A 14% decline in nutritional segment sales that slightly hampered Perrigo Co. PLC’s consumer business revenue could affect the firm’s stock valuation if it cannot turn the division around, multiple analysts said in Nov. 8 notes.

While the nutritional performance caught UBS, Morningstar and Deutsche Bank analysts off-guard, Perrigo executives downplayed the result as largely driven by an expected and temporary blip.

Sales in the nutritional segment fell to $103 million in the quarter, down 13.27% from the comparable quarter last year, the firm reported Nov. 7. But the consumer health care segment saw “all-time record first-quarter sales,” up 9.4% to $450.4 million, CEO Joseph Papa said.

Nutritionals fell in part because Perrigo shut down its Vermont plant temporarily in July to install “a new $29 million state-of-the-art consumer-friendly packaging line” for infant formula, Chief Financial Officer Judy Brown said on the firm’s Nov. 7 earnings call.

The planned shutdown “shifted about $10 million of sales that would have taken place during the first quarter of 2013 to the fourth quarter of fiscal 2012” as Perrigo shipped orders ahead of the closure to protect against shortages, she maintained Also see "Perrigo Launch Investments Hold Income Back, As Firm Girds For 2013" - Pink Sheet, 20 August, 2012..

Papa expects the new packaging to more than pay for the shutdown and installation because it will allow Perrigo’s infant formula packaging to closely resemble the packaging of national brands, and whenever Perrigo’s packaging follows national brands’ packaging, “we gain market share,” Papa said.

Resembling national brands without infringing on trademarks can be a fine line. Procter & Gamble Co. is one national brand marketer that has aggressively pursued trade dress infringement and look-alike violations in the past ([A#05160510017_b]).

He expects the new packaging to hit store shelves in December and to lift sales in the nutritional segment next quarter.

Unprecedented promotional spending from national infant formula brands also dampened Perrigo’s sales in the quarter, Papa said. But that kind of competition cuts both ways in that private-label products often can ride the coattails of brand advertising – which is what happened when Perrigo launched store-brand versions of Zyrtec and Prilosec OTC Also see "Perrigo Reaches Record As Retailers, Consumers Turn More To Store Brands" - Pink Sheet, 14 July, 2008..

Regulatory changes in China also dragged down Perrigo’s nutritional sales, the executives said. The firm had to delay fulfillment of orders until it could comply with the country’s label change requirements and labeling specifications, but it anticipates resuming shipments to China in mid-2013.

“From a quality point of view,” the product is fine, Papa claimed.

Vitamin, mineral and supplement sales also dipped 5.7% in the 52 weeks ending Sept. 23, according to data from SymphonyIRI that Perrigo presented. The decline is due partly to increased competition and partly to a loss of $1 million in sales of discontinued products, Brown said.

Papa expects VMS sales to turn around in the rest of the fiscal year thanks to the addition of two new retailers that will carry Perrigo products. Perrigo began shipping to one of the unnamed clients already and expects to begin shipping to the other after the New Year.

“We are continuing to develop new relationships with retailers in the category so we still see opportunity for the future,” Papa added.

On the strength of these new relationships, a restored flow of products to international markets and the appeal of new nutritional products and packaging, Perrigo executives expect the nutritional segment will rebound strongly with a projected growth of $150 million, or 15% to 20%, per remaining quarter, Brown confirmed.

Deutsche Bank and UBS analysts are skeptical Perrigo’s nutritional segment can meet such ambitious growth targets, though, Nov. 8 notes reveal.

Morningstar analysts agree, stating in a Nov. 8 note, “We still expect pricing pressure and high raw material costs will subdue earnings growth in the near term.”

Consumer Segment Growth

Despite the nutritional segment in the first quarter, Perrigo’s consumer health care division’s revenue topped $450 million, up 9.4%

He attributed the increase partly to $36 million in sales from existing products including those in the cough/cold and smoking cessation categories, and to $13 million in new product sales, including loratadine-D 12, lansoprazole, minoxidil foam and the recent launch of dextromethorphan extended-release suspension Also see "Perrigo To Launch Private Label Mucinex, Prevacid, With An Eye On Lipitor" - Pink Sheet, 22 August, 2011..

Sales in the gastrointestinal category, including store brand omeprazole and lansoprazole among other products, were up 6% year-over-year, he said.

Those sales helped the division outpace the overall OTC consumer market, which was relatively flat with a 0.7% increase in the last 52 weeks, Papa said. Store brands gained 8.5% on the strength of new product launches, national brand recalls and increased market share, while sales of national brands fell 3%, he said.

Papa expects the growth trend to continue with 60 new products in the pipeline for this fiscal year, which should translate to $190 million in annual sales.

Among those is a store-brand version of Mucinex 600 mg, with annual branded sales of $135 million, Papa said. The firm still is validating additional batches of guaifenesin extended release 600 mg, he added ([A#05120917010]).

In the future, Perrigo hopes to launch a store-brand version of an OTC Nexium if it switches. Pfizer Inc. acquired the global rights from AstraZeneca PLC to market a potential OTC 20-mg Nexium, which is available only by prescription now, but is a strong candidate for switch, Papa noted Also see "Nexium OTC Switch Would Face Crowded Field, Potential Questions" - Pink Sheet, 20 August, 2012..

Analgesic Category In Pain

Analgesic and feminine hygiene categories declined $17 million and saw a $4 million loss due to discontinued products versus last year, Papa said.

The drop in the analgesic category could be due to the return of some national brand painkillers that had been missing from store shelves following recalls by Johnson & Johnson and Novartis Consumer Health Inc.

Novartis returned Excedrin Migraine and a few other OTC brands to market in October with the help of third-party manufacturers as it continues remediation at its Lincoln, Neb., facility where FDA inspectors found quality control issues in 2011 ([A#05121029011]).

Johnson & Johnson is slowly returning stock-keeping units to store shelves that were recalled in 2009 and 2010, but has not publicly discussed a complete timeline for returning all the products ([A#05121022007]).

Perrigo’s share of the analgesic market likely will continue to drop as the national brands return more products to store shelves over the next year, Papa acknowledged.

“The operating assumption that we have in our business is to continue to expect that as they return to the business that instead of our normal 91% retention rate … we would retain approximately 50% of the consumers that have moved from the national brand to the store brand because … there was no access to a national brand product,” Papa said.

The drop in feminine hygiene products was due partly to a volume change caused by supply flow, Brown added.

Even with this well-anticipated drop in analgesics, the consumer health care division has contributed to a “great start” for the firm’s overall fiscal year, Papa said. Overall first quarter sales climbed 6.1% to $769 million, which equals a 15.6% increase in the adjusted net income of $119 million in the quarter compared to the year-ago period.

As a result, the firm raised its expected adjusted earnings per share to between $5.45 and $5.65 per diluted share for fiscal 2013 – a 9% to 13% increase from $4.99 in fiscal 2012.

Perrigo Nutritional Dip Riles Analysts Amid Record Consumer Sales

More from Marketing & Advertising

More from Compliance