Perrigo OTC Growth Rides Innovation Path Wider Than Switches

When Perrigo executives confirmed their faith during an earnings briefing in the firm's OTC private label as its primary revenue driver, some analysts wanted more as assurance that the business will continue stabilizing the firm.

Perrigo’s outlook on the consumer market anticipates OTC switches of additional migraine and ophthalmic treatments and somewhat later, for indications already on the overall nonprescription proposal landscape, high cholesterol and erectile dysfunction indications, says Perrigo Co. PLC CEO John Hendrickson.

While all offer opportunities for the firm, when Perrigo executives during a May 31 earnings brief confirmed their faith in the firm's OTC private label as its primary revenue driver, some analysts wanted more as assurance that the business will continue stabilizing the firm. Hendrickson offered a general description of Perrigo's outlook for launching generics OTC switches and other nonprescription products and analysts pressed for details.

"What will be the new major needle movers in the [consumer] business as we sort of exit the decade 2018, 2019? What are those big brands that are going from Rx to OTC that we should look for?" asked Jami Rubin, of Goldman Sachs Group Inc. Research Division.

In addition to generics it provides of intranasal corticosteroid allergy treatments made available OTC over the past five years and its planned launch of the first private label version of the OTC proton pump inhibitor Nexium 24HR (esomeprazole) marketed by Pfizer Inc., Perrigo expects to follow potential switches of branded Rx ingredients indicated for migraine and for ophthalmic treatments.

"We invest in those categories that we think could potentially switch and are open to switch. I think the good thing is the environment that we're in and trying to find cost-effective ways of health care plays into our government and individual companies looking to bring products to a more economical position and switching them," Hendrickson said.

Other currently Rx-only ingredients such as treatments for high cholesterol, erectile dysfunction and asthma, he added, "continue to be, in my mind, a little bit further away."

Three proposals to switch an Rx statin have failed and a fourth didn't reach FDA after an unsuccessful actual use trial. On the ED ingredient front, meanwhile, Sanofi is preparing a new drug application to switch Cialis (tadalafil), under license from Eli Lilly & Co., and Pfizer Inc. is considering asking FDA to approve an OTC version of its Viagra (sildenafil). (Also see "Light Still On For Switches After Pfizer Pulls Plug On OTC Lipitor" - Pink Sheet, 3 Aug, 2015.)

One Brand But 'Many' Private Label SKUs

Perrigo, headquartered in Dublin while continuing its primary operations in the Allegan, Mich., area, has options in the OTC space, though, in addition to launches of generics of branded nonprescription product switches. While a switch innovator distributes a single new product to retailers, Perrigo later makes its private label versions available, populating store shelves with multiple packaging versions of the same ingredient.

"When a product switches, it switches as a dose," but Perrigo later distributes "different package configurations, different offerings, different combo packs, different things that present at the consumer in many different ways," Hendrickson said.

And Perrigo will capitalize with the rest of the industry on potential changes, which Hendrickson expects eventually will come, in FDA's processes for facilitating moving additional ingredients to OTC. (Also see "FDA's OTC Naloxone Study Is A Starting Point For Other Switches, Not A Roadmap" - Pink Sheet, 16 May, 2017.)

"I believe that the incentive for industry, government, et cetera, to figure out ways to bring those to more consumer choice type of offerings remains out there. So, the incentives are there to drive that. … I look out over the next three to five years, I believe that some of those paths will present themselves," the CEO said.

International Stabilization Progress

Perrigo continues reviewing its consumer health care international business for potential changes to grow revenues or cut costs, but unlike its Rx generics business also under review, divesting that division is not on the table.

Hendrickson noted Perrigo sold some of European consumer product distribution infrastructure in 2016 while paring the division's OTC drug and nutritional product portfolio of redundant products and introducing new formulations in some markets. (Also see "Perrigo Trims Workforce, Ships Tysabri License, Stays European Course" - Pink Sheet, 1 Mar, 2017.)

Perrigo's "long-term expectation" is for its consumer international business to grow at 1.5 times industry growth in European markets where it competes. "Each country is a little bit different. But in my mind, you grow 1, 1.5, we should be able to grow 2%, 3% kind of ranges over the long-term," he said, adding, "We made meaningful progress on our plan to enhance [consumer] international, their profitability and execution against their overall business plan."

The consumer international division's reported net sales slipped 15%, including a 5% impact from foreign exchange, to $375m and its operating income dropped 6% to $52m in the January-March period, although gross margin for the unit improved from 12.5% to 13.8m, Perrigo said.

Hendrickson left no doubt that even though net sales for Perrigo's private label OTC drug and adult and infant nutrition business were off 9% to $483m during the quarter, the division, which also includes animal care products, remains the firm's key driver. The unit's gross profit was off 2% to $201m and its gross margin dropped slightly to 20.2%.

"With approximately 80% of our revenues coming from our consumer-facing businesses, our ability to execute in these important segments is expected to drive value for our shareholders," he said.

Morningstar senior equity analyst Michael Waterhouse shares Perrigo's consumer market confidence. In a same-day research note, Waterhouse wrote that "revenue declines in the US and European consumer health divisions look a bit concerning, but we still think these segments can squeeze out low single-digit growth going forward thanks to store-brand penetration and new product launches."

From the editors of the Tan Sheet.