Perrigo Company plc — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparable period ended April 2, 2016. Perrigo is a global healthcare products company focused on consumer healthcare and prescription pharmaceuticals.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,194.0 million | $1,347.3 million |
| Gross profit / margin | $464.4 million / 38.9% | $533.1 million / 39.6% |
| Operating income (loss) | $128.5 million | $(231.6) million |
| Net income (loss) | $71.6 million | $(529.2) million |
| Diluted EPS | $0.50 | $(3.70) |
| Cash from operations | $194.5 million | $98.5 million |
- Revenue fell 11% year over year. The filing attributes the decline principally to the prior-year sale of the U.S. vitamins, minerals and supplements business, exits from distribution agreements, foreign exchange, and lower prescription sales, including Entocort.
- Operating results improved from the prior-year loss mainly because Q1 2016 included $403.9 million of impairment charges. Q1 2017 included $38.7 million of restructuring costs and a $12.2 million impairment of in-process R&D assets.
- Cash from investing was $2.3 billion, largely reflecting $2.2 billion cash proceeds from the Tysabri royalty-stream sale. Cash from financing was an outflow of $37.2 million, including $23.0 million of dividends. Capital expenditures were $22.0 million.
- At April 1, 2017, cash was $3.08 billion; total borrowings were $5.79 billion, comprising $1.18 billion current and $4.62 billion long-term debt. Current assets were $5.11 billion and current liabilities $2.49 billion.
- Quarterly dividends declared were $0.16 per share. No shares were repurchased during the quarter.
Segments and material changes
- Consumer Healthcare Americas (CHCA): Sales declined 9% to $582.8 million; operating income fell 25% to $75.0 million. The VMS divestiture and pricing/volume pressure outweighed new-product sales and strength in cough/cold.
- Consumer Healthcare International (CHCI): Sales declined 15% to $374.9 million. Operating income was $0.2 million versus a $396.4 million loss, primarily because prior-year impairment charges did not recur; operating conditions remained weak in Germany and Belgium.
- Prescription Pharmaceuticals (RX): Sales declined 12% to $217.4 million; operating income declined 4% to $88.2 million. Lower Entocort sales and price erosion were partly offset by new products and $21.8 million of ANDA sales.
- Other: Sales were $18.9 million, down from $20.6 million; operating income was $5.7 million.
- On March 27, Perrigo sold its Tysabri royalty stream to Royalty Pharma for $2.2 billion cash plus up to $650 million in milestone payments tied to royalty thresholds. It recorded a $17.1 million gain and recognized the contingent milestones at an estimated fair value of $184.5 million.
Outlook, commentary and risks
- Management forecast a 9%–11% pricing decline in RX for 2017, citing customer purchasing pressure, competition, low raw-material costs and customer consolidation. It expected increased competition to reduce 2017 Entocort sales by approximately $72 million.
- Exits from certain CHCI distribution agreements were expected to reduce 2017 sales by approximately $220 million. Management was evaluating strategic alternatives for the RX business and Israel API operations, and evaluating business models in Russia and Argentina.
- A workforce-reduction and cost-optimization program was expected to reduce global non-production staffing by approximately 750 employees. Expected total pretax restructuring charges were $55–$65 million; targeted annual savings were approximately $130 million by mid-2018.
- Management said cash, operating cash flow and available credit were expected to fund foreseeable liquidity needs, and intended to use Tysabri proceeds to repay debt. The $600 million 2.3% notes were redeemed on May 8, 2017; €180 million of retail bonds were repaid on May 23, 2017.
- Disclosure controls and internal control over financial reporting were ineffective at April 1, 2017 because of unremediated material weaknesses involving Tysabri accounting, income-tax controls and impairment asset-group identification. Remediation was underway; management cautioned that it was not yet validated.
- Tax uncertainties include $407.8 million of liabilities for uncertain tax positions. Perrigo disputed IRS assessments, including approximately $68.9 million for fiscal 2009–2010 and $74.2 million for fiscal 2011–2012; the filing warns unfavorable outcomes could materially affect results or cash flows.
- Other disclosed exposures include generic-drug price-fixing claims, securities litigation, Eltroxin and Tysabri product-liability matters, and an arbitration claim related to the Omega acquisition. Outcomes were uncertain.
Important facts for investors to verify
- Whether the announced cost reductions and $130 million annual savings target are realized, and how restructuring charges and timing develop.
- Actual RX pricing and Entocort performance versus management’s 2017 expectations, alongside continuing CHCA and CHCI pricing, volume and distribution pressures.
- Debt repayment, cash deployment and credit-rating developments following the Tysabri divestiture and subsequent note repayments.
- Progress in remediating the material weaknesses and any further restatements, accounting changes or compliance implications.
- Outcomes and potential cash effects of IRS audits, uncertain tax positions, litigation and the contingent Tysabri milestone payments.