Perrigo Co. PLC's branded consumer health product business needs the firm's private label business "standards" and the help of the company president after tripping over unexpected costs, ill-timed advertising and other problems in late 2015.

The firm's report of problems in its European branded product business on Feb. 18 prompted a sharp dip in its share price, closing down more than 10% at $130.40, and left analysts looking for its private label OTC business to continue as its growth driver.

"It's a personal disappointment but clearly something we know we can fix, and we're going to take every effort we can … by improving the sales and operations planning, improving the financial planning and analysis, making the globalized supply chain – things that we know how to do because they fit right into what Perrigo does really well," CEO Joseph Papa said during the firm's 2015 full-year and fourth-quarter earnings briefing with analysts.

Analysts did not minimize the potential drag on Perrigo's earnings from the branded business problems. "It’s still not entirely clear what happened in Europe," Jefferies analysts said in a same-day research note. They added that one question they will track is, "How big of a mess is [the branded product business] and how long will it take to 'fix' it?"

"Management intends to make organization and process changes, including greater oversight of [the branded product] segment’s executive leadership, restructuring the sales organization, and exiting less profitable product categories. Historically, we’ve been impressed with management’s execution, and we imagine management can deliver improvements despite this stumble," said Morningstar analyst Michael Waterhouse.

Private Label Up 5%

Perrigo reported company-record full-year sales of $5.35bn in 2015, up 28% from 2014, adjusted net income of $1.09bn, an increase of 29%, and a 21% increase in adjusted earnings per share to $7.59.

For its fourth quarter, the Dublin-based firm reported 5% growth in sales of private label OTC drugs and nutritional products to $709.5m, driven by $60m in new product sales, a $32m increase in existing product sales, primarily in the infant formula, cough/cold and smoking cessation categories, according to its earnings release.

Adjusted operating income for the segment grew 14% from the year-ago period to $127m on higher gross profit contribution and relatively flat operating expenses. But its growth was slowed by $47m in discontinued products, a $19m decline in sales of existing products, primarily in the analgesics and diabetes categories, and by $10m to unfavorable foreign exchange rates.

For the European consumer product business it built with its 2015 acquisitions of Omega Pharma NV and Naturwohl Pharma GmbH, both of Germany, and of OTC drug and nutritional product brands divested by GlaxoSmithKline PLC and Novartis AG, Perrigo reported revenues of $325.7m in the October-December period.

Perrigo said the segment's revenues were below expectations partly due to a comparatively slow cough-cold-flu season in Europe and a $185m charge for unexpected costs related to the Omega deal, but also because of poor guidance by the unit's management.

The firm is expanding the European business' executive committee and assigning President John Hendrickson there.

"We're going to expand the size of the executive committee to just make sure we have more inputs into the process, Papa said, adding that Hendrickson will "go over there and help them with some of the issues and opportunities to improve the functional or process opportunities."

Additionally, Perrigo is "strengthening the line of connectivity and functional accountability of the [branded product] business with Perrigo standards," he said.

Applying those standards includes improving the unit's sales forecasting, inventory control and operations planning; financial forecasting, planning and analysis; and supply chain integration. The changes also include moving to "incentive-based compensation that is focused on adjusted operating income and return on invested capital, similar to the existing Perrigo system," Papa said.

Another hit on the unit's performance came from considerable advertising and promotion investments during the quarter behind weight loss products, for which sales "typically peak during summer months," Papa said. The advertising was done "with the expectation of converting these products into a full-year maintenance product."

Management In Ireland Changing, Too

In addition to shaking up management of its European branded consumer health product business, Perrigo is moving some corporate functions to its corporate headquarters in Ireland as part of its " focused international growth strategy and global expansion."

Papa announced during the earnings briefing that Arthur Shannon will move from his post in Allegan, Mich., as vice president for investor relations to a post in Ireland of VP, global corporate affairs and European investor relations. Shannon will continue to oversee internal and external global communications and also will be responsible for establishing a global government relations base from Dublin and expanding investor relations programs across Europe

Perrigo also will add more executive posts in Ireland for multiple functions including supply chain/global operations, procurement, enterprise risk management and corporate finance and information technology.

However, the spending "did not generate the desired sales in the quarter, even though [the advertising] may still prove useful for a longer-term perspective. In any event, it is clear that this large A&P investment adversely affected the adjusted operating margin this quarter," he said.

Inventories were too large in some markets, notably Germany and Spain, and Perrigo has reviewed the branded portfolio and will discontinue slow-selling brands.

M&A Remains On Table

Perrigo's branded business problems emerge after the firm fended off Mylan NV's hostile takeover attempt, which dominated the firm's focus for most of 2015, and after it looked to its European expansion not only as a new growth driver by expanding its footprint from six to 39 countries, but also as proof that it was better off on its own, not under Mylan's control ([A#05150727009]).

In response to an analyst's question, Papa acknowledged that Mylan's bid "caused some challenges for us" as the firm was "trying to put resources towards branded consumer healthcare."

However, the branded business problems will not dissuade Perrigo, which maintains its primary operations in Allegan, Mich., from considering additional acquisitions in 2016, he added.

"There may be some opportunities that we think, from a timing point of view or a strategy point of view may be very important to us, and we're going to look at those for the next 12 months. We don't think putting an absolute moratorium makes sense," Papa said.

Still, Perrigo expects organic sales growth of 5% to 10%. "We feel very optimistic about our organic growth rate and the consumer-facing part of our business," which accounts for 70% of the firm's revenues, the CEO said.

Analysts are on board with the firm's outlook but also point out the branded segment problems add to its challenges.

Deutsch Bank analysts said they "still believe that [Perrigo] is a unique asset with good value creation potential over the longer term. Needless to say, execution in the coming quarters (especially on the newly-acquired [European] business) is of paramount importance."

Perrigo OTC Brand Journey Detours Into Management, Operating Problems

More from Germany

More from Europe