Perrigo Reports Broad Growth, But Investors Sour On Turnaround's Price Tag

Its reported worldwide consumer Q4 net sales increased 12.7%, or 16.4% adjusted for currency exchange rates, product launches and other changes from the prior-year period, to $1.1bn. The s results, though, sent share price plummeting $8.64, more than 14%, to $51.82.

Perrigo Co. PLC apparently has reached firm footing in turning around its consumer health product sales, but investors aren’t sure about staying on board as the OTC private label giant pays the costs of the recovery.

The Dublin-based firm on 27 November said its reported worldwide consumer fourth-quarter net sales increased 12.7%, or 16.4% adjusted for currency exchange rates, product launches and other changes from the prior-year period, to $1.1bn.

(HBW Insight will report additional details on Perrigo’s 2019 full-year and fourth-quarter results in a separate article to be published soon.)

Perrigo’s reported growth in North and South America consumer sales was 15.2% to $711 million, with $52m of the total coming from sales of brand and private label oral care products it gained by acquiring Ranir Global Holdings LLC in May 2019. Its reported international consumer health net sales, predominantly in Europe, grew 8.2% to $356m.

Its overall reported net sales, including its Rx generic topicals business, increased 10.7% to $1.3bn on increased demand for existing products, the addition of Ranir and new product sales of $58 million. The growth rate was offset by pricing pressures and $9m.

Paying The Tab

Impressive numbers across its segments, but Perrigo has to pay for buying Ranir and other bolt-on deals as well as for extensive infrastructure and operational changes its made since CEO Murray Kessler took them helm in late 2018. One of the bolt-ons was adding more oral care assets from portfolio company High Ridge Brands Co. in an agreement announced on 24 February. (Also see "Perrigo Oral Care Targets North American Value Tier With High Ridge Brands Buy" - HBW Insight, 25 Feb, 2020.)

Perrigo’s “transformational efforts are requiring more investments and will likely need a significant amount of time to play out,” said Jefferies analysts in a research note posted following the publication of firm’s 2019 full-year and fourth-quarter results.

Morningstar analyst Soo Romanoff also noted the turnaround’s costs. “Operating results were probably also weighed down by the required investments necessary for the turnaround,” said Romanoof in a research note.

In a flash note posted immediately after Perrigo posted its results, SVB Leerink analyst Ami Fadia portended investors’ reaction. “We believe the stock may trade lower on the higher-than-expected spend outlook,” Fadia said.

Perrigo’s share price has moved up and down by small increments, typically in values of less than $1 and at percentages less than 1%, for around 15 months as Kessler implemented changes, including cost cutting, to launch a turnaround.

Following the firm’s latest results, though, its share price plummeted by $8.64, more than 14%, to $51.82.

The results sparked heavy trading – 3.75m shares were traded of a stock with a daily average volume of less than 1m. The day’s range was $50.06 to $55.94; the 52-week range is $40.68 to $63.86.

Perrigo’s reported diluted earnings per share for 2019 was $1.07, up from 95 cents in 2018. Its adjusted diluted EPS for 2019 was $4.03, down from $4.55 the previous year.

For the October-December period, it reported a net loss of $19m, or 14 cents per diluted share, following net income of $82m, 60 cents per diluted share, in the prior-year period. The loss primarily was due to non-cash impairment charges of $142 million, mostly in the RX segment, according to the firm.

'Work To Be Done'

Kessler pointed out during a same-day earnings briefing that paying for the turnaround isn’t done. “We're only nine months into a two- to three-year transformation and there's still much work to be done, but the drivers of growth, the quality of growth and the breadth of growth across businesses in Q4 provides strong evidence that we are on the right track,” he said.

Analysts agree, but also acknowledge the firm has to convince investors. “With another $50m in planned investments, [2020] earnings will likely be flat with [2019]. Bolt-on acquisitions will be key to help shore up [its] financials, but they are nonorganic sources of growth,” said Morningstar’s Romanoff.

Perrigo had decades of strong results as the dominant private label/store brand OTC drug provider, primarily in the US but also with revenues from Canada and Latin America. The firm's entry into the branded product space through its acquisition of European business Omega Pharma NV in 2014, as it responded to a hostile takeover bid by Mylan NV, was seen as a major cause of its years-long slump. Perrigo struggled to get on top of controlling the business' costs for numerous quarters. (Also see "Perrigo Lights Smoking Cessation For Growth With Turnaround Woes 'Fixable'" - HBW Insight, 28 Feb, 2019.)

A key component of Kessler’s plan is offering “national brand better” products that compete with national brands based on factors other than being available at lower prices. (Also see "Perrigo's Turnaround Tools: 'National Brand,' Novel NRTs, CBD And Natural Products, Sponsoring OTC Switches" - HBW Insight, 13 May, 2019.)