Perrigo Boosts R&D Spending, Focuses On Quality Control

Perrigo plans to increase R&D spending in the second half of FY 2001 pending a favorable FDA follow-up manufacturing audit of the firm's Allegan, Mich. facility, President & CEO David Gibbons told analysts during a conference call Jan. 23.

"We plan to pick up spending on R&D...primarily to focus on ANDA opportunities as a lot of drugs go from Rx to OTC to generic," Gibbons said.

Exec VP & Chief Financial Officer Douglas Schrank noted Perrigo spent $3.5 mil. on R&D in the second quarter ended Dec. 30, which was below last year's level and "well below what we had planned."

The company deferred most of its quarterly R&D expenditures to focus resources on FDA compliance, Gibbons said.

Perrigo has made a concerted effort toward implementing its global improvement plan, which was developed to address problems found during an unfavorable FDA inspection of the firm's Allegan facility in August, he added.

Following the inspection, the agency noted pending NDA, ANDA or export approval requests would not be approved until Perrigo corrected the violations (¹ (Also see "Perrigo Extended-Release Acetaminophen Launch Delayed By QC Issues" - Pink Sheet, 11 Sep, 2000.)).

"We have responded to the FDA in writing and in person, with specific corrective actions that we're taking...to ensure ongoing compliance," Gibbons said.

The plan involves reviewing and updating all standard operating procedures, expanding incident investigations and documentation and adding comprehensive training programs to address quality control issues.

Gibbons also stressed Perrigo is working toward improved customer service. By the time FDA conducts its follow-up audit, scheduled for late February or early March, the firm will be able to "ensure that quality as well as customer service [are]...compelling competitive advantages for Perrigo," he said.

Although the company was forced to push back the launch date of minoxidil 5% (comparable to Pharmacia's Rogaine Extra Strength for Men) and extended-release acetaminophen (McNeil's Tylenol Arthritis Pain) due to the quality control issues, Perrigo expects to introduce a slew of new products in April, after the FDA audit.

Women's Menstrual Relief, Migraine Ibuprofen Tablets, Ibuprofen Cold & Sinus and four nasal spray formulas, all comparable to store brands, are on the plate for a mid-2001 launch (² (Also see "Perrigo Indication-Specific Analgesics Slated For Mid-2001 Launch" - Pink Sheet, 20 Nov, 2000.)).

Perrigo also noted it is reformulating its PPA-containing products in time for next year's cough/cold season. The firm told analysts it has taken a second quarter charge of $24 mil. due to the voluntary withdrawal of the items from retail shelves.

Perrigo originally estimated in November that discontinued sales of PPA OTCs would result in a charge of up to $19 mil. The projection came shortly after FDA recommended companies pull the products off shelves due to evidence linking the ingredient's use to an increased risk of hemorrhagic stroke (³ (Also see "Perrigo PPA Product Withdrawal Costs Could Reach $19 Mil." - Pink Sheet, 13 Nov, 2000.)).

Schrank attributed the additional charge to the "slow start to the cough/cold season," which meant "there was more inventory at retail than we initially anticipated...[and] sell-through had been lower than normal."

However, the firm maintained there will be "little or no long-term impact," due to its efforts to reformulate the affected products.

Excluding the PPA withdrawal charge, second quarter sales were $204.9 mil., up 2.1% compared to the year-ago period. Accounting for the voluntary withdrawal, quarterly sales declined 4.9%. Moreover, while net income for the quarter would have risen 46.3% had the PPA actions not occurred, the charge resulted in net income of $820,000, compared to $11 mil. in the prior-year quarter.

The PPA withdrawal also negatively affected six-month results, with net sales for the period down 7% to $384.2 mil. and net income down 45.7% to $11.4 mil.

The weak cough/cold season was accompanied by slow vitamin sales, but both were counterbalanced by strong performances in the analgesic and antacid categories, the firm stated.

Looking ahead, Schrank noted current financial results will be "tough to match in the second half" due to the cost of Perrigo's quality and compliance efforts and the current lack of PPA replacement products.