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MarketScreener Homepage  >  Equities  >  Nyse  >  Perrigo Company plc    PRGO   IE00BGH1M568

PERRIGO COMPANY PLC

(PRGO)
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PERRIGO : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/06/2019 | 10:14am EST

EXECUTIVE OVERVIEW

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements included in this Form 10-Q and our Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K"). These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under "Risk Factors" in Item 1A of our 2018 Form 10-K and Part II. Item 1A of this Form 10-Q.

Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.

We are dedicated to making lives better by bringing "Quality, Affordable Self-Care Products™" that consumers trust everywhere they are sold. We are a leading provider of over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be


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                                                    Perrigo Company plc - Item 2
                                                              Executive Overview


self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and nasal sprays.

Segment Reporting Change

During the three months ended March 30, 2019, we changed the composition of our operating and reporting segments. We moved our pharmaceuticals and diagnostic businesses in Israel from the Consumer Self-Care International segment to the Prescription Pharmaceuticals segment and we made certain adjustments to our allocations between segments. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Financial information related to our business segments and geographic locations can be found in Item 1. Note 2 and Note 16 . For results by segment, see "Segment Results" below.

Our new reporting and operating segments are as follows:

•      Consumer Self-Care Americas ("CSCA"), formerly Consumer HealthcareAmericas, comprises our consumer self-care business (OTC, contract
       manufacturing, infant formula, and oral self-care categories and our
       divested animal health category) in the U.S., Mexico and Canada.


•      Consumer Self-Care International ("CSCI"), formerly Consumer Healthcare
       International, comprises our branded consumer self-care business primarily
       in Europe, our consumer-focused business in the United Kingdom and
       Australia, and our liquid licensed products business in the United
       Kingdom.


•      Prescription Pharmaceuticals ("RX") comprises our Prescription
       Pharmaceuticals business in the U.S. and our pharmaceuticals and
       diagnostic businesses in Israel, which were previously in our CSCI
       segment.



Highlights

•      On August 9, 2018, we announced a plan to separate our RX business, which,
       when completed, will enable us to focus on expanding our consumer-facing
       businesses. We continue to make progress related to the preparations for
       separation, which may include a possible sale, spin-off, merger or other
       form of separation. While we remain committed to transforming to a
       consumer-focused business, we cannot commit to a specific date for the
       separation. In connection with the proposed separation, we anticipate
       incurring significant preparation costs, excluding restructuring expenses
       and transaction costs, in the range of $45.0 million to $80.0 million
       depending on the final structure of the transaction.



•      On July 8, 2019, we completed the sale of our animal health business to
       PetIQ for base consideration of $185.0 million, which resulted in a gain
       of $72.4 million recorded in Other (income) expense, net on the Condensed
       Consolidated Statements of Operations. The final purchase price and gain
       is subject to customary post-closing adjustments for changes to working
       capital compared to the target working capital on the closing date and is
       expected to be finalized in the fourth quarter of 2019 (refer to   Item 1.
       Note 3  ).



•      On July 1, 2019, we acquired 100% of the outstanding equity interest in
       Ranir Global Holdings, LLC ("Ranir"), a privately-held company, for total
       base consideration of $750.0 million in a debt-free, cash-free
       transaction, subject to post-closing adjustments for changes to working
       capital compared to the target working capital on the closing date. This
       transaction advances our transformation to a consumer-focused, self-care
       company while enhancing our position as a global leader in consumer
       self-care solutions (refer to   Item 1. Note 3  ).




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                                                    Perrigo Company plc - Item 2
                                                                    Consolidated


RESULTS OF OPERATIONS

CONSOLIDATED

Recent Developments

Notice of Proposed Adjustments

Draft NOPA

On August 22, 2019, we received a draft Notice of Proposed Adjustment ("NOPA") from the IRS relative to our fiscal tax years ended June 28, 2014 and June 27, 2015 and relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company, plc. The draft NOPA, which the IRS has stated will be reflected in its final NOPA, would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum), on the stated ground that the loans were not negotiated on an arms'-length basis and proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense of approximately $170.0 million, excluding interest and penalties, for fiscal years ended June 28, 2014 through June 27, 2015. In addition, we expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense will not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond this period, given that proposed regulations will eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1. Note 13 ).

Final NOPA

On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the theory from a 2017 draft NOPA that when Elan took over the future funding of Athena's In-process Research & Development ("IPR&D") in 1996, after it acquired Athena in 1996, it should have paid a substantially higher royalty rate for the right to exploit Athena's intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS income position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1. Note 13 ).



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                                                    Perrigo Company plc - Item 2
                                                                    Consolidated


Consolidated Results

Three Month Comparison
                                  Three Months Ended
                           September 28,      September 29,
(in millions)                   2019               2018
Net sales                 $      1,191.1$     1,133.1
Gross profit              $        412.8$       424.8
Gross profit %                      34.7 %            37.5  %
Operating income (loss)   $         54.4     $      (122.0 )
Operating income (loss) %            4.6 %           (10.8 )%


                [[Image Removed: chart-6e1afd1f5ca955cf8e4.jpg]]

                [[Image Removed: chart-43d6378531cd5f32a77.jpg]]

* Total net sales by geography is derived from the location of the entity that sells to a third party.

Operating income increased $176.4 million, or 145%, due to:

$58.0 million, or 5%, increase in net sales due to:

$77.0 million increase due to our acquisition of Ranir and $51.7
             million increase due to new product sales; partially offset by


•            $18.6 million decrease due to our divested animal health business,
             $18.3 million decrease due primarily to unfavorable Euro foreign
             currency translation, $9.4 million decrease due to discontinued
             products, $9.2 million decrease due to the retail market withdrawal
             of Ranitidine products, $8.1 million decrease due to our exited
             foods business, and $7.1 million net decrease of existing products
             due primarily to competition-driven pricing pressure.


•      $12.0 million decrease in gross profit, or a 280 basis point decrease in
       gross profit as a percentage of net sales, due primarily to operating
       inefficiencies, competition-driven pricing pressure, and unfavorable
       product mix; partially offset by new product sales and our acquisition of
       Ranir.


$188.4 million decrease in operating expenses due primarily to:

$210.9 million decrease in impairment charges due to the absence of
             $221.8 million in impairment charges related to animal health
             goodwill and intangible assets and certain IPR&D taken in the prior
             year period; partially offset by


•            $25.8 million increase in selling and administrative expenses due
             primarily to increased employee incentive compensation expenses, the
             effect of Euro unfavorable foreign currency translation, and
             increased acquisition and integration-related charges and contingent
             consideration adjustments.




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                                                    Perrigo Company plc - Item 2
                                                                    Consolidated


Nine Month Comparison
                            Nine Months Ended
                    September 28,      September 29,
(in millions)            2019               2018
Net sales          $      3,514.6$      3,536.5
Gross profit       $      1,292.5$      1,388.5
Gross profit %               36.8 %             39.3 %
Operating income   $        211.7$        129.0
Operating income %            6.0 %              3.6 %



                [[Image Removed: chart-4472dad6e7f45571b4b.jpg]]


                [[Image Removed: chart-35a49b3b0e6c576ba4a.jpg]]

* Total net sales by geography is derived from the location of the entity that sells to a third party.

Operating income increased $82.7 million, or 64%, due to:

$21.9 million, or 0.6%, decrease in net sales due to:

$86.2 million net decrease of existing products due primarily to
             competition-driven pricing pressure across all segments,
             $77.8 million decrease due primarily to unfavorable Euro foreign
             currency translation, $41.2 million decrease due to discontinued
             products, $34.8 million decrease due to our divested animal health
             business, $21.0 million decrease due to our exited foods business,
             and $9.2 million decrease due to the retail market withdrawal of
             Ranitidine products; partially offset by


•            $171.3 million increase due to new product sales, and $77.0 million
             increase due to our acquisition of Ranir.



•      $96.0 million decrease in gross profit, or a 250 basis point decrease in
       gross profit as a percentage of net sales due primarily to
       competition-driven pricing pressure, operating inefficiencies, unfavorable
       product mix, and unfavorable Euro foreign currency translation; partially
       offset by new product sales and our acquisition of Ranir.




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                                                    Perrigo Company plc - Item 2
                                                                    Consolidated


$178.7 million decrease in operating expenses due primarily to:

$180.6 million decrease in impairment charges due to the absence of
             $223.5 million in impairment charges related to animal health
             goodwill and intangible assets and certain IPR&D taken in the prior
             year period; and


•            $46.0 million decrease in R&D expenses primarily related to the
             absence of a $50.0 million upfront license fee payment to enter into
             a license agreement with Merck Sharp & Dohme Corp. ("Merck") in the
             prior year period; partially offset by


•            $45.8 million increase in selling and administrative expenses due
             primarily to increased legal and consulting fees.



CONSUMER SELF-CARE AMERICAS

Recent Developments

•      During the three months ended September 28, 2019, after regulatory bodies
       announced worldwide that Ranitidine may potentially contain NDMA, a known
       environmental contaminant, we promptly began testing our externally
       sourced Ranitidine Active Pharmaceutical Ingredient ("API") and
       Ranitidine-based products. On October 8, 2019 we halted shipments of the
       product based upon preliminary results. Based on the totality of data
       gathered, we made the decision to conduct a voluntary retail market
       withdrawal, which resulted in a decrease in our net sales of $7.4 million
       and a decrease in gross profit of $15.5 million.



•      On September 4, 2019, we entered into a definitive agreement to acquire
       the branded OTC rights of Prevacid® from GlaxoSmithKline. The transaction
       is expected to close in the fourth quarter of 2019 subject to customary
       closing conditions. Total cash consideration will be subject to adjustment
       for brand performance prior to the closing and will range from
       $61.5 million to $65.0 million. The acquisition of Prevacid®  will expand
       our OTC gastrointestinal product portfolio, and we expect to allocate
       almost all of the purchase price to a brand named intangible asset (refer
       to   Item 1. Note 3  ).



•      On July 8, 2019, we completed the sale of our animal health business to
       PetIQ for base consideration of $185.0 million, which resulted in a gain
       of $72.4 million recorded in Other (income) expense, net on the Condensed
       Consolidated Statements of Operations. The final purchase price and gain
       is subject to customary post-closing adjustments for changes to working
       capital compared to the target working capital on the closing date and is
       expected to be finalized in the fourth quarter of 2019 (refer to   Item 1.
       Note 3  ).



•      On July 1, 2019, we acquired 100% of the outstanding equity interest in
       Ranir, a privately-held company, for total base consideration of $750.0
       million in a debt-free, cash-free transaction, subject to post-closing
       adjustments for changes to working capital compared to the target working
       capital on the closing date. This transaction advances our transformation
       to a consumer-focused, self-care company while enhancing our position as a
       global leader in consumer self-care solutions (refer to   Item 1. Note
       3  ).



•      On April 1, 2019, we purchased the Abbreviated New Drug Applications
       ("ANDAs") and other records and registrations of Budesonide Nasal Spray, a
       generic equivalent of Rhinocort Allergy® and Triamcinolone Nasal Spray, a
       generic equivalent of Nasacort Allergy®, from Barr Laboratories, Inc., a
       subsidiary of Teva Pharmaceuticals, for a total of $14.0 million in cash
       (refer to   Item 1. Note 3  ).




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                                                    Perrigo Company plc - Item 2
                                                                            CSCA


Segment Results

Three Month Comparison
                                 Three Months Ended
                          September 28,      September 29,
(in millions)                  2019              2018
Net sales                $        613.3$      596.2
Gross profit             $        185.1$      189.5
Gross profit %                     30.2 %           31.8  %
Operating income (loss)  $         81.3     $     (119.0 )
Operating income (loss)%           13.3 %          (20.0 )%


Three Months Ended September 28, 2019 vs. Three Months Ended September 29, 2018

Operating income increased $200.3 million, or 168%, due to:

$17.1 million, or 3%, increase in net sales due primarily to:

$54.2 million increase due to our acquisition of Ranir and $5.9
             million increase due primarily to the launches of Loperamide
             Simethicone and Nicotine cherry ice mint mini lozenge; partially
             offset by


•            $18.6 million decrease due to our divested animal health business,
             $8.1 million decrease due to our exited foods business, $7.4 million
             decrease due to the retail market withdrawal of Ranitidine products,
             and $7.3 million net decrease of existing products due primarily to:


•                  Lower sales volume in our contract infant formula business due
                   to customer brand discontinuations, pricing pressure primarily
                   in our gastrointestinal and smoking cessation categories,
                   lower sales volume in our analgesics category due to overall
                   market contraction, and lower sales volume in Mexico;
                   partially offset by


•                  Higher sales volume in our allergy category due to improved
                   service levels, store brand share expansion, along with higher
                   sales volume in our smoking cessation category due to a new
                   customer contract.



•      $4.4 million decrease in gross profit, or a 160 basis point decrease in
       gross profit as a percentage of net sales, due primarily to operating
       inefficiencies, pricing pressure, and the retail market withdrawal of
       Ranitidine products; partially offset by our acquisition of Ranir and
       improved profitability on OTC products sold through prescriptions.


$204.7 million decrease in operating expenses due primarily to:

$221.8 million decrease in impairment charges due to the absence of
             impairment charges related to animal health goodwill and intangible
             assets and certain IPR&D taken in the prior year period; partially
             offset by


•            $7.1 million increase in other operating expenses due to an asset
             abandonment related to our operations in Vermont and $5.1 million
             increase in R&D expenses due to increased spending on growth
             initiatives.




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                                                    Perrigo Company plc - Item 2
                                                                            CSCA


Nine Month Comparison
                            Nine Months Ended
                    September 28,      September 29,
(in millions)            2019               2018
Net sales          $      1,777.2$      1,794.7
Gross profit       $        565.9$        597.9
Gross profit %               31.8 %             33.3 %
Operating income   $        283.3     $         64.2
Operating income %           15.9 %              3.6 %


Nine Months Ended September 28, 2019 vs. Nine Months Ended September 29, 2018

Operating income increased $219.1 million, or 341%, due to:

$17.5 million, or 1%, decrease in net sales due to:

$24.7 million net decrease of existing products due primarily to
             pricing pressure across all categories, lower sales volume in our
             infant formula business due to customer brand discontinuations, and
             lower sales volume in our analgesics category due to overall market
             contraction and product specific service challenges; partially
             offset by higher sales volume due to store brand share expansion in
             our allergy category, and improved customer service; and


•            $34.8 million decrease due to our divested animal health business,
             $21.0 million decrease due to our exited foods business,
             $7.4 million decrease due to the retail market withdrawal of
             Ranitidine products, $3.7 million decrease due to discontinued
             products, and $1.0 million decrease due to unfavorable Mexican peso
             foreign currency translation; partially offset by


•            $54.2 million increase due to our acquisition of Ranir and $20.9
             million increase due primarily to the launches of Loperamide
             Simethicone and Nicotine cherry ice mint mini lozenge.



•      $32.0 million decrease in gross profit, or a 150 basis point decrease in
       gross profit as a percentage of net sales, due primarily to operating
       inefficiencies, pricing pressure, and the retail market withdrawal of
       Ranitidine products; partially offset by our acquisition of Ranir and
       improved profitability on OTC products sold through prescriptions.


$251.1 million decrease in operating expenses due primarily to:

$218.2 million decrease in impairment charges due primarily to the
             absence of $221.8 million in impairment charges related to animal
             health goodwill and intangible assets and certain IPR&D taken in the
             prior year period, and


•            $42.1 million decrease in R&D expenses primarily due to the absence
             of a $50.0 million upfront license fee payment to enter into a
             license agreement with Merck; partially offset by


•            $7.1 million increase in other operating expenses due to an asset
             abandonment related to our operations in Vermont.


CONSUMER SELF-CARE INTERNATIONAL

Recent Trends and Developments

•      Management continues the execution of its focused brand strategy, sales
       force restructuring and optimization, continued innovations linked to
       product launch excellence, and manufacturing insourcing and optimization,
       which is expected to reduce selling costs, improve operating margins and
       focus on higher value self-care products and brands. As part of this
       strategy, we are making progress on the previously reported CSCI
       restructuring plan, primarily in France, where we are benefiting from a
       reduced cost base. We expect the current restructuring activities to be
       finalized by year-end.



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                                                    Perrigo Company plc - Item 2
                                                                            CSCI



•      During the three months ended September 28, 2019, after regulatory bodies
       announced worldwide that Ranitidine may potentially contain NDMA, a known
       environmental contaminant, we promptly began testing our externally
       sourced Ranitidine API and Ranitidine-based products. On October 8, 2019
       we halted shipments of the product based upon preliminary results. Based
       on the totality of data gathered, we made the decision to conduct a
       voluntary retail market withdrawal, which resulted in a decrease in our
       net sales of $1.8 million and a decrease in gross profit of $2.9 million.



•      On July 1, 2019, we acquired 100% of the outstanding equity interest in
       Ranir, a privately-held company, for total base consideration of $750.0
       million in a debt-free, cash-free transaction, subject to post-closing
       adjustments for changes to working capital compared to the target working
       capital on the closing date. This transaction advances our transformation
       to a consumer-focused, self-care company while enhancing our position as a
       global leader in consumer self-care solutions. Ranir's non-U.S. operations
       are primarily in the United Kingdom, Germany, and China (refer to   Item
       1. Note 3  ).



Segment Results

Three Month Comparison
                                 Three Months Ended
                           September 28,     September 29,
(in millions)                  2019              2018
Net sales                 $       347.5$      334.2
Gross profit              $       156.3$      158.6
Gross profit %                     45.0 %           47.5  %
Operating income (loss)   $        13.2$       (4.7 )
Operating income (loss) %           3.8 %           (1.4 )%


Three Months Ended September 28, 2019 vs. Three Months Ended September 29, 2018

Operating income increased $17.9 million, or 384%, due to:

$13.3 million, or 4%, increase in net sales due primarily to:

$28.3 million increase due primarily to the launches of XLS Forte 5
             and Bronchostop® in the lifestyle and cough/cold/allergy/sinus
             categories, respectively, and $22.8 million increase due to our
             acquisition of Ranir; partially offset by


•            $18.6 million decrease due to unfavorable Euro foreign currency
             translation, $14.8 million net decrease of existing products due
             primarily to lower net sales in France due to the reorganization of
             our sales force, which disrupted sales effectiveness and customer
             outreach, and lower net sales in the anti-parasites and natural
             health and vitamins, minerals and dietary supplements ("VMS")
             categories due to declining market consumption; partially offset by
             higher net sales in the distribution business and in the
             cough/cold/allergy/sinus category due to new distribution channels
             and increased market share.



•      $2.3 million decrease in gross profit, or a 250 basis point decrease in
       gross profit as a percentage of net sales, due primarily to unfavorable
       product mix as a result of the addition of Ranir products, which have a
       lower gross margin and unfavorable Euro foreign currency translation;
       partially offset by new product sales.


$20.2 million decrease in operating expenses due primarily to:

$17.0 million decrease in restructuring expenses due primarily to
             the absence of cost reduction initiatives that were taken in the
             prior year period; and


•            $3.4 million decrease in selling and administrative expenses due to
             the effect of Euro foreign currency translation.




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                                                    Perrigo Company plc - Item 2
                                                                            CSCI


Nine Month Comparison
                            Nine Months Ended
                    September 28,      September 29,
(in millions)            2019               2018
Net sales          $      1,025.8$      1,069.9
Gross profit       $        480.0$        517.7
Gross profit %               46.8 %             48.4 %
Operating income   $         18.4     $         11.6
Operating income %            1.8 %              1.1 %


Nine Months Ended September 28, 2019 vs. Nine Months Ended September 29, 2018

Operating income increased $6.8 million, or 58%, due to:

$44.1 million, or 4%, decrease in net sales due primarily to:

$76.2 million decrease due to unfavorable Euro foreign currency
             translation, $62.8 million net decrease of existing products due
             primarily to lower net sales in the personal care and
             derma-therapeutics and lifestyle categories due primarily to
             decreased customer demand and lower sales in France due to the
             reorganization of our sales force; partially offset by higher net
             sales in the distribution business and the cough/cold/allergy/sinus
             category due primarily to increased customer demand, and
             $10.6 million decrease due to discontinued products; partially
             offset by


•            $84.5 million increase due primarily to the launches of XLS Forte 5,
             Phytosun® Aroms Organic essential oils, and ACO® brands in the
             lifestyle, personal care and derma-therapeutic, and VMS categories,
             respectively, and $22.8 million increase in sales due our
             acquisition of Ranir.



•      $37.7 million decrease in gross profit, or a 160 basis point decrease in
       gross profit as a percentage of net sales, due primarily to unfavorable
       product mix as a result of sales growth in lower margin products and
       unfavorable Euro foreign currency translation; partially offset by new
       product sales and favorable pricing.


$44.5 million decrease in operating expenses due primarily to:

$35.0 million decrease in selling and administrative expenses due to
             the effect of Euro foreign currency translation; and


•            $8.3 million decrease in restructuring expenses due primarily to the
             absence of cost reduction initiatives that were taken in the prior
             period.


PRESCRIPTION PHARMACEUTICALS

Recent Trends and Developments

•      Although pricing pressure is beginning to moderate, we continue to
       experience a year-over-year reduction in pricing in our RX segment due to
       competitive pressures. Similar to the first half of 2019, we experienced
       year-over-year price declines in the third quarter and expect softness in
       pricing to continue to impact the segment for the foreseeable future.



•      On July 2, 2019, we purchased the ANDA for a generic gel product for
       $49.0 million in cash, which we capitalized as a developed product
       technology intangible asset. We launched the product during the third
       quarter of 2019 (refer to   Item 1. Note 3  ).



•      During the three months ended September 28, 2019, we identified impairment
       indicators related to our Evamist branded product, which is a
       definite-lived intangible asset. The indicators related to a decline in
       sales volume and a corresponding reduction in our long-range revenue
       forecast. We determined the asset was impaired by $10.8 million (refer to
         Item 1. Note 4  ).




                                       51

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                                                    Perrigo Company plc - Item 2
                                                                              RX


•      On May 17, 2019, we purchased the ANDA for a generic product used to
       relieve pain for $15.7 million in cash, which we capitalized as a
       developed product technology intangible asset. We launched the product
       during the third quarter of 2019 (refer to   Item 1. Note 3  ).



•      During the three months ended June 29, 2019, we identified impairment
       indicators for a certain definite-lived asset related to changes in
       pricing and competition in the market, which lowered the projected cash
       flows we expect to generate from the asset. We determined the asset was
       impaired by $27.8 million (refer to   Item 1. Note 4  ).



Segment Results

Three Month Comparison
                          Three Months Ended
                    September 28,     September 29,
(in millions)           2019              2018
Net sales          $      230.3$       202.7
Gross profit       $       71.4$        76.8
Gross profit %             31.0 %             37.9 %
Operating income   $       19.7$        36.1
Operating income %          8.5 %             17.8 %


Three Months Ended September 28, 2019 vs. Three Months Ended September 29, 2018

Operating income decreased $16.4 million, or 46%, due to:

$27.6 million, or 14%, increase in net sales due primarily to:

$17.5 million increase due to the launches of new products; and

$15.0 million net increase in certain existing products to meet the
             increased demand of our existing customers, partially offset by
             competition-driven pricing pressure; partially offset by


•            $5.7 million decrease due to discontinued products due primarily to
             regulatory changes.


•      $5.4 million decrease in gross profit, or a 690 basis point decrease in
       gross profit as a percentage of net sales, due primarily to
       competition-driven pricing pressure, sales growth in lower margin products
       and manufacturing inefficiencies; partially offset by new product sales.



•      $11.0 million increase in operating expenses due primarily to an
       impairment charge of $10.8 million related to a definite-lived intangible
       asset.



Nine Month Comparison
                           Nine Months Ended
                    September 28,     September 29,
(in millions)           2019              2018
Net sales          $       711.6$       671.9
Gross profit       $       246.5$       273.0
Gross profit %              34.6 %            40.6 %
Operating income   $        95.0$       150.9
Operating income %          13.4 %            22.5 %




                                       52

--------------------------------------------------------------------------------

                                                    Perrigo Company plc - Item 2
                                                                              RX


Nine Months Ended September 28, 2019 vs. Nine Months Ended September 29, 2018

Operating income decreased $55.9 million, or 37%, due to:

$39.7 million, or 6%, increase in net sales due primarily to:

$65.9 million increase due to the launches of new products; and

$1.2 million net increase in certain existing products to meet the
             increased demand of our existing customers, partially offset by
             competition-driven pricing pressure; partially offset by


•            $26.9 million decrease due to discontinued products due primarily to
             regulatory changes.


•      $26.5 million decrease in gross profit, or a 600 basis point decrease in
       gross profit as a percentage of net sales, due primarily to
       competition-driven pricing pressure, sales growth in lower margin
       products, and manufacturing inefficiencies; partially offset by new
       product sales.


$29.4 million increase in operating expenses due primarily to:

$38.7 million increase in impairment charges related to
             definite-lived intangible assets; partially offset by

$5.3 million decrease due primarily to contingent consideration adjustments.

Unallocated Expenses

Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded in Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):

         Three Months Ended                      Nine Months Ended
  September 28,       September 29,       September 28,      September 29,
       2019                2018               2019                2018
$     59.8           $          34.3    $     185.1         $          97.6


The increase of $25.5 million in unallocated expenses during the three months ended September 28, 2019 compared to the prior year period was primarily due to a $12.5 million increase in acquisition and integration-related charges related to Ranir, a $7.9 million increase in employee incentive compensation expenses, and a $5.0 million increase due to legal and consulting fees.

The increase of $87.5 million in unallocated expenses during the nine months ended September 28, 2019 compared to the prior year period was due to a $47.8 million increase in legal and consulting fees, a $14.7 million increase in acquisition and integration-related charges due to Ranir, a $19.3 million increase in employee incentive compensation expenses, and a $10.5 million increase due to the reorganization of our executive management team.

Change in Financial Assets, Interest expense, net, and Other (income) expense,

© Edgar Online, source Glimpses

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