Perrigo OTCs, Nutritionals Underperform Despite Record Overall Revenue
This article was originally published in The Tan Sheet
Executive Summary
Perrigo delivered record first-quarter revenue but fell short of analyst expectations due to slowing growth in its consumer health care and nutritional units.
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Perrigo delivered record first-quarter revenue but fell short of analyst expectations due to slowing growth in its consumer health care and nutritional units. The consumer health care business rode the strength of cough/cold, analgesics and smoking-cessation OTCs to $411.7 million in sales, up 4% year over year, but Perrigo’s gastrointestinal category took a $12 million hit due to competitive pressure from fellow private labeler Dr. Reddy’s Laboratories.
The CHC unit’s adjusted operating income dropped 9% in the quarter to $67 million in the three months ended Sept. 25, due partly to investments in improving manufacturing capacity to accommodate additional products, Perrigo executives said during an Oct. 27 earnings call. Perrigo’s vitamin/mineral/supplement business in particular weighed on the nutritionals division, for which net sales dipped 2% to $120 million. Infant formula subsidiary PBM Products, also part of the nutritionals business, is chipping away at branded products market share, but costs of raw materials, including whey protein, are cutting into profit margins and depressed U.S. birth rates are stifling category growth, Perrigo said. Street Questions OTC, Nutrition Fundamentals Though the Allegan, Mich., company does not publicize quarterly financial guidance, UBS analysts noted Perrigo’s OTC sales fell short of the Wall Street consensus estimate by $34 million and nutritional sales were $8 million off expectations. The underperformance “raises some concern around fundamentals and growth in these segments,” UBS said. Morningstar analysts said a strong lineup of OTC launches – worth an expected $190 million in annual sales, according to Perrigo – should help the firm meet its fiscal 2012 forecasts, though it still must contend with the pending return of recalled Johnson & Johnson products to the market. Perrigo anticipates the full retail reinstatement of J&J pediatric liquids, including Children’s Tylenol products, by March 2012. Perrigo says that when consumers switch to its private-label products because branded equivalents are temporarily unavailable, Perrigo expects to retain about half of those consumers after the brands return to shelves. Meanwhile, Perrigo’s prescription drug business had a strong quarter, increasing sales 84% to $128 million, thanks largely to the acquisition of Paddock Laboratories closed in July ( (Also see "In Brief" - Pink Sheet, 1 Aug, 2011.), In Brief). First-quarter overall net income decreased 5.3% to $70.5 million and diluted earnings per share from continuing operations dipped to a reported 75 cents from 79 cents. However, Perrigo revised upward its full-year adjusted diluted earnings guidance from continuing operations to a range of $4.65-$4.80, from a previous projection of $4.50-$4.65. UBS discounted the upward guidance adjustment as driven mostly by a lower-than-expected tax rate. Perrigo High On New OTCs, China Deal Perrigo CEO Joseph Papa sees upsides for OTCs and nutritionals in the rest of the firm’s fiscal 2012. The company’s Allegan facilities have surpassed previous production levels following an FDA warning letter that resulted in reduced capacity for parts of 2010 and 2011 (Also see "Perrigo Applies Crime Scene Investigation Model To Improve Quality Control" - Pink Sheet, 17 Oct, 2011.). With the augmented capacity, Papa said Perrigo can seize up to $75 million in sales from J&J’s absent OTCs – a total opportunity Perrigo estimates at $100 million per year. Following the recent successful introduction of generic Allegra (fexofenadine), Perrigo’s fiscal 2012 launch schedule includes equivalents of the proton pump inhibitors Prevacid 24HR (lansoprazole) and Zegerid OTC (omeprazole/sodium bicarbonate), as well as the long-delayed generic version of Mucinex (guaifenesin) (Also see "Perrigo To Launch Private Label Mucinex, Prevacid, With An Eye On Lipitor" - Pink Sheet, 22 Aug, 2011.). Perrigo also has an eye on Merck’s prescription antihistamine Clarinex (desloratadine), which it expects will be open to generic competition by June 2012 and likely will switch OTC soon after. In nutrition, Perrigo anticipates full-year revenue growth between 3% and 5%, not including gains from the recently announced infant formula distribution partnership with Founder Pharma in China ( (Also see "In Brief" - Pink Sheet, 24 Oct, 2011.), In Brief). Founder, which operates medical centers and manufactures active pharmaceutical ingredients, “is the type of partner we’ve been in search of in China,” Papa said. Formula shipments to China are expected to begin within three to six months. Additionally, Perrigo’s nutritional new product slate includes a store-brand version of Procter & Gamble’s Align probiotic supplement, which records annual sales of about $85 million, Papa said. By Dan Schiff |
