Perrigo takes the next step toward becoming a one-stop shop for private-label consumer health products with its $808 million acquisition of infant formula and baby food firm PBM Holdings Inc.

The private label giant could face its biggest challenge yet, however, in growing market share in a category historically resistant to store brands, experts say.

With the deal announced March 23, Perrigo gains one of only four domestic FDA-approved infant formula manufacturers and approximately 370 product stock-keeping units. PBM was founded in 1997 and initially licensed the U.S. rights to Wyeth formula products before purchasing those assets in 2005.

The other FDA-approved manufacturers in the category are Mead Johnson, Abbott Nutrition and Nestle.

Perrigo expects the deal to close by its fiscal fourth quarter, ending in June. The firm projects the infant nutrition business will add about $300 million in annual sales to its fiscal 2011 numbers; it expects to begin realizing synergies and efficiencies in fiscal 2012.

Acquiring Gordonsville, Va.-based PBM "is an outstanding strategic opportunity for us, as it allows us to enter into a new, financially compelling category, while also allowing us to leverage PBM's international footprint in the $23 billion global pediatric nutrition market," said Perrigo President and CEO Joseph Papa during a same-day call with analysts.

PBM President and CEO Paul B. Manning said in a release he expects "this merger will provide PBM with a strong base and strategic resources to continue to provide its customers with quality, affordable store-branded products." PBM manufactures Walmart's Parent's Choice line of infant nutritionals.

Perrigo is eyeing expansion into China, Europe, Latin America and the Middle East, Papa said, and is counting on the infant formula portfolio to provide a "foothold" for the rest of its OTC offerings.

About 20 percent of PBM's sales, projected to reach around $285 million in 2010, are international. Papa said those sales are largely Canadian.

During the Allegan, Mich., company's investor day in September 2009, Perrigo executives identified infant nutrition as a prime adjacent category - worth $5.9 billion in U.S. sales, the firm estimated at the time - into which its Consumer Healthcare unit could move.

Additional adjacent categories mentioned during the presentation in New York included sanitary napkins and tampons, first-aid accessories, eye care, adult incontinence, diet liquids and powders, contraceptives and diagnostic test kits.

Perrigo is driving CHC growth on multiple fronts: through its "ORx" program seeking reimbursements for prescribed OTCs; through acquisitions such as Australian firm Orion Labs, announced in early March; and through first-to-market product launches as branded OTCs lose exclusivity (¹ Also see "Perrigo Pursues OTC Reimbursement Opportunity In Emerging "ORx" Space" - Pink Sheet, 22 February, 2010. and ² Also see "Perrigo Will Acquire Orion Labs To Reach Australian Market" - Pink Sheet, 8 March, 2010.).

Slim Segment Share

The private labeler has feasted on growing public acceptance of store-brand OTCs in recent years, especially as the economic downturn made lower price points more attractive to both consumers and retailers.

While certain categories lend themselves to sizable private label penetration - for example, Perrigo claims more than 80 percent of the generic omeprazole market, which has seized nearly 50 percent of Prilosec OTC sales - infant nutrition is not one of them (³ 'The Tan Sheet' Dec. 21, 2009, In Brief).

Papa said private-label formula in the U.S. comprises about 10 percent of the segment - with PBM claiming nearly 90 percent of that slice - though by other measures, store-brand products are even less significant.

Private-label formula "has among the lowest penetrations of any food category we track," said Lee Linthicum of Euromonitor International. Data from the market research firm indicated a 6.8 percent store brand market share in the U.S. in 2008, and even lower shares in several European markets.

Linthicum, Euromonitor's head of global food research, said the numbers place infant formula in the same boat as pet food and cigarettes - consumer goods for which brand loyalty and perceptions of quality trump price point.

The Private Label Manufacturers Association offered data, originally from the Nielsen Co., showing private-label infant formula comprising 4.2 percent of the $3.3 billion category in the U.S. in 2009. That share was down 20 basis points compared to the prior year, according to Nielsen.

Changing Perceptions Of Private Label

Papa laid out a goal of reaching 20 percent penetration for private-label infant formula over the next four or five years. While experts say Perrigo is the right firm to drive increased share, they indicate it will not be easy.

"When you are a mother and you are making the decision for your baby, you typically seem to think that the branded products are better," said SunTrust Robinson Humphrey analyst Frank Pinkerton.

"The real question is: How do you change that perception?"

Linthicum said it will be important for Perrigo/PBM to play up its value-added offerings, such as products with essential fatty acids, probiotics or organic formulations.

Perrigo noted that on a product-by-product basis, PBM's current portfolio compares favorably with branded lines including Mead Johnson's Enfamil and Abbott's Similac . PBM is working on a hypoallergenic formula with a launch slated for late 2010, Perrigo said.

PBM won a legal victory over branded competition in 2009 when a federal court in Virginia imposed a $13.5 million fine against Mead Johnson and prohibited the firm from implying that its Enfamil LIPIL provides superior nutritional benefits than other formula products (⁴ 'The Tan Sheet' Dec. 7, 2009, In Brief.)

Developing Markets Offer Challenges, Too

While convincing U.S. parents to accept the private label value proposition poses its own challenges, Linthicum said developing markets are often no more likely to embrace store brands.

"In Latin America and Eastern Europe especially, you've got a very aspirational consumer base" that equates brands with elevated status, he said. Chinese consumers are particularly wary of formulas with perceived lower quality, in the wake of the melamine-tainted formula scandal that killed several infants and sickened thousands (⁵ Also see "Mead Johnson Set Loose To Navigate Market, Shifting Economic Winds " - Pink Sheet, 16 February, 2009.).

Still, the expansion of major retailers such as Walmart and French chain Carrefour offers new opportunities for store brands in developing markets, Linthicum said.

To chip away at the brand stronghold on infant nutrition products, Perrigo will be able to use its vast network of distributors to introduce PBM products into smaller, more regional retail channels, Pinkerton said.

Perrigo might also transition the formula labeling from a branded generic model to more of a store-brand model, he added.

The company prides itself on the turnkey solutions it offers retailers in support of its products; Perrigo's growth strategy likely will include educational and marketing programs aimed at changing consumer perception of private-label formulas (⁶ Also see "Perrigo Strives To Stand Out Against Incoming Private Label Competition" - Pink Sheet, 9 November, 2009.).

Papa also noted that "packaging design opportunities" exist for improving PBM's products, likely referring to a container similar to Abbott's Similac SimplePac (⁷ Also see "Abbott Nutrition Offers Complete Package For Similac Formula Users" - Pink Sheet, 23 March, 2009.).

- Dan Schiff ( ⁸ d.schiff@elsevier.com )

Perrigo Grows Into Adjacent Infant Formula Category With PBM Acquisition

More from Archive

More from Pink Sheet