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.
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 theU.S. ,Mexico andCanada . •Consumer Self-Care International ("CSCI") comprises our branded consumer self-care business primarily inEurope , our consumer self-care businesses in theUnited Kingdom andAustralia , and our divested liquid licensed products business in theUnited Kingdom . •Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in theU.S. , predominantly generics, and our pharmaceuticals and diagnostic businesses inIsrael . 44
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Perrigo Company plc - Item 2 Executive Overview
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
• EffectiveJuly 29, 2020 , our board of directors appointed Katherine C. Doyle to serve as a director of the Company and a member of its Audit Committee. • OnJune 19, 2020 ,Perrigo Finance Unlimited Company ("Perrigo Finance") issued$750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 (the "2020 Notes") and received net proceeds of$737.1 million after fees and market discount. Interest on the 2020 Notes is payable semi-annually in arrears onJune 15 andDecember 15 of each year, beginning onDecember 15, 2020 . The 2020 Notes will mature onJune 15, 2030 . The 2020 Notes are governed by the 2020 Indenture. The 2020 Notes are fully and unconditionally guaranteed on a senior unsecured basis byPerrigo and, no other subsidiary ofPerrigo guarantees the 2020 Notes. There are no restrictions under the 2020 Notes onPerrigo 's ability to obtain funds from its subsidiaries.Perrigo Finance may redeem the 2020 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2020 Indenture. OnJuly 6, 2020 , the net proceeds of the 2020 Notes were used to fund the redemption ofPerrigo Finance's$280.4 million of 3.500% Senior Notes dueMarch 15, 2021 and$309.6 million of 3.500% Senior Notes dueDecember 15, 2021 . The balance will be used for general corporate purposes which may include the repayment or redemption of additional indebtedness. In connection with the redemption, we incurred early redemption costs of$19.0 million , which will be included in Loss on extinguishment of debt on the Condensed Consolidated Statements of Operations in the third quarter of 2020. • 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. 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. We have not committed to a time frame for a separation.
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 and implemented controls related to physical distancing and hygiene measures, 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.
During the first half of 2020, we experienced a change in product sales mix
across all our Segments, which we attribute to consumer and customer behavior
surrounding the COVID-19 pandemic. In March and April of 2020, we experienced a
surge in demand for certain of our essential health-care and self-care products,
followed by a slow-down in demand for some of these products in May and June,
which we attribute primarily to consumer pantry de-load. Further, during the
second quarter, we saw lower consumer demand for certain other self-care
products in our CSCI segment and in our RX segment a lower volume of
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Perrigo Company plc - Item 2 Executive Overview
attribute to consumer behavior, travel bans, and country lock-downs resulting
from COVID-19. We estimate that the net positive impact on net sales attributed
to consumer and customer behavior surrounding the COVID-19 pandemic during the
first half of 2020 is between
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, increasing absenteeism, affecting the supply of raw materials and third party supplied finished goods, and preventing many of 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, a number of jurisdictions that relaxed such restrictions, or have experienced limited public adherence with suggested safety measures, have experienced new surges in COVID-19 cases. Many of these jurisdictions are now contemplating or implementing new or renewed restrictions. As such, as the pandemic continues or intensifies, it is 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 CARES Act enacted on
RESULTS OF OPERATIONS CONSOLIDATED
Consolidated Financial Results
Three Month Comparison
Three Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 1,219.1 $ 1,149.0 Gross profit$ 434.7 $ 430.8 Gross profit % 35.7 % 37.5 % Operating income$ 117.4 $ 55.0 Operating income % 9.6 % 4.8 % 46
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Perrigo Company plc - Item 2 Consolidated [[Image Removed: chart-8ab53a64169a5f08a83.jpg]] [[Image Removed: chart-8f453e73563e5a09828.jpg]]
* 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$70.1 million , or 6%, due to: •$111.8 million , or a 10%, net increase due primarily to an increase of$81.8 million from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands , an increase of$73.2 million from the launch of albuterol sulfate inhalation aerosol, increased OTC sales in response to COVID-19 in theU.S. driven by strong e-commerce performance, and additional new product sales. These increases were partially offset by lowerU.S. prescription dermatology volumes in the RX segment and lower consumer demand in certain product categories in the CSCI segment, which were impacted by consumer behavior, travel bans and country lock-downs resulting from COVID-19, consumer pantry de-load, and a$10.9 million decrease due to discontinued products; partially offset by
•
•$16.1 million primarily from unfavorable Euro and Mexican peso foreign currency translation; and •$25.6 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
•$3.9 million increase in gross profit due primarily to increased net sales as described above. Gross profit as a percentage of net sales decreased 180 basis points due primarily to unfavorable product mix partially due to the prioritization of products most needed by consumers in response to the COVID-19 pandemic, which are lower gross margin products; and
•
• The absences of a$27.8 million impairment charge related to a definite-lived intangible asset,$11.8 million of restructuring expenses related primarily to the reorganization of our sales force inFrance , and$8.0 million of expenses related to the divested animal health business; •$17.5 million decrease due primarily to the reduction and delay in selling, advertising, and promotion expenses in response to consumer behavior during the COVID-19 pandemic and the movement restrictions to combat spreading of the virus; and • A decrease in administration expenses due primarily to a reduction in legal and professional fees and a decrease in expenses related to our current cost savings initiative; partially offset by • The inclusion of$21.7 million of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands ; and • Incremental costs of operating in the current COVID-19 environment, including costs related to 47
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Perrigo Company plc - Item 2 Consolidated
measures implemented to keep employees safe and rewarded.
Six Month Comparison
Six Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 2,560.1 $ 2,323.5 Gross profit$ 917.9 $ 879.6 Gross profit % 35.9 % 37.9 % Operating income$ 263.1 $ 157.3 Operating income % 10.3 % 6.8 % [[Image Removed: chart-c3a4f611f8dbbdb950f.jpg]] [[Image Removed: chart-fd200ce6bca49e81be4.jpg]]
* Total net sales by geography is derived from the location of the entity that sells to a third party.
Six Months Ended
Net sales increased$236.6 million , or 10% due to: •$314.8 million , or a 14%, net increase due primarily to an increase of$158.1 million from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands , an increase of$116.9 million from the launch of albuterol sulfate inhalation aerosol, which includes the positive impact in demand related to customer behavior surrounding the COVID-19 pandemic, an increase in OTC sales in response to COVID-19 in theU.S. driven by strong e-commerce performance, as well as additional new product sales. These increases were partially offset by lowerU.S. prescription dermatology volumes in the RX segment, consumer pantry de-load, and lower consumer demand in certain product categories in the CSCI segment, which were impacted by consumer behavior, travel bans and country lock-downs resulting from COVID-19, pricing pressure, and a$25.7 million decrease due to discontinued products; further partially offset by
•
•$29.3 million primarily from unfavorable Euro and Peso foreign currency translation; and •$48.9 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
•$38.3 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 48
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sales decreased 200 basis points due primarily to unfavorable product mix, pricing pressure, and operational inefficiencies; and
•
• The absences of$32.0 million of impairment charges related to a definite-lived intangible asset and IPR&D asset,$21.2 million of restructuring expenses related primarily to the reorganization of our sales force inFrance and the reorganization of our executive management team, and$16.9 million of expenses related to the divested animal health business; •$21.9 million decrease due primarily to the reduction and delay in selling, advertising, and promotion expenses in response to consumer behavior during the COVID-19 pandemic and the movement restrictions to combat spreading of the virus; and • A decrease in administration expenses due primarily to a reduction in legal and professional fees and a reduction in employee related expenses, partially offset by an increase in insurance expense; partially offset by • The inclusion of$39.1 million of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands ; •$3.5 million increase in R&D expense due primarily to the timing of clinical studies; and • Incremental costs of operating in the current COVID-19 environment, including costs related to measures implemented to keep employees safe and rewarded.
Recent Developments
Internal Revenue Service Complaint
As previously disclosed, on
Internal Revenue Service Notice of Proposed Adjustment
As previously disclosed, on
Internal Revenue Service Notice of Proposed Adjustment
On
Irish Tax Appeals Commission Notice of Amended Assessment
On
49
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Perrigo Company plc - Item 2 Consolidated
of the issuance of the NoA by Irish Revenue.
CONSUMER SELF-CARE
Recent Trends and Developments
• In March and April of 2020, we experienced a surge in demand for many of our OTC and infant nutrition products, which we attributed to consumer reaction to the outbreak of COVID-19. In May and June, we experienced a slow-down in demand for some of these products, which we attributed primarily to consumer pantry stocking during the initial March and April surge. It is possible that we could continue to see a slow- down in demand for some of these products as consumers continue to pantry de-load, however, this could depend on the duration and severity of the COVID-19 pandemic and related illnesses. Alternatively, it is possible that we could experience another surge in demand if a concentrated second wave of COVID-19 occurs. • OnJune 17, 2020 , we announced our entrance into the CBD market through a strategic investment in and long-term supply agreement withKazmira LLC ("Kazmira"), a leading supplier of hemp-based, THC-free CBD products. In addition to the supply agreement, we acquired an approximate 20% equity stake in Kazmira for$50.0 million with$15.0 million paid at close of the transaction and the balance due within 18 months. Our minority equity investment initiates the first phase of the partnership in which we will collaborate to scale-up Kazmira's facilities and laboratories, in accordance with current Good Manufacturing Practices and to produce THC-free CBD from industrial hemp that meets our standards for reliability and consistency. In the second phase of the partnership, we will work to launch THC-free, hemp-based CBD products in a number of global markets, while leveraging our supply agreement with Kazmira, which is exclusive for the U.S. store brand market (refer to Item 1. Note 7 and Note 10 ). • OnApril 6, 2020 , we received approval from theU.S. Food and Drug Administration on our abbreviated new drug application ("ANDA") 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. • OnApril 1, 2020 , we acquired the oral care assets ofHigh Ridge Brands for total purchase consideration of$113.0 million , subject to customary post-closing adjustments, including a working capital settlement. After post-closing adjustments as ofJune 27, 2020 , total cash consideration paid was$106.0 million . This acquisition includes the children's oral care value brand, Firefly®, in addition to the REACH® and Dr. Fresh® brands, and a licensing portfolio. 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 licensing portfolio will enable creative solutions for our customers (refer to Item 1. Note 3 ). • OnJanuary 3, 2020 , we acquired Steripod®, a leading toothbrush accessory brand and innovator in the toothbrush protector market, fromBonfit America Inc. Total consideration paid was$26.0 million . The transaction was accounted for as an asset acquisition, in which we capitalized$24.9 million as a brand-named intangible asset. The remainder of the purchase price was allocated to working capital. The acquisition, which includes a portfolio of antibacterial toothbrush protectors, kids' toothbrush protectors and tongue cleaners, complements our current portfolio of oral self-care products, and leverages our manufacturing and marketing platform (refer to Item 1. Note 3 ). 50
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Perrigo Company plc - Item 2 CSCA Segment Financial Results Three Month Comparison Three Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 627.6 $ 582.1 Gross profit$ 199.6 $ 196.8 Gross profit % 31.8 % 33.8 % Operating income$ 106.3 $ 107.8 Operating income % 16.9 % 18.5 %
Three Months Ended
Net sales increased$45.5 million , or 8%, due to: •$72.1 million , or a 12%, net increase due primarily to an increase of$63.2 million from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands . OTC net sales growth was due primarily to e-commerce growth, which more than offset category declines due to lower foot traffic at brick and mortar customers, increased consumer COVID-19 related demand, increased distribution of our products to retail customers, and$8.7 million of new product sales primarily from Prevacid® and Esomeprazole Mini, all of which led to share gains of 60 basis points in product categories where we compete. The OTC growth was partially offset by the lost net sales on products we de-prioritized while we focused on providing products most needed by consumers during the COVID-19 pandemic and competitive pricing pressure on certain products. Nutrition net sales growth was due primarily to new product sales from an infant formula launch at a major retailer in the prior year and Complete Comfort Formula, growth in the infant formula contract manufacturing business, and e-commerce growth, which were partially offset by pantry de-load of oral electrolyte solution products and multi-year pricing contracts; further partially offset by
•
•
•
Operating income decreased
•$2.8 million increase in gross profit due primarily to increased net sales as described above. Gross profit as a percentage of net sales decreased 200 basis points due primarily to pricing pressure on specific products, the divested animal health business, and the acquisition of the lower gross margin oral self-care category; more than offset by •$4.3 million increase in operating expenses due primarily to the inclusion of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands ; partially offset by the absence of expenses from the divested animal health business and a decrease in R&D expenses related to delays in timing of projects. 51
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Perrigo Company plc - Item 2 CSCA Six Month Comparison Six Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 1,328.2 $ 1,163.9 Gross profit$ 415.1 $ 380.8 Gross profit % 31.3 % 32.7 % Operating income$ 230.8 $ 202.0 Operating income % 17.4 % 17.4 %
Six Months Ended
Net sales increased$164.3 million , or 14%, due to: •$211.5 million , or an 18%, net increase due primarily to an increase of$118.5 million from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands . OTC net sales growth was due primarily to e-commerce growth, increased consumer COVID-19 related demand, favorable consumer conversion in digestive health products, overall market growth, and$16.7 million of new product sales primarily from Prevacid® and Esomeprazole Mini, which were partially offset by pricing pressure on certain products. Nutrition net sales growth was due primarily to new product sales from an infant formula launch at a major retailer in the prior year and Complete Comfort Formula and e-commerce growth, which were partially offset by multi-year pricing contracts and a$5.8 million decrease due to discontinued products; further partially offset by
•
•
•
Operating income increased
•$34.3 million increase in gross profit due primarily to increased net sales as described above, partially offset by operating inefficiencies at one of our infant nutrition facilities. Gross profit as a percentage of net sales decreased 140 basis points due primarily to operating inefficiencies, pricing pressure on certain products and the divested animal health business, partially offset by favorable product mix; partially offset by •$5.5 million increase in operating expenses due primarily to the inclusion of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands ; partially offset by the absence of expenses from the divested animal health business, a reduction in employee related expenses, and a decrease in R&D expenses related to delays in timing of projects.
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
• During the first half of 2020, we experienced demand shifts for certain products, which we attribute to consumer reactions related to the COVID-19 pandemic and the movement restrictions put in place to combat spreading of the virus, such as travel bans, school closings and country lock-downs. Certain products in our upper respiratory, vitamins, minerals and supplements ("VMS"), and pain and sleep-aids categories increased, while products in our skincare and personal hygiene and healthy lifestyle categories decreased. It is possible that demand in our skincare and personal hygiene and healthy lifestyle categories may continue to decrease, and that well-stocked consumer pantries may temporarily reduce demand for products in our upper respiratory, VMS, and pain and sleep-aids categories. Both factors could depend on the duration and severity of the COVID-19 pandemic and related illnesses. 52
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Perrigo Company plc - Item 2 CSCI • Consistent with our strategy to reconfigure our portfolio to focus on our consumer self-care businesses, onJune 19, 2020 , we completed the sale of ourU.K. - basedRosemont Pharmaceuticals business, a generic prescription pharmaceuticals manufacturer focused on liquid medicines, to aU.K. headquartered private equity firm for cash consideration of £155.6 million (approximately$195.0 million ), which resulted in a pre-tax loss of$17.4 million (refer to Item 1. Note 3 ). • OnFebruary 13, 2020 , we acquired Dexsil®, a silicon supplement brand, from RXW Group Nv, for total cash consideration paid of approximately$8.0 million . The transaction was accounted for as an asset acquisition, in which we capitalized the consideration paid as a brand-named intangible asset. The acquisition provides additional opportunities for growth through new product launches and geographic expansion (refer to Item 1. Note 3 ). Segment Financial Results Three Month Comparison Three Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 321.1 $ 327.5 Gross profit$ 149.3 $ 155.4 Gross profit % 46.5 % 47.4 % Operating income (loss)$ 10.5 $ (2.9 ) Operating income (loss) % 3.3 % (0.9 )%
Three Months Ended
Net sales decreased$6.4 million , or 2%, due to: •$9.2 million , or a 3%, net increase due primarily to new product sales of$23.0 million , driven partially by XLS-Medical Forte 5 and products in the skincare and personal hygiene category, and an$18.6 million increase from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands . These increases were partially offset by lower consumer demand of certain self-care products due to consumer behavior, travel bans, school closings and country lock-downs resulting from COVID-19, consumer pantry de-load of products purchased during the initial March surge, and a$1.1 million decrease due to discontinued products; more than offset by
•
•$12.3 million from unfavorable foreign currency translation primarily related to the Euro; and •$3.3 million due to our divested Canoderm prescription product previously included in the Nordic region.
Operating income increased
•$6.1 million decrease in gross profit due primarily to the decrease in net sales as described above, partially offset by improved operational efficiencies. Gross profit as a percentage of net sales decreased 90 basis points due primarily to the addition of the oral self-care category, which has a relatively lower gross margin than the overall portfolio and unfavorable product mix, partially offset by improved operational efficiencies; more than offset by 53
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Perrigo Company plc - Item 2 CSCI •$19.5 million decrease in operating expenses due primarily to a reduction and partial delay in selling, advertising, and promotion expenses in response to consumer behavior during the COVID-19 pandemic and the movement restrictions to combat spreading of the virus, favorable Euro foreign currency translation, and the absence of restructuring expenses related to the reorganization of our sales force inFrance , partially offset by the inclusion of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands and increased R&D expense.
Six Month Comparison
Six Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 703.8 $ 678.3 Gross profit$ 329.2 $ 323.7 Gross profit % 46.8 % 47.7 % Operating income$ 35.6 $ 5.1 Operating income % 5.1 % 0.8 %
Six Months Ended
Net sales increased$25.5 million , or 4%, due to: •$58.1 million , or a 9%, net increase due primarily to new product sales of$53.1 million , driven partially by XLS-Medical Forte 5 and products in the skincare and personal hygiene category, and a$39.6 million increase from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands . These increases were partially offset by lower consumer demand of certain self-care products due to consumer behavior, travel bans, school closings and country lock-downs resulting from COVID-19, and a$2.4 million decrease due to discontinued products; partially offset by
•
•$25.6 million from unfavorable foreign currency translation primarily related to the Euro; and •$7.0 million due to our divested Canoderm prescription product previously included in the Nordic region.
Operating income increased
•$5.5 million increase in gross profit due primarily to increased net sales as described above and a 90 basis point decrease in gross profit as a percentage of net sales, due primarily to the addition of the oral self-care category, which has a relatively lower gross margin than the overall portfolio and unfavorable product mix; and •$25.0 million decrease in operating expenses due primarily to a reduction and partial delay in selling, advertising, and promotion expenses in response to consumer behavior during the COVID-19 pandemic and the movement restrictions to combat spreading of the virus, favorable Euro foreign currency translation, and the absence of restructuring expenses related to the reorganization of our sales force inFrance , partially offset by the inclusion of expenses from our acquisitions of Ranir and the oral care assets ofHigh Ridge Brands and increased R&D expense.
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
• We experienced moderate pricing reductions compared to the prior year in our RX segment due to competitive approvals against products in our portfolio and overall competitive pressures. We expect softness in pricing to continue to impact the segment for the foreseeable future. 54
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Perrigo Company plc - Item 2 RX • OnFebruary 24, 2020 , along with our partner Catalent Pharma Solutions, we received approval from theU.S. Food and Drug Administration on our abbreviated new drug application for generic albuterol sulfate inhalation aerosol, the first AB-rated generic version of ProAir® HFA. We launched commercially shortly after the approval. • During the second quarter, we experienced a reduction in demand for certain of our existing base products due to a lower volume of prescriptions written related to the reduction in doctor visits resulting from restrictions put in place to combat spreading of the COVID-19 virus. The decrease in demand of existing base products appeared to be market-wide and did not result in market share loss. We did, however, see continued high demand for our AB-rated generic albuterol sulfate inhalation aerosol. Segment Financial Results
Three Month Comparison
Three Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 270.4 $ 239.4 Gross profit$ 85.8 $ 78.6 Gross profit % 31.7 % 32.8 % Operating income$ 47.8 $ 14.7 Operating income % 17.6 % 6.1 %
Three Months Ended
Net sales increased$31.0 million , or 13%, due primarily to: •$30.4 million , or a 13%, net increase due primarily to new product sales of$80.5 million driven by the launches of generic albuterol sulfate inhalation aerosol and diclofenac sodium topical gel 1%. This includes the positive impact on demand for albuterol sulfate inhalation aerosol related to customer behavior surrounding the COVID-19 pandemic. This increase was partially offset by a decline in the base business, which was affected by fewer doctor visits compared to the prior year period leading to lowerU.S. prescription dermatology volumes due to COVID-19, and a$9.1 million decrease due to discontinued low margin distribution products.
Operating income increased
•$7.2 million increase in gross profit due primarily to the increase in net sales as described above, partially offset by third party operational inefficiencies on partnered products. Gross profit as a percentage of net sales decreased 110 basis points, due primarily to unfavorable product mix and third party operational inefficiencies on partnered products, partially offset by the incremental sales driven by generic albuterol sulfate inhalation aerosol pre-launch inventory that was expensed as pre-commercialization product in the prior year; and •$25.9 million decrease in operating expenses due primarily to the absence of an impairment charge related to a definite-lived intangible asset, partially offset by an increase in R&D expense to continue to support future growth initiatives. 55
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Perrigo Company plc - Item 2 RX Six Month Comparison Six Months Ended June 27, June 29, (in millions) 2020 2019 Net sales$ 528.1 $ 481.3 Gross profit$ 173.6 $ 175.1 Gross profit % 32.9 % 36.4 % Operating income$ 99.4 $ 75.3 Operating income % 18.8 % 15.7 %
Six Months Ended
Net sales increased$46.8 million , or 10%, due primarily to: •$45.1 million , or a 9%, net increase due primarily to new product sales of$138.7 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 on demand for albuterol sulfate inhalation aerosol related to customer behavior surrounding the COVID-19 pandemic. This increase was partially offset by a decline in the base business, which was affected by fewer doctor visits compared to the prior year period leading to lowerU.S. prescription dermatology volumes due to COVID-19, pricing pressure due partially to testosterone gel 1.62% (which still had 180-day market exclusivity in the prior year period), and$17.5 million of discontinued low margin distribution products.
Operating income increased
•$1.5 million decrease in gross profit due primarily to the increase in net sales as described above being more than offset by third party operational inefficiencies on partnered products. Gross profit as a percentage of net sales decreased 350 basis points, due primarily to pricing pressure, unfavorable product mix, and third party operational inefficiencies on partnered products, partially offset by the incremental sales driven by generic albuterol sulfate inhalation aerosol pre-launch inventory that was expensed as pre-commercialization product in the prior year. The decreases described above were more than offset by •$25.6 million decrease in operating expenses due primarily to the absence of an impairment charge related to a definite-lived intangible asset, partially offset by an increase in R&D expense to continue to support future growth initiatives.
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded in Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
Three Months Ended Six Months Ended June 27, June 29, June 27, June 29, 2020 2019 2020 2019$ 47.2 $ 64.6 $ 102.7 $ 125.1
The decrease of
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Perrigo Company plc - Item 2 Unallocated, Interest, Other, and Taxes
The decrease of
Change in Financial Assets, Interest expense, net, and Other (income) expense,
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