PERRIGO COMPANY PLC 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
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 self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, and gels as well as nasal sprays and inhalers.
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Perrigo Company plc - Item 2 Executive Overview Our Segments
Our reporting and operating segments are as follows:
• Consumer Self-Care Americas ("CSCA") 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") comprises our branded consumer
self-care business primarily in Europe , our consumer self-care businesses
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. , predominantly generics, and our
pharmaceuticals and diagnostic businesses in Israel .
Our segments reflect the way in which our 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.
Highlights
• We previously announced a plan to separate our RX business, which, if
completed, would enable us to focus solely on our consumer-focused
businesses. A separation of the RX business could include a possible sale,
spin-off, merger or other form, and we have not committed to a time frame
for a separation. We have incurred significant preparation costs due to
the announced plan to separate, and if completed we could incur total
costs in the range of $45.0 million to $80.0 million , excluding
restructuring expenses and transaction costs, depending on timing and
structure of a transaction.
Impact of COVID-19 Pandemic
We have been impacted by the novel coronavirus (COVID-19) global pandemic and the responses by government entities to combat the virus. We currently continue to operate in all our jurisdictions and are complying with the rules and guidelines prescribed in each jurisdiction. We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies. Our first priority has been, and will continue to be, the safety of our employees who continue to come to work and are dedicated to keeping our essential products flowing into the market. We have taken extra precautions at our facilities to help ensure the health and safety of our employees that are in line with guidance from global health authorities and local authorities. Among other precautions implemented, we have restricted access to our facilities worldwide to essential employees only, implemented a multi-step pre-screening access process before an employee can enter a facility, communicated regularly with employees and provided education related to social distancing and hand washing, prioritized production to essential products, implemented remote work arrangements where appropriate, and restricted business travel. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
In
Both the outbreak of the disease and the actions to slow its spread have had an adverse impact on our operations by, among other things, disrupting our manufacturing operations, affecting the supply of raw materials and third party supplied finished goods, and preventing our employees from coming to work. We have responded to such impacts by, among other things, implementing protocols to protect the health of factory workers, adjusting production schedules, and seeking alternate suppliers where available, and so far, most of our facilities have continued to produce at high levels despite these challenges. However, if the pandemic continues or intensifies, it is
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Perrigo Company plc - Item 2 Executive Overview
possible that these or other challenges may begin having a larger impact on our operations. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has adversely impacted, and may continue to adversely impact our stock price and our ability to access capital markets. The situation surrounding COVID-19 remains fluid, and we are actively managing our response and assessing potential impacts to our financial condition, supply chains and other operations, employees, results of operations, consumer demand for our products, and our ability to access capital. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19 (refer to
Item 1A. Risk Factors for related risks).
We also experienced a decrease in our effective tax rate due to additional
interest and depreciation deductions provided for in the
Financial Condition, Liquidity and Capital Resources section below.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Financial Results
Three Month Comparison
Three Months Ended
March 28, March 30,
(in millions) 2020 2019
Net sales $ 1,341.0 $ 1,174.5
Gross profit $ 483.2 $ 448.8
Gross profit % 36.0 % 38.2 %
Operating income (loss) $ 145.7 $ 102.3
Operating income (loss) % 10.9 % 8.7 %
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* Total net sales by geography is derived from the location of the entity that sells to a third party.
Three Months Ended
Net sales increased
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Perrigo Company plc - Item 2 Consolidated •$203.0 million , or a 17%, net increase due primarily to an increase in demand for our consumer products due to increased cough and cold illnesses and allergens, and new product sales including the launch of albuterol sulfate inhalation aerosol, both of which include the positive impact from a surge in demand for certain products due to consumer and customer behavior surrounding the COVID-19 pandemic, as well as an increase of$76.3 million due to our acquisition of Ranir. These increases were partially offset by pricing pressure, primarily in our RX segment, and an$11.2 million decrease due to discontinued products; partially offset by
•
•$13.2 million primarily from unfavorable Euro foreign currency translation; and •$23.3 million due to our divested animal health business previously included in our CSCA segment and Canoderm prescription product previously included in the Nordic region of our CSCI segment.
Operating income increased
•$34.4 million increase in gross profit due primarily to increased net sales as described above, partially offset by operational inefficiencies primarily in our CSCA and RX segments. Gross profit as a percentage of net sales decreased 220 basis points due primarily to pricing pressure in our RX segment, operational inefficiencies, and unfavorable product mix; and •$9.0 million decrease in operating expenses due primarily to the absence of restructuring expenses taken in the prior year period, the absence of expenses for the divested animal health business, and a decrease in expenses related to our current cost savings initiative, partially offset by the inclusion of Ranir.
Recent Developments
Internal Revenue Service Complaint
On
Internal Revenue Service Notice of Proposed Adjustment
As previously disclosed, on
Irish Tax Appeals Commission Notice of Amended Assessment
On
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Perrigo Company plc - Item 2 CSCA CONSUMER SELF-CAREAMERICAS
Recent Trends and Developments
• Towards the end of the quarter, we experienced an increase in demand for
many of our OTC and infant nutrition products attributed to consumer
reaction to the outbreak of COVID-19. We are uncertain as to what extent,
or if, the demand will continue in the future and what the impact may be
on our future results of operations. It is possible that consumer demand
for such products in future periods may be reduced and could depend on the
duration and severity of the COVID-19 related illnesses.
• On April 6, 2020 , we received approval from the U.S. Food and Drug
Administration on our abbreviated new drug application for OTC diclofenac
sodium topical gel 1%, the store brand equivalent to Voltaren® gel. When
launched, this product will be marketed under store brand labels and will
provide consumers with a high-quality, value alternative for the temporary
relief of arthritis pain. We expect to launch the new OTC product later
this year.
• On April 1, 2020 , we completed the acquisition of the oral care assets of
High Ridge Brands for total agreed purchase consideration of $113.0
million , subject to customary post-closing adjustments, including a
working capital settlement which may raise or lower the purchase price.
The consideration includes an $11.3 million deposit we paid during the
three months ended March 28, 2020 , which is recorded on the Condensed
Consolidated Balance Sheets within Other non-current assets. This
acquisition includes the leading children's oral care value brand,
Firefly®, in addition to the REACH® and Dr. Fresh® brands. The addition of
these brands positions us as the number one fastest-growing value brand
player in the children's oral care category and the strong licensing
portfolio will enable creative solutions for our customers (refer to
Item 1. Note 17 ).
• On January 3, 2020 , we acquired Steripod®, a leading toothbrush accessory
brand and innovator in the toothbrush protector market, from Bonfit
America Inc. Total consideration paid was $26.0 million , subject to
customary post-closing adjustments. The transaction was accounted for as
an asset acquisition, in which we capitalized $24.9 million as a
brand-named intangible asset. The remainder of the purchase price was
allocated to working capital. The acquisition, which includes a portfolio
of antibacterial toothbrush protectors, kids' toothbrush protectors and
tongue cleaners, complements our current portfolio of oral self-care
products, and leverages our manufacturing and marketing platform (refer to
Item 1. Note 3 ).
Segment Financial Results
Three Month Comparison
Three Months Ended
March 28, March 30,
(in millions) 2020 2019
Net sales $ 700.6 $ 581.8
Gross profit $ 215.5 $ 184.0
Gross profit % 30.8 % 31.6 %
Operating income (loss) $ 124.6 $ 94.2
Operating income (loss)% 17.8 % 16.2 %
Three Months Ended
Net sales increased$118.8 million , or 20%, due to: •$139.4 million , or a 24%, net increase due primarily to an increase of$18.3 million due to new product sales driven by an infant formula launch at a major retailer and Prevacid®, and e-commerce growth in the OTC and nutrition categories. Additional OTC category increases relate to market share gains from store brand competitors due to greater consumer purchases of existing and new products, and increased store brand penetration market-wide versus national brand. All of these drivers include the positive impact from a surge in demand for certain products due to consumer behavior surrounding the COVID-19 pandemic. 47
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Perrigo Company plc - Item 2 CSCA
Additionally, there was an increase of
•
•
Operating income increased
•$31.5 million increase in gross profit due primarily to increased net sales as described above, partially offset by carryover impact from the prior year operating inefficiencies at one of our infant nutrition facilities. Gross profit as a percentage of net sales decreased 80 basis points due primarily to operating inefficiencies at one of our infant nutrition facilities, and the exited animal health business, which had relatively higher gross margins than the overall portfolio, partially offset by favorable product mix; partially offset by •$1.1 million increase in operating expenses due primarily to the inclusion of Ranir, partially offset by the absence of expenses from the divested animal health business, and a decrease in expenses related to our current cost savings initiative.
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
• Towards the end of the quarter, we experienced an increase in demand for
products included in our upper respiratory and vitamins, minerals and
supplements categories and certain of our store brand products, as well as
a decrease in demand for certain products in our skincare and personal
hygiene category, attributed primarily to consumer reaction to COVID-19.
We are uncertain as to what extent, or if, the demand shift will continue
in the future and what the impact may be on our future results of
operations.
• On February 13, 2020 , we acquired Dexsil®, a silicon supplement brand,
from RXW Group Nv, for total cash consideration paid of approximately
$8.0 million . The transaction was accounted for as an asset acquisition,
in which we capitalized the consideration paid as a brand-named intangible
asset. The acquisition provides additional opportunities for growth
through new product launches and geographic expansion (refer to Item 1.
Note 3 ).
Segment Financial Results
Three Month Comparison
Three Months Ended
March 28, March 30,
(in millions) 2020 2019
Net sales $ 382.7 $ 350.8
Gross profit $ 179.9 $ 168.4
Gross profit % 47.0 % 48.0 %
Operating income $ 25.0 $ 8.1
Operating income % 6.5 % 2.3 %
Three Months Ended
Net sales increased$31.9 million , or 9%, due to: •$48.9 million , or a 14%, net increase due primarily to new product sales of$30.1 million driven partially by XLS-Medical Forte 5 and the ACO skincare line and a$21.0 million increase from our acquisition of Ranir. In addition volume increased in our upper respiratory and vitamins, minerals and supplements categories andUK store brand business, which included the positive impact from a surge in demand for certain products due to consumer behavior surrounding the COVID-19 pandemic. These increases were partially 48
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Perrigo Company plc - Item 2 CSCI
offset by lower net sales in
•
•$13.3 million from unfavorable foreign currency translation primarily related to the Euro; and •$3.7 million due to our divested Canoderm prescription product previously included in the Nordic region.
Operating income increased
•$11.5 million increase in gross profit due primarily to increased net sales as described above, partially offset by operational inefficiencies. Gross profit as a percentage of net sales decreased 100 basis points due primarily to the acquisition of Ranir, which has a relatively lower gross margin than the overall portfolio, and operational inefficiencies, partially offset by favorable product mix; and •$5.4 million decrease in operating expenses due primarily to favorable Euro foreign currency translation, a decrease in expenses related to our current cost savings initiative, and a decrease in advertising and promotion expense, partially offset by the inclusion of Ranir.
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 approvals against products in our portfolio and overall
competitive pressures. We expect softness in pricing to continue to impact
the segment for the foreseeable future.
• Towards the end of the quarter, as the COVID-19 pandemic gained momentum,
we experienced increased customer interest in and demand for certain
products that other competitors are struggling to consistently supply. It
is too early to assess the scope and scale of this trend, which would
depend on the duration and severity of supply disruptions that our
competitors or we may experience, but we believe that our competitive
advantage in supply chain strength and organizational efficiencies may
allow us to, in the near term, benefit from the trend if competitors are
unable to meet supply demands.
• On February 24, 2020 , along with our partner Catalent Pharma Solutions, we
received approval from the U.S. Food and Drug Administration on our
abbreviated new drug application for generic albuterol sulfate inhalation
aerosol, the first AB-rated generic version of ProAir® HFA. We launched
commercially shortly after the approval.
Segment Financial Results
Three Month Comparison
Three Months Ended
March 28, March 30,
(in millions) 2020 2019
Net sales $ 257.7 $ 241.9
Gross profit $ 87.9 $ 96.4
Gross profit % 34.1 % 39.9 %
Operating income $ 51.7 $ 60.6
Operating margin 20.0 % 25.1 %
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Perrigo Company plc - Item 2 RX
Three Months Ended
Net sales increased$15.8 million , or 7%, due to: •$14.7 million , or a 6%, net increase due to new product sales of$58.2 million driven mainly by the launch of generic albuterol sulfate inhalation aerosol, the scopolamine relaunch, and diclofenac sodium topical gel 1%. This includes the positive impact from a surge in demand for certain products due to customer behavior surrounding the COVID-19 pandemic. This increase was partially offset by pricing pressure due partially to testosterone gel 1.62%, which still had 180-day market exclusivity in the prior year period, and$4.8 million of discontinued low margin distribution products; and
•
Operating income decreased
•$8.5 million decrease in gross profit, or a 580 basis point decrease in gross profit as a percentage of net sales, due primarily to pricing pressure, third party operational inefficiencies on partnered products and higher inventory costs on a key product, partially offset by the gross profit from the incremental sales driven by generic albuterol sulfate inhalation aerosol pre-launch inventory that was expensed as pre-commercialization product in the prior year.
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
March 28, March 30,
2020 2019
$ 55.5 $ 60.6 The decrease of
Change in Financial Assets, Interest expense, net, and Other (income) expense,
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