Perrigo Company plc (PRGO) Earnings Call Transcript & Summary

Yes. And I was on to the other things that give Perrigo the consumer advantage that offsets it. But the classic example is you launch an Omeprazole product. You have a number of years of -- as the only store brand competitor. And then eventually, your competitors file their ANDAs. They come in, and they try to compete on price. So it's up to us to innovate and stay ahead with either the product or with services, which we're getting better at, but that's still an area of focus. And we have a $0.5 billion of new products in the pipeline. So you innovate on the existing products, but you also stay ahead of them. So again, like on a Voltaren, which we weren't expecting, we're ahead. Then we'll have some competition. And we end up landing -- we end up holding our market shares, but you get back a little price concession. So we need to be faster, and we're getting there. I love what I see in terms of innovation in the company. And I'd say versus where I joined 2 years ago, we probably have 30%, 40% less price erosion than we did when I joined. And then we're getting there, we're getting there.

So the less price erosion, could you just expand on that, please?

Well, the less price erosion is just how many actual concessions you make with a customer or how much they demand. So if you develop a unique product and you launch it and there's nobody -- there's no leverage by the customer, right? Or if they can't service and we can service, there's less leverage. Or if you're focusing on products that have higher margins and you're trading up in mix, there's less margin erosion. So if I sort of concede on an area that is a lower-than-average gross margin but I -- or a lower revenue product, then I, as an example -- or I can trade into a category -- consumers into a category where you have a higher market share, those all generate revenue. So in the national brands, I -- in acetaminophen, the big player, has done a good job with that as an example of launching innovative products. Not raising prices, but launching innovative forms and dissolvables and at higher prices, so it drives the average up. We quickly follow. It drives our average up. So in Omeprazole and some of those categories, we're the market leader, actually. So we have innovated and brought things like minis and dissolvables that -- et cetera, that, again, give us competitive advantage and higher retail or higher purchase prices by our customers.

Got it. Okay. That's very helpful. And could you talk about the international business and paint the picture of that? You have both branded OTC. And you also have private label, particularly in the U.K. and certain other areas. So could you paint the picture for that business to help us understand that and the momentum for your international segment?

Yes. I mean we had a lot of momentum going into this. First off, your simple answer is it's probably a 90% branded business, 10% store brand, concentrated very heavily in the OTC area in the U.K. And then we bought Ranir, and Ranir had a nice -- and still has a nice piece of business across Europe, focused in 3 or 4 big markets: U.K., Germany and a couple of others. And that's actually presenting itself as a branded opportunity for us as well as some expansion on store brand. But so again, because of differentiation -- and I think Ranir was ahead of Perrigo a bit in terms of some of the innovation that helps it face less price pressure. And so we're having good success with that. Our oral care business has been a heck of an acquisition and is growing beautifully. The rest of the CSCI business, I would say, about half of it or 40% of it was helped by COVID. And the other half was hurt pretty much by COVID at a significant level, and it's kind of bounced back almost to sort of even with where it was. There are some segments we still have a ways to go. We didn't get hurt more than competition. In fact, in the second quarter when I reported, I think you'll see that Perrigo's international business outperformed most others internationally in that space. We are not brands that are pan-European by nature. We are more local heroes and local gems where we're #1 or #2 in the Netherlands, and then #1 or #2 with our ACO line of skin care, medicated skin care products in the Scandinavian country and we're #1 or #2 with Physiomer or some of the others in other areas. So the strategy there, and what's been building the momentum, and we need to get back to pre-COVID and get on with it again, has been a very strong innovation pipeline. We had something like 200 products. And it's not like you're used to with an albuterol, where it's a one big punch. It's winning across areas. And our strategy, instead of trying to build and go against the national brands pan-European is to take our strengths and then regionally expand it, and it's been working beautifully. So we have a skin care business in the Netherlands, and we buy a skin care business recently in Poland, but we are #1 in Scandinavia with 50 outstanding products. And we take those products and roll them out under the well-recognized brands in those other countries, but we get an instant pipeline. So that's been a real winner. And now what I'm pushing on is to take those same winners and bring them to the U.S. So a lot of geographic expansion but not brand expansion, if I'm clear.

That's very helpful. Staying on consumers. So could you just frame for us the current situation with the flu? Obviously, I believe the southern hemisphere has seen minimal flu to date due to social distancing and mask wearing. What are the implications for Perrigo? How should we think about your cough, cold, flu business and prospects there?

Like -- for the reasons you just said, and part of why I was pretty darn conservative in the second quarter call, was assuming no second spike, meaning that you would expect a softer cold cough season. Now when I still see consumer takeaway, it's off still in cough cold. So even in this reconfirming guidance, we've still assumed a down cold cough season versus a year ago. Now we haven't seen it in our shipments yet really. We're still pretty robust. We'll see as we get into what was a very strong October, November, December. But customer pre-build and things like that are still solid. I will correct one potential misperception that some people think when we report upper respiratory, I'm just talking cold, cough. And less than half of that is cold, cough. The other half is allergy, which has been very, very strong the whole year and still now.

Got it. Okay. Excellent. That's very helpful. So e-commerce is obviously booming. Could you remind us where Perrigo's sales stand today as a percentage of the company's revenue just so we understand its current relevance? And then discuss your strategy for the channel and the long-term implications for Perrigo.

Well, again, this is an area that is evolving. It's -- I believe the numbers are something like 8% of total. I think we at the end of the second quarter was somewhere around $80 million. It's becoming meaningful, but more importantly is it's become a major focus. And COVID has woken a number of giants to say that it's not just Amazon, who can be annoying for us, but we need that for a new normal world, right? There is -- I don't know what your shopping behavior is. But the instacarts and the ships and -- is one scenario of delivered to home. And then there is a click-and-pick component, where you'll go in and you might pick it up at curbside. So I don't think people realize how much Perrigo is involved or a national brand for that matter with that actual marketing. It's not like we just ship them the product and then they deliver it that way. We actually have built tremendous resources in software and analytics and marketing programs that help you when you go on to those websites and you see the advertisements and the bundling recommendations and the feedback on what's working and what's not working. Perrigo has been a leader by far. And that's one of the Perrigo Advantage benefits, and that's why the business is doubling and tripling. I think it's got to even do more going forward. And we are very focused on the one area where -- one of our key marketing things we rely on, Dave, is that you, as a consumer, go into the store and we switch use to gain share by you looking at that price comparison side by side. So where a lot of our development is now is I don't want to just have -- if you're an existing consumer and you click on it and you ask for a national brand, you don't see the price comparison or you don't see us. All you see is the brand you selected. And maybe if it's out of stock, they say, "Can we substitute Myers brand or Equate or CVS brand or whichever one?" We want those references to pop up and compare and save and -- because you're already paying a premium, right, to get it delivered, and you're paying a premium in margins. So to us, if we do it right, it's a big opportunity. And if we don't do it at all, it could actually slow our growth. But if done right, it could be an accelerator because now in a recessionary period and even without a recessionary period, if you continue in those behaviors, you're paying a premium for your groceries, and this is a way to save money. We just got to make sure you're aware of it.

That's great. That makes a lot of sense. So a couple of other questions. First, I wanted to touch on ProAir and then a wrap-up question. So with respect to ProAir, the 2 basic questions are, could you just put the historical ProAir sales in perspective so we know what to pull out when we're looking at the comps in the first half of '21 and then to normalize the growth in the generic Rx business? And what will it take for you to get the product back to market? What are the gating factors and potential timing?

Well, your first question, it was roughly $150 million plus or minus. So I think it was like $45 million in the first quarter and $115 million, somewhere in that neighborhood, in the second quarter. And third quarter was only in for -- it will only be in for -- through the first -- I think first week or 2 of August. And then there'll probably be some offsets on the recall so you can sort of just wash away. I would say it's that first half impact. I guess fortunately, for us, that's when the base business of Rx was hardest hit by lockdown. So when you do your modeling, you're going to have to sort of take that out maybe, maybe because I don't know yet. But if we're not able to get it back to market quickly, then you would have that negative hit in the first half but offset to some extent by a normalized people going back to their doctors' offices on the base business. But to me, the -- not to keep going back to the same thing, but I find it remarkable that we could have a hiccup on something as big as albuterol, and our consumer business completely cover it. We may not have to -- and make a conservative assumption or a -- maybe it's not even conservative, just make an assumption that we're not going to have any more albuterol for the balance of the year and still hold guidance, which means we have to be killing it on the consumer businesses, right? So gating factors, the issue is there were certain level -- amount of these devices at a level that we deem too high, that we're clogging. And despite years of testing, despite approval from the FDA, we saw a level of complaints that was unacceptable to us, and it wasn't coming down. They are hard at work at doing 2 things: executing the recall, and second, determining the root cause of what is causing the clogging. It's a different device than the national brand that's out there. It's got a little bit different cleaning instructions. I can say that -- I will tell you that when consumers send back the devices to us and it's cleaned properly, we haven't had one that didn't work. So I guess I could go from a range of -- we determined that it was just lack of understanding on how to clean the device, et cetera, all the way to there's an issue with the device, and there is full testing under -- dispensing tests underway and everything that's involved with properly diagnosed. And I just don't know the answer at the moment. If it is on one end of the spectrum, we get back rather quickly. If it actually takes a change in the device, it will take longer. But I pulled it from the numbers right now.

Got it. Very helpful. And then just to wrap up. There is the potential for tax overhang removal. Could you talk about that optionality?

Well, yes. Again, it's complicated. We haven't actually gotten into the fight with the Irish revenue department yet of whether the tax is correct or now. What this first 1.5 years has been about is a judicial review of whether or not they kind of broke the rules and violated the legitimate expectations law, which said we should have been able to rely on the prior tax filings for the company we bought because this is a -- audit of Elan's books that -- before we owned them by Irish revenue. But they had dozens of prior transactions, very similar, all handled in the same way and taxes, IP. There was a Shannon certificate process that went through when the company was certified for this type of tax treatment and -- in the business it was in, and nothing changed. And all of a sudden, 5 years later, they came and we say, they violated our legitimate expectations. They have been previously audited. We relied on those audits. That all was argued a few months ago. We've been expecting an answer by the fall and we could win it outright if we -- we think our argument was very strong. If we win it out right, it's gone. If not, then we start the normal tax appeal process and say why it was proper to be IP and have all those arguments. And we believe that it was done correctly. Not only did they not have a right to do it, but it was also done correctly and the way they treated it was incorrectly. Anywhere along those -- that process, people always ask me, "Would you settle or wouldn't you settle?" The question is -- the answer is we act in the best interest of shareholders. So -- but it hadn't been ripe enough. And we'll see if it -- as it gets into actual course, that's when cases start to -- lawyers start to really have dialogues. When people see other sides, arguments, et cetera, they start to come to the table. So I'm not opposed to it as long as it is in the best interest of shareholders, and we'll see. But on the other hand, I still operate from a position that we think they're incorrect and that Elan file properly.

Excellent. Great. Well, we need to wrap it up. Sorry for the technological disruptions. We really appreciate you joining and sharing all that perspective and that color on the business. So thank you again and have a great rest of the week.

Thanks, Dave.

Appreciate it.