117 Water Street
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-perspirants. 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 decisionmaking 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 determinable," 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.
Principal Subsidiaries: L. Perrigo Company; Perrigo Company of South Carolina, Inc.; Cumberland-Swan, Inc.; Perrigo International, Inc.