PERRIGO COMPANY PLC EXECUTIVE OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements included in this Form 10-Q and our Form 10-K for the year endedDecember 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 ofIreland onJune 28, 2013 and became the successor registrant ofPerrigo Company , aMichigan corporation, onDecember 18, 2013 in connection with the acquisition ofElan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo ," the "Company," "we," "our," "us," and similar pronouns used herein refer toPerrigo Company plc , its subsidiaries, and all predecessors ofPerrigo Company plc and its subsidiaries. 48 --------------------------------------------------------------------------------
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
and
•
self-care business primarily in
in the
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
Doyle to serve as a director of the Company and a member of its Audit
Committee.
• On
issued
due 2030 (the "2020 Notes") and received net proceeds of
after fees and market discount. Interest on the 2020 Notes is payable
semi-annually in arrears on
beginning on
2030. The 2020 Notes are governed by the 2020 Indenture. The 2020 Notes
are fully and unconditionally guaranteed on a senior unsecured basis by
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
Finance's
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 inLoss 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.
49--------------------------------------------------------------------------------
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 endedSeptember 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 ofU.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
50
--------------------------------------------------------------------------------Perrigo Company plc - Item 2 Executive Overview additional interest and depreciation deductions provided for in the CARES Act enacted onMarch 27, 2020 resulting in a reduction of income tax expense by approximately$30.8 million during the nine months endedSeptember 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 %
[[Image Removed: chart-a264a626c33153a5abb.jpg]]
[[Image Removed: chart-85469c30e3cc5f78a30.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
CSCA segment of
driven growth across most product categories led by continued consumer
channel shifting from traditional brick and mortar outlets to e-commerce
and
pre-recall albuterol sulfate inhalation
51--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 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
•
sales as described above, which were partially offset by the net charge of
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
•
• 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 %
52--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Consolidated [[Image Removed: chart-714199db9f68549eabb.jpg]] [[Image Removed: chart-9c392cf67c4954c4ab1.jpg]]
* Total net sales by geography is derived from the location of the entity that sells to a third party.
Nine Months Ended
Net sales increased
CSCA segment of
acquisitions of Ranir and
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
Ranir and
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
due primarily to pre-recall Albuterol sales of
increase of
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,
establishment of the estimated Albuterol recall reserve, and
of discontinued lower margin distribution products; further partially
offset by
•
•$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
•
sales as described above, which were partially offset by the net charge of
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
53--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Consolidated
•
• 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 inFrance 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 healthbusiness,
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, includingemployee
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 theCOVID-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, onAugust 15, 2017 , we filed a complaint in theUnited 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 theIRS , plus statutory interest thereon from the dates of payment, for the fiscal tax years endedJune 27, 2009 ,June 26, 2010 ,June 25, 2011 , andJune 30, 2012 . In response to our complaint, theUnited States District Court for Western District of Michigan scheduled a new trial date forJanuary 26, 2021 (refer to
Item 1. Note 13 ).
Internal Revenue Service Notice of Proposed Adjustment
As previously disclosed, onApril 26, 2019 , we received a revised Notice of Proposed Adjustment ("NOPA") from theIRS regarding transfer pricing positions related to theIRS audit of Athena for the years endedDecember 31, 2011 ,December 31, 2012 andDecember 31, 2013 . We strongly disagree with theIRS position and will pursue all available administrative and judicial remedies, including those available under theU.S. - Ireland Income Tax Treaty to alleviate double taxation. Accordingly, onApril 14, 2020 , we filed a request for Competent Authority Assistance with theIRS (refer to Item 1. Note 13
).
The request was accepted and is under review.
Internal Revenue Service Notice of Proposed Adjustment
OnMay 7, 2020 , we received a final NOPA from theIRS , which was unchanged from the draft NOPA previously received, regarding the deductibility of interest related to theIRS audit ofPerrigo Company for the years endedJune 28, 2014 andJune 27, 2015 . We strongly disagree with theIRS position and are pursuing all available administrative and judicial remedies (refer to Item 1. Note 13 ).
Irish Tax Appeals Commission Notice of Amended Assessment
OnOctober 30, 2018 , we received an audit finding letter from theIrish Office of the Revenue Commissioners ("Irish Revenue") for the years endedDecember 31, 2012 andDecember 31, 2013 relating to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® toBiogen 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 theTax Appeals Commission . Separately, we were granted leave by theIrish High Court onFebruary 25, 2019 to seek 54 --------------------------------------------------------------------------------
Perrigo Company plc - Item 2 Consolidated judicial review of the issuance of the NoA by Irish Revenue.The High Court held a hearing inJune 2020 regarding the judicial review case and onNovember 4, 2020 ruled that the NoA did not violate our rights and legitimate expectations as a taxpayer. Because theIrish 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 theIrish Tax Appeals Commission (refer to Item 1. Note 13 ).
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, 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
strategic investment in and long-term supply agreement with
("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
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 produceTHC-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 OTCdiclofenac sodium topical gel 1%, the store brand equivalent to Voltaren®
gel. On
under store brand labels, which provides consumers with a high-quality,
value alternative for the temporary relief of arthritis pain.
• On
of
including a working capital settlement. After post-closing adjustments as
of
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
brand and innovator in the toothbrush protector market, from Bonfit
was accounted for as an asset acquisition, in which we capitalized
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 ).
55--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 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
Net sales increased
million from our acquisition of
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 newproduct 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
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
•
•$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
•
Operating income increased
•
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
•
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 $4.0
million insurance reimbursement received in the current year period.
Nine Month Comparison
56
--------------------------------------------------------------------------------Perrigo Company plc - Item 2 CSCA Nine Months Ended September 26, September 28, (in millions) 2020 2019 Net sales$ 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
Net sales increased
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
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
•
•
•$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
•
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 theoperating 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
•
• The absence of a$7.1 million asset abandonment charge related to our waste water treatment plant inVermont 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 andDr. 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
57
--------------------------------------------------------------------------------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
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
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
our
pharmaceuticals manufacturer focused on liquid medicines, to a
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
from
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
Net sales decreased
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 lineextensions 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
•
business and Canoderm prescription product previously included in the
Nordic region; partially offset by
58--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 CSCI •$12.1 million increase from favorable foreign currency translation
primarily related to the Euro; and
•
withdrawal included in the prior year period.
Operating income decreased
•
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
•
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
Net sales increased
increase from our acquisitions of Ranir and
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
•
•$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.
59--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 CSCI
Operating income increased
•
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
•
•$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
•
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
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
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
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 $202.4 million .
• Starting in the second quarter, with a partial rebound in the thirdquarter, we experienced a reduction in demand for certain of our existing
base products due to lower prescription volumes related to pandemic and
lock-down-related reductions in doctor visits. The decrease in demand of
existing base products was market-wide and did not result in market share
loss.
Segment Financial Results
Three Month Comparison
60--------------------------------------------------------------------------------
Perrigo Company plc - Item 2 RX Three Months Ended September 26, September 28, (in millions) 2020 2019 Net sales$ 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
Net sales decreased
pre-recall Albuterol sales being more than offset by the establishment of
the estimated Albuterol recall reserve of
discontinued lower margin distribution products, and a slight decline in
the base business. Net sales increased from other new products by
Operating income decreased
•
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
partially offset by the absence of a
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
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,
establishment of the estimated Albuterol recall reserve, and
of discontinued lower margin distribution products.
Operating income decreased
•
inefficiencies on partnered products, offset by the increase in net sales
as
61--------------------------------------------------------------------------------
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
•
offset by the absence of
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
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.
62
--------------------------------------------------------------------------------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
The$7.2 million increase for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 ourRosemont 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 endedSeptember 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 ).
© Edgar Online, source
