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, 2019 (the
"2019 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 2019 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.
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Perrigo Company plc - Item 2
Executive Overview
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 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 divested 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
• Effective July 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.
• On June 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 on June 15 and December 15 of each year,
beginning on December 15, 2020. The 2020 Notes will mature on June 15,
2030. The 2020 Notes are governed by the 2020 Indenture. The 2020 Notes
are fully and unconditionally guaranteed on a senior unsecured basis by
Perrigo and, no other subsidiary of Perrigo guarantees the 2020 Notes.
There are no restrictions under the 2020 Notes on Perrigo'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. On July 6, 2020, the
net proceeds of the 2020 Notes were used to fund the redemption of Perrigo
Finance's $280.4 million of 3.500% Senior Notes due March 15, 2021 and
$309.6 million of 3.500% Senior Notes due December 15, 2021 (collectively,
the "2021 Notes"). The balance will be used for general corporate purposes
which may include the repayment or redemption of additional indebtedness.
As a result of the early redemption of the 2021 Notes, during the three
months ended September 26, 2020, we recorded a loss of $20.0 million in
Loss on extinguishment of debt on the Condensed Consolidated Statements of
Operations, consisting of the premium on debt repayments, the write-off of
deferred financing fees, and the write-off of the remaining bond
discounts.
• 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.
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Perrigo Company plc - Item 2
Executive Overview
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
and local health authorities. Among other precautions implemented, we have
generally restricted access to our production facilities worldwide to essential
employees only and permitted a limited number of nonessential employees into
other facilities with a strict approval process, 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, implemented remote
work arrangements where appropriate, restricted business travel, and prioritized
production of essential products for several months following the initial
outbreak. 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.
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).
During the nine months ended September 26, 2020, we have experienced a number of
changes 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 in both the CSCA and CSCI segments. This was
followed by a slow-down in demand in May and June in both the CSCA and CSCI
segments for some of the products in which we previously saw surges, which we
attribute primarily to consumer pantry de-load. In the third quarter, demand in
our CSCA segment normalized and was not significantly impacted by the pandemic.
Our CSCI segment also experienced lower consumer demand during the second and
third quarters, with some improvement in the third quarter, for certain other
self-care products that were impacted by the movement and social distancing
restrictions put in place to combat spreading of the virus, such as travel bans,
country lock-downs and school closings. In March and April of 2020 our RX
segment saw strong demand for Albuterol. In the latter half of the second
quarter, our RX segment experienced a decrease in demand for base products due
to lower volume of U.S. prescriptions from pandemic and lock down-related
reductions in doctor visits, which partially rebounded in the third quarter.
Also in the third quarter, we voluntarily recalled Albuterol and established an
estimated recall reserve. Consequently, on a year-to-date basis, after
accounting for both the positive and negative sales impacts related to the
pandemic, excluding Albuterol, we believe COVID-19 did not significantly impact
our consolidated net sales.
In the same time frame, we had incremental operating costs of approximately
$11.0 million related to COVID-19 and estimate that full year incremental
operating costs will be between $15.0 million to $20.0 million, primarily
related to the precautions implemented to keep our employees safe and properly
rewarded during the pandemic as well as increased material costs. We also
experienced a decrease in our effective tax rate due to
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Perrigo Company plc - Item 2
Executive Overview
additional interest and depreciation deductions provided for in the CARES Act
enacted on March 27, 2020 resulting in a reduction of income tax expense by
approximately $30.8 million during the nine months ended September 26, 2020.
Given our financial strength, we expect to continue to maintain sufficient
liquidity as we manage through the current environment.
Moving forward, whether the trends we've experienced in our segments will
continue or change is uncertain and will likely depend on the duration and
severity of the COVID-19 pandemic and the annual cold and flu season. If the
pandemic intensifies or there is a second wave, it is possible that we could see
another surge in demand for our essential self-care products. However, this
could lead to continued lower demand for certain self-care products in our CSCI
segment, as well as products in our RX segment. Additionally, we could
experience continued slow-down in demand for our essential products sold in the
initial sales surge if consumers continue to pantry de-load, all of which could
depend on the duration and severity of the COVID-19 pandemic and related
illnesses.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Financial Results
Three Month Comparison
Three Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 1,213.7$ 1,191.1
Gross profit $ 428.1$ 412.8
Gross profit % 35.3 % 34.7 %
Operating income (loss) $ (95.5 ) $ 54.4
Operating income (loss) % (7.9 )% 4.6 %
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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 September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales increased $22.6 million, or 2%, due to:
• $19.8 million, or 2%, net increase due primarily to an increase in the
CSCA segment of $48.0 million, which includes $24.5 million of demand
driven growth across most product categories led by continued consumer
channel shifting from traditional brick and mortar outlets to e-commerce
and $23.5 million from the acquisition of the oral care assets of High
Ridge Brands ("Dr. Fresh"). These gains were partially offset by a
$20.5 million decline in net sales in our RX segment as $23.0 million in
pre-recall albuterol sulfate inhalation
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Consolidated
aerosol ("Albuterol") sales were more than offset by the establishment of the
estimated Albuterol recall reserve of $31.2 million and $8.7 million from
discontinued lower margin distribution products. Due primarily to
pandemic-related consumer behavior, net sales in our CSCI segment decreased
$7.8 million as lower demand in certain product categories more than offset
increased demand in other categories; and
• $2.8 million increase due primarily to:
• $10.0 million increase primarily from favorable Euro foreign
currency translation; and
• $9.2 million increase due to the absence of the Ranitidine retail
market withdrawal included in the prior year period; partially
offset by
• $16.4 million decrease due to our divested Rosemont
pharmaceuticals
business and Canoderm prescription product, both previously included
in our CSCI segment, and our divested animal health business
previously included in our CSCA segment.
Operating income decreased $149.9 million, or 276%, due to:
• $15.3 million increase in gross profit due primarily to increased net
sales as described above, which were partially offset by the net charge of
$22.5 million from the Albuterol recall and an increase in commodity costs
for a certain OTC brand. Gross profit as a percentage of net sales
increased 60 basis points due primarily to the absence of the Ranitidine
retail market withdrawal included in the prior year period, partially
offset by the net charge from the Albuterol recall and unfavorable product
mix; more than offset by
• $165.2 million increase in operating expenses due primarily to:
• A $202.4 million goodwill impairment charge in the current year
period related to RX goodwill, partially offset by the absence of a
$10.8 million impairment charge related to a definite-lived
intangible asset in the prior year period; partially offset by
• The absence of $12.5 million in acquisition and
integration-related
charges related to the acquisition of Ranir in the prior year
period;
• The absence of a $7.1 million asset abandonment charge related to
our waste water treatment plant in Vermont recorded in the prior
year period;
• $4.4 million decrease in restructuring expenses that were related
primarily to the reorganization of our executive management team;
and
• $4.0 million insurance reimbursement received in the current year period.
Nine Month Comparison
Nine Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 3,773.8$ 3,514.6
Gross profit $ 1,346.0$ 1,292.5
Gross profit % 35.7 % 36.8 %
Operating income $ 167.6$ 211.7
Operating income % 4.4 % 6.0 %
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Consolidated
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* Total net sales by geography is derived from the location of the entity that
sells to a third party.
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $259.2 million, or 7% due to:
• $334.6 million, or 10%, net increase due primarily to an increase in the
CSCA segment of $259.5 million, including $142.0 million from our
acquisitions of Ranir and Dr. Fresh and $117.5 million of demand driven
growth across most product categories, which was due primarily to
increased consumer COVID-19 related demand and benefited from strong
e-commerce performance, and the incremental impact of new product sales.
In our CSCI segment, net sales increased $50.4 million due primarily to
Ranir and Dr. Fresh contributing $40.6 million and an overall increase
from the incremental impact of new product sales and increased demand in
certain product categories more than offsetting the decrease in demand of
other categories, both due to pandemic-related factors, and discontinued
products of $5.3 million. The $24.7 million increase in the RX segment was
due primarily to pre-recall Albuterol sales of $142.7 million and an
increase of $24.4 million in other new product offerings. These increases
were partially offset by pricing pressure, a decline in the base business
due to lower prescription volumes related to the pandemic and lock
down-related reductions in doctor visits, $31.2 million for the
establishment of the estimated Albuterol recall reserve, and $24.4 million
of discontinued lower margin distribution products; further partially
offset by
• $75.4 million decrease due primarily to:
• $65.3 million decrease due to our divested Rosemont
pharmaceuticals
business and Canoderm prescription product, both previously included
in our CSCI segment, and our divested animal health business
previously included in our CSCA segment; and
• $19.3 million decrease primarily from unfavorable Euro and Peso
foreign currency translation; partially offset by
• $9.2 million increase due to the absence of the Ranitidine retail
market withdrawal included in the prior year period.
Operating income decreased $44.1 million, or 21%, due to:
• $53.5 million increase in gross profit due primarily to increased net
sales as described above, which were partially offset by the net charge of
$22.5 million from the Albuterol recall, operational inefficiencies,
increased labor and overhead costs associated with the COVID-19 pandemic,
and an increase in commodity costs for a certain OTC brand. Gross profit
as a percentage of net sales decreased 110 basis points due primarily to
the gross profit factors discussed above and unfavorable product mix; more
than offset by
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Consolidated
• $97.6 million increase in operating expenses due primarily to:
• A $202.4 million goodwill impairment charge in the current year
period related to RX goodwill, partially offset by the absence of
$42.9 million of impairment charges related to definite-lived
intangible assets and IPR&D assets in the prior year period; further
offset by
• $25.7 million decrease in restructuring expenses related primarily
to the reorganization of our sales force in France and the
reorganization of our executive management team in the prior year;
• $26.5 million decrease in administration expenses due
primarily to a
reduction in legal and professional fees, the absence of
acquisition
and integration-related charges related to the acquisition of
Ranir,
the absence of expenses from the divested animal health
business,
and a reduction in employee related expenses, partially offset by an
increase in insurance expense, the inclusion of expenses from our
acquisitions of Ranir and Dr. Fresh, and incremental costs of
operating in the current COVID-19 environment, including
employee
bonuses and costs related to measures implemented to keep
employees
safe;
• $8.1 million decrease in selling expense due primarily to the
reduction in selling, advertising, and promotion expenses in
response to consumer sentiment and behavior during the
COVID-19
pandemic in the CSCI segment and the absence of expenses from
the
divested animal health business, partially offset by the
inclusion
of expenses from our acquisitions of Ranir and Dr. Fresh; and
• The absence of a $7.1 million asset abandonment charge
related to
our waste water treatment plant in Vermont taken in the prior year
period.
Recent Developments
Internal Revenue Service Complaint
As previously disclosed, on August 15, 2017, we filed a complaint in the United
States District Court for the Western District of Michigan to recover $163.6
million of Federal income tax, penalties, and interest assessed and collected by
the IRS, plus statutory interest thereon from the dates of payment, for the
fiscal tax years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30,
2012. In response to our complaint, the United States District Court for Western
District of Michigan scheduled a new trial date for January 26, 2021 (refer to
Item 1. Note 13 ).
Internal Revenue Service Notice of Proposed Adjustment
As previously disclosed, on April 26, 2019, we received a revised Notice of
Proposed Adjustment ("NOPA") from the IRS regarding transfer pricing positions
related to the IRS audit of Athena for the years ended December 31, 2011,
December 31, 2012 and December 31, 2013. We strongly disagree with the IRS
position and will pursue all available administrative and judicial remedies,
including those available under the U.S. - Ireland Income Tax Treaty to
alleviate double taxation. Accordingly, on April 14, 2020, we filed a request
for Competent Authority Assistance with the IRS (refer to Item 1. Note 13
).
The request was accepted and is under review.
Internal Revenue Service Notice of Proposed Adjustment
On May 7, 2020, we received a final NOPA from the IRS, which was unchanged from
the draft NOPA previously received, regarding the deductibility of interest
related to the IRS audit of Perrigo Company for the years ended June 28, 2014
and June 27, 2015. We strongly disagree with the IRS position and are pursuing
all available administrative and judicial remedies (refer to Item 1. Note
13 ).
Irish Tax Appeals Commission Notice of Amended Assessment
On October 30, 2018, we received an audit finding letter from the Irish Office
of the Revenue Commissioners ("Irish Revenue") for the years ended December 31,
2012 and December 31, 2013 relating to the tax treatment of the 2013 sale of the
Tysabri® intellectual property and other assets related to Tysabri® to Biogen
Idec from Elan Pharma. We strongly disagree with this assessment and believe
that the Notice of Amended Assessment ("NoA") is without merit and incorrect as
a matter of law and appealed the assessment to the Tax Appeals Commission.
Separately, we were granted leave by the Irish High Court on February 25, 2019
to seek
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Perrigo Company plc - Item 2
Consolidated
judicial review of the issuance of the NoA by Irish Revenue. The High Court held
a hearing in June 2020 regarding the judicial review case and on November 4,
2020 ruled that the NoA did not violate our rights and legitimate expectations
as a taxpayer. Because the Irish High Court did not quash the NoA in the
judicial review case, absent an appeal by Elan Pharma in the judicial review
case, the amended assessment can be examined on its merits by the Irish Tax
Appeals Commission (refer to Item 1. Note 13 ).
CONSUMER SELF-CARE AMERICAS
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, the initial surge
slowed, and we experienced a decrease in demand for some of these
products, which we attributed primarily to consumers' de-load of pantry
stocking that occurred during the initial March and April surge. During
the third quarter, demand normalized and COVID-19 did not have a
significant impact on our net sales. It is possible that we could still
experience a lower demand for some of the products sold in the initial
surge if 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 wave of COVID-19 occurs.
• On June 17, 2020, we announced our entrance into the CBD market through a
strategic investment in and long-term supply agreement with Kazmira 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 ).
• On April 6, 2020, we received approval from the U.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. On September 8, 2020, we launched this product to our retail partners
under store brand labels, which provides consumers with a high-quality,
value alternative for the temporary relief of arthritis pain.
• On April 1, 2020, we acquired Dr. Fresh for total purchase consideration
of $113.0 million, subject to customary post-closing adjustments,
including a working capital settlement. After post-closing adjustments as
of September 26, 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 ).
• 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. The transaction
was accounted for as an asset acquisition, in which we capitalized $25.1
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 ).
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CSCA
Segment Financial Results
Three Month Comparison
Three Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 664.0$ 613.3
Gross profit $ 217.1$ 185.1
Gross profit % 32.7 % 30.2 %
Operating income $ 123.6$ 81.3
Operating income % 18.6 % 13.3 %
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales increased $50.7 million, or 8%, due to:
• $48.0 million, or 8%, net increase due primarily to an increase of $23.5
million from our acquisition of Dr. Fresh and demand driven growth across
most product categories benefiting from e-commerce growth as consumers
continued to shift purchasing towards online where we have greater market
share, which more than offset lower traditional brick and mortar
purchases. More specifically, OTC net sales growth of $15.5 million was
driven by strong demand in the pain, allergy, and digestive health
categories, resulting from strong e-commerce growth and incremental new
product sales including Prevacid®, Diclofenac sodium topical gel 1%, and
Esomeprazole Mini. These increases were partially offset by a decrease in
sales of cough and cold products included in our upper respiratory
category due to a weaker start to the cough and cold season and normal
pricing pressure. Nutrition net sales growth of $5.5 million was due
primarily to new product sales from an infant formula launch at a major
retailer in the prior year, greater shipments in the infant formula
contract manufacturing business, and e-commerce growth, which were
partially offset by multi-year pricing contracts. Growth in the oral
self-care category was driven by strong e-commerce performance and
• $2.7 million increase due primarily to:
• $7.4 million increase due to the absence of the Ranitidine retail
market withdrawal included in the prior year period; partially
offset by
• $2.9 million decrease from unfavorable Mexican peso foreign currency
translation; and
• $1.8 million decrease related to our divested animal health business.
Operating income increased $42.3 million, or 52%, due primarily to:
• $32.0 million increase in gross profit due primarily to increased net
sales as described above. Gross profit as a percentage of net sales
increased 250 basis points due primarily to the absence of the Ranitidine
retail market withdrawal included in the prior year period and higher
margin new product sales, partially offset by normal pricing pressure; and
• $10.3 million decrease in operating expenses due primarily to the absence
of a $7.1 million asset abandonment charge related to our waste water
treatment plant in Vermont taken in the prior year period and a $4.0
million insurance reimbursement received in the current year period.
Nine Month Comparison
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CSCA
Nine Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 1,992.2$ 1,777.2
Gross profit $ 632.2$ 565.9
Gross profit % 31.7 % 31.8 %
Operating income $ 354.5$ 283.3
Operating income % 17.8 % 15.9 %
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $215.0 million, or 12%, due to:
• $259.5 million, or 15%, net increase due primarily to an increase of
$142.0 million from our acquisitions of Ranir and Dr. Fresh and demand
driven growth across most product categories, which was due primarily to
increased consumer COVID-19 related demand and benefited from strong
e-commerce performance. More specifically, OTC net sales growth of
$100.5 million across most product categories was due primarily to the net
increase of consumer COVID-19 related demand, overall market growth,
favorable consumer conversion in digestive health products, and the
incremental impact of new product sales led by Prevacid®, Diclofenac
sodium topical gel 1%, and Esomeprazole Mini. All of these drivers
benefited from continued robust e-commerce growth. These increases were
partially offset by normal pricing pressure on certain products. Nutrition
net sales growth of $11.4 million was due primarily to new product sales
from an infant formula launch at a major retailer in the prior year,
partially offset by multi-year pricing contracts and a $5.8 million
decrease due to discontinued products. In the oral self-care category,
growth was driven by the incremental impact of new product sales
benefiting from e-commerce growth; partially offset by
• $44.5 million decrease due primarily to:
• $43.7 million decrease due to our divested animal health business; and
• $8.2 million decrease from unfavorable Mexican peso foreign currency
translation; partially offset by
• $7.4 million increase due to the absence of the Ranitidine retail
market withdrawal included in the prior year period.
Operating income increased $71.2 million, or 25%, due to:
• $66.3 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 as well as increased labor and
overhead costs associated with the COVID-19 pandemic. Gross profit as a
percentage of net sales decreased 10 basis points due primarily to the
operating inefficiencies described above, pricing pressure on certain
products, and the divested animal health business, partially offset by the
absence of the Ranitidine retail market withdrawal included in the prior
year period, and higher margin new product sales; and
• $4.9 million decrease in operating expenses due primarily to:
• The absence of a $7.1 million asset abandonment charge related to
our waste water treatment plant in Vermont taken in the prior year
period and a $4.0 million insurance reimbursement received in the
current year period; partially offset by
• $6.3 million increase in selling and administration expenses due
primarily to the inclusion of expenses from our acquisitions of
Ranir and Dr. Fresh and an increase in promotion expenses on branded
products, partially offset by a reduction in employee related
expenses and the absence of expenses from the divested animal health
business.
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
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Perrigo Company plc - Item 2
CSCI
• Throughout the year, we experienced demand shifts for certain products,
which we attributed to consumer reactions related to the COVID-19 pandemic
and the movement and social distancing restrictions put in place to combat
spreading of the virus, such as travel bans, and country lock-downs.
Certain products in our pain and sleep-aids and vitamins, minerals and
supplements ("VMS") 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 due to continued movement
and social distancing restrictions, which could depend on the duration and
severity of the COVID-19 pandemic and related illnesses.
• On August 7, 2020, we entered into a definitive agreement to acquire three
Eastern European OTC dermatological skincare and hair loss treatment
brands, Emolium®, Iwostin®, and Loxon® from Sanofi for €52.0 million and
additional consideration for the transfer of related inventory on hand. On
October 30, 2020, the transaction closed for €53.3 million (approximately
$62.0 million), subject to post-closing conditions. The acquisition will
be accounted for as a business combination. This transaction builds on our
self-care transformation and strengthens our skincare and personal hygiene
portfolio.
• Consistent with our strategy to reconfigure our portfolio to focus on our
consumer self-care businesses, on June 19, 2020, we completed the sale of
our U.K.- based Rosemont Pharmaceuticals business, a generic prescription
pharmaceuticals manufacturer focused on liquid medicines, to a U.K.
headquartered private equity firm for cash consideration of £155.6 million
(approximately $195.0 million), which resulted in a pre-tax loss of
$18.7 million (refer to Item 1. Note 3 ).
• 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
September 26, September 28,
(in millions) 2020 2019
Net sales $ 339.0$ 347.5
Gross profit $ 154.1$ 156.3
Gross profit % 45.5 % 45.0 %
Operating income $ 10.2$ 13.2
Operating income % 3.0 % 3.8 %
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales decreased $8.5 million, or 2%, due to:
• $7.8 million, or 2%, net decrease due primarily to lower sales of cough
and cold OTC products in the upper respiratory category and lower consumer
demand for anti-parasite products in the skincare and personal hygiene
category due to pandemic-related consumer behavior, travel bans, social
distancing measures, country lock-downs, and school closings, and a
$2.9 million decrease from discontinued products. These decreases were
partially offset by incremental new product sales including line
extensions in the ACO dermatology product and the XLS Forte-Five weight
management brand in the skincare and personal hygiene and healthy
lifestyle categories, respectively, and higher net sales in our pain and
sleep-aids and VMS categories due to pandemic-related consumer behavior;
and
• $14.6 million decrease due to our divested Rosemont pharmaceuticals
business and Canoderm prescription product previously included in the
Nordic region; partially offset by
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Perrigo Company plc - Item 2
CSCI
• $12.1 million increase from favorable foreign currency translation
primarily related to the Euro; and
• $1.8 million increase due to the absence of the Ranitidine retail market
withdrawal included in the prior year period.
Operating income decreased $3.0 million, or 23%, due to:
• $2.2 million decrease in gross profit due primarily to the decrease in net
sales as described above and higher commodity costs for a certain OTC
brand. Gross profit as a percentage of net sales increased 50 basis points
due primarily to the absence of the Ranitidine retail market withdrawal
included in the prior year period, partially offset by the divested
Rosemont pharmaceuticals business, unfavorable product mix, and higher
commodity costs for a certain OTC brand; and
• $0.8 million increase in operating expenses due primarily to unfavorable
Euro foreign currency translation, partially offset by the absence of
expenses from the divested Rosemont pharmaceuticals business and a
decrease in administration and restructuring expenses.
Nine Month Comparison
Nine Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 1,042.8$ 1,025.8
Gross profit $ 483.3$ 480.0
Gross profit % 46.3 % 46.8 %
Operating income $ 45.7 $ 18.4
Operating income % 4.4 % 1.8 %
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $17.0 million, or 2%, due to:
• $50.4 million, or 5%, net increase due primarily to a $40.6 million
increase from our acquisitions of Ranir and Dr. Fresh and an increase in
demand for products in our pain and sleep-aids and VMS categories due to
pandemic-related consumer behavior. The segment also benefited from the
incremental impact of new product sales, including line extensions in the
ACO dermatology product line and the XLS Forte-Five weight management
brand in the skincare and personal hygiene and healthy lifestyle
categories, respectively. These increases were partially offset by lower
consumer demand of certain self-care products in the upper respiratory,
skincare and personal hygiene and healthy lifestyle categories due to
pandemic-related consumer behavior, travel bans, social distancing
measures as well as country lock-downs and discontinued products of
$5.3 million; partially offset by
• $33.4 million decrease due primarily to:
• $21.6 million decrease due to our divested Rosemont
pharmaceuticals
business and Canoderm prescription product previously included in
the Nordic region; and
• $13.6 million decrease from unfavorable foreign currency translation
primarily related to the Euro; partially offset by
• $1.8 million increase due to the absence of the Ranitidine retail
market withdrawal included in the prior year period.
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Perrigo Company plc - Item 2
CSCI
Operating income increased $27.3 million, or 148%, due to:
• $3.3 million increase in gross profit due primarily to increased net sales
as described above, partially offset by higher commodity costs for a
certain OTC brand. Gross profit as a percentage of net sales decreased 50
basis points due primarily to the addition of the oral self-care category,
which has a relatively lower gross margin than the overall portfolio,
unfavorable product mix, and an increase in commodity costs, partially
offset by positive pricing trends and the absence of the Ranitidine retail
market withdrawal included in the prior year period; and
• $24.0 million decrease in operating expenses due primarily to:
• $18.1 million decrease in selling and administration
expenses due
primarily to a reduction in selling, advertising, and promotion
expenses in response to consumer sentiment and behavior during the
COVID-19 pandemic, partially offset by the inclusion of expenses
from our acquisitions of Ranir and Dr. Fresh; and
• $10.4 million decrease due to the absence of restructuring expenses
related to the reorganization of our sales force in France;
partially offset by
• $4.1 million increase in R&D expenses towards continued innovation efforts.
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
• We experienced more moderate pricing reductions compared to the prior year
in our RX segment, but pricing erosion continues due to approvals for
products competing with our portfolio and overall competitive pressures.
We expect some softness in pricing to continue to impact the segment for
the foreseeable future.
• On September 17, 2020, we initiated a voluntary nationwide recall to the
retail level of Albuterol as a result of complaints from patients that
some units may not dispense due to clogging. Corrective action plans are
underway and a definitive time-line for product reintroduction has not
been determined at this time. As a result of the recall, we recorded a net
charge of $22.5 million in our Condensed Consolidated Statements of
Operations during the third quarter. We launched Albuterol in the first
quarter of 2020 after receiving approval from the U.S. Food and Drug
Administration on our abbreviated new drug application on February 24,
2020, along with our partner Catalent Pharma Solutions.
• During the three months ended September 26, 2020, our RX U.S. reporting
unit had an indication of potential impairment primarily from the stoppage
of production and distribution of Albuterol and voluntary nationwide
recall at the retail level, combined with a decline in market multiples.
We prepared an impairment test as of September 26, 2020, determined the
carrying value of the RX U.S. reporting unit exceeded its estimated fair
value and recorded a goodwill impairment of $202.4 million.
• Starting in the second quarter, with a partial rebound in the third
quarter, we experienced a reduction in demand for certain of our existing
base products due to lower prescription volumes related to pandemic and
lock-down-related reductions in doctor visits. The decrease in demand of
existing base products was market-wide and did not result in market share
loss.
Segment Financial Results
Three Month Comparison
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Perrigo Company plc - Item 2
RX
Three Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 210.7$ 230.3
Gross profit $ 57.0$ 71.4
Gross profit % 27.0 % 31.0 %
Operating income (loss) $ (180.6 )$ 19.7
Operating income (loss) % (85.7 )% 8.5 %
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales decreased $19.6 million, or 9%, due primarily to:
• $20.5 million, or 9%, net decrease due primarily to $23.0 million in
pre-recall Albuterol sales being more than offset by the establishment of
the estimated Albuterol recall reserve of $31.2 million, $8.7 million from
discontinued lower margin distribution products, and a slight decline in
the base business. Net sales increased from other new products by
$3.0 million, mainly from the Scopolamine patch relaunch.
Operating income decreased $200.3 million, or 1,017%, primarily due to:
• $14.4 million decrease in gross profit, and a 400 basis point decrease in
gross profit as a percentage of net sales, due primarily to the net charge
of $22.5 million from the Albuterol recall; and
• $185.9 million increase in operating expenses due primarily to the
$202.4 million goodwill impairment charge in the current year period,
partially offset by the absence of a $10.8 million impairment charge
related to a definite-lived intangible asset in the prior year period and
a decrease in R&D expenses driven by lower clinical study costs.
Nine Month Comparison
Nine Months Ended
September 26, September 28,
(in millions) 2020 2019
Net sales $ 738.8$ 711.6
Gross profit $ 230.6$ 246.5
Gross profit % 31.2 % 34.6 %
Operating income (loss) $ (81.2 )$ 95.0
Operating income (loss) % (11.0 )% 13.4 %
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $27.2 million, or 4%, due primarily to:
• $24.7 million, or 3%, net increase due primarily to $142.7 million from
Albuterol sales prior to the recall and an increase of $24.4 million in
other new product sales driven by the Scopolamine relaunch and Diclofenac
sodium topical gel 1%. These increases were partially offset by pricing
pressure, including for testosterone gel 1.62% (which still had 180-day
market exclusivity in the prior year period), a decline in the base
business, which was due to lower prescription volumes related to pandemic
and lock-down-related reductions in doctor visits, $31.2 million for the
establishment of the estimated Albuterol recall reserve, and $24.4 million
of discontinued lower margin distribution products.
Operating income decreased $176.2 million, or 185%, due to:
• $15.9 million decrease in gross profit due primarily to the net charge of
$22.5 million from the Albuterol recall and third party operational
inefficiencies on partnered products, offset by the increase in net sales
as
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Perrigo Company plc - Item 2
RX
described above. Gross profit as a percentage of net sales decreased 340 basis
points, due primarily to the gross profit factors discussed above and pricing
pressure; and
• $160.3 million increase in operating expenses due primarily to the
$202.4 million goodwill impairment in the current year period, partially
offset by the absence of $38.7 million of impairment charges related to
definite-lived intangible assets in the prior year period and a decrease
in selling and administration costs related primarily to a reduction in
employee related expenses.
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 26, September 28, September 26, September 28,
2020 2019 2020 2019
$ 48.6 $ 59.8 $ 151.3 $ 185.1
The decrease of $11.2 million in unallocated expenses during the three months
ended September 26, 2020 compared to the prior year period was due primarily to
the absence of $12.5 million in acquisition and integration-related charges
related to the acquisition of Ranir and a $5.6 million decrease in legal and
consulting fees, partially offset by an increase of $3.2 million in insurance
related expenses.
The decrease of $33.8 million in unallocated expenses during the nine months
ended September 26, 2020 compared to the prior year period was due primarily to
a $27.9 million decrease in legal and consulting fees, a $13.3 million decrease
in Restructuring expense related primarily to the reorganization of our
executive management team, and the absence of $12.5 million in acquisition and
integration-related charges related to the acquisition of Ranir, partially
offset by an increase of $12.8 million in employee incentive compensation
expenses, which included COVID-19 bonuses for production employees, and an
increase of $11.7 million in insurance related expenses.
Change in Financial Assets, Interest expense, net, Other (income) expense, net
and Loss on extinguishment of debt (Consolidated)
Three Months Ended
Nine Months Ended
September 26, September 28, September 26, September 28,
(in millions) 2020 2019 2020 2019
Change in financial assets $ (22.2 )$ (2.6 )$ (25.9 )$ (18.5 )
Interest expense, net $ 34.0 $ 30.5 $
97.6 $ 90.4
Other (income) expense, net $ 0.4 $ (71.0 ) $ 17.1 $ (65.6 )
Loss on extinguishment of debt $ 20.0 $ 0.2 $ 20.0 $ 0.2
Change in Financial Assets
The proceeds from our 2017 sale of the Tysabri® financial asset consisted of
$2.2 billion in upfront cash and up to $250.0 million and $400.0 million in
contingent milestone payments related to 2018 and 2020, respectively. During the
year ended December 31, 2019 we received the $250.0 million contingent milestone
payment.
During the three and nine months ended September 26, 2020, the fair value of the
Royalty Pharma contingent milestone payment related to 2020 increased by $22.2
million and $25.9 million, respectively to $121.2 million, which is recorded on
the Condensed Consolidated Balance Sheets within Prepaid expenses and other
current assets. The adjustments were driven by higher projected global net sales
of Tysabri® compared to the estimates in the prior period, and the estimated
probability of achieving the earn-out. During the three and nine months ended
September 28, 2019, the fair value of the Royalty Pharma contingent milestone
payments increased by $2.6 million and $18.5 million, respectively. These
adjustments were driven by higher projected global net sales of Tysabri® and the
estimated probability of achieving the earn-out.
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Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
The Royalty Pharma payments from Biogen for Tysabri® were $337.5 million in
2018, which triggered the $250.0 million milestone payment received during the
first quarter of 2019. There is no contingent milestone based on 2019 sales of
Tysabri®. In order for us to receive the remaining contingent milestone payment
of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales, as
defined in the agreement, in 2020 must exceed $351.0 million. If Royalty Pharma
payments from Biogen for Tysabri® sales do not meet the prescribed threshold in
2020, we will write off the $121.2 million asset and record a loss. If the
prescribed threshold is exceeded, we will increase the asset to $400.0 million
and recognize income of $278.8 million in Change in financial assets on the
Condensed Consolidated Statements of Operations (refer to Item 1. Note 6 ).
Interest Expense, Net
The $3.5 million increase for the three months ended September 26, 2020,
compared to the prior year period was due primarily to a reduction in interest
income received and changes in our underlying hedge exposure.
The $7.2 million increase for the nine months ended September 26, 2020, compared
to the prior year period was due primarily to changes in our underlying hedge
exposure and the addition of interest expense on our 2020 Notes and two
Promissory Notes related to our equity method investment in Kazmira.
Other (Income) Expense, Net
The $71.4 million increase in expense during the three months ended
September 26, 2020 compared to the prior year period was due primarily to the
absence of the pre-tax gain of $71.7 million on the sale of our animal health
business (refer to Item 1. Note 3 ).
The $82.7 million increase in expense during the nine months ended September 26,
2020 compared to the prior year period was due primarily to the absence of the
pre-tax gain of $71.7 million on the sale of our animal health business and the
$18.7 million pre-tax loss on the divestiture of our Rosemont Pharmaceuticals
business, partially offset by a decrease of $5.3 million in losses on investment
securities (refer to Item 1. Note 3 ).
Loss on Extinguishment of Debt
During the three months ended September 26, 2020, we recorded a loss of $20.0
million as a result of the early redemption of the 2021 Notes, consisting of the
premium on debt repayments, the write-off of deferred financing fees, and the
write-off of the remaining bond discounts (refer to Item 1. Note 10 ).
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