Perrigo Co. PLClowered its full-year revenue guidance after overestimating consumer demand for cough and cold OTCs by about $25 million in the firm’s fiscal 2012 third quarter.

The Allegan, Mich., firm dropped its full-year growth guidance to a range of 15%-18%, from a previous 17%-20% projection, after building up more capacity to manufacture cough/cold/flu products than the market needed.

The private labeler’s global consumer health care sales grew 5.6% to $448.8 million, but the firm reported the segment’s adjusted operating margin declined 0.3 percentage points to 17.2% in the quarter. Consolidated net sales were $778 million, up 12.5%, while net income increased 26.4% to $115.7 million.

CEO Joseph Papa said during a May 8 earnings call the firm’s U.S. consumer health care division grew about 8% in the January-March period, but would have expanded 15% had the excess cough/cold product shipped.

The full impact of the mild season on Perrigo surprised UBS analysts, who had projected U.S. consumer health care sales of $490.5 million.

Despite the tempered outlook for top-line growth and the OTC operating margin challenges, Perrigo elevated its full-year earnings-per-share guidance to a range of $4.90 to $5.00, compared to a February estimate of $4.70 to $4.80. The upward adjustment stems from Perrigo’s bullish expectations for product launches and the successful integration of generics firm Paddock Laboratories LLC, acquired in July 2011, which is helping drive margin expansion in the Rx business Also see "Perrigo Relies On New Products For Fiscal Second-Half Boost" - Pink Sheet, 13 February, 2012..

Analysts remained upbeat on Perrigo’s long-term prospects, with the continued consumer movement toward store-brand OTCs and the company’s diversification into additional health product areas such as diabetes care, which it gained via the January acquisition of CanAm Care.

Pivoting From J&J To Novartis Opportunity

Perrigo expanded OTC manufacturing capacity and updated technology specifically to take advantage of Johnson & Johnson’s recalls of Tylenol and other pediatric liquids, which proved a $50 million sales opportunity for Perrigo in fiscal 2012 Also see "McNeil Remediation Stretches Out, Dragging On J&J Consumer Sales" - Pink Sheet, 23 April, 2012.. The private labeler since ramped up its capacity for liquid suspensions to manufacture about $75 million worth per year.

“We’re there, we’re ready with capacity,” Papa said. “We just have to wait and see if next year’s [cold and flu] season is sufficient to be able to come back into this with the full $75 million opportunity.”

In the meantime, Papa said Perrigo is shifting some capacity to seize the opportunity offered by Novartis AG’s OTC manufacturing issues, which temporarily shut down the Novartis Consumer Health Inc. facility that makes Excedrin, Bufferin, Gas-X Prevention and NoDoz productsAlso see "LIPIL for Moms" - Pink Sheet, 25 October, 2004..

Papa said so far there has been incrementally higher demand for Perrigo’s private-label acetaminophen/aspirin/caffeine product, equivalent to Excedrin Migraine. But the CEO sees more benefit to come from the absent Novartis products, which he says translate to a total store brand opportunity worth between $15 million and $25 million per quarter.

“The real opportunity [from] Novartis, we think, will be in our fourth quarter and our fiscal 2013,” Papa said. “As those products are just emptying off the shelves, that’s where we will refill the demand at that point.”

Out To Launch

Perrigo continues to maintain that its fiscal 2012 – which ends June 30 – is back-end-loaded with OTC product launches. Papa said Perrigo is on track to generate $190 million in full-year new product revenue, largely from OTCs, by the end of its fourth quarter. Year-to-date new product sales have tallied about $160 million, he said.

On the immediate horizon is a generic version of Novartis’ Prevacid 24HR (lansoprazole), which Perrigo expects to begin shipping around May 19. The proton pump inhibitor is worth an estimated $223 million in annual branded sales.

Upcoming OTC product launches for Perrigo include private-label versions of Allegra D-12 Hour, Delsym and Prevacid 24HR.

An equivalent to Sanofi’s Allegra D-12 Hour (fexofenadine/pseudoephedrine), the rights to which Perrigo licensed from Teva Pharmaceutical Industries Ltd., also is due by next month. The allergy/congestion remedy could benefit from what Papa called “a very early and very strong allergy season” in the U.S. this year, which would provide a counterbalance to the winter’s mild cold and flu conditions.

On deck in the firm’s fiscal 2013 are expanded distribution and additional stock-keeping units for Perrigo’s guaifenesin expectorant line, equivalent to Reckitt Benckiser Group PLC’s extended-release Mucinex, and a generic version of Reckitt’s cough suppressant Delsym (dextromethorphan polistirex), on which Perrigo has partnered with Tris Pharma Inc. ([A#05180190012_b]).

Though Perrigo had included generics of Merck & Co. Inc.’s Rx Clarinex (desloratadine) on previous CHC launch schedules, it is now an unknown. Papa said “we have not seen any indications” that Merck plans to switch the allergic rhinitis product to OTC sale Also see "Merck Looks To “Exploit” Switches With Exit From J&J Joint Venture" - Pink Sheet, 3 October, 2011..

Prior Year Sets High Bar For Nutrition

The nutritionals business, facing a challenging year-over-year comparison, saw sales decline 5.2% to $117.7 million in the third quarter. A year ago, Perrigo’s PBM Nutritionals infant formulasubsidiary gained an additional $8 million in third-quarter sales from [Abbott Nutrition]’s late 2010 Similac recall Also see "Perrigo Sales Reach Record Highs Despite Manufacturing Restrictions" - Pink Sheet, 7 February, 2011..

Papa said excluding the impact of the Similac recall during the year-ago quarter, Perrigo’s infant nutrition actually grew 12% in the January-March period.

Vitamins, minerals and supplements are another story, however, as that category’s sales dropped more than 15% in the quarter, Papa said. Perrigo for years has struggled to increase margins for VMS and continues to rationalize its supplement SKUs.

“VMS is a rocky road,” Papa said, though he added there are signs the business is turning a corner. Perrigo inked deals with “two new large customers” for VMS products, with shipments beginning in fiscal 2013.

Retail expansion should help VMS growth in the short term, and Papa suggested an FDA crackdown on companies not practicing good manufacturing practices eventually could help consolidate the supplement industry, to Perrigo’s benefit.

“We believe that when the FDA truly enforces some of the requirements for products made in the U.S., as they look at some of the overseas manufacturers, we think that could help us,” he said.

In the meantime, Perrigo’s nutrition division saw its operating margin decrease 4.3 percentage points to 14.8% in the quarter. For fiscal 2012, nutritional revenue is expected to come in flat to down 2%, versus a previous guidance range of 3%-5% growth.

Perrigo Feels Ill Effects Of Mild Cold Season, Excess OTC Capacity

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