Perrigo Misses on Earnings and Sales, Outlook Slashed

Zacks Equity Research

Perrigo Company plc’s (PRGO) third-quarter fiscal 2014 (ended Mar 29, 2014) earnings of $1.31 per share were well short of the Zacks Consensus Estimate of $1.53. Lower-than-expected revenues led to the earnings miss. Moreover, third quarter earnings were 8% below the year-ago figure. Results were hurt by the tough retail environment and a weak cough/cold and flu season.

Net sales in the quarter climbed 9% to $1,004.2 million. Revenues increased $77 million due to the inclusion of results of Rosemont Pharma (acquired by Perrigo in Feb 2013), Velcera (acquired in Apr 2013), Fera’s ophthalmic product portfolio (acquired in Jun 2013) and Elan Corporation (acquired in Dec 2013). Newly launched products boosted revenues by $60 million. Revenues fell short of the Zacks Consensus Estimate of $1,065 million.

The Third Quarter in Detail

Perrigo reports revenue primarily from the following segments: Consumer HealthCare (CHC), Nutritionals, Rx Pharmaceuticals, Active Pharmaceutical Ingredients (API) and Specialty Sciences. The Specialty Sciences unit came into existence following the completion of the acquisition of Elan Corporation on Dec 18, 2013.

Consumer Healthcare: Perrigo reported CHC revenue of $537.3 million in the quarter, up marginally from the prior year. Segmental revenues were hurt by lower sales of existing offerings primarily in the cough/cold, contract manufacturing and analgesics units. Adjusted gross margin for the segment declined to 32.1% from 33.5% a year ago. Margins were hurt by an under absorption of fixed production costs on lower volume output compared to the year-ago quarter.
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Nutritional: Perrigo reported revenue of $137.8 million, up 3% year over year. Existing and newly launched products boosted segmental sales by $4 million and $7 million, respectively. Adjusted gross margin for the segment climbed to 27.8% in the third quarter of fiscal 2014 from 25.5% a year ago. Improved operating efficiencies contributed to the margin expansion.

Rx Pharmaceuticals: The Rx Pharmaceuticals segment performed encouragingly during the quarter with net sales improving 18% to $223.4 million. Sales of new products boosted segmental revenues by $33 million. Inclusion of results of Rosemont Pharma and Fera’s ophthalmic product portfolio boosted sales by $17 million. Adjusted gross margin for the segment expanded to 58.3% from 57.9% a year ago. The increase was due to favorable product mix and acquisitions.

Active Pharmaceutical Ingredients: The company reported API sales of $32 million, down 22% from the prior-year quarter. Results were hurt by lower sales of existing products due to increased competition.

Specialty Sciences: Segmental revenues came in at $53.4 million due to royalties received by Perrigo on multiple sclerosis drug Tysabri from Biogen Idec (BIIB). We note that this is the second earnings report for the Dublin, Ireland-based Perrigo Company plc, formed following the Dec 2013 merger of Allegan, Mich. based Perrigo Company and Elan Corporation.

Others accounted for the remaining revenues.

Fiscal 2014 View Lowered

Perrigo lowered its earnings per share (on an adjusted basis) guidance for fiscal 2014 in view of the tough retail environment and the relatively weak cough, cold and flu season. The company now expects earnings in the range of $6.15–$6.30 (previous guidance: $6.45–$6.70). The Zacks Consensus Estimate (pre-earnings) for fiscal 2014 stands at $6.61 per share.

We believe the estimate will be revised downwards in view of the fresh guidance issued by the company. The lackluster earnings report and the disappointing guidance adversely impacted the stock in pre-market trading.

Our View

We are disappointed by the all-around miss of the company in the third quarter of fiscal 2014. Weakness in the CHC segment is a matter of concern as the segment is the major contributor to Perrigo’s top line. The below par guidance also disappoints us.

We expect investor focus to remain on the performance of the merged entity following Perrigo’s acquisition of Elan.

Some well ranked stocks in the medical sector include Mallinckrodt (MNK) and Dr. Reddy's Laboratories Ltd. (RDY). While Mallinckrodt carries a Zacks Rank #1 (Strong Buy), Dr. Reddy's Labs hold a Zacks Rank #2 (Buy).

Read the Full Research Report on PRGO
Read the Full Research Report on RDY
Read the Full Research Report on BIIB
Read the Full Research Report on MNK


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