For Perrigo Apples And Oranges

May 5, 2006
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ALLEGAN — When a company’s sales are up 51 percent and its profitability has improved by more than $400 million in a given quarter, it’s usually safe to say that company is having a great year.

But for Allegan-based pharmaceutical firm Perrigo Corp., it’s not quite that simple. The company was able to boast those sales and profit figures in its just-ended third quarter. However, there were so many one-time charges and credits in this quarter and the third quarter of 2005 as to make a comparison of the two periods almost meaningless.

The reason for the apples-to-oranges comparison is Perrigo’s acquisition in March 2005 of Agis Industries, an Israeli competitor that specializes in topical creams. During the period of the acquisition, Perrigo logged nearly $400 million in “acquisition-related charges,” including a $389 million write-off of research and development costs. Removing the one-time charges related to the acquisition still leaves an unbalanced comparison, since Perrigo didn’t start including Agis’ revenue in its own sales figures until the final quarter of fiscal 2005.

As such, the second quarter of this fiscal year — lacking any unusual acquisition-related charges, and including Agis’ sales figures — makes a better basis for comparison to understand Perrigo’s third-quarter performance.

In the quarter just ended, the company recorded $332 million in sales on goods costing $235 million. That’s a 51 percent increase in sales from the same period in 2005, before Agis joined the Perrigo fold. However, revenue contracted compared to the second quarter, when the company logged $360 million in sales on a $254 million cost basis. Despite the 9 percent decrease in sales, expenses were relatively flat, resulting in an 18 percent decrease in quarterly profitability. In the second quarter, net income was $25 million. In the quarter just past, net income was $21 million.

Those numbers may be somewhat deceptive, in that they reflect the seasonality of Perrigo’s sales. The second fiscal quarter — roughly the last quarter of the calendar year — has historically been stronger than the third fiscal quarter. As the largest manufacturer of private-label over-the-counter cold medicine in the country, Perrigo’s revenues increase as the country moves into cold and flu season.

But that has also been one of the company’s downfalls in recent years. Many states have begun restricting the sale of medicines that contain pseudoephedrine, a decongestant that is also used in the illicit production of narcotics. The restriction of pseudoephedrine-based product sales has dealt a blow to Perrigo’s revenues and profitability over the past several quarters. However, that acquisition of Agis came in part in response to those lagging sales.

“The results in our consumer health care segment continue to reflect the ongoing market impact of pseudoephedrine-based cough and cold products, as retailers respond to the passage of federal legislation,” David Gibbons, Perrigo chairman, president and CEO, said in a statement released with the quarterly financial report. “Despite a decline of $26 million in sales of pseudoephedrine products, our consumer health care sales increased 10 percent, as the pseudoephedrine sales loss was offset by topical product sales of $16 million related to the Agis acquisition, strong new product revenues in smoking cessation, and increased vitamin sales.”

Gibbons said that continuing growth in the generic prescription drug sector and the active pharmaceutical ingredients sector can be attributed to the addition of Agis’ products. Looking ahead to the final quarter of the fiscal year, Gibbons credited sales in those areas with balancing out the loss of pseudoephedrine sales.

“Even with increasing investments in research and development and competitive pricing on several key prescription and API products in the fourth quarter, we still anticipate that results from these businesses will help balance the challenges in consumer health care.”

Gibbons said that despite being “disappointed by the year-over-year decline” in profitability related to the restrictions on pseudoephedrine sales, the company expects fourth-quarter profitability to be “in line with historical levels,” with new products making “significant revenue and profit contributions.”    

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