|
| | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
65.5 | % | | 16.4 | % | | 68.7 | % | | 17.2 | % |
The effective tax rate for the nine months ended September 30, 2017 was negatively impacted by non-deductible fees related to our debt cancellation, discrete tax items, and additional valuation allowances recorded against deferred tax assets.
Our tax rate is subject to adjustment over the balance of the fiscal year due to, among other things: the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments based on differing interpretations of the applicable transfer pricing standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. international tax reform); changes in U.S. GAAP; and expiration of or the inability to renew tax rulings or tax holiday incentives.
The total liability for uncertain tax positions was $454.9 million and $398.0 million as of September 30, 2017 and December 31, 2016, respectively, before considering the federal tax benefit of certain state and local items.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $79.0 million and $63.5 million as of September 30, 2017 and December 31, 2016, respectively.
We file income tax returns in numerous jurisdictions and are therefore subject to audits by tax authorities. Our primary income tax jurisdictions are Ireland, the United States, Israel, Belgium, France, and the United Kingdom.
On August 15, 2017, we filed a complaint in the United States District Court for the Western District of Michigan to recover $163.6 million of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”), plus statutory interest thereon from the dates of payment, for the fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012 (the “2009 tax year,” “2010 tax year,” “2011 tax year,” and “2012 tax year,” respectively). The IRS audits of those years culminated in the issuances of two statutory notices of deficiency: (1) on August 27, 2014 for the 2009 and 2010 tax years and (2) on April 20, 2017 for the 2011 and 2012 tax years. The statutory notices of deficiency both included un-agreed income adjustments related principally to transfer pricing adjustments regarding the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States. In addition, the statutory notice of deficiency for the 2011 and 2012 tax years included the capitalization of certain expenses that were deducted when paid or incurred in defending
Perrigo Company plc - Item 1
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against certain patent infringement lawsuits. We fully paidFor additional details about the assessed amountseffect of tax, interest, and penalties set forth in the statutory notices and filed timely claims for refund on June 11, 2015 and June 7, 2017 for the 2009-2010 tax years and 2011-2012 tax years, respectively. Our claims for refund were disallowed by certified letters dated August 18, 2015 and July 11, 2017, for the 2009-2010 tax years and 2011-2012 tax years, respectively. The complaint was timely, based upon the refund claim denials, and seeks refunds of tax, interest, and penalties of $37.2 million for the 2009 tax year, $61.5 million for the 2010 tax year, $40.2 million for the 2011 tax year, and $24.7 million for the 2012 tax year. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges on our balance sheet during the three months ended July 1, 2017.reclassified from AOCI refer to Note 10.
On December 22, 2016, we received a notice of proposed adjustment for the IRS audit of Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Perrigo acquired Elan in December 2013. This proposed adjustment relates to the deductibility of litigation costs. We disagree with the IRS’s position asserted in the notice of proposed adjustment and intend to contest it.
On July 11, 2017, we received a draft notice of proposed adjustment associated with transfer pricing positions for the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Athena was the originator of the patents associated with Tysabri® prior to the acquisition of Athena by Elan in 1996. The amount of adjustments that may be asserted by the IRS in the final notice of proposed adjustment cannot be quantified at this time; however, based on the draft notice received, the amount to be assessed may be material. We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment and intend to contest it.
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Israel and France. In addition to the matters discussed above, the IRS is currently auditing our fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. The French Tax Authority is currently auditing the years ended December 2014, December 2015, and December 2016.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
In view of the inherent difficulties of predicting the outcome of various types of legal proceedings, we cannot determine the ultimate resolution of the matters described below. We establish reserves for litigation and regulatory matters when losses associated with the claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal matters may be substantially higher or lower than the amounts reserved for those matters. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated as of September 30, 2017, we have not recorded a loss reserve. If certain of these matters are determined against us, there could be a material adverse effect on our financial condition, results of operations, or cash flows. We currently believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously regardless of whether or not we have a loss reserve. Other than what is disclosed below, we do not expect the outcome of the litigation matters to which we are currently subject individually or in the aggregate, to have a material adverse effect on our financial condition, results of operations, or cash flows.
Antitrust Violations
We have been named as a counterclaim co-defendant in the lawsuit Fera Pharmaceuticals, LLC v. Akorn, Inc., et al., in which Akorn, Inc. (“Akorn”) alleges tortious interference and antitrust violations against us and Fera Pharmaceuticals, LLC (“Fera”). This litigation arises from our acquisition of bacitracin ophthalmic ointment from Fera in 2013. Akorn asserts claims under Sections 1 and 2 of the Sherman Antitrust Act alleging that we and Fera conspired to monopolize, attempted to monopolize, and did unlawfully monopolize the market for sterile bacitracin ophthalmic ointment in the United States through the use of an exclusive agreement with a supplier of sterile bacitracin active pharmaceutical ingredient. The lawsuit is currently pending in the Southern District of New York. Trial was rescheduled from January 2018 to February 2018. Akorn seeks damages, injunctive relief, and attorney’s fees. Any award of antitrust damages would be subject to trebling under antitrust laws. An estimate of any possible loss cannot be determined at this time.
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We believe the claims are without merit and intend to defend them vigorously. We have preserved our indemnification rights against Fera for potential liability, defense costs, and expenses incurred as a result of this litigation.
Price-Fixing Lawsuits
We have been named as a co-defendant with other manufacturers in a number of cases alleging that we and other manufacturers of the same product engaged in anti-competitive behavior to fix or raise the prices of certain drugs starting, in some instances, as early as June 2013. The products in question are Clobetasol, Desonide, and Econazole. These complaints, along with complaints filed against other companies alleging price fixing with respect to 15 other drugs, have been consolidated for pretrial proceedings as part of a case captioned In re Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724. Pursuant to the court’s schedule staging various cases in phases, we have moved to dismiss the complaints relating to Clobetasol and Econazole. At this stage, we cannot reasonably predict the outcome of the liability, if any, associated with these claims.
Securities Litigation
In the United States
On May 18, 2016, a shareholder filed a securities case against us and our former CEO, Joseph Papa, in the U.S. District Court for the District of New Jersey (Roofers’ Pension Fund v. Papa, et al.). The plaintiff purported to represent a class of shareholders for the period from April 21, 2015 through May 11, 2016, inclusive. The original complaint alleged violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against both defendants and 20(a) control person liability against Mr. Papa. In general, the allegations concerned the actions taken by us and the former executive to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015. The plaintiff also alleged that the defendants provided inadequate disclosure concerning alleged integration problems related to the Omega acquisition in the period from April 21, 2015 through May 11, 2016. On July 19, 2016, a different shareholder filed a securities class action against us and our former CEO, Joseph Papa, also in the District of New Jersey (Wilson v. Papa, et al.). The plaintiff purported to represent a class of persons who sold put options on our shares between April 21, 2015 and May 11, 2016. In general, the allegations and the claims were the same as those made in the original complaint filed in the Roofers' Pension Fund case described above. On December 8, 2016, the court consolidated Roofers' Pension Fund case and the Wilson case under the Roofers' Pension Fund case number. In February 2017, the court selected the lead plaintiffs for the consolidated case and the lead counsel to the putative class. In March 2017, the court entered a scheduling order.
On June 21, 2017, the court-appointed lead plaintiffs filed an amended complaint that superseded the original complaints in the Roofers’ Pension Fund case and the Wilson case. The lead plaintiffs seek to represent a class of shareholders for the period April 21, 2015 through May 3, 2017, and identifies three subclasses - shareholders who traded during the entire period on the U.S. exchanges; shareholders who traded during the entire period on the Tel Aviv exchange; and shareholders who traded during the period while the Mylan tender offer was pending (April 21, 2015 through November 13, 2015). The amended complaint names as defendants us and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The amended complaint alleges violations of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against all defendants and 20(a) control person liability against the 11 individuals. In general, the allegations concern the actions taken by us and the former executives to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015 and the allegedly inadequate disclosure throughout the entire class period related to purported integration problems related to the Omega acquisition, alleges incorrect reporting of organic growth at the Company, alleges price fixing activities with respect to six generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. The amended complaint does not include an estimate of damages. In August 2017, the defendants filed motions to dismiss the amended complaint. The plaintiffs filed their opposition in October 2017. The defendants filed replies in support of the motions to dismiss in November 2017. The court has not indicated whether there will be oral argument of the motions or whether the court will decide the motions on the papers. We intend to defend the lawsuit vigorously.
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On November 1, 2017, Carmignac Gestion, S.A., filed a securities lawsuit against us and three individuals (former Chairman and CEO Joseph Papa, former CFO Judy Brown, and former Executive Vice President and Board member Marc Coucke). This lawsuit is not a securities class action. The case is styled Carmignac Gestion, S.A. v. Perrigo Company plc, et al., and was filed in the U.S. District Court for the District of New Jersey. The complaint asserts claims under Securities Exchange Act sections 10(b) (and Rule 10b-5), 14(e), and 18 against all defendants as well as 20(a) control person liability against the individual defendants. In general, the plaintiff’s allegations focus on events during the period from April 2015 through April 2016. Plaintiff contends that the defendants provided inadequate disclosure throughout the period concerning the valuation and integration of Omega, the financial guidance provided by us during that period, our reporting about the generic prescription pharmaceutical business and its prospects, and the activities surrounding the efforts to defeat the Mylan tender offer during 2015. Many of the allegations in this newly-filed case overlap with the allegations of the June 2017 amended complaint in the Roofers’ Pension Fund case described above. The plaintiff does not provide an estimate of damages. We intend to defend the lawsuit vigorously.
In Israel
Because our shares are traded on the Tel Aviv exchange under a dual trading arrangement, we are subject to securities litigation in Israel. Three cases are currently pending. We are consulting Israeli counsel about our response to these allegations and we intend to defend these cases vigorously.
On May 22, 2016, shareholders filed a securities class action against us and five individual defendants: Our former CEO Mr. Papa, our former Executive Vice President and General Manager of the BCH segment Marc Coucke, our Chief Executive Officer John Hendrickson, our former Board member Gary Kunkle, Jr., and our Board member Laurie Brlas alleging violations of Israeli law in the District Court of Tel Aviv-Jaffa (Schweiger et al. v. Perrigo Company plc, et al.). On June 15, 2016, we filed a motion to stay the case pending the outcome of the securities class action pending in the New Jersey Federal Court. The plaintiffs did not oppose the motion. The Israeli court granted the motion on the same day, and the Schweiger action is stayed. We intend to defend the lawsuit vigorously when and if the stay is lifted. In October 2017, the Schweiger plaintiffs dismissed their claims without prejudice because of the pendency of another class action case filed in Israel (see discussion below of the Israel Elec. Corp. Employees’ Educ. Fund case). The court approved the voluntary dismissal.
On March 29, 2017, plaintiff Eyal Keinan commenced an action in the District Court of Tel Aviv-Jaffa asserting securities claims against two defendants: Perrigo and its auditor Ernst & Young LLP ("EY"). The case is styled Keinan v. Perrigo Company plc, et al. The action seeks certification of a class of purchasers of Perrigo shares on the Israeli exchange beginning February 6, 2014. The proposed closing date for the class is not clear from the complaint though it appears to extend into 2017. In general, the plaintiff asserts that we improperly accounted for our stream of royalty income from two drugs: Tysabri® and Prialt. The court filings contend that the alleged improper accounting caused the audited financial results for Perrigo to be incorrect for the six month period ended December 31, 2015, and the years ended June 27, 2015 and June 28, 2014 and the other financial data released by us over those years and 2016 to also be inaccurate. The plaintiff maintains that the defendants are liable under Israeli securities law or, in the alternative, under U.S. securities law. The plaintiff indicates an initial, preliminary class damages estimate of 686.0 million NIS (approximately $192.0 million at 1 NIS = $0.28 cent). The response from the defendants is not yet due. We intend to defend the lawsuit vigorously.
On June 28, 2017, a plaintiff filed a complaint in Tel Aviv District Court styled Israel Elec. Corp. Employees’ Educ. Fund v. Perrigo Company plc, et al. The lead plaintiff seeks to represent a class of shareholders who traded in Perrigo stock on the Tel Aviv exchange during the period April 24, 2015 through May 3, 2017. The amended complaint names as defendants the Company, EY (the Company’s auditor), and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The complaint alleges violations under U.S. securities laws of Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against all defendants and 20(a) control person liability against the 11 individuals or, in the alternative, under Israeli securities laws. In general, the allegations concern the actions taken by us and our former executives to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015 and the allegedly inadequate disclosure concerning purported integration problems related to the Omega acquisition, alleges incorrect reporting of organic growth at the Company, alleges price fixing activities with respect to six
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generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. The plaintiff indicates an initial, preliminary class damages estimate of 2.7 billion NIS (approximately $760.0 million at 1 NIS = $0.28 cent). We intend to defend the lawsuit vigorously.
On July 12, 2017, the plaintiff in the Israel Elec. Corp. Employees’ Educ. Fund v. Perrigo Company plc, et al. case filed a motion to have all three cases pending in Israel either consolidated or the other two cases dismissed so that the Israel Elec. Corp. Educ. Fund plaintiff can proceed as the sole plaintiff. That motion is pending. In October 2017, the Schweiger plaintiffs (see description above) voluntarily dismissed their securities class action without prejudice as part of their response to the motion filed by the Israel Elec. Corp. Educ. Fund plaintiff. A variety of other procedural motions are also pending at this time having to do with the timing of any response by defendants. The court has scheduled an initial conference on November 9, 2017 to address the motion filed by the Israel Elec. Corp. Educ. Fund plaintiff. The court has indicated that other procedural motions will be addressed after it has decided the Israel Elec. Corp. Educ. Fund plaintiff’s motion.
Eltroxin
During October and November 2011, nine applications to certify a class action lawsuit were filed in various courts in Israel related to Eltroxin, a prescription thyroid medication manufactured by a third party and distributed in Israel by our subsidiary, Perrigo Israel Agencies Ltd. The respondents included our subsidiaries, Perrigo Israel Pharmaceuticals Ltd. and/or Perrigo Israel Agencies Ltd., the manufacturers of the product, and various healthcare providers who provide healthcare services as part of the compulsory healthcare system in Israel.
One of the applications was dismissed and the remaining eight applications were consolidated into one application. The applications arose from the 2011 launch of a reformulated version of Eltroxin in Israel. The consolidated application generally alleges that the respondents (a) failed to timely inform patients, pharmacists and physicians about the change in the formulation; and (b) failed to inform physicians about the need to monitor patients taking the new formulation in order to confirm patients were receiving the appropriate dose of the drug. As a result, claimants allege they incurred the following damages: (a) purchases of product that otherwise would not have been made by patients had they been aware of the reformulation; (b) adverse events to some patients resulting from an imbalance of thyroid functions that could have been avoided; and (c) harm resulting from the patients' lack of informed consent prior to the use of the reformulation.
Several hearings on whether or not to certify the consolidated application took place in December 2013 and January 2014. On May 17, 2015, the District Court certified the motion against Perrigo Israel Agencies Ltd. and dismissed it against the remaining respondents, including Perrigo Israel Pharmaceuticals Ltd.
On June 16, 2015, we submitted a motion for permission to appeal the decision to certify to the Israeli Supreme Court together with a motion to stay the proceedings of the class action until the motion for permission to appeal is adjudicated. We have filed our statement of defense to the underlying proceedings. The parties are currently engaged in mediation in an attempt to settle the matter. The underlying proceedings have been stayed pending the outcome of the mediation process and, if necessary, a decision on the motion to appeal.
Tysabri® Product Liability Lawsuits
We and our collaborator Biogen are co-defendants in product liability lawsuits arising out of the occurrence of Progressive Multifocal Leukoencephalopathy, a serious brain infection, and serious adverse events, including deaths, which occurred in patients taking Tysabri®. Each co-defendant would be responsible for 50% of losses and expenses arising out of any Tysabri® product liability claims. During calendar year 2016, one case in the U.S. was settled and two others were dismissed with prejudice. In 2017, seven other cases were dismissed with prejudice. While we intend to vigorously defend the remaining lawsuits, management cannot predict how these cases will be resolved. Adverse results in one or more of these lawsuits could result in substantial judgments against us.
Claim Arising from the Omega Acquisition
On December 16, 2016, we and Perrigo Ireland 2 brought an arbitral claim ("Claim") against Alychlo NV ("Alychlo") and Holdco I BE NV ("Holdco") (together the Sellers) in accordance with clause 26.2 of the Share Purchase Agreement dated November 6, 2014 ("SPA") and the rules of the Belgian Centre for Arbitration and
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Mediation ("CEPANI"). Our Claim relates to the accuracy and completeness of information about Omega provided by the Sellers as part of the sale process, the withholding of information by the Sellers during that process and breaches of Sellers’ warranties. We are seeking monetary damages from the Sellers. The Sellers served their respective responses to the Claim on February 20, 2017. In its response, Alychlo has asserted a counterclaim for monetary damages contending that we breached the duty of good faith in performing the SPA. There can be no assurance that our Claim will be successful, and Sellers deny liability for the Claim. We deny that Alychlo is entitled to any relief (including monetary relief) under the counterclaim. The arbitration proceedings are confidential as required by the SPA and the rules of the CEPANI.
NOTE 15 –14 - RESTRUCTURING CHARGES
We periodically take action to reduce redundant expenses and improve operating efficiencies. Restructuring activity includes severance, lease exit costs, asset impairments, and related consulting fees. The following reflects our restructuring activity (in millions):
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2023 | | |
| Supply Chain Reinvention | HRA Pharma Integration | Other Initiatives | Total | | |
Beginning balance | $ | — | | $ | 9.6 | | $ | 3.8 | | $ | 13.4 | | | |
Additional charges | 13.5 | | 0.5 | | 1.5 | | 15.5 | | | |
Payments | (2.3) | | (4.0) | | (2.8) | | (9.0) | | | |
Non-cash adjustments | (11.2) | | (0.1) | | (0.4) | | (11.7) | | | |
| | | | | | |
Ending balance | $ | — | | $ | 6.0 | | $ | 2.2 | | $ | 8.2 | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Beginning balance | $ | 39.7 |
| | $ | 12.2 |
| | $ | 19.7 |
| | $ | 20.7 |
|
Additional charges | 3.8 |
| | 6.6 |
| | 54.7 |
| | 17.9 |
|
Payments | (17.8 | ) | | (8.6 | ) | | (47.6 | ) | | (33.3 | ) |
Non-cash adjustments | 0.4 |
| | 0.1 |
| | (0.7 | ) | | 5.0 |
|
Ending balance | $ | 26.1 |
| | $ | 10.3 |
| | $ | 26.1 |
| | $ | 10.3 |
|
| | | | | | | | | | | | |
| Three Months Ended |
| October 1, 2022 |
| Supply Chain Reinvention | | Other Initiatives | Total |
Beginning balance | $ | 7.6 | | | $ | 5.9 | | $ | 13.5 | |
Additional charges | 11.4 | | | 7.7 | | 19.1 | |
Payments | (10.0) | | | (2.9) | | (12.9) | |
Non-cash adjustments | — | | | (0.4) | | (0.4) | |
| | | | |
Ending balance | $ | 9.0 | | | $ | 10.3 | | $ | 19.3 | |
Restructuring activity includes severance, lease exit costs, and asset impairments.
| | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | |
| Supply Chain Reinvention | HRA Pharma Integration | Other Initiatives | Total | | |
Beginning balance | $ | 2.2 | | $ | 13.3 | | $ | 4.3 | | $ | 19.8 | | | |
Additional charges | 17.4 | | 2.7 | | 5.6 | | 25.7 | | | |
Payments | (8.4) | | (10.1) | | (7.8) | | (26.3) | | | |
Non-cash adjustments | (11.2) | | 0.1 | | 0.1 | | (11.0) | | | |
Ending balance | $ | — | | $ | 6.0 | | $ | 2.2 | | $ | 8.2 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
| Nine Months Ended |
| October 1, 2022 |
| Supply Chain Reinvention | | Other Initiatives | Total |
Beginning balance | $ | — | | | $ | 6.9 | | $ | 6.9 | |
Additional charges | 22.3 | | | 9.9 | | 32.2 | |
Payments | (13.3) | | | (5.7) | | (19.0) | |
Non-cash adjustments | — | | | (0.8) | | (0.8) | |
Ending balance | $ | 9.0 | | | $ | 10.3 | | $ | 19.3 | |
| | | | |
| | | | |
| | | | |
The charges incurred during the three and nine months ended September 30, 20172023 and October 1, 2022 were primarily associated with actions we tooktaken on our multi-year supply chain restructuring program initiative started in 2022, and HRA Pharma integration activities associated with employee separation, continuity and other benefit-related costs. Supply chain restructuring charges in the three months ended September 30, 2023 included an asset impairment of $11.2 million and other restructuring charges of $2.3 million. We have incurred $15.2 million of cumulative restructuring expense to streamline our organization as announced on February 21, 2017. Duringdate related to HRA Pharma integration. We expect that most of the HRA Pharma restructuring expenses will be incurred by the end of 2023.
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Of the amount recorded during the three and nine months ended September 30, 2017, $3.82023, $12.5 million and $54.7$19.2 million, ofrespectively, was related to our CSCI segment, due primarily to supply chain restructuring expenses were recorded, respectively.(including the $11.2 million asset impairment) and HRA Pharma integration initiatives, and $2.3 million and $4.6 million related to our CSCA segment, also due primarily to supply chain restructuring initiatives. Of the amount recorded during the three and nine months ended September 30, 2017, $27.2October 1, 2022, $6.4 million and $8.1 million, respectively, was related to our CSCI segment, $6.8 million and $6.9 million was related to the CHCAour CSCA segment, and $5.8 million and $17.2 million was related to our Unallocated segment. For all segments, amounts were due primarily to supply chain restructuring.
There were no other material restructuring programs that significantly impacted any other reportable segments.for the periods presented. All charges are recorded in Restructuring expense on the Condensed Consolidated Statements of Operations. The remaining $22.4$8.2 million liability for employee severance benefits and consulting fees is expected to be mostly paid within the next year, whileyear.
NOTE 15 - INCOME TAXES
The effective tax rates were as follows:
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
19.7 | % | | (1,377.1) | % | | 49.5 | % | | 5.3 | % |
The effective tax rate on the remaining $3.7 million liabilitypre-tax income for lease exit coststhe three months ended September 30, 2023 decreased compared to the effective tax rate on the pre-tax loss for the three months ended October 1, 2022, primarily due to changes in the jurisdictional mix of earnings, as well as the impact of benefits not realized on certain pre-tax losses in the three months ended October 1, 2022. The effective tax rate on the pre-tax income for the nine months ended September 30, 2023, increased compared to the effective tax rate on the pre-tax loss for the nine months ended October 1, 2022, primarily due to audit settlements occurring in the current period, as well as the tax benefit of the loss on sale of our Latin American businesses recognized in the prior year. The effective tax rate for these periods differs from the statutory income tax rate of 12.5% primarily due to non-deductible expenses as well as the impact of audit settlements in these periods.
The Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended changes to numerous longstanding tax principles. Changes include imposing a global minimum corporation tax of 15% and introducing new filing obligations. These changes are being adopted and implemented by many of the countries in which we do business. Specifically, in December 2022, the EU adopted a directive issued by the European Commission requiring EU members to implement the OECD's global minimum tax rules in part by January 1, 2024 and fully by January 1, 2025. Any such global minimum tax is expected to be a period cost, and thus we are continuing to evaluate the potential global impact on future periods.
Internal Revenue Service Audits of Perrigo Company, a U.S. Subsidiary
Perrigo Company, our U.S. subsidiary ("Perrigo U.S."), is engaged in a series of tax disputes in the U.S. relating primarily to transfer pricing adjustments including income in connection with the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States, including the generic heartburn medication omeprazole. On August 27, 2014, we received a statutory notice of deficiency from the Internal Revenue Service ("IRS") relating to our fiscal tax years ended June 27, 2009, and June 26, 2010 (the “2009 tax year” and “2010 tax year”, respectively). On April 20, 2017, we received a statutory notice of deficiency from the IRS for the years ended June 25, 2011 and June 30, 2012 (the “2011 tax year” and “2012 tax year”, respectively). Specifically, both statutory notices proposed adjustments related to the offshore reporting of profits on sales of omeprazole in the United States resulting from the assignment of an omeprazole distribution contract to an Israeli affiliate. In addition to the transfer pricing adjustments, which applied to all four tax years, the statutory notice of deficiency for the 2011 and 2012 tax years included adjustments requiring the capitalization and amortization of certain legal expenses that were deducted when paid or incurred in defending against certain patent infringement lawsuits related to ANDAs filed with a Paragraph IV Certification.
We do not agree with the audit adjustments proposed by the IRS in either of the notices of deficiency. We paid the assessed amounts of tax, interest, and penalties set forth in the statutory notices and timely filed claims for refund
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on June 11, 2015 for the 2009 and 2010 tax years, and on June 7, 2017, for the 2011 and 2012 tax years. On August 15, 2017, following disallowance of such refund claims, we timely filed a complaint in the United States District Court for the Western District of Michigan seeking refunds of tax, interest, and penalties of $27.5 million for the 2009 tax year, $41.8 million for the 2010 tax year, $40.1 million for the 2011 tax year, and $24.7 million for the 2012 tax year, for a total of $134.1 million, plus statutory overpayment interest thereon from the dates of payment. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges in Other non-current assets on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges in Other non-current assets on our balance sheet during the three months ended July 1, 2017.
A bench trial was held during the period May 25, 2021 to June 7, 2021 for the refund case in the United States District Court for the Western District of Michigan. The total amount of cumulative deferred charge that we are seeking to receive in this litigation is approximately $111.6 million, which reflects the impact of conceding that Perrigo U.S. should have received a 5.24% royalty on all omeprazole sales. That concession was previously paid and is the subject of the above refund claims. The issues outlined in the statutory notices of deficiency described above are continuing in nature, and the IRS will likely carry forward the adjustments set forth therein as long as the OTC medication is sold, in the case of the omeprazole issue, and for all post-2012 Paragraph IV filings that trigger patent infringement suits, in the case of the ANDA issue. Post-trial briefings were completed on September 24, 2021 and the case is now fully submitted for the court’s decision. On April 30, 2021, we filed a Notice of New Authority in our refund case in the Western District of Michigan alerting the court to a United States Tax Court decision in Mylan v. Comm'r that ruled in favor of the taxpayer on nearly identical ANDA issues as we have before the court. On January 28, 2022, the IRS filed a Notice of Appeal with the United States Court of Appeals of the Third Circuit to appeal the United States Tax Court's decision in Mylan v. Comm'r. Briefing to the appellate court was completed during 2022, oral argument was held before the Third Circuit on January 12, 2023, and on July 27, 2023, the Third Circuit Court affirmed the decision of the Tax Court. On August 1, 2023, we filed a Notice of New Authority in our refund case in the Western District of Michigan alerting the court to the Third Circuit Court decision in Mylan v. Comm’r that ruled in favor of the taxpayer on nearly identical ANDA issues that we have before the court. On August 22, 2022, the parties filed a Notice of New Authority in the refund case alerting the court to a United States Court of Federal Claims decision in Actavis Laboratories v. United States that also ruled in favor of the taxpayer on the ANDA issues. The government appealed the Actavis Laboratories decision to the United States court of Appeals for the Federal Circuit in December of 2022 and briefing to the appellate court is ongoing.
On January 13, 2021, the IRS issued a 30-day letter and Revenue Agent's Report ("RAR") with respect to its audit of our fiscal tax years ended June 29, 2013, June 28, 2014, and June 27, 2015. The 30-day letter proposed, among other modifications, transfer pricing adjustments in connection with the distribution of omeprazole in the aggregate amount of $141.6 million and ANDA-related adjustments in the aggregate amount of $21.9 million. The 30-day letter also set forth adjustments described in the next two paragraphs. We timely filed a protest to the 30-day letter for those additional adjustments but noting that due to the pending refund litigation described above, IRS Appeals would not consider the merits of the omeprazole or ANDA matters. We believe that we should prevail on the merits on both carryforward issues and have reserved for taxes and interest payable on the 5.24% deemed royalty on omeprazole through the tax year ended December 31, 2018. Beginning with the tax year ended December 31, 2019, we began reporting income commensurate with the 5.24% deemed royalty. We have not reserved for the ANDA-related issue described above. While we believe we should prevail on the merits of this case, the outcome remains uncertain. If our litigation position on the omeprazole issue is not sustained, the outcome for the 2009–2012 tax years could range from a reduction in the refund amount to denial of any refund. In addition, we expect that the outcome of the refund litigation could effectively bind future tax years. In that event, an adverse ruling on the omeprazole issue could have a material impact on subsequent periods, with additional tax liability in the range of $24.0 million to $112.0 million, not including interest and any applicable penalties.
The 30-day letter for the 2013-2015 tax years also proposed to reduce Perrigo U.S.'s deductible interest expense for the 2014 tax year and the 2015 tax year on $7.5 billion in certain intercompany debts owed by it to Perrigo Company plc. The debts were incurred in connection with the 2013 Elan merger transaction. On May 7, 2020, the IRS issued a Notice of Proposed Adjustment ("NOPA") capping the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate ("AFR") (a blended rate reduction of 4.0% per annum) on the stated ground that the loans were not negotiated on an arms-length basis. The May 7, 2020 NOPA proposed a reduction in gross interest expense of approximately $414.7 million for tax years 2014 and 2015. On January 13, 2021, we received a RAR, together with the 30-day letter, requiring our filing of a written protest to request IRS Appeals consideration. The protest was timely filed with the IRS on February 26, 2021. On January 20, 2022, the IRS responded to our protest with its rebuttal in which it revised its position on this interest rate issue by reasserting that implicit parental support considerations are necessary to determine the arm's length interest rates and
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proposed revised interest rates that are higher than the interest rates proposed under its 130.0% of AFR assertion. The blended interest rate proposed by the IRS rebuttal was 4.36%, an increase from the blended interest rate in the RAR of 2.57% but lower than the stated blended interest rate of the loans of 6.8%. An IRS Appeals conference for the interest rate issue was held during March 7, 2023 through March 9, 2023. On May 5, 2023, we finalized an agreement with IRS Appeals resulting in settlement of the May 7, 2020 NOPA of $153.4 million of gross interest expense reduction for the 2013-2015 tax years. This implies a blended interest rate of 5.44%. In addition, based on the above agreement with IRS Appeals, we will apply similar adjustments for all remaining tax years through 2018. Tax payments relating to the settlement have been suspended until the pending disputes relating to omeprazole income recognition and deductibility of certain ANDA legal costs are fully resolved. In the second quarter of fiscal year 2023 we adjusted our previously established reserves related to this matter to account for the agreed reduction of the interest rates.
On December 2, 2021, the IRS commenced an audit of our federal income tax returns for the tax years ended December 31, 2015, through December 31, 2019.
Internal Revenue Service Audit of Athena Neurosciences, Inc., a U.S. Subsidiary
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena Neurosciences, LLC ("Athena") for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. The April 26, 2019 NOPA carried forward the IRS's theory from its 2017 draft NOPA that when Elan took over the remaining termsfuture funding of Athena's in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property in various developmental products, including the Multiple Sclerosis drug Tysabri, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The April 26, 2019 NOPA proposed a payment of $843.0 million, which represented additional tax based on imputing royalty income to Athena using a 24.7% royalty rate derived by the IRS and a 40.0% accuracy-related penalty. This amount excluded consideration of offsetting tax attributes and any potential interest that may be imposed. We strongly disagreed with the IRS position. On December 22, 2016, we also received a NOPA for these years denying the deductibility of settlement costs incurred in 2011 by Athena's parent company Elan Pharmaceuticals, Inc. ("EPI") related to illegal marketing of Zonegran by EPI's employees in the United States raised in a Qui Tam action under the U.S. False Claims Act. We strongly disagreed with the IRS' position on this issue as well. Because we believed that any concession on these issues in Appeals would be contrary to our evaluation of the issues and to avoid double taxation of the same income in the United States and Ireland, we pursued our remedies under the Mutual Agreement Procedure ("MAP") of the U.S.-Ireland Income Tax Treaty to alleviate double taxation. On April 21 and 23, 2020, we filed requests for Competent Authority assistance with the IRS and Irish Revenue on the Tysabri royalty issue, and those MAP applications were accepted. On October 20, 2020, we amended our requests for Competent Authority assistance to include the Zonegran issue and these supplemental requests were also accepted.
On April 24, 2023, we received a letter from the IRS informing us that the U.S. Competent Authority had agreed to fully withdraw the income and penalty adjustments related to the Tysabri royalty issue and considered that case to be closed. The April 24, 2023 letter concluded the competent authority process for the Tysabri royalty issue without the need for negotiations between the Competent Authorities and constitutes a full and final resolution of all adjustments proposed by the IRS in the April 26, 2019 NOPA. In the second quarter of fiscal year 2023 we adjusted previously established reserves related to this and other matters in the same audit period. The Zonegran deduction issue remains pending in the MAP case and is being considered by the U.S. and Irish Competent Authorities.
Summary
Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable leases.tax laws, the final determination with respect to any tax audit and any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions - one or more of which may occur within the next twelve months - it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those recorded as of
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September 30, 2023. However, we are not able to estimate a reasonably possible range of how these events may impact our unrecognized tax benefits in the next twelve months.
NOTE 16 - CONTINGENCIES
In view of the inherent difficulties of predicting the outcome of various types of legal proceedings, we cannot determine the ultimate resolution of the matters described below. We establish reserves for litigation and regulatory matters when losses associated with the claims become probable and the amounts can be reasonably estimated. The actual costs of resolving legal matters may be substantially higher or lower than the amounts reserved for those matters. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated as of September 30, 2023, we have not recorded a loss reserve. If certain of these matters are determined against us, there could be a material adverse effect on our financial condition, results of operations, or cash flows. We currently believe we have valid defenses to the claims in these lawsuits and intend to defend these lawsuits vigorously regardless of whether or not we have a loss reserve. Other than what is disclosed below, we do not expect the outcome of the litigation matters to which we are currently subject to, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows.
Price-Fixing Lawsuits Related to the Company's Former Rx Business
Beginning in 2016, the Company, along with other manufacturers, was named as a defendant in lawsuits in the United States and Canada generally alleging anticompetitive conduct with respect to the sale of generic drugs by the Company’s former Rx business. The complaints – which have been filed by putative classes of direct purchasers, end payors, andindirect resellers, as well as individual direct and indirect purchasers and certain cities and counties – allege a conspiracy to fix, maintain, stabilize, and/or raise prices, rig bids, and allocate markets or customers for various generic drugs in violation of federal and state antitrust and consumer protection laws. While most of the complaints involve alleged single-drug conspiracy, the three putative classes have each filed an over-arching conspiracy complaint alleging that Perrigo and other manufacturers (and some individuals) entered into an “overarching conspiracy” that involved allocating customers, rigging bids, and raising, maintaining, and fixing prices for various products.The vast majority of the lawsuits described in this paragraph have been consolidated in the generic pricing multidistrict litigation ("MDL") MDL No. 2724 (United States District Court for Eastern District of Pennsylvania).
While the Court has ordered that the class actions alleging “single drug” conspiracies involving Clobetasol will proceed on a more expedited basis (as a bellwether) than the other cases in MDL No. 2724, the classes voluntarily dismissed their claims against Perrigo relating to "single drug" conspiracies involving Clobetasol in May 2023. The Court also ordered that the State Attorney General Complaint (described below) will proceed as a bellwether case. The bellwether cases completed discovery during October 2023 under the schedule set by the Court, and motions for summary judgment will be due on June 28, 2024. No trial dates have been set for any of the bellwether cases, or any of the other cases in the MDL.
State Attorney General Complaint
On June 10, 2020, the Connecticut Attorney General’s office filed a lawsuit on behalf of Connecticut and 50 other states and territories against Perrigo, 35 generic pharmaceutical manufacturers, and certain individuals (including two former Perrigo employees), alleging an overarching conspiracy to allocate customers and/or fix, raise, or stabilize prices of eighty products. This case is included among the “bellwether cases” designated to follow the expedited schedule described above. Like the other cases in the MDL, no trial date has been set for this case.
Canadian Class Action Complaint
In June 2020, an end payor filed a class action in Ontario, Canada against Perrigo and 29 manufacturers alleging an overarching conspiracy to allocate customers and/or fix, raise, or stabilize prices of dozens of products, most of which were neither made nor sold by Perrigo's former Rx business. The product conspiracies allegedly involving Perrigo focus on the same products as those involved in other MDL complaints naming Perrigo: Clobetasol, Desonide, Econazole, and Nystatin. In December 2020, Plaintiffs amended their complaint to add additional claims based on the State Attorney General Complaint of June 2020.
Hospitals Complaint
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On June 30, 2023, a group of 150 hospitals filed a complaint against Perrigo and 35 manufacturers alleging a conspiracy to fix, raise, or stabilize prices of 228 products. Perrigo's former Rx business made and sold 30 of these products. Most of the product conspiracies allegedly involving Perrigo focus on products that are the same as the products involved in other MDL complaints naming Perrigo.
At this stage, we cannot reasonably estimate the outcome of the liability if any, associated with the claims listed above. We intend to defend each of these lawsuits vigorously.
Securities Litigation
In the United States (cases related to events in 2015-2017)
Beginning in May 2016, purported class action complaints were filed against the Company and our former CEO, Joseph Papa, in the U.S. District Court for the District of New Jersey (Roofers’ Pension Fund v. Papa, et al.) purporting to represent a class of shareholders for the period from April 21, 2015 through May 11, 2016, inclusive. The original complaint alleged violations of federal securities laws in connection with the actions taken by us and the former executive to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015. The plaintiff also alleged that the defendants provided inadequate disclosure concerning alleged business developments during the alleged class period including integration problems related to the Omega acquisition.
The operative complaint is the first amended complaint filed on June 21, 2017, and named as defendants us and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The amended complaint alleges violations of federal securities laws arising out of the actions taken by us and the former directors and executives to defend against the unsolicited takeover bid by Mylan in the period from April 21, 2015 through November 13, 2015 and the allegedly inadequate disclosure throughout the entire class period related to the business developments during that longer period (April 2015 to May 2017) including purported integration problems related to the Omega acquisition, alleges incorrect reporting of organic growth at the Company and at Omega, alleges price fixing activities with respect to six generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. During 2017, the defendants filed motions to dismiss, which the plaintiffs opposed. On July 27, 2018, the court issued an opinion and order granting the defendants’ motions to dismiss in part and denying the motions to dismiss in part. The court dismissed without prejudice defendants Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, Donal O’Connor, and Marc Coucke. The court also dismissed without prejudice claims arising from the Tysabri® accounting issue described above and claims alleging incorrect disclosure of organic growth described above. The defendants who were not dismissed are the Company, Joe Papa, and Judy Brown. The claims (described above) that were not dismissed relate to the integration issue regarding the Omega acquisition, the defense against the Mylan tender offer, and the alleged price fixing activities with respect to six generic prescription pharmaceuticals. The defendants who remain in the case (us, Mr. Papa, and Ms. Brown) have filed answers denying liability.
On November 14, 2019, the court granted the lead plaintiffs’ motion and certified three classes for the case: (i) all those who purchased shares between April 21, 2015 through May 2, 2017 inclusive on a U.S. exchange and were damaged thereby; (ii) all those who purchased shares between April 21, 2015 through May 2, 2017 inclusive on the Tel Aviv exchange and were damaged thereby; and (iii) all those who owned shares as of November 12, 2015 and held such stock through at least 8:00 a.m. on November 13, 2015 (whether or not a person tendered shares in response to the Mylan tender offer) (the "tender offer class"). Plaintiffs' counsels have sent notices to the alleged classes.
The parties took discovery from 2018 through 2020. After discovery ended, defendants filed motions for summary judgement and to exclude plaintiffs' experts, which were fully briefed. The case was then re-assigned to a new federal judge, who heard oral argument on the motions in April 2022. In July 2023 the court reassigned the case to another federal judge. On August 17, 2023, the court granted summary judgment to Ms. Brown on all claims and dismissed her from the case; the court granted summary judgment in part to Mr. Papa terminating the claim against him that he made false statements with respect to alleged collusive pricing at the Generic Rx business. The court did not grant summary judgment on statements made about the integration of Omega during 2015. As to the Company, the court reserved ruling on claims related to the Generic Rx unit and ordered further briefing on that issue as to Perrigo and set an argument in mid-November 2023 on that issue. The court also indicated it would later
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address aspects of defendants’ challenges to the plaintiffs’ experts. The case remains ongoing against Perrigo while the court considers the remaining issues. There can be no certainty that Perrigo will be successful in these further proceedings. We intend to defend the lawsuit vigorously.
In addition to the class action, the following opt-out cases have been filed against us, and in some cases, Mr. Papa and Ms. Brown. We intend to defend these lawsuits vigorously. These cases in the New Jersey federal court currently are stayed pending further developments in the Roofers' case (discussed above). The lawsuits, contain factual allegations and claims that are similar to some or all of the factual allegations and claims in the class actions:
| | | | | |
Case | Date Filed |
Carmignac Gestion, S.A. v. Perrigo Company plc, et al. | 11/1/2017 |
First Manhattan Co. v. Perrigo Company plc, et al. | 2/16/2018; amended 4/20/2018 |
Nationwide Mutual Funds, et al. v. Perrigo Company plc, et al. | 10/29/2018 |
Schwab Capital Trust, et al. v. Perrigo Company plc, et al. | 1/31/2019 |
Aberdeen Canada Funds -- Global Equity Fund, et al. v. Perrigo Company plc, et al. | 2/22/2019 |
Principal Funds, Inc., et al. v. Perrigo Company plc, et al. | 3/5/2020 |
Kuwait Investment Authority, et al. v. Perrigo Company plc, et al. | 3/31/2020 |
Mason Capital L.P., et al. v. Perrigo Company plc, et al. | 1/26/2018 |
Pentwater Equity Opportunities Master Fund Ltd., et al. v. Perrigo Company plc, et al. | 1/26/2018 |
WCM Alternatives: Event-Drive Fund, et al. v. Perrigo Co., plc, et al. | 11/15/2018 |
Hudson Bay Master Fund Ltd., et al. v. Perrigo Co., plc, et al. | 11/15/2018 |
Discovery Global Citizens Master Fund, Ltd., et al. v. Perrigo Co. plc, et al. | 12/18/2019 |
York Capital Management, L.P., et al. v. Perrigo Co. plc, et al. | 12/20/2019 |
Burlington Loan Management DAC v. Perrigo Co. plc, et al. | 2/12/2020 |
Universities Superannuation Scheme Limited v. Perrigo Co. plc, et al. | 3/2/2020 |
Harel Insurance Company, Ltd., et al. v. Perrigo Company plc, et al. | 2/13/2018 |
TIAA-CREF Investment Management, LLC., et al. v. Perrigo Company plc, et al. | 4/20/2018 |
Sculptor Master Fund (f/k/a OZ Master Fund, Ltd.), et al. v. Perrigo Company plc, et al. | 2/6/2019 |
BlackRock Global Allocation Fund, Inc., et al. v. Perrigo Co. plc, et al. | 4/21/2020 |
Starboard Value and Opportunity C LP, et al. v. Perrigo Company plc, et al. | 2/25/2021 |
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In June 2020, three Highfields Capital entities filed a lawsuit in Massachusetts State Court with factual allegations that generally were similar to the factual allegations in the Amended Complaint in the Roofers' Pension Fund case described above, except that the Highfields plaintiffs did not include allegations about alleged collusive pricing of generic prescription drugs, and alleged Massachusetts state law claims under the Massachusetts Unfair Business Methods Law (chapter 93A) and Massachusetts common law claims of tortious interference with prospective economic advantage, common law fraud, negligent misrepresentation, and unjust enrichment. In December 2021, the Massachusetts State Court granted Defendants’ motion to dismiss in part and denied it in part. Defendants’ filed their answers in January 2022 denying liability. This is the only opt out case that has not been stayed during the summary judgment proceedings in the New Jersey federal court. The discovery phase in this case is underway (including discovery related to some factual allegations that were not part of the discovery in the actions in New Jersey federal court). The Court held a discovery conference and approved fact discovery deadlines into May 2023 and later deadlines to complete expert discovery. Subsequently, the Court held a further conference in March 2023 and revised the schedule with fact discovery ending in October 2023 and expert discovery in May 2024. Subsequently, on November 1, 2023, the Court issued a further revised scheduling order that ends fact discovery in March 2024, ends expert discovery in August 2024, and a post-discovery court conference in September 2024. We intend to defend the lawsuit vigorously.
In Israel (cases related to events in 2015-2017)
On June 28, 2017, a plaintiff filed a complaint in Tel Aviv District Court styled Israel Elec. Corp. Employees’ Educ. Fund v. Perrigo Company plc, et al. The lead plaintiff seeks to represent a class of shareholders who purchased
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Perrigo stock on the Tel Aviv exchange during the period from April 24, 2015 through May 3, 2017 and also a claim for those that owned shares on the final day of the Mylan tender offer (November 13, 2015). The complaint names as defendants the Company, Ernst & Young LLP (the Company’s auditor), and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The complaint alleges violations under Israeli securities laws that are similar to U.S. Securities Exchange Act sections 10(b) (and Rule 10b‑5) and 14(e) against all defendants and 20(a) control person liability against the 11 individuals or, in the alternative, under other Israeli securities laws. In general, the allegations in Israel are similar to the factual allegations in the Roofers' Pension Fund case in the U.S. as described above. The plaintiff indicates an initial, preliminary class damages estimate of 2.7 billion NIS (approximately $760.0 million at 1 NIS = 0.28 cents). After the other two cases filed in Israel were voluntarily dismissed, the plaintiff in this case agreed to stay this case pending the outcome of the Roofers’ Pension Fund case in the U.S. (described above). The Israeli court approved the stay, and this case is now stayed. We intend to defend the lawsuit vigorously.
In Israel (case related to Irish Tax events)
On December 31, 2018, a shareholder filed an action against the Company, our former CEO Murray Kessler, and our former CFO Ronald Winowiecki in Tel Aviv District Court (Baton v. Perrigo Company plc, et. al.). The case is a securities class action brought in Israel making similar factual allegations for the same period as those asserted in a securities class action case (for those who purchased on a U.S. exchange) in New York federal court in which the settlement received final approval in February 2022. The Baron case alleges that persons who purchased securities through the Tel Aviv stock exchange and suffered damages can assert claims under Israeli securities law that will follow the liability principles of Sections 10(b) and 20(a) of the U.S. Securities Exchange Act. The plaintiff does not provide an estimate of class damages. Since 2019, the court granted several requests by Perrigo to stay the proceedings pending the resolution of proceedings in the New York federal court. During 2022, the case was reassigned to a newly-appointed judge. After the settlement of the U.S. case in New York federal court, Perrigo's counsel informed the Israeli Court of the final approval of the settlement of the U.S. case. The parties then sought further stays of the case while they attempted mediation, which the Court granted. In April 2023, the parties reported to the Court that the mediation had led to a preliminary agreement on settlement; the Court set a deadline for the parties to file settlement papers, which was later extended to November 16, 2023.
Other Matters
Talcum Powder
The Company has been named, together with other manufacturers, in product liability lawsuits in a variety of state courts alleging that the use of body powder products containing talcum powder causes mesothelioma and lung cancer due to the presence of asbestos. All but one of these cases involve legacy talcum powder products that have not been manufactured by the Company since 1999. One of the pending actions involves a current prescription product that contains talc as an excipient. As of October 13, 2023, the Company is currently named in 101 individual lawsuits seeking compensatory and punitive damages. The Company has several defenses and intends to aggressively defend these lawsuits. Trials for these lawsuits are currently scheduled throughout 2023, 2024 and 2025, with the earliest trial date commencing in November 2023.
Ranitidine
After regulatory bodies announced worldwide that ranitidine may potentially contain N-nitrosodimethylamine ("NDMA"), a known environmental contaminant, the Company promptly began testing its externally-sourced ranitidine API and ranitidine-based products. On October 8, 2019, the Company halted shipments of the product based upon preliminary results and on October 23, 2019, the Company made the decision to conduct a voluntary retail market withdrawal.
In February 2020, the resulting actions involving Zantac® and other ranitidine products were transferred for coordinated pretrial proceedings to a Multi-District Litigation (In re Zantac®/Ranitidine Products Liability Litigation MDL No. 2924) in the U.S. District Court for the Southern District of Florida. After the Company successfully moved to dismiss the first set of Master Complaints in the MDL, it now includes three: 1) an Amended Master Personal Injury Complaint; 2) a Consolidated Amended Consumer Economic Loss Class Action Complaint; and 3) a Consolidated Medical Monitoring Class Action Complaint. All three name the Company. Plaintiffs appealed one of
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the original Master Complaints, the Third-Party Payor Complaint, and two individual plaintiffs appealed their individual personal injury claims on limited grounds. The Company is not named in the appeals.
On June 30, 2021, the Court dismissed all claims against the retail and distributor defendants with prejudice, thereby reducing the Company’s potential for exposure and liability related to possible indemnification. On July 8, 2021, the Court dismissed all claims against the Company with prejudice. Appeals of these dismissal orders to the U.S. Court of Appeals for the 11th Circuit have been filed, as well as several state level claims related to the theories advanced in the MDL litigation. The Company will continue to vigorously defend each of these lawsuits. In December 2022 the Court granted in full brand defendants Daubert motions, finding no scientific causation, and in turn granted summary judgment dismissing the actions with prejudice. The Court later ruled that it was appropriate to apply the same standards to the retail and distributor defendants as well as the generic defendants, and the Court thereby ruled that its Daubert decision applied equally to these defendants as well. Appeals of these orders have been filed to the 11th Circuit.
Excepting the MDL due to the nature of the multiple dismissals as described above, as of October 13, 2023, the Company has been named in 202 personal injury lawsuits, primarily in the state courts of California and Pennsylvania. The Company is named in these lawsuits with manufacturers of the national brand Zantac® and other manufacturers of ranitidine products, as well as distributors, repackagers, and/or retailers. Plaintiffs seek compensatory and punitive damages, and in some instances seek applicable remedies under state consumer protection laws. The Company believes that it has strong defenses to such claims based on a significant body of scientific evidence, and pursuant to the doctrine of federal preemption. As noted above, the Company has won multiple motions to dismiss in the MDL, most recently in Illinois where the Circuit Court granted in full the Company's motions to dismiss based on federal preemption, as well as additional state court actions in California and Maryland. The Company has also been dismissed from additional state court actions in Ohio, New York and New Jersey.
The Company has also been named in a Complaint brought by the New Mexico Attorney General based on the following theories: violation of a New Mexico public nuisance statute, NMSA 30-8-1 to -14; common law nuisance; and negligence and gross negligence. The Company is named in this lawsuit with manufacturers of the national brand Zantac® and other manufacturers of ranitidine products and/or retailers. Brand name manufactures named in the lawsuit also face claims under the state’s Unfair Practices & False Advertising acts. The Company filed motions to dismiss the action. The New Mexico District Court denied the Company’s Motion to Dismiss and litigation continues. The Company will continue to vigorously defend this lawsuit.
Some of the Company’s retailer customers are seeking indemnity from the Company for a portion of their defense costs and liability relating to these cases.
Acetaminophen
In October 2022 the Judicial Panel on Multidistrict Litigation ("MDL") consolidated a number of pending actions filed in various federal courts alleging that prenatal exposure to acetaminophen is purportedly associated with the development of autism spectrum disorder (“ASD”) and attention-deficit/hyperactivity disorder (“ADHD”). The MDL is styled In re: Acetaminophen – ASD/ADHD Products Liability Litigation (MDL No. 3043) and is pending before the U.S. District Court for the Southern District of New York. Plaintiffs in the MDL have asserted claims against Johnson & Johnson Consumer, Inc. (“JJCI”) and various retailer chains alleging that plaintiff-mothers took acetaminophen products while pregnant and that plaintiff-children developed ASD and/or ADHD as a result of prenatal exposure to these acetaminophen products. At this time, the MDL proceedings are in the early stages. Currently, it is not possible to assess reliably the outcome of these cases or any potential future financial impact on the Company. As of October 13, 2023 the Company has not been named as a defendant in any Complaints filed in the MDL. Certain of the Company’s customers have made requests regarding indemnity from the Company for a portion of their defense costs and potential liability.
Phenylephrine
In September 2023, the FDA’s Advisory Committee on Nonprescription Drugs issued an advisory opinion calling into question the efficacy of orally administered phenylephrine (PE) containing products as a nasal decongestant. While the FDA itself has thus far taken no action in response to the Advisory Committee opinion, several putative class action lawsuits have been filed asserting various economic injury claims to consumers. The Judicial Panel on Multi-District Litigation (JPML) is determining whether to create an MDL class-action related to PE lawsuits. Currently, it is not possible to assess reliably the outcome of these cases or any potential future financial impact on the
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Company. Certain of the Company’s customers have made requests regarding indemnity from the Company for a portion of their defense costs and potential liability.
Contingencies Accruals
As a result of the matters discussed in this Note, the Company has established a loss accrual for litigation contingencies where we believe a loss to be probable and for which an amount of loss can be reasonably estimated. However, we cannot determine a reasonable estimate of the maximum possible loss or range of loss for these matters given that they are at various stages of the litigation process and each case is subject to inherent uncertainties of litigation. At September 30, 2023, the loss accrual for litigation contingencies reflected on the balance sheet in Other accrued liabilities was $67.6 million. The Company also recorded an insurance recovery receivable reflected on the balance sheet in Prepaid expenses and other current assets of $32.9 million related to these litigation contingencies because it believes such amount is recoverable based on communications with its insurers to date; however, the Company may erode this insurance receivable as it incurs defense costs associated with defending the matters. The Company’s management believes these accruals for contingencies are reasonable and sufficient based upon information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates or that all of the final costs related to these contingencies will be covered by insurance. (See "Insurance Coverage Litigation," below.) In addition, we have other litigation matters pending for which we have not recorded any accruals because our potential liability for those matters is not probable or cannot be reasonably estimated based on currently available information. For those matters where we have not recorded an accrual but a loss is reasonably possible, we cannot determine a reasonable estimate of the maximum possible loss or range of loss for these matters given that they are at various stages of the litigation process and each case is subject to the inherent uncertainties of litigation.
Insurance Coverage Litigation
In May 2021, insurers on multiple policies of D&O insurance filed an action in the High Court in Dublin against the Company and multiple current and former directors and officers of the Company seeking declaratory judgments on certain coverage issues. Those coverage issues include claims that policies for periods beginning in December 2015 and December 2016, respectively, do not have to provide coverage for the securities actions described above pending in the District of New Jersey or in Massachusetts state court concerning the events of 2015-2017. The policy for the period beginning December 2014 is currently providing coverage for those matters, and the litigation would not affect that existing coverage. However, if the plaintiffs are successful, the total amount of insurance coverage available to defend such lawsuits and to satisfy any judgment or settlement costs thereunder would be limited to one policy period. The insurers’ lawsuit also challenges aspects of coverage for Krueger derivatively on behalf of nominal defendant Perrigo Company plc v. Alford et al., a prior derivative action filed in the District of New Jersey that was dismissed in August 2020, and for the counterclaims brought in the Omega arbitration proceedings. Perrigo responded on November 1, 2021; Perrigo’s response includes its position that the policies for the periods beginning December 2015 and December 2016 provide coverage for the underlying litigation matters and seeks a ruling to that effect. The discovery stage of the case occurred in 2022. The Court has set a schedule for submissions by the parties during 2023 and for a bench trial in mid-November 2023. We intend to defend the lawsuit vigorously.
Perrigo Company plc - Item 2
Note 17
NOTE 16 –17 - SEGMENT INFORMATION
Our reporting segments are as follows:
CHCA,comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
CHCI,comprises our legacy Branded Consumer Healthcare segment and now includes our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
RX,comprises our U.S. Prescription Pharmaceuticals business.
We also have an "Other" reporting segment that consists of our legacy API business, which does not meet the quantitative threshold required to be a separately reportable segment. Effective January 1, 2017, due to the sale of the Tysabri® financial asset, all legal expenses associated with the former Specialty Sciences segment were moved to unallocated expenses. Our segments reflect the way in which our chief operating decision maker reviews our operating results and allocates resources.
Perrigo Company plc - Item 1
Note 16
The tables below tables show select financial measures by reporting segment (in millions):
| | | | | | | | | | | | | | |
| | Total Assets |
| | September 30, 2023 | | December 31, 2022 |
CSCA | | $ | 5,094.6 | | | $ | 5,134.1 | |
CSCI | | 5,663.7 | | | 5,883.2 | |
| | | | |
| | | | |
| | | | |
Total | | $ | 10,758.3 | | | $ | 11,017.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2023 | | October 1, 2022 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CSCA | $ | 703.5 | | | $ | 91.1 | | | $ | 14.5 | | | $ | 722.3 | | | $ | 75.2 | | | $ | 14.6 | |
CSCI | 420.3 | | | 13.6 | | | 53.5 | | | 377.9 | | | 1.3 | | | 53.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Unallocated | — | | | (42.6) | | | — | | | — | | | (43.4) | | | — | |
Continuing Operations Total | $ | 1,123.8 | | | $ | 62.1 | | | $ | 68.0 | | | $ | 1,100.2 | | | $ | 33.1 | | | $ | 67.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | October 1, 2022 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CSCA | $ | 2,217.9 | | | $ | 272.0 | | | $ | 43.1 | | | $ | 2,160.2 | | | $ | 240.0 | | | $ | 40.6 | |
CSCI | 1,280.7 | | | 43.6 | | | 159.6 | | | 1,136.1 | | | 19.0 | | | 138.2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Unallocated | — | | | (148.1) | | | — | | | — | | | (211.1) | | | — | |
Continuing Operations Total | $ | 3,498.7 | | | $ | 167.5 | | | $ | 202.7 | | | $ | 3,296.3 | | | $ | 47.9 | | | $ | 178.8 | |
|
| | | | | | | | |
| | Total Assets |
| | September 30, 2017 | | December 31, 2016 |
CHCA | | $ | 3,833.7 |
| | $ | 3,351.3 |
|
CHCI | | 5,114.2 |
| | 4,795.2 |
|
RX | | 2,597.0 |
| | 2,646.4 |
|
Specialty Sciences | | — |
| | 2,775.8 |
|
Other | | 297.7 |
| | 301.4 |
|
Total | | $ | 11,842.6 |
| | $ | 13,870.1 |
|
Perrigo Company plc - Item 2
Executive Overview
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | October 1, 2016 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CHCA | $ | 598.8 |
| | $ | 124.3 |
| | $ | 16.9 |
| | $ | 611.2 |
| | $ | 99.0 |
| | $ | 17.6 |
|
CHCI | 365.4 |
| | 4.6 |
| | 50.2 |
| | 377.4 |
| | (1,615.5 | ) | | 44.4 |
|
RX | 250.6 |
| | 82.1 |
| | 21.0 |
| | 251.9 |
| | 74.4 |
| | 27.2 |
|
Specialty Sciences | — |
| | — |
| | — |
| | — |
| | 3.2 |
| | — |
|
Other | 16.5 |
| | (0.4 | ) | | 0.4 |
| | 21.1 |
| | (1.5 | ) | | 0.5 |
|
Unallocated | — |
| | (48.2 | ) | | — |
| | — |
| | (27.9 | ) | | — |
|
Total | $ | 1,231.3 |
| | $ | 162.4 |
| | $ | 88.5 |
| | $ | 1,261.6 |
| | $ | (1,468.3 | ) | | $ | 89.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CHCA | $ | 1,786.4 |
| | $ | 303.6 |
| | $ | 51.1 |
| | $ | 1,880.2 |
| | $ | 316.4 |
| | $ | 53.3 |
|
CHCI | 1,116.8 |
| | 8.7 |
| | 143.4 |
| | 1,232.7 |
| | (2,011.3 | ) | | 130.6 |
|
RX | 708.4 |
| | 239.6 |
| | 65.6 |
| | 776.9 |
| | 258.3 |
| | 78.6 |
|
Specialty Sciences | — |
| | — |
| | — |
| | — |
| | (1.9 | ) | | — |
|
Other | 51.5 |
| | 9.4 |
| | 1.2 |
| | 59.5 |
| | 2.6 |
| | 1.4 |
|
Unallocated | — |
| | (121.7 | ) | | — |
| | — |
| | (79.2 | ) | | — |
|
Total | $ | 3,663.1 |
| | $ | 439.6 |
| | $ | 261.3 |
| | $ | 3,949.3 |
| | $ | (1,515.1 | ) | | $ | 263.9 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
ThisThe following Management’s Discussion and Analysis ("MD&A") is intended to provide readers with an understanding of Financial Conditionour financial condition, results of operations, and Results of Operationscash flows by focusing on changes in certain key measures from year to year. This MD&A is provided as a supplement to, and should be read in conjunction with the financial statementsour Condensed Consolidated Financial Statements and accompanying Notes found in Item I included in this Form 10-Q, and our Form 10-K for the year ended December 31, 20162022 (the “2016“2022 Form 10-K”). These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under “Risk Factors” in Item 1A of our 20162022 Form 10-K and Part II,II. Item 1A of this Form 10-Q.
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
Perrigo Company plc - Item 2
Executive OverviewEXECUTIVE OVERVIEW
We are a leading global healthcare company that delivers value to our customers and consumers by providing Quality Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business model that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe we are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market. We also are a leading provider of branded OTCover-the-counter ("OTC") health and wellness solutions that are designed to enhance individual well-being and empower consumers to proactively prevent or treat conditions that can be self-managed. Our vision is to make lives better by bringing quality, affordable self-care products throughout Europe and the U.S., as well as a leading producer of generic standard topical products such as creams, lotions, and gels, as well as inhalants and injections ("extended topical") prescription drugs.that consumers trust everywhere they are sold. We are headquartered in Ireland and sell our products primarily in North America and Europe, as well as in other markets around the world.
Our core competencies are geared to fully take advantage of the massive global trend towards self-care. We define self-care as not just treating disease or helping individuals feel better after taking a product, but also maintaining and enhancing their overall health and wellness. Consistent with our vision, we recently completed our three-year strategy to transform the Company into a consumer self-care leader by reconfiguring our portfolio through the divestiture of our Rx business in 2021 and acquiring Héra SAS (“HRA Pharma”) in 2022. Additionally, we removed significant uncertainty in 2021 through final settlement of the Irish Revenue Notice of Amended Assessment. Upon completion of our transformation, we have transitioned our strategy to ‘Optimizing’ business and ‘Accelerating’ profitable growth. Several initiatives are anticipated to propel this strategy, including Australia, Israelplans to achieve significant synergies from our acquisitions and China.implementation of our Supply Chain Reinvention Program. In addition, we continue to invest in other initiatives, including innovation, information systems and tools, and our people to drive consistent and sustainable results in line with consumer-packaged goods peers.
Our fiscal year begins on January 1 and ends on December 31. We end our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
Our Segments
Our reporting and operating segments are as follows:reflect the way our chief operating decision maker, who is our CEO, makes operating decisions, allocates resources and manages the growth and profitability of the Company. Our reporting and operating segments are:
•Consumer HealthcareSelf-Care Americas ("CHCA" ("CSCA"), comprises our consumer self-care business in the U.S., Mexico and Canada. CSCA previously included our Latin American businesses until they were disposed on March 9, 2022.
•Consumer Self-Care International ("CSCI") comprises our consumer self-care business outside of the U.S. and Canada, consumer healthcareprimarily in Europe and Australia.
We previously had an Rx segment which was comprised of our generic prescription pharmaceuticals business (OTC, contract, infant formulain the U.S. and animal health categories).
Consumer Healthcare International("CHCI"),comprises our legacy Branded Consumer Healthcare segmentother pharmaceuticals and now includes our consumer focuseddiagnostic businesses in the U.K., Australia,Israel, which have been divested. The Rx segment was reported as Discontinued Operations in 2021, and Israel. This segment also includes our U.K. liquid licensed products business.is presented as such for all periods in this report.
Perrigo Company plc - Item 2
Executive Overview
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
Recent Highlights
We also have an "Other" reporting segment, which comprises our legacy Active Pharmaceutical Ingredients•On September 11, 2023, we announced the appointment of Catherine "Triona" Schmelter as Executive Vice President and President, CSCA and Global Portfolio Optimization.
Tax Updates
On April 26, 2019, we received a revised Notice of Proposed Adjustment ("API"NOPA") business,which does not meetfrom the quantitative threshold required to be a separately reportable segment. Effective January 1, 2017, dueIRS regarding transfer pricing positions related to the saleIRS audit of Athena Neurosciences, LLC ("Athena") for its 2013 to 2015 fiscal tax years. The April 26, 2019 NOPA carried forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena's in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property in various developmental products, including the Multiple Sclerosis drug Tysabri, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The April 26, 2019 NOPA proposed a payment of $843.0 million, which represented additional tax based on imputing royalty income to Athena using a 24.7% royalty rate derived by the IRS and a 40.0% accuracy-related penalty. On April 24, 2023, we received a letter from the IRS regarding the Competent Authority request filed by Athena concluding the competent authority process commenced by such submissions without the need for negotiations between the competent authorities and constitutes a full and final resolution of the April 26, 2019 NOPA. We believe that any prior uncertainty regarding the tax treatment of the Tysabri® financial asset, all legal expenses associated with our former Specialty Sciences segment were moved royalty is now resolved. In the second quarter of fiscal year 2023 we adjusted previously established reserves related to unallocated expenses. For results by segment, see "Segment Results" belowthis and other matters in the same audit period. Refer to Item 1. Note 1615. for additional information.
2017 Year-to-Date HighlightsOn January 13, 2021, the IRS issued a 30-day letter and Revenue Agent's Report with respect to its audit of our 2013 to 2015 fiscal tax years. The 30-day letter proposed, among other modifications, to reduce Perrigo U.S.'s deductible interest expense for certain intercompany debts owed in connection with the 2013 Elan merger transaction. On May 5, 2023, we finalized an agreement with IRS Appeals providing for settlement of the May 7, 2020 NOPA. In addition, based on the agreement with IRS Appeals, we will apply similar adjustments for all remaining tax years through 2018. In the second quarter of fiscal year 2023 we adjusted previously established reserves related to this and other matters in the same audit period. Refer to Item 1. Note 15 for additional information.
| |
• | On March 27, 2017, we completed the sale of our Tysabri® financial asset, effective January 1, 2017, to Royalty Pharma for up to $2.85 billion, which consists of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we derecognized the Tysabri® financial asset and recorded a $17.1 million gain (refer to Item 1. Note 6). |
| |
• | On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited for $22.2 million, inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 1. Note 2). |
| |
• | On August 4, 2017, we signed a definitive agreement for the sale of our Israel API business to SK Capital for $110.0 million in cash, inclusive of a net debt adjustment. We expect to finalize the sale within the next three months. The sale is not expected to have a material impact on our operations (refer to Item 1. Note 9). |
| |
• | We completed $2.2 billion of debt repayments during the nine months ended September 30, 2017 (refer to Item 1. Note 10). |
| |
• | On August 25, 2017, we completed the sale of our Russian business to Alvogen Pharma LLC and Alvogen CEE Kft. for €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 1. Note 2). |
Supply Chain Reinvention Program
In 2022, we initiated our Supply Chain Reinvention Program to reduce structural costs, improve profitability and our service levels to our retail partners, and strengthen our resiliency by streamlining and simplifying our global supply chain. Through this initiative, we plan to reduce portfolio complexity, invest in advanced planning capabilities, diversify sourcing, and optimize our manufacturing assets and distribution models. We have identified a total annual run-rate potential savings opportunity by the end of fiscal year 2028 of between an estimated $200 million to $300 million per year (not including related depreciation expense on capital investments) if all facets of the Program are successfully implemented and executed. To obtain these potential benefits, we anticipate incurring costs of between $350 million to $570 million by the end of fiscal year 2028 to complete the program implementation, including capital investments, restructuring expenses, and implementation costs. A significant portion of the annual run-rate potential savings of the Program, between $150 million to $200 million per year (not including related depreciation expense on capital investments), are anticipated by the end of fiscal year 2025, along with associated potential spend of between $300 million and $450 million. Refer to Item 1. Note 14 for further details on restructuring charges.
We initiated the first phase of our Supply Chain Reinvention Program by announcing on November 1, 2022, a $170 million strategic investment to expand and strengthen our U.S. infant formula manufacturing. This strategic investment included the $110 million purchase of Nestlé’s Gateway infant formula plant in Eau Claire, Wisconsin, along with the U.S. and Canadian rights to the GoodStart® infant formula brand and other related formula brands ("Gateway"), and an additional $60 million investment into the plant to expand its capacity. Refer to Item 1. Note 3 for further transaction details.
Market Factors and Trends
Infant Formula
As part of its efforts to prevent supply interruptions and future Cronobacter spp. illnesses associated with powdered infant formula, in March 2023, the FDA released an "Immediate National Strategy to Increase the Resiliency of the
Perrigo Company plc - Item 2
ConsolidatedExecutive Overview
U.S. Infant Formula Market" and issued a letter to the powdered infant formula industry to share information to assist the industry in improving the microbiologic safety of powdered infant formula. As a result of the FDA communications, we are experiencing additional costs and lower production volumes associated with compliance with these new and evolving regulatory expectations. In addition, as did others in the industry, Perrigo received a warning letter from the FDA on August 30, 2023. Consistent with the Company’s commitment to quality, the Company is in the process of working with the FDA to resolve issues raised in the August 30 letter, which stemmed from a routine inspection of the Company's recently-acquired infant formula facility in Wisconsin.
Economic Uncertainty
Current macroeconomic conditions remain very dynamic, including impacts from rising inflation and interest rates, volatile changes in foreign currency exchange rates, political unrest, COVID-19 and legislative and regulatory changes. Any causes of market size contraction could reduce our sales or erode our operating margin and consequently reduce our net earnings and cash flows.
Our interest expense is impacted by the overall global economic and interest rate environment. We manage interest rate risk through our capital structure and the use of interest rate swaps to fix the interest rate on greater than 90% of our outstanding debt.
Inflationary Costs and Supply Chain
Over the course of 2022 and 2023, supply chain disruptions, including volatility in both cost and availability of agricultural, oil and paper based commodities driven by the war in Ukraine, have led to higher input costs. Additionally, we experienced employment vacancies and attrition as the labor market negatively impacted productivity and drove the need for wage rate increases and other retention benefits. We implemented a series of actions to substantially mitigate these and other inflationary cost pressures such as strategic pricing and our Supply Chain Reinvention Program. Benefits from our actions have begun to substantially offset inflationary pressures, and the global freight constraints in availability of freight containers and truck drivers are normalizing. However, future supply chain disruptions and inflationary pressures from the continuation of the war in Ukraine and the more recent events from the war in Israel are uncertain.
War in Ukraine
The invasion of Ukraine by Russia and resulting economic and political sanctions imposed by the United States, United Kingdom, European Union, and others on Russia, Belarus, and occupied regions in Ukraine have negatively impacted our results from operations in the region. We currently have 81 employees working in our Ukraine subsidiary. We do not have a subsidiary or employees in Russia. We have no manufacturing facilities in either Russia or Ukraine and we previously sold products into Russia entirely through distributors. In March 2022, we halted all sales to distributors in Russia and sales in Ukraine were severely depressed. If the conflict spreads or materially escalates, or economic conditions deteriorate, the impact on our business and results of operations could be material.
Israel-Hamas War
In response to the attack by Hamas in Israel and the subsequent hostilities, the Company is continuing to monitor the social, political and economic environment in Israel and in the surrounding region to evaluate the impacts on our operations and supply chain. The Company has suppliers who operate in Israel and could experience disruption of their manufacturing facilities due to terrorist acts or military actions, which could lead to delays, increased costs or the need to seek alternative sourcing. If the conflict spreads or materially escalates, or if the conflict leads to further volatility and uncertainty in financial markets or economic conditions, the impact on our business and results of operations could be material.
Foreign Exchange
We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. Significant exchange rate fluctuations, especially in the Euro or the British Pound Sterling, have had, and could continue to have, a significant
Perrigo Company plc - Item 2
Executive Overview
impact on our net sales, net earnings and cash flows, and have significantly impacted our historical net sales, costs and net earnings and could do so in the future.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Results
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 1,261.6 |
| | $ | 1,231.3 |
| | $ | 3,949.3 |
| | $ | 3,663.1 |
|
Gross profit | $ | 484.5 |
| | $ | 497.8 |
| | $ | 1,564.1 |
| | $ | 1,466.7 |
|
Gross profit % | 38.4 | % | | 40.4 | % | | 39.6 | % | | 40.0 | % |
Operating expenses | $ | 1,952.8 |
| | $ | 335.4 |
| | $ | 3,079.2 |
| | $ | 1,027.1 |
|
Operating expenses % | 154.8 | % | | 27.2 | % | | 78.0 | % | | 28.0 | % |
Operating income (loss) | $ | (1,468.3 | ) | | $ | 162.4 |
| | $ | (1,515.1 | ) | | $ | 439.6 |
|
Operating income (loss) % | (116.4 | )% | | 13.2 | % | | (38.4 | )% | | 12.0 | % |
Change in financial assets | $ | 377.4 |
| | $ | 2.6 |
| | $ | 1,492.6 |
| | $ | 24.2 |
|
Interest and other, net | $ | 55.6 |
| | $ | 31.1 |
| | $ | 195.6 |
| | $ | 132.0 |
|
Loss on extinguishment of debt | $ | 0.7 |
| | $ | — |
| | $ | 1.1 |
| | $ | 135.2 |
|
Income tax expense (benefit) | $ | (311.8 | ) | | $ | 84.2 |
| | $ | (550.7 | ) | | $ | 101.8 |
|
Net income (loss) | $ | (1,590.2 | ) | | $ | 44.5 |
| | $ | (2,653.7 | ) | | $ | 46.4 |
|
The $30.3 million decrease in consolidated net sales for the three months ended September 30, 2017 as compared to the prior year period was due to discontinued products of $6.2 million, lower sales in the CHCA segment, due primarily to the absence of $21.0 million of sales related to the U.S. Vitamins, Minerals, and Supplements ("VMS") business, lower sales in the CHCI segment due primarily to the absence of $41.7 million of sales as a resultCurrency translation effects described below represent estimates of the cancellationnet differences between translation of certain distribution contracts, and lower sales in the RX segment driven by lower net sales of Entocort® in the amount of $10.2 million and pricing pressures across the portfolio. These decreases were partially offset by new product sales of $55.4 million and favorable foreign currency translation of $13.0 million. Consolidated operating incometransactions into U.S. dollars for the three months ended September 30, 2017 increased due primarily to the absence of asset impairment charges in the amount of $1.6 billion taken in the prior year period (refer to Item 1. Note 3).
The $286.2 million decrease in consolidated net sales for the nine months ended September 30, 2017 as compared to the prior year period was due to discontinued products of $18.4 million, lower sales in the CHCA segment due primarily to the absence of $110.1 million of sales related to the U.S. VMS business, lower sales in the CHCI segment due primarily to the absence of $118.4 million of sales as a result of the cancellation of certain distribution contracts, and lower sales in the RX segment driven by lower net sales of Entocort® in the amount of $61.4 million and pricing pressures across the portfolio. These decreases were partially offset by new product sales
Perrigo Company plc - Item 2
Consolidated
of $155.8 million. Consolidated operating income for the nine months ended September 30, 2017 increased due primarily to the absence of asset impairment charges in the amount of $2.0 billion taken in the prior year period (refer to Item 1. Note 3).
Restructuring
On February 21, 2017, we approved a workforce reduction plan as part of a larger cost optimization strategy across the Company. We expect to reduce our global workforce by approximately 750 employees, which includes some actions already taken and 235 employees who have elected to participate in a voluntary early retirement program. This represents a reduction of approximately 14% of our global non-production workforce. The changes to our workforce will vary by country, based on legal requirements and required consultations with works councils and other employee representatives, as appropriate.
In connection with this plan, we estimate that we will recognize total pre-tax restructuring charges of approximately $55.0 million to $65.0 million, consisting of one-time termination benefits, severance arrangements, and other termination costs. We expect to incur the majority of the remaining charges in 2017, with the balance to be recognized during the first quarter of the year ending December 31, 2018. During the three and nine months ended September 30, 2017, we recognized $3.8 million and $54.7 million, respectively, of restructuring expenses due primarily to this cost optimization strategy.
Our cost optimization strategy is expected to yield approximately $130.0 million in savings per annum by mid-2018. This is in addition to2023 at the savings that our supply chain organization continues to generate for both our North American and International segments.
CONSUMER HEALTHCARE AMERICAS
Recent Trends and Developments
We continue to experience a reduction in pricing expectations within our CHCA segment, primarily in the cough/cold, animal health, and analgesics categories due to various factors, including increased focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our CHCA segmentaverage exchange rates for the foreseeable future.
reporting period and average exchange rates for the three and nine months ended October 1, 2022.
| |
• | We completed the sale of the animal health pet treats plant fixed assets on February 1, 2017 and received $7.7 million in proceeds (refer to Item 1. Note 2). |
Perrigo Company plc - Item 2
CHCACONSOLIDATED FINANCIAL RESULTS
Segment Results
Three Month Comparison
| | | | | | | | | | | | |
| Three Months Ended | |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 | |
Net sales | $ | 1,123.8 | | | $ | 1,100.2 | | |
Gross profit | $ | 411.2 | | | $ | 362.9 | | |
Gross profit % | 36.6 | % | | 33.0 | % | |
| | | | |
| | | | |
Operating income | $ | 62.1 | | | $ | 33.1 | | |
Operating income % | 5.5 | % | | 3.0 | % | |
|
| | | | | | | |
| Three Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 611.2 |
| | $ | 598.8 |
|
Gross profit | $ | 199.2 |
| | $ | 206.1 |
|
Gross profit % | 32.6 | % | | 34.4 | % |
Operating income | $ | 99.0 |
| | $ | 124.3 |
|
Operating income % | 16.2 | % | | 20.8 | % |
Three Months Ended September 30, 2017 vs. Three Months Ended October 1, 2016
Net sales decreased $12.4increased $23.6 million, or 2%2.1%, over the prior year period due to:
| |
• | New product sales of $13.2 million related primarily to the launches of Esomemprazole Magnesium (store brand equivalent to Nexium®); and
|
Favorable foreign currency translation movement of $1.4 million; more than offset by
| |
• | The absence of $21.0 million in sales attributable to the U.S. VMS business, which was sold in August 2016 (refer to Item 1. Note 2); |
A net decrease in sales of existing products of $3.2 million due primarily to:
Higher•$27.0 million increase from our acquisition of Gateway, and
•$22.4 million increase from favorable foreign currency translation; partially offset by
•$13.4 million decrease, or 1.2%, due to lower net sales in legacy U.S. Nutrition stemming from the gastrointestinalFDA evolving regulatory expectations for infant formula manufacturing, lower net sales as a result of purposeful SKU prioritization actions to focus capacity on higher margin products, lower volumes driven by consumer consumption, primarily in U.S. OTC and animal health categoriesan unfavorable impact from distributor transitions as part of the integration strategy to capture synergies from the acquisition of HRA Pharma. These factors were partially offset by strategic pricing actions of approximately $51 million and in our Mexico business;new product sales; and
Pricing pressures in the cough/cold, and analgesics categories; and•$12.4 million decrease from exited product lines.
Lower volumes in the nicotine replacement category; and
Discontinued products of $2.7 million.
Operating income increased $25.3$29.0 million, or 26%87.6%, as a result of:due primarily to:
An•$48.3 million increase of $6.9 million in gross profit due to:
Favorable product mixdriven by strategic pricing actions, new products and the acquisition of Gateway; partially offset by higher cost of goods sold inflation primarily in certain categories;CSCI, and
Positive contributions from supply chain efficiencies; offset partially by
| |
• | The absence of $3.4 million in gross profit as a result of the sale of the U.S. VMS business (refer to Item 1. Note 2); and |
Pricing pressures in certain categories as discussed above.
A decrease of $18.4 million in operating expenses due to:
| |
• | Decreased restructuring expense of $4.8 million related primarily to the cost reduction initiatives taken in the prior year (refer to Item 1. Note 15); |
Decreased selling and administrative expenses of $4.8 million due primarily to timing of promotions related to our animal health category and savings related to our previously announced strategic initiatives;
Decreased Research and Development ("R&D") expenses of $4.5 million due to timing of clinical trials; and
| |
• | The absence of a $3.4 million impairment charge related to held-for-sale assets associated with our animal health pet treats plant (refer to Item 1. Note 9); offset partially by |
| |
• | A $2.0 million gain related to contingent consideration (refer to Item 1. Note 6). |
lower manufacturing productivity within U.S. Nutrition. Gross profit as a percentage of net sales was 1.8% higher due primarilyincreased 360 basis points compared to favorable product mix and supply chain efficiencies as discussed above.
Perrigo Company plc - Item 2
CHCA
Operating income as a percentage of net sales was 4.6% higher due primarily to favorable product mix as discussed above and decreased operating expenses.
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 1,880.2 |
| | $ | 1,786.4 |
|
Gross profit | $ | 615.1 |
| | $ | 598.3 |
|
Gross profit % | 32.7 | % | | 33.5 | % |
Operating income | $ | 316.4 |
| | $ | 303.6 |
|
Operating income % | 16.8 | % | | 17.0 | % |
Nine Months Ended September 30, 2017 vs. Nine Months Ended October 1, 2016
Net sales decreased $93.8 million, or 5%, over the prior year period due to:
| |
• | New product sales of $51.2 million related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase®), smoking cessation products and Esomemprazole Magnesium (store brand equivalent to Nexium®); more than offset by
|
| |
• | The absence of $110.1 million in sales attributable to the U.S. VMS business (refer to Item 1. Note 2); |
A net decrease in sales of existing products of $22.6 million due to:
Higher sales in the cough/cold category and Mexico business; more than offset by
Lower sales in our infant nutrition and animal health categories;
Pricing pressures in the cough/cold, analgesics, and gastrointestinal categories; and
Lower volumes in the nicotine replacement category;
Discontinued products of $11.1 million; and
Unfavorable foreign currency translation movement of $1.1 million.
Operating income decreased $12.8 million, or 4%, as a result of:
A decrease of $16.8 million in gross profit due to:
Favorable product mix in certain categories; and
Positive contributions from supply chain efficiencies; more than offset by
| |
• | The absence of $17.6 million in gross profit as a result of the sale of the U.S. VMS business (refer to Item 1. Note 2); and |
Pricing pressures in certain categories as discussed above.
A decrease of $4.0 million in operating expenses due to:
Decreased selling and administrative expenses of $10.8 million due primarily to timing of promotions related to our animal health category and savings related to our cost reduction initiatives taken in the prior year;
| |
• | The absence of a $9.6 million impairment charge related to the U.S. VMS business (refer to Item 1. Note 2) and held-for-sale assets associated with our animal health pet treats plant (refer to Item 1. Note 9); and |
Decreased R&D expenses of $7.6 million due to timing of clinical trials, reduced spending on infant formula clinical trials and lower costs related to our cost reduction initiatives; offset partially by
| |
• | A $2.9 million gain related to contingent consideration (refer to Item 1. Note 6); |
| |
• | Increased restructuring expenses of $21.5 million related primarily to strategic organizational enhancements (refer to Item 1. Note 15); and |
A $4.1 million impairment charge recorded on idle property, plant and equipment.
Perrigo Company plc - Item 2
CHCI
CONSUMER HEALTHCARE INTERNATIONAL
Recent Trends and Developments
As part of our strategic initiatives, management continues to drive improvements and evaluate the overall cost structures within our CHCI segment in the following ways:
On December 8, 2016, we announced the cancellation of the unprofitable EuroGenerics NV distribution agreement in Belgium. The cancellation, combined with the exit of certain OTC distribution agreements, is expected to reduce net sales by approximately $210.0 million in 2017.
We continue to make progress on our previously announced restructuring plans to right-size the Omega business due to the impact of market dynamics on sales volumes. Management continues to evaluate the overall cost structure relative to current and expected market dynamics. During the three and nine months ended September 30, 2017, we recognized $3.6 million and $13.2 million of restructuring expense in the CHCI segment, respectively.
Management continues to evaluate the most effective business model for each country, aligning our sales infrastructure and actively integrating sales strategies with promotional programs.
| |
• | On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC and Alvogen CEE Kft. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resulted in an immaterial gain in the segment (refer to Item 1. Note 2). |
The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
Segment Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 377.4 |
| | $ | 365.4 |
|
Gross profit | $ | 155.2 |
| | $ | 165.9 |
|
Gross profit % | 41.1 | % | | 45.4 | % |
Operating income (loss) | $ | (1,615.5 | ) | | $ | 4.6 |
|
Operating income (loss) % | (428.1 | )% | | 1.2 | % |
Three Months Ended September 30, 2017 vs. Three Months Ended October 1, 2016
Net sales decreased $12.0 million, or 3%, over the prior year period due primarily to:
Favorable foreign currency translation movement of $11.6 million;
New product sales of $11.4 million; and
A net increase in sales of existing products of $8.9 million due to increased sales primarily in the cough/cold, allergy, analgesics, and lifestyle categories; more than offset by
Perrigo Company plc - Item 2
CHCI
The absence of $41.7 million in sales attributable to the cancellation of unprofitable distribution contracts; and
Discontinued products of $3.2 million.
Operating income increased $1.6 billion, as a result of:
An increase of $10.7 million insame factors that drove gross profit due primarily to:in addition to benefits from purposeful SKU prioritization actions in CSCA.
Favorable foreign currency translation movement;
Improved product mix for sales of existing products; and
Operational efficiencies across the organization.
A decrease of $1.6 billion•$19.3 million increase in operating expenses due primarily to increased costs as a result of the acquisition of Gateway and higher cost due to inflation; which were partially offset by decreased acquisition and integration costs and a favorable effect of $7.2 million from foreign currency translation.
Perrigo Company plc - Item 2
Consolidated
Nine Month Comparison
| | | | | | | | | | | | | | | |
| | | Nine Months Ended |
(in millions, except percentages) | | | | | September 30, 2023 | | October 1, 2022 |
Net sales | | | | | $ | 3,498.7 | | | $ | 3,296.3 | |
Gross profit | | | | | $ | 1,253.1 | | | $ | 1,072.8 | |
Gross profit % | | | | | 35.8 | % | | 32.5 | % |
| | | | | | | |
| | | | | | | |
Operating income | | | | | $ | 167.5 | | | $ | 47.9 | |
Operating income % | | | | | 4.8 | % | | 1.5 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net sales increased $202.4 million, or 6.1%, due primarily to:
The absence•$188.8 million increase from our acquisition of $1.6 billionGateway inclusive of impairment chargesan unfavorable impact of $9.2 million from a voluntary product recall, four additional months of HRA Pharma sales (HRA Pharma was acquired on certain indefinite-livedApril 29, 2022) inclusive of an unfavorable impact of $22.1 million due to distributor transitions as part of the integration strategy to capture synergies from the acquisition of HRA Pharma; and definite-lived intangible brand category assets
•$76.7 million increase, or 2.4%, due primarily to approximately $164 million in strategic pricing actions and goodwill impairmentshigher sales volume in the Branded Consumer Healthcare - Rest of World ("BCH-ROW")OTC and Branded Consumer Healthcare - Belgium ("BCH-Belgium")
reporting units recordedOral Care product categories within CSCA and within the CSCI segment. The increase was partially offset by declines in legacy Nutrition in the CSCA segment due primarily to a national brand recall that benefited our sales in the prior year period (referand lower net sales stemming from the FDA evolving regulatory expectations for infant formula manufacturing, and lower net sales due primarily to Item 1. Note 3);purposeful SKU prioritization actions to focus capacity on higher margin products andA decrease of $4.6 $5.4 million in selling and administrative expenses due to previously announceddistributor transitions in addition to impacts noted above; partially offset by
•$31.4 million decrease from exited product lines and a $19.3 million decrease from the divestitures of the Latin American businesses and ScarAway® brand asset; and
•$12.7 million decrease from unfavorable foreign currency translation.
Operating income increased $119.6 million, or 249.7%, due primarily to:
•$180.3 million increase in gross profit driven by strategic initiatives to better align promotional investments with salespricing actions and $95.1 million from our acquisitions of the GoodStart®infant formula brand and HRA Pharma, including $22.1 million unfavorable impact of distributor transitions; partially offset by cost reduction initiatives taken inof goods sold inflation, and lower infant formula productivity within U.S. Nutrition stemming from the current year; offset partially by
| |
• | Increased restructuring charges totaling $1.2 million related to strategic organizational enhancements (refer to Item 1. Note 15). |
FDA evolving regulatory expectations for infant formula manufacturing. Gross profit as a percentage of net sales was 4.3%increased 330 basis points compared to the prior year due to the same factors that drove gross profit and benefits from the purposeful SKU prioritization actions to focus capacity on higher due primarilymargin products in CSCA.
•$60.7 million increase in operating expense as a result of the acquisition of HRA Pharma and Gateway, and higher employee expenses, partially offset by decreased acquisition and integration expenses compared to improved product mix primarily driven by the cancellation of certain unprofitable distribution contracts, as described above.prior year period and $2.2 million from foreign currency translation.
| |
• | Operating income as a percentage of net sales was 429.3% higher due primarily to the absence of $1.6 billion of intangible asset and goodwill impairment charges as discussed above (refer to Item 1. Note 3). |
Nine
CONSUMER SELF-CARE AMERICAS FINANCIAL RESULTS
Three Month Comparison
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 | | |
Net sales | $ | 703.5 | | | $ | 722.3 | | | | | |
Gross profit | $ | 224.0 | | | $ | 190.3 | | | | | |
Gross profit % | 31.8 | % | | 26.3 | % | | | | |
Operating income | $ | 91.1 | | | $ | 75.2 | | | | | |
Operating income % | 12.9 | % | | 10.4 | % | | | | |
|
| | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 1,232.7 |
| | $ | 1,116.8 |
|
Gross profit | $ | 542.1 |
| | $ | 509.4 |
|
Gross profit % | 44.0% | | 45.6 | % |
Operating income (loss) | $ | (2,011.3 | ) | | $ | 8.7 |
|
Operating income (loss) % | (163.2 | )% | | 0.8 | % |
40
Nine Months EndedSeptember 30, 2017 vs. Nine Months EndedOctober 1, 2016Perrigo Company plc - Item 2
CSCA
Net sales decreased $115.9$18.8 million, or 9%2.6%, overdue primarily to:
•$36.6 million decrease, or 5.1%, due primarily to lower net sales in legacy U.S. Nutrition driven by lower manufacturing productivity, purposeful SKU prioritization actions to focus capacity on higher margin products and lower net sales of branded OTC products; partially offset by approximately $26 million in strategic pricing actions; and
•$27.0 million increase from the addition of Gateway; partially offset by
•$9.0 million decrease from exited product lines.
| | | | | | | | | | | | | | | | | | | | | | | |
Sales | Three Months Ended | | | | |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 | | $ Change | | % Change |
Nutrition | $ | 130.7 | | | $ | 124.4 | | | $ | 6.3 | | | 5.1 | % |
Upper Respiratory | 130.2 | | | 132.2 | | | (2.0) | | | (1.5) | % |
Digestive Health | 117.1 | | | 119.6 | | | (2.5) | | | (2.1) | % |
Pain and Sleep-Aids | 94.1 | | | 104.0 | | | (9.9) | | | (9.5) | % |
Healthy Lifestyle | 79.4 | | | 73.8 | | | 5.6 | | | 7.6 | % |
Oral Care | 76.5 | | | 83.6 | | | (7.1) | | | (8.5) | % |
Skin Care | 47.6 | | | 48.9 | | | (1.3) | | | (2.7) | % |
Women's Health | 10.2 | | | 12.4 | | | (2.2) | | | (17.7) | % |
Vitamins, Minerals, and Supplements ("VMS") | 4.3 | | | 7.1 | | | (2.8) | | | (39.4) | % |
Other CSCA | 13.4 | | | 16.3 | | | (2.9) | | | (17.8) | % |
Total CSCA | $ | 703.5 | | | $ | 722.3 | | | $ | (18.8) | | | (2.6)% |
Sales drivers in each category are provided below:
•Nutrition: Net sales of $130.7 million increased 5.1% due primarily to the Gateway acquisition. This benefit was partially offset by lower net sales in legacy infant formula due to lower manufacturing productivity and exited product lines;
•Upper Respiratory: Net sales of $130.2 million decreased 1.5% due primarily to the launch and channel fill of Nasonex® in the prior year periodquarter and exited product lines, partially offset by higher net sales of cough cold products, led by store brand Guaifenesin-based offerings, and the new product launch of store brand Cough Relief Liquid Honey;
•Digestive Health: Net sales of $117.1 million decreased 2.1% due primarily to:
New productto lower net sales of $50.4 million; more thanstore brand Proton Pump Inhibitors, partially offset by higher net sales of store brand laxatives, including Polyethylene Glycol 3350 Orange;
The absence•Pain and Sleep-aids: Net sales of $118.4$94.1 million decreased 9.5% due primarily to purposeful SKU prioritization actions in adult analgesic offerings to focus capacity on higher margin products, partially offset by sales attributableof new products, including store brand Dual Action Acetaminophen 250mg and Ibuprofen 125mg Tablets, and higher demand for children's analgesics products;
•Healthy Lifestyle: Net sales of $79.4 million increased 7.6% due primarily to higher sales volumes and market share gains in smoking cessation products;
•Oral Care: Net sales of $76.5 million decreased 8.5% due primarily to purposeful SKU prioritization actions and timing of promotions compared to the cancellation of unprofitable distribution contracts;
Unfavorable foreign currency translation movement of $25.2 million;
A decreasethird quarter in the prior year, partially offset by higher net sales of existingstore brand teeth whitening products and power toothbrush handles;
•Skin Care: Net sales of $17.4$47.6 million decreased 2.7% due primarily to exited product lines, partially offset by strong performance of Mederma®;
•Women's Health: Net sales of $10.2 million decreased 17.7% due primarily to purposeful SKU prioritization actions in the anti-parasitesfeminine hygiene; and vitamins categories;
•VMS and
Discontinued products Other: Net sales of $5.0 million.
$17.7 million decreased 24.4% due primarily to purposeful SKU prioritization actions.
Perrigo Company plc - Item 2
CHCICSCA
Operating income increased $2.0 billion$15.9 million, or 21.1%, due primarily to:
A decrease of $32.7•$33.7 million increase in gross profit due primarily to:
Improved product mix for salesto strategic pricing actions, the addition of existing products;Gateway, favorable input costs and
Operational efficiencies a decrease of integration costs and lower amortization; partially offset by increased direct labor costs across the organization; more than offset by
Lower marginsCompany, and lower manufacturing productivity in our U.K. store brand business; and
Unfavorable foreign currency translation movement.
A decrease of $2.1 billion in operating expenses due primarily to:
The absence of $2.0 billion of impairment charges on certain indefinite-lived and definite-lived intangible brand category assets and goodwill impairments inU.S. Nutrition stemming from the BCH-ROW and BCH-Belgium
reporting units recorded in the prior year period (refer to Item 1. Note 3); andA decrease in selling and administrative expenses of $48.5 million due to previously announced strategic initiatives to better align promotional investments with sales and cost reduction initiatives taken in the current year; offset partially by
| |
• | A $4.8 million impairment charge recorded related to the Russian business (refer to Item 1. Note 2) and In-Process Research and Development ("IPR&D"); and |
| |
• | Increased restructuring expense of $2.8 million related to strategic organizational enhancements (refer to Item 1. Note 15). |
FDA evolving regulatory expectations for infant formula manufacturing. Gross profit as a percentage of net sales was 1.6% higherincreased 550 basis points compared to the prior year due to the same factors that drove gross profit in addition to benefits from purposeful SKU prioritization actions.
•$17.8 million increase in operating expenses due primarily to improved product mix primarily driventhe addition of Gateway and Opill® pre-launch expenses, partially offset by reduced distribution costs compared to the cancellation of certain unprofitable distribution contracts, as described above.prior year period.
| |
• | Operating income as a percentage of net sales was 164.0% higher due primarily to the absence of $2.0 billion of intangible asset and goodwill impairment charges as discussed above (refer to Item 1. Note 3). |
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
We continue to experience a significant reduction in pricing expectations from historical levels in our RX segment due to industry and competitive pressures. This softness in pricing is attributable to various factors, including increased focus from customers to capture supply chain productivity savings, low raw material commodity pricing, competition in specific products, and consolidation of certain customers. We expect this softness to continue to impact the segment for the foreseeable future, and we are forecasting a high single digit pricing decline in this segment for the year ending December 31, 2017.
On November 10, 2016, we announced that as part of our portfolio review process we are conducting a comprehensive internal evaluation of the RX segment's market position, growth opportunities, and interdependencies with our manufacturing and shared service operations to determine if strategic alternatives should be explored.
| |
• | During the three months ended December 31, 2016, the U.S. market for Entocort® (Budesonide) capsules, including both brand and authorized generic capsules, experienced significant and unexpected increased competition, which reduced our future revenue stream. We expect our net sales in the RX segment for the year ending December 31, 2017 will be negatively impacted by approximately $67.0 million.
|
During the nine months ended September 30, 2017, we sold various Abbreviated New Drug Applications ("ANDAs") for a total gain of $23.0 million.
Perrigo Company plc - Item 2
RX
Segment Results
ThreeNine Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 251.9 |
| | $ | 250.6 |
|
Gross profit | $ | 120.9 |
| | $ | 116.7 |
|
Gross profit % | 48.0 | % | | 46.6 | % |
Operating income | $ | 74.4 |
| | $ | 82.1 |
|
Operating income % | 29.5 | % | | 32.8 | % |
Three Months Ended September 30, 2017 vs. Three Months Ended October 1, 2016
| | | | | | | | | | | |
| Nine Months Ended |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 |
Net sales | $ | 2,217.9 | | | $ | 2,160.2 | |
Gross profit | $ | 659.3 | | | $ | 555.0 | |
Gross profit % | 29.7 | % | | 25.7 | % |
Operating income (loss) | $ | 272.0 | | | $ | 240.0 | |
Operating income % | 12.3 | % | | 11.1 | % |
Net sales decreased $1.3increased $57.7 million, or 1%2.7%, due primarily to:
| |
• | New product sales of $30.8 million due primarily to the sale of Scopolamine and Testosterone 2% topical (store brand equivalent to Axiron®); more than offset by
|
Decreased•$120.6 million increase from four additional months of HRA Pharma sales of existing products of $21.5(HRA Pharma was acquired on April 29, 2022), and Gateway; partially offset by
•$20.4 million decrease, or 1.0%, due primarily to lower distribution driven by known capacity constraints that limited our net sales primarily in cough cold products during the first quarter and purposeful SKU prioritization actions of approximately $55 million to focus capacity on higher margin products that primarily impacted net sales in our CSCA Pain and Sleep product categories, partially offset by approximately $79 million of strategic pricing pressure acrossactions in addition to new products; and
•$19.3 million decrease from the portfolio;divestitures of the Latin American businesses and
| |
• | Lower Entocort® sales of $10.2 million.
|
ScarAway® brand asset and $21.9 million decrease from exited product lines.
Segment operating | | | | | | | | | | | | | | | | | | | | | | | |
Sales | Nine Months Ended | | | | |
(in millions, except percentages)(1) | September 30, 2023 | | October 1, 2022 | | $ Change | | % Change |
Nutrition | $ | 435.4 | | | $ | 376.7 | | | $ | 58.7 | | | 15.6 | % |
Upper Respiratory | 422.2 | | | 430.9 | | | (8.7) | | | (2.0) | % |
Digestive Health | 368.0 | | | 363.3 | | | 4.7 | | | 1.3 | % |
Pain and Sleep-Aids | 295.0 | | | 309.5 | | | (14.5) | | | (4.7) | % |
Oral Care | 237.8 | | | 230.6 | | | 7.2 | | | 3.1 | % |
Healthy Lifestyle | 220.1 | | | 208.7 | | | 11.4 | | | 5.5 | % |
Skin Care | 150.7 | | | 138.4 | | | 12.3 | | | 8.9 | % |
Women's Health | 34.6 | | | 32.6 | | | 2.0 | | | 6.1 | % |
VMS | 12.7 | | | 23.0 | | | (10.3) | | | (44.8) | % |
Other CSCA | 41.4 | | | 46.5 | | | (5.1) | | | (11.0) | % |
Total CSCA | $ | 2,217.9 | | | $ | 2,160.2 | | | $ | 57.7 | | | 2.7% |
Sales drivers in each category are provided below:
•Nutrition: Net sales of $435.4 million increased 15.6% due primarily to the Gateway acquisition and strong growth in contract infant formula. This growth was partially offset by lower net sales in legacy infant formula
Perrigo Company plc - Item 2
CSCA
due to lower manufacturing productivity, an unfavorable impact due to a voluntary recall and exited product lines;
•Upper Respiratory: Net sales of $422.2 million decreased 2.0% due primarily to lower net sales of allergy products driven by a weaker and later start to the allergy season compared to the prior year, a voluntary OTC product recall, the divested Latin American businesses, exited product lines and the absence of the launch and channel fill of Nasonex® from the prior year quarter. These factors were partially offset by higher net sales of cough cold products, led by store brand Guaifenesin-based offerings, and the new product launch of store brand Cough Relief Liquid Honey;
•Digestive Health: Net sales of $368.0 million increased 1.3% due to higher net sales of Omeprazole, increased manufacturing capacity and demand for Polyethylene Glycol 3350, and new products, including Omeprazole Mini Capsules and Polyethylene Glycol 3350 Orange. Growth in this category was partially offset by the divested Latin American businesses and lower net sales of store brand Proton Pump Inhibitors;
•Pain and Sleep-aids: Net sales of $295.0 million decreased 4.7% due primarily to purposeful SKU prioritization actions in adult analgesic offerings to focus capacity on higher margin products as well as the divested Latin American businesses, partially offset by new products, including store brand Dual Action Acetaminophen 250mg and Ibuprofen 125mg Tablets and higher demand for children's analgesics products resulting from a relatively stronger cough cold and flu season;
•Oral Care: Net sales of $237.8 million increased 3.1% due primarily to the normalization of supply chain disruptions that impacted net sales in the prior year period and higher net sales of Plackers® and store brand teeth whitening products, partially offset by purposeful SKU prioritization actions and lower sales of manual toothbrushes, including branded Firefly® and REACH®, and store brand offerings;
•Healthy Lifestyle: Net sales of $220.1 million increased 5.5% due primarily to higher sales volumes and market share gains in smoking cessation products, partially offset by lost distribution at a specific customer;
•Skin Care: Net sales of $150.7 million increased 8.9% due primarily to the addition of HRA Pharma brands, including Mederma®and Compeed®, partially offset by the unfavorable impact from the divested Latin American businesses and ScarAway® brand asset and exited product lines;
•Women's Health: Net sales of $34.6 million increased 6.1% due primarily to the addition of HRA Pharma brands, including ella®, partially offset by purposeful SKU prioritization actions in feminine hygiene; and
•VMS and Other: Net sales of $54.1 million decreased 22.2% due primarily to the unfavorable impact from the divested Latin American businesses and purposeful SKU prioritization actions.
Operating income increased $7.7$32.0 million, or 10%13.3%, as a result of:due primarily to:
A decrease of $4.2•$104.3 million increase in gross profit due primarily to:
| |
• | Lower Entocort® sales as discussed above; and
|
Pricing pressureto strategic pricing actions, the addition of HRA Pharma and Gateway, and new products; partially offset by lower manufacturing productivity in U.S. Nutrition stemming from the FDA evolving regulatory expectations for infant formula manufacturing, the divestitures of the Latin American businesses and ScarAway® brand asset in the prior year period, discontinued product lines and higher employee costs in the current year period. Gross profit as discussed above.a percentage of net sales increased 400 basis points compared to the prior year due to the same factors that drove gross profit in addition to purposeful SKU prioritization actions to focus capacity on higher margin products.
A decrease of $11.9•$72.3 million increase in operating expenses due primarily to:
Decreased sellingto the addition of HRA Pharma and administrative expensesGateway as well as higher advertising and promotion costs on branded business, higher administration costs and the absence of $8.4 million due primarilya gain on the sale of ScarAway® asset brand from the prior year period, partially offset by reduced distribution costs compared to the prior year specialty pharmaceuticals sales force restructuring initiative;period and
Decreased R&D expenses the absence of $7.3 million due to timing of clinical trials, lower legal spend, and lower ongoing costs on certain projects; offset partially by
A $4.0 million impairment charge on certain fixed assetsthe divested Latin American businesses in the current period.prior year.
| |
• | Gross profit as a percentage of net sales was 1.4% lower due primarily to lower sales of Entocort® and pricing pressures.
|
| |
• | Operating income as a percentage of net sales was 3.3% higher due primarily to decreased costs related to R&D spend and restructuring initiatives taken in the prior year; offset partially by lower sales of Entocort®.
|
Perrigo Company plc - Item 2
RXCSCI
CONSUMER SELF-CARE INTERNATIONAL FINANCIAL RESULTS
Nine
Three Month Comparison
| | | | | | | | | | | |
| Three Months Ended |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 |
Net sales | $ | 420.3 | | | $ | 377.9 | |
Gross profit | $ | 187.2 | | | $ | 172.6 | |
Gross profit % | 44.5 | % | | 45.7 | % |
Operating income | $ | 13.6 | | | $ | 1.3 | |
Operating income % | 3.2 | % | | 0.3 | % |
|
| | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 776.9 |
| | $ | 708.4 |
|
Gross profit | $ | 380.2 |
| | $ | 332.1 |
|
Gross profit % | 48.9 | % | | 46.9 | % |
Operating income | $ | 258.3 |
| | $ | 239.6 |
|
Operating income % | 33.3 | % | | 33.8 | % |
Nine Months Ended September 30, 2017 vs. Nine Months Ended October 1, 2016
Net sales decreased $68.5increased $42.4 million, or 9%11.2%, due primarily to:
•$23.1 million, or 6.2%, net increase due primarily to approximately $26 million of strategic pricing actions in addition to new products, partially offset by lower sales volumes in certain product categories; and
| |
• | New product sales of $53.2 million due primarily to sales of Scopolamine and Testosterone 2% topical (store brand equivalent to Axiron®); more than offset by
|
| |
• | Lower Entocort® sales of $61.4 million;
|
Decreased
•$22.7 million increase from favorable foreign currency translation; partially offset by
•$3.4 million decrease from exited product lines.
| | | | | | | | | | | | | | | | | | | | | | | |
Sales | Three Months Ended | | | | |
(in millions, except percentages)(1) | September 30, 2023 | | October 1, 2022 | | $ Change | | % Change |
Skin Care | $ | 86.7 | | | $ | 81.1 | | | $ | 5.6 | | | 6.9 | % |
Upper Respiratory | 78.2 | | | 69.2 | | | 9.0 | | | 13.0 | % |
Pain and Sleep-Aids | 61.1 | | | 46.1 | | | 15.0 | | | 32.5 | % |
Healthy Lifestyle | 52.4 | | | 47.6 | | | 4.8 | | | 10.1 | % |
VMS | 46.1 | | | 46.4 | | | (0.3) | | | (0.6) | % |
Women's Health | 28.5 | | | 28.7 | | | (0.2) | | | (0.7) | % |
Oral Care | 24.8 | | | 21.7 | | | 3.1 | | | 14.3 | % |
Digestive Health | 10.8 | | | 8.2 | | | 2.6 | | | 31.7 | % |
Other CSCI | 31.7 | | | 28.9 | | | 2.8 | | | 9.7 | % |
Total CSCI | $ | 420.3 | | | $ | 377.9 | | | $ | 42.4 | | | 11.2 | % |
(1) We updated our global reporting product categories as a result of our product portfolio reconfiguration. These product categories have been adjusted retroactively to reflect the changes and have no impact on historical financial position, results of operations, or cash flows.
Sales in each category were driven primarily by:
•Skin Care: Net sales of existing$86.7 million increased 6.9%, inclusive of a 2.5% favorable effect of currency translation, driven primarily by the Sebamed and ACO brands, partially offset by lower net sales in wound care products, which were primarily impacted by distributor transitions;
•Upper Respiratory: Net sales of $58.0$78.2 million increased 13.0%, inclusive of a 7.9% favorable effect of currency translation, due primarily to higher demand for cough cold products, including Bronchostop and Coldrex. Net sales of U.K. store brand cough cold products were also higher compared to the prior year period;
•Pain & Sleep-Aids: Net sales of $61.1 million increased 32.5%, inclusive of a 9.5% favorable effect of currency translation, due primarily to quarterly phasing of Solpadeine, higher net sales in store brands and increased demand for Nytol;
•Healthy Lifestyle: Net sales of $52.4 million increased 10.1%, inclusive of a 5.7% favorable effect of currency translation, due primarily to higher net sales of anti-parasite offerings that continue to outpace strong category growth and higher demand for smoking cessation products. This growth was partially offset by lower category consumption in weight loss, impacting XLS Medical;
•VMS: Net sales of $46.1 million decreased 0.6%, inclusive of a 6.9% favorable effect of currency translation, due primarily to lower category consumption, impacting sales volume of certainDavitamon and Abtei;
Perrigo Company plc - Item 2
CSCI
•Women's Health: Net sales of $28.5 million decreased 0.7%, inclusive of a 6.3% favorable effect of currency translation, due primarily to lower net sales in contraceptive products, which were primarily impacted by distributor transitions;
•Oral Care: Net sales of $24.8 million increased 14.3%, inclusive of a 7.8% favorable effect of currency translation, due primarily to higher net sales of power oral care products, Plackers® and improved service levels compared to the prior year;
•Digestive Health and Other: Net sales of $42.5 million increased 14.6%, inclusive of a 3.8% favorable effect of currency translation, due primarily to higher net sales of store brand digestive health products and pricing pressure across the portfolio; and
Discontinued products of $2.3 million.
distribution brands.
Operating income decreased $18.7increased $12.3 million, or 7%946.2%, as a result of:due primarily to:
A decrease of $48.1•$14.6 million increase in gross profit due primarily to:
| |
• | Lower Entocort® sales as noted above; and
|
Pricing pressureto strategic pricing actions and higher margin new products, partially offset by $16.0 million of cost of goods sold inflation. Gross profit as discussed above.a percentage of net sales decreased 110 basis points due primarily to inflation and unfavorable brand volume/mix, partially offset by positive pricing benefits; and
A decrease of $29.4•$2.4 million increase in operating expenses due primarily to higher restructuring expenses and higher administrative expenses, partially offset by lower advertising and promotion investments.
Nine Month Comparison
| | | | | | | | | | | |
| Nine Months Ended |
(in millions, except percentages) | September 30, 2023 | | October 1, 2022 |
Net sales | $ | 1,280.7 | | | $ | 1,136.1 | |
Gross profit | $ | 593.8 | | | $ | 517.8 | |
Gross profit % | 46.4 | % | | 45.6 | % |
Operating income | $ | 43.6 | | | $ | 19.0 | |
Operating income % | 3.4 | % | | 1.7 | % |
Net sales increased $144.6 million, or 12.7%, due primarily to:
A $23.0•$91.7 million, gainor 8.1%, net increase due primarily to approximately $84 million of strategic pricing actions, and new products, partially offset by lower sales volumes in certain product categories and an unfavorable impact of $5.4 million from distributor transitions as part of the integration strategy to capture synergies after the twelve month anniversary of the HRA Pharma acquisition;
•$68.3 million increase from an additional four months of HRA Pharma sales prior to the twelve month anniversary of the HRA Pharma acquisition, which included an unfavorable impact of $22.1 million from distributor transitions; and
•$11.2 million decrease from unfavorable foreign currency translation; and
•$10.4 million decrease from exited product lines.
Perrigo Company plc - Item 2
CSCI
| | | | | | | | | | | | | | | | | | | | | | | |
Sales | Nine Months Ended | | | | |
(in millions, except percentages)(1) | September 30, 2023 | | October 1, 2022 | | $ Change | | % Change |
Skin Care | $ | 293.1 | | | $ | 257.5 | | | $ | 35.6 | | | 13.8 | % |
Upper Respiratory | 227.9 | | | 194.5 | | | 33.4 | | | 17.2 | % |
Healthy Lifestyle | 179.4 | | | 165.6 | | | 13.8 | | | 8.3 | % |
Pain and Sleep-Aids | 163.8 | | | 149.2 | | | 14.6 | | | 9.8 | % |
VMS | 135.4 | | | 138.2 | | | (2.8) | | | (2.0) | % |
Women's Health | 89.5 | | | 65.7 | | | 23.8 | | | 36.2 | % |
Oral Care | 75.5 | | | 71.2 | | | 4.3 | | | 6.0 | % |
Digestive Health | 30.0 | | | 27.4 | | | 2.6 | | | 9.5 | % |
Other CSCI | 86.1 | | | 66.8 | | | 19.3 | | | 28.9 | % |
Total CSCI | $ | 1,280.7 | | | $ | 1,136.1 | | | $ | 144.6 | | | 12.7 | % |
(1) We updated our global reporting product categories as a result of our product portfolio reconfiguration. These product categories have been adjusted retroactively to reflect the changes and have no impact on historical financial position, results of operations, or cash flows.
Sales in each category were driven primarily by:
•Skin Care: Net sales of certain ANDAs;$293.1 million increased 13.8%, inclusive of a 4.4% unfavorable effect of currency translation, driven primarily by the addition of HRA Pharma, Sebamed and ACO brands, partially offset by lower net sales in wound care products, which were primarily impacted by distributor transitions;
| |
• | A $17.0 million gain related to contingent consideration (refer to Item 1. Note 6); |
Decreased selling •Upper Respiratory: Net sales of $227.9 million increased 17.2%, inclusive of an 0.3% favorable effect of currency translation, due primarily to strong demand for cough cold products, including Bronchostop and administrative expensesColdrex, stemming from a relatively stronger cough cold and flu season. Net sales of $18.3the U.K. allergy brand Beconase were also higher compared to the prior year period;
•Healthy Lifestyle: Net sales of $179.4 million increased 8.3%, inclusive of a 0.2% favorable effect of currency translation, due primarily to higher net sales of anti-parasite offerings that continue to outpace strong category growth, partially offset by lower category consumption in weight management impacting XLS Medical;
•Pain & Sleep-Aids: Net sales of $163.8 million increased 9.8%, inclusive of a 0.3% favorable effect of currency translation, primarily due to quarterly phasing of Solpadeine, higher net sales in store brands and increased demand for Nytol;
•VMS: Net sales of $135.4 million decreased 2.0%, inclusive of a 1.1% favorable effect of currency translation, primarily due to higher sales in the prior year due to pandemic related demand and lower category consumption, impacting sales of Davitamon and Abtei;
•Women's Health: Net sales of $89.5 million increased 36.2%, inclusive of a 0.6% favorable effect of currency translation, due primarily to the addition of HRA Pharma brands, including ellaOne®and NorLevo®, partially offset bylower net sales in contraceptive products, which were primarily impacted by distributor transitions;
•Oral Care: Net sales of $75.5 million increased 6.0%, due primarily to higher net sales of power oral care products, Plackers® and improved service levels compared to the prior year specialty pharmaceuticalsyear;
•Digestive Health and Other: Net sales force restructuring initiative; and
Decreased R&D expenses of $14.1$116.1 million due to timing of clinical trials, lower legal spend, and lower ongoing costs on certain projects; offset partially by
| |
• | Impairment charges related to certain definite-lived intangible assets, certain fixed assets and IPR&D of $34.8 million (refer to Item 1. Note 3); and |
| |
• | Increased restructuring expenses of $5.9 million related to strategic organizational enhancements (refer to Item 1. Note 15). |
| |
• | Gross profit as a percentage of net sales was 2.0% lower due primarily to lower sales of Entocort® as discussed above.
|
Perrigo Company plc - Item 2
Other
OTHER
Recent Trends and Developments
On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited. We received $22.2 million of proceeds, inclusive of an estimated working capital adjustment, which resulted in an immaterial gain. Prior to closing the sale, we determined that the carrying value of the India API business exceeded its fair value less the cost to sell, resulting in an impairment charge of $35.3 million, which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016 (refer to Item 1. Note 2).
On August 4, 2017, we signed a definitive agreement for the sale of our Israel API business to SK Capital for $110.0 million in cash,increased 23.2%, inclusive of a net debt adjustment. We expect to finalize the sale within the next three months, and the sale is not expected to have a material impact on our operations (refer to Item 1. Note 9).
Segment Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 21.1 |
| | $ | 16.5 |
|
Gross profit | $ | 9.4 |
| | $ | 9.1 |
|
Gross profit % | 44.5 | % | | 55.5 | % |
Operating income (loss) | $ | (1.5 | ) | | $ | (0.4 | ) |
Operating income (loss)% | (7.4 | )% | | (2.4 | )% |
Three Months Ended September 30, 2017 vs. Three Months Ended October 1, 2016
Net sales decreased $4.6 million3.6% unfavorable effect of currency translation, due primarily to increased competition on certain products. Operating loss decreased $1.1 million due primarily to a $1.4 million decrease in operating expenses. The decrease in operating expenses related to the absenceaddition of a $6.5 million impairment charge recorded on the India API businessHRA Pharma Rare Diseases portfolio in the prior year; offset partially by a $3.3 million impairment charge recorded on the Israel API business in the current period (refer to Item 1. Note 9).Other category and higher net sales of store brand digestive health products and distribution brands.
Perrigo Company plc - Item 2
Other
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 |
Net sales | $ | 59.5 |
| | $ | 51.5 |
|
Gross profit | $ | 26.8 |
| | $ | 27.8 |
|
Gross profit % | 45.0 | % | | 54.1 | % |
Operating income | $ | 2.6 |
| | $ | 9.4 |
|
Operating income % | 4.4 | % | | 18.2 | % |
Nine Months Ended September 30, 2017 vs. Nine Months Ended October 1, 2016
Net sales decreased $8.0 million due primarily to competition on certain products. Operating income increased $6.8$24.6 million, or 129.5%, due to a $1.0primarily to:
•$76.0 million increase in gross profit drivenfrom positive sales pricing benefits and the addition of HRA Pharma, partially offset by favorable product mix$25.0 million of cost of goods sold inflation and $22.1 million impact from distributor transitions. Gross profit as a $5.8percentage of net sales increased 80 basis points due primarily to the same factors that drove gross profit; and
•$51.4 million decrease in operating expenses. The decreaseincrease in operating expenses relateddue to higher selling and administrative expenses primarily todriven by the absenceaddition of a $10.8 million impairment charge recorded on the India API business in the prior year;HRA Pharma, higher restructuring and increased amortization expenses, partially offset partially by a $3.3$4.6 million impairment charge recordedgain on the Israel API businessan asset divestiture in the current period (refer to year.
Perrigo Company plc - Item 1. Note 9).2
Unallocated, Interest, Other, and Taxes
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded abovein Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
$ | 42.5 | | | $ | 43.4 | | | $ | 148.1 | | | $ | 211.1 | |
|
| | | | | | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 |
$ | 27.7 |
| | $ | 48.2 |
| | $ | 79.1 |
| | $ | 120.8 |
|
Effective January 1, 2017, dueThe decrease of $63.0 million in unallocated expenses during the nine months ended September 30, 2023, compared to the sale of the Tysabri® financial asset, all legalprior year periods was due primarily to a decrease in acquisition and integration expenses associated with the former Specialty Sciences segment were moved to unallocated expenses.HRA Pharma and Gateway acquisitions.
Interest expense, net, and Other (income) expense, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 |
Interest expense, net | $ | 43.5 | | | $ | 41.0 | | | $ | 131.1 | | | $ | 115.1 | |
Other (income) expense, net | $ | (0.6) | | | $ | (4.0) | | | $ | (9.6) | | | $ | 48.7 | |
(Gain) loss on extinguishment of debt | $ | — | | | $ | (0.4) | | | $ | — | | | $ | 8.9 | |
The $2.5 million increase of $20.5 million in unallocated expensesInterest Expense, net during the three months ended September 30, 20172023 compared to the prior year period was due primarily to increasing interest rates on our variable rate debt.
The $16.0 million increase in Interest Expense, net during the nine months ended September 30, 2023 compared to the prior year period was due primarily to an increase in share-based compensation expense of $4.7outstanding borrowings under our New Senior Secured Credit Facilities (as defined in Item 1. Note 11) in addition to increasing interest rates on our variable rate debt.
The $3.4 million driven primarily by the resignation of certain executives, which had a favorable impact on the prior year period, and an increase of $15.6 million of administrative expenses driven by consulting fees and employee-related expenses.
The increase of $41.7 milliondecrease in unallocated expensesincome in Other (Income) Expense, net during the ninethree months ended September 30, 20172023 compared to the prior year period was due to an increase of $26.9 million of administrative expenses driven by consulting fees and employee-related expenses, $8.8 million in share-based compensation driven primarily by the resignation of certain executives, which had a favorable impact on the prior year period, and $5.9 million of restructuring expenses related to ourcost reduction initiatives.
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
Interest, Other and Change in financial assets (Consolidated)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 |
Change in financial assets | $ | 377.4 |
| | $ | 2.6 |
| | $ | 1,492.6 |
| | $ | 24.2 |
|
Interest expense, net | $ | 54.6 |
| | $ | 34.7 |
| | $ | 163.2 |
| | $ | 133.1 |
|
Other (income) expense, net | $ | 1.0 |
| | $ | (3.6 | ) | | $ | 32.4 |
| | $ | (1.1 | ) |
Loss on extinguishment of debt | $ | 0.7 |
| | $ | — |
| | $ | 1.1 |
| | $ | 135.2 |
|
Change in Financial Assets
On December 18, 2013, we acquired Elan, which had a royalty agreement with Biogen Idec Inc. ("Biogen"), whereby Biogen conveyed the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the drug Tysabri®. Pursuant to the royalty agreement, we were entitled to royalty payments from Biogen based on its Tysabri® sales in all indications and geographies. We received royaltiesunfavorable revaluation of 12% on worldwide Biogen sales of Tysabri® from December 18, 2013 through April 30, 2014. From May 1, 2014, we received royalties of 18% on annual worldwide Biogen sales of Tysabri® up to $2.0 billion and 25% on annual sales above $2.0 billion.foreign currency.
We accounted for the Tysabri® royalty stream as a financial asset and elected to use the fair value option model. We made the election to account for the Tysabri® financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date. The financial asset acquired represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected probability weighted future cash flows to be generated by the royalty stream. The financial asset was classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including industry analyst estimates for global Tysabri® sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri® through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows were based upon the expected royalty stream forecasted into perpetuity using a 20-year discrete period with a declining rate terminal value.
In the first quarter of 2016, a competitor's pipeline product, Ocrevus®, received breakthrough therapy designation from the U.S. Food and Drug Administration ("FDA"). Breakthrough therapy designation is granted when a drug is intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. In June 2016, the FDA granted priority review with a target action date in December 2016. A priority review is a designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved late in the first quarter of 2017. The product is expected to compete with Tysabri®, and we expected it to have a significant negative impact on the Tysabri® royalty stream. Industry analysts believe that, based on released clinical study information, Ocrevus® will compete favorably against Tysabri® in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Given the new market information for Ocrevus®, we used industry analyst estimates to reduce our first ten year growth forecasts from an average of growth of approximately 3.4% in the fourth calendar quarter of 2015 to an average decline of approximately minus 2.0% in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of $204.4$58.3 million $910.8 million, $377.4 million and $1.1 billion in the first, second, third and fourth quarters of 2016, respectively.
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, which consists of $2.2 billion in cash and up to $250.0 million and $400.0 million in
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended July 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $143.2 million as of September 30, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.
We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.05% as of July 1, 2017 and a volatility of 30.0% and a rate of return of 8.06% as of September 30, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the three and nine months ended September 30, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $2.9 million and $42.1 million, respectively, as a result of the decrease in the estimated projected Tysabri® revenues due to the launch of Ocrevus® lateexpense in the first quarter of 2017 (refer to Item 1. Note 6).
InterestOther (Income) Expense, Net
The (gain) loss on extinguishment of debt was due to the prior year write-off of certain deferred financing fees and
Item 1. Note 10).make whole payments on debt redeemed prior to maturity.
Other (Income) Expense, Net
Income Taxes (Consolidated)
Other (income) expense, net was $3.6 million
The effective tax rates were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | Nine Months Ended | | |
September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 | | | | |
19.7 | % | | (1,377.1) | % | | 49.5 | % | | 5.3 | % | | | | |
The effective tax rate on the pre-tax income for the three months ended September 30, 2017,2023 decreased compared to $1.0 million expensethe effective tax rate on the pre-tax loss for the three months ended October 1, 2016.2022, primarily due to the jurisdictional mix of earnings, as well as the impact of benefits not realized on certain pre-tax losses in the three months ended October 1, 2022. The $4.6 million decrease in expense was due primarily to $2.6 million of favorable changes in revaluation of monetary assets and liabilities held in foreign currencies.
Other (income) expense, net was $1.1 millioneffective tax rate on the pre-tax income duringfor the nine months ended September 30, 2017,2023, increased compared to $32.4 million expensethe effective tax rate on the pre-tax loss for the nine months ended October 1, 2016. The $33.5 million decrease2022, primarily due to audit settlements occurring in expenses was due primarily to the absencecurrent period, as well as the tax benefit of a $22.3 million equity investment impairment (refer to Item 1. Note 7), $6.7 million of favorable changes in revaluation of monetary assets and liabilities held in foreign currencies, and a $4.2 million reduction in equity method losses, partially offset by a $5.9 million loss related to the pre-issuance hedge reclassification (refer to Item 1. Note 8).
Loss on Extinguishment of Debt
During the nine months ended September 30, 2017, we recorded a $135.2 million loss on extinguishmentsale of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts related toour Latin American business recognized in the $500.0 million 3.500% senior notes due December 2021, $500.0 million 3.500% senior notes due March 2021, $400.0 million 4.900% senior notes due 2044, $800.0 million 4.000% senior notes due 2023, and $400.0 million 5.300% senior notes due 2043 (refer to Item 1. Note 10).prior year. The effective tax rate for these periods
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
Income Taxes (Consolidated)
The effective tax rates were as follows:
|
| | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 |
16.4 | % | | 65.5 | % | | 17.2 | % | | 68.7 | % |
The effectivediffers from the statutory income tax rate for the nine months ended September 30, 2017 was negatively impacted by non-deductible fees related to our debt cancellation, discrete tax items, and additional valuation allowances recorded against deferred tax assets.
Our tax rate is subject to adjustment over the balance of the fiscal year12.5% primarily due to among other things:non-deductible expenses as well as the jurisdictionsimpact of audit settlements in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments based on differing interpretations of the applicable transfer pricing standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. international tax reform); changes in U.S. GAAP; and expiration of or the inability to renew tax rulings or tax holiday incentives.these periods.
On August 15, 2017, we filed a complaint in the United States District Court for the Western District of Michigan to recover $163.6 million of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”), plus statutory interest thereon from the dates of payment, for the fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012 (the “2009 tax year,” “2010 tax year,” “2011 tax year,” and “2012 tax year,” respectively). The IRS audits of those years culminated in the issuances of two statutory notices of deficiency: (1) on August 27, 2014 for the 2009 and 2010 tax years and (2) on April 20, 2017 for the 2011 and 2012 tax years. The statutory notices of deficiency both included un-agreed income adjustments related principally to transfer pricing adjustments regarding the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States. In addition, the statutory notice of deficiency for the 2011 and 2012 tax years included the capitalization of certain expenses that were deducted when paid or incurred in defending against certain patent infringement lawsuits. We fully paid the assessed amounts of tax, interest, and penalties set forth in the statutory notices and filed timely claims for refund on June 11, 2015 and June 7, 2017 for the 2009-2010 tax years and 2011-2012 tax years, respectively. Our claims for refund were disallowed by certified letters dated August 18, 2015 and July 11, 2017, for the 2009-2010 tax years and 2011-2012 tax years, respectively. The complaint was timely, based upon the refund claim denials, and seeks refunds of tax, interest, and penalties of $37.2 million for the 2009 tax year, $61.5 million for the 2010 tax year, $40.2 million for the 2011 tax year, and $24.7 million for the 2012 tax year. The amounts sought in the complaint for the 2009 and 2010 tax years were recorded as deferred charges on our balance sheet during the three months ended March 28, 2015, and the amounts sought in the complaint for the 2011 and 2012 tax years were recorded as deferred charges on our balance sheet during the three months ended July 1, 2017.
On December 22, 2016, we received a notice of proposed adjustment for the IRS audit of Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Perrigo acquired Elan in December 2013. This proposed adjustment relates to the deductibility of litigation costs.
On July 11, 2017, we received a draft notice of proposed adjustment associated with transfer pricing positions for the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. Athena was the originator of the patents associated with Tysabri® prior to the acquisition of Athena by Elan in 1996. The amount of adjustments that may be asserted by the IRS in the final notice of proposed adjustment cannot be quantified at this time; however, based on the draft notice received, the amount to be assessed may be material. We disagree with the IRS’s position as asserted in the draft notice of proposed adjustment and intend to contest it.
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
We have ongoing audits in multiple other jurisdictions the resolution of which remains uncertain. These jurisdictions include, but are not limited to, the United States, Israel and France. In addition to the matters discussed above, the IRS is currently auditing our fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015. The Israel Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. The French Tax Authority is currently auditing the years ended December 2014, December 2015, and December 2016.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and capital markets financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate other available financing sources including term and revolving bank credit and securities offerings. In determining our future capital requirements, we regularly consider, among other factors, known trends and uncertainties, such as the war in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, recent financial market volatility, the COVID-19 pandemic and other uncertainties. We may from time to time, subject to relevant restrictions under our debt agreements, use available funds to redeem, repurchase or refinance our debt in privately negotiated or open market transactions, by tender offer or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms we deem appropriate (which may be below par) and subject to our cash requirements for other purposes and other factors management deems relevant.
Based on the foregoing, management believes that our operations and borrowing resources are sufficient to provide for our short-term and long-term capital requirements, as described below. However, an adverse result with respect to our appeal of any material outstanding tax assessments or litigation, including securities or drug pricing matters and product liability cases, damages resulting from third-party claims, and related interest and/or penalties, could ultimately require the use of corporate assets to pay such assessments and any such use of corporate assets would limit the assets available for other corporate purposes. As such, we continue to evaluate the impact of the above factors on liquidity and may determine that modifications to our capital structure are appropriate if market conditions deteriorate, favorable capital markets opportunities become available, or any change in conditions relating to the war in Ukraine and Israel, inflation and interest rates, the status of material contingent liabilities, financial market volatility, the COVID-19 pandemic or other uncertainties have a material impact on our capital requirements.
Cash and Cash Equivalents
| | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 598.3 | | | $ | 600.7 | |
Working capital(1) | $ | 1,196.7 | | | $ | 1,041.8 | |
*(1) Working capital represents current assets less current liabilities, excluding cash and cash equivalents and excluding current indebtedness.
Cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance the known and/or foreseeableour liquidity and capital expenditures.expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities. Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future.
Cash Flows
The following table includes summarized cash flow activities:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | |
(in millions) | September 30, 2023 | | October 1, 2022 | | $ Change |
Net cash from operating activities | $ | 196.8 | | | $ | 121.4 | | | $ | 75.4 | |
Net cash for investing activities | (54.7) | | | (1,932.6) | | | 1,877.9 | |
Net cash (for) from financing activities | (142.6) | | | 464.1 | | | (606.7) | |
Effect of exchange rate changes on cash and cash equivalents | (1.9) | | | (63.5) | | | 61.6 | |
Net increase (decrease) in cash and cash equivalents | $ | (2.4) | | | $ | (1,410.6) | | | $ | 1,408.2 | |
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
Net cash from (for) Operating Activities
|
| | | | | | | | | | | |
| Nine Months Ended |
(in millions) | October 1, 2016 | | September 30, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Operating Activities | | | | | |
Net income (loss) | $ | (2,653.7 | ) | | $ | 46.4 |
| | $ | 2,700.1 |
|
Non-cash adjustments | 3,229.9 |
| | 560.8 |
| | (2,669.1 | ) |
Subtotal | 576.2 |
| | 607.2 |
| | 31.0 |
|
| | | | | |
Increase (decrease) in cash due to: | | | | | |
Accounts receivable | 113.0 |
| | 38.4 |
| | (74.6 | ) |
Inventories | 25.1 |
| | (28.3 | ) | | (53.4 | ) |
Accounts payable | (57.7 | ) | | (6.0 | ) | | 51.7 |
|
Payroll and related taxes | (40.0 | ) | | (36.7 | ) | | 3.3 |
|
Accrued customer programs | (73.7 | ) | | (15.8 | ) | | 57.9 |
|
Accrued liabilities | (90.0 | ) | | (18.8 | ) | | 71.2 |
|
Accrued income taxes | 5.2 |
| | (61.5 | ) | | (66.7 | ) |
Other, net | (9.4 | ) | | 3.5 |
| | 12.9 |
|
Subtotal | $ | (127.5 | ) | | $ | (125.2 | ) | | $ | 2.3 |
|
| | | | | |
Net cash from operating activities | $ | 448.7 |
| | $ | 482.0 |
|
| $ | 33.3 |
|
We generated $482.0 million of cash from operating activities during the nine months ended September 30, 2017, a $33.3The $75.4 million increase overin operating cash flow was primarily driven by an increase in cash flow from the prior year period, due to the following:
Increasedchange in net earnings after adjustments for items such asincluding deferred income taxes impairment charges, restructuring charges, changes in our financial assets, loss on extinguishment of debt, and depreciation and amortization;amortization, partially offset by higher working capital, primarily related to timing of sales and payments received and made.
Changes
Net cash from (for) Investing Activities
The $1.9 billion increase in accrued liabilitiesinvesting cash flow was due to deferred revenue associated with BCH-Belgium distribution contracts and the absence of accrualsa $1.9 billion cash paid for the acquisition of HRA Pharma in the prior year and a $15.6 million increase in proceeds from royalty rights primarily driven by higher milestone income related to legacy royalty rights in the current year, partially offset by $58.7 million of prior year proceeds from the sale of our U.S. VMS business;Latin American businesses and from an ANDA for a generic topical lotion related to our RX business sale.
ChangesNet cash from (for) Financing Activities
The $606.7 million decrease in accrued customer-related programsfinancing cash flow was due primarily to $589.3 million from the pricing dynamics in the RX segment; and