact.

Perrigo also believes that other market factors could be beneficial. The OTC (over-the-counter) drug market is due to increase enormously in the next few years as the patents on dozens of prescription drugs run out. Estimates of what this market may be worth vary from $4 billion to $10 billion by the year 2000. Perrigo has been preparing for this boom in potential products throughout the early 1990s by increasing investment in research and development and by entering into joint ventures with generic prescription drug manufacturers such as Sandoz Pharmaceuticals. Once a prescription drug is reclassified as OTC the patent holder has two years of exclusivity. During this period Perrigo watches the success of the product and decides whether it should produce an equivalent version, letting the national brand pick up the tab for advertising the product to the consumer. New products accounted for $45 million of the company’s net sales in fiscal year 1994.

The final frontier for Perrigo is the international market. Perrigo is investing in its recently formed subsidiary Perrigo International in hopes of spreading its domestic success overseas and increasing profits accordingly.