Perrigo Moves From Health Care To 'Self Care'
This article was originally published in The Pink Sheet
Executive Summary
Providing self-care products "opens this organization up to massive opportunity" which Perrigo will identify in early 2019, says new CEO Murray Kessler. It remains committed to selling or spinning off its Rx unit, though it's "just a few FDA approvals away from significantly" growing, he says as firm reports $68m net loss in its latest quarter.
Perrigo Co. PLC will change its focus from health care to "self care" and introduce additional products outside its OTC drug core to solve its consumer health revenue problems, says recently appointed CEO Murray Kessler.
During Perrigo's 2018 third-quarter earnings briefing Nov. 8, Kessler also said the firm's Rx generics business will see some changes even as Perrigo still looks to sell it or spin it off. The unit is again helmed by its former chief and also is close to "significantly" growing.
Summing up his future vision for Perrigo, Kessler said, "You see a health-care company and I see a self-care company."
Providing self-care products "opens this organization up to massive opportunity," which Perrigo plans to identify in early 2019 when it releases its next earnings report. "If we are not limiting ourselves through a lens of health care … there are massive, massive categories" of product opportunities, the CEO added.
Kessler outlined his expectations after Perrigo reported worldwide consumer business net sales down around 1% to $953.8m from the year-ago period, with sales flat in the Americas at $596.7 and down 2% in Europe to $257.6m. Its Rx generics' sales were down 28.5% to $179.3m (see chart below).
The Dublin-based firm reported a net loss of $68m during the July-September period after reporting $45m net income a year ago. It also reported a 49-cent loss per diluted share after earning 31 cents per share in the year-ago period.
Kessler outlined his expectations after Perrigo reported worldwide consumer businesses net sales down around 1% to $953.8m from the year-ago period, with sales flat in the Americas at $596.7 and down 2% in Europe to $257.6m. Its Rx generics' sales were down 28.5% to $179.3m as the Dublin-based firm reported a – a net loss of $68m during the July-September period after reporting $45m net income a year ago. It also reported a 49-cent loss per diluted share after earning 31 cents per share in the year-ago period.
The change "can be reported to Rx under-performing against our original plan. This is obviously disappointing," said Chief Financial Officer Ron Winowiecki.
OTC Pipeline 'Insufficient'
For Perrigo, consumer health almost entirely has meant OTC drugs sold in North America. It also makes infant formula and animal health products and includes nutritional products in its European portfolio , but the bulk of its revenues are from private label and store brand OTC drugs.
That isn't working any longer.
A dearth of additional ingredients approved for OTC use is choking Perrigo's growth even as it remains the largest OTC private label provider, said Kessler, who joined the firm in early October with more than 18 years' experience in consumer-packaged goods with companies including Vlasic Foods International Inc., Campbell Soup Co. and Clorox Co. (Also see "Another Change At Perrigo Helm As Results Remain Turbulent" - Pink Sheet, 9 Oct, 2018.)
Slips Across Perrigo Divisions
With Each of its s three divisions showing lower net sales year to year, perrigo looks to broaden its consumer health play into self care.
Perrigo 2018 Q3 Earnings Statement
"In the current environment of less Rx-to-OTC switches … the new product pipeline is simply insufficient and lower than in prior years," he said.
Kessler noted, though, that Perrigo recently announced exclusive US rights to develop and market an OTC version of Merck & Co. Inc.'s Nasonex Nasal Spray as a branded product as well as in private label and store brand formulations sold by retailers and other businesses. He said it's a $50m investment. (Also see "Perrigo's OTC Core Could Expand To Include National Brands" - Pink Sheet, 9 Aug, 2018.)
Additional curbs on consumer health growth are coming from retailers' push for lower pricing and from Perrigo's own problems with delivering products and services that retailers and its other customers request.
"We've lost revenues, in certain places, meaningful revenues from not being able to service customers in certain respects, and there are all kinds of cost implications when that starts to happen, relative to overtime and customer finds and all kinds of things that can come as a result of that," Kessler said.
But Perrigo should meet all existing demands from its consumer health product customers while it also prepares to expand its product footprint, the CEO said. "All the makings are there," he said, adding, "We'll ramp up the new-product program and that will fix the mid-term and the long-term."
Perrigo's pivot to self care under Kessler tracks with larger trends to make more health care products available nonprescription to consumers and to see non-drug remedies as beneficial to maintaining health and preventing disease. Consumer interest in self-care and demand for more non-drug remedies also are drawing pharma and other health care industry firms into the sector.
In addition to OTC drugs, the self-care sector includes vitamins, minerals, nutritional supplements, herbal remedies, homeopathic OTCs and natural foods; topical and aromatic products or devices with healing or wellness properties; and yoga and other exercise or meditation disciplines.
"Unlike the consumer business, the pipeline on RX is robust, and we are just a few FDA approvals away from significantly changing the trajectory of this business." – Perrigo CEO Murray Kessler
Kessler didn't offer details on how Perrigo will make its presence in self care. Instead, he compared the road ahead at Perrigo with his previous posts at the helm of firms in other consumer packaged good industries.
"Most of the dialogues that I have seen coming into the company is dollar revenue-related versus volume-related. Coming out of a CPG company, most of the conversations I've always had are volume-related. In doing so the underlying trends on this business are almost completely different in many areas," Kessler said.
Perrigo can maintain its production volume capacities but needs to improve its capabilities for meeting its customers' needs, he added. "When I talk to some of our biggest customers, they tell me that four years ago they could not go to anybody else but Perrigo because the advantage was so great. We still have an advantage, but the gap has narrowed, that gap needs to be widened again."
Rx Growth Before Sale?
Perrigo put its Rx generics business on the sales block earlier in 2018 following extended pressure from key investors. But it won't divest the business from a weak bargaining position. (Also see "Perrigo Looks To Spin Out Or Sell Off Rx Business, But Will Separating Generics Add Value?" - Scrip, 9 Aug, 2018.)
The firm announced that it appointed Sharon Kochan president of the Rx business, which he led from 2005 through 2012. Kochan, also named an executive vice president, was Perrigo's consumer health head when he was transferred to an international post in 2016. (Also see "Perrigo Trims Workforce, Ships Tysabri License, Stays European Course" - Pink Sheet, 1 Mar, 2017.)
Kochan "is an experienced operator who is instrumental in building the Perrigo Rx segment from its infancy and is the right executive to lead the previously announced" plan to sell or divest the unit, Winowiecki said.
After Kessler said multiple product approvals are pending and should spark revenue growth for the Rx business, Winowiecki fielded questions for details on the products.
The CFO noted Perrigo's work on a generic of the ProAir inhaler asthma treatment. In May it received from FDA a complete response letter on its application, which prompted the firm to lower its guidance for the year and ditch plans to launch the product in 2018. (Also see "Perrigo Generic Of Teva's ProAir Stunned By Another FDA CRL " - Scrip, 14 May, 2018.)
Winowiecki declined to elaborate on Perrigo's response to FDA but included the product as one the firm expects to recharge its Rx business. "Our team remains committed and dedicated to launching that product and getting the approval," he said.
The second sales driver Perrigo expects for its Rx business would not be new but a returning product, its scopolamine transdermal patch indicated for anti-nausea. It launched scopolamine in late 2017 but disclosed early this year that a supply problem interrupted production.
"We pulled it out of the market due to a deviation. The team again responded to that with the FDA and continues to move down our improvement plan in that product," Winowiecki said.
Kessler, whose experience also includes heading Lorillard Tobacco Co. and UST Inc., a subsidiary of vice chairman of tobacco products firm Altria Inc., says the Rx business is "a distraction to our core business" but is in for a big jump.
"Unlike the consumer business, the pipeline on Rx is robust, and we are just a few FDA approvals away from significantly changing the trajectory of this business. Our regulatory team is optimistic they will come soon. Importantly, we believe it's not a matter of if, it's a matter of when," he said.
'Tuck-In' Consumer Deals Expected
As for the consumer health pipeline, help could come from "tuck-in" acquisitions of product brands that complement but still broaden Perrigo's existing offerings, particularly in Europe, he said. "Tuck-in acquisitions would give us the scale we need in those markets to be successful. So I'm pretty confident that you'll start seeing some of those come around pretty quickly."
Larger acquisitions, however, are "the last thing [Perrigo] needs right now," he added.
In addition to other health care categories, Perrigo should do more with its existing OTC lineup, Kessler said. "I think we won't have any problems developing a strong pipeline. I'm also not convinced, we fully explored our product," he said, adding that "being a player in the Rx-to-OTC switches that have already happened … doesn't mean we've reached full potential on those, not even close."
Perrigo's sales and earnings slide began in 2016 after the firm's management convinced shareholders to reject a tender offer from Mylan NV. It launched its European consumer health business with an acquisition during the tender and pointed to its OTC private label market-share dominance as proof that it had a stronger future ahead on its own. However, the European business has been a drag on earnings and its OTC drug revenues have not maintained the same growth rates partly due to a slump in new ingredients becoming available nonprescription but also due to its own problems in supply and production. A royalty license for an Rx specialty drug and an active pharmaceutical ingredient business in Israel also did not contribute to Perrigo's margin and have been sold as it attempts to stop its nearly three-year dive in its results and its share price. (Also see "Perrigo Haunted By Mylan Rejection As Securities Fraud Complaints Mount" - Pink Sheet, 31 Oct, 2018.)
The third-quarter results and its executives' commentary did little to sway investors' confidence. Its share price closed at $62.88 after closing at $75.14 the day before.
From the editors of the Tan Sheet.