ALLEGAN — The sweeping transformation plan from Perrigo Co. plc President and CEO Murray Kessler aims to return the company to higher sales and earnings growth within a few years.
Murray envisions a Perrigo that’s focused on “self-care,” producing products for consumers not only to treat themselves with store-brand, over-the-counter medications but also to maintain their health and prevent illness.
“We have a new vision for the company,” he told investors during a presentation after unveiling the transformation plan this month. “Bottom line is we want this company vital and growing, and that’s what drives value for the people that invest in the company.”
Self-care represents a $450 billion market for Perrigo to play in, Kessler said. He described self-care as “not a trend” but a “mega-trend” that represents a “mega opportunity” for Perrigo, which already has a foothold in the market with its consumer divisions and OTC products.
“This is what we do. It’s an evolution. It’s an evolution from treatment to treatment and wellness. It doesn’t sound like a big change, but it opens up a huge opportunity for us,” Kessler said. “Self-care is on-trend and here to stay, and the opportunity is massive.”
Perrigo’s new strategy involves moving into product areas such as nutritional drinks, probiotics, cannabis-infused products and oral care, the latter of which will come with the proposed $750 million acquisition of Grand Rapids-based Ranir Holdings Group LLC. Perrigo also will get into technologies that allow people to manage their own care, Kessler said.
“We will play a role in that going forward as well. You will see us get involved in technologies that help consumers pursue self-care,” he said.
Perrigo (NYSE: PRGO), which is domiciled in Dublin, Ireland, but run from Allegan, its hometown where Luther Perrigo founded the company 130 years ago, also intends to divest its $824 million generic drug business by late 2019 or early 2020 through a sale or spinoff. The company plans to ramp up M&A through bolt-on acquisitions and invest in research and development to generate new products to drive sales growth.
Kessler, a former tobacco executive who joined Perrigo as president and CEO in October, expects that it will take two to three years to “fully transform Perrigo into a high-performing consumer company.”
That goal hinges on a strategy of M&A and R&D, the latter of which will remain at a “robust” $130 million in 2019.
M&A and R&D were key drivers of sales growth for years until 2015. Both have since lagged. In the years since, acquisitions for the company “completely vanished,” Kessler said.
“It’s not the external factors that are killing us. We have no one else to look at but ourselves and we need to fix (it),” he said.
As Perrigo introduced fewer new products to the market through innovations, the company experienced escalating pricing pressures from major retailers. That resulted in flat sales the last few years in the consumer products division — the company’s largest business unit that accounted for $2.41 billion in sales in 2018, or a little more than half of all annual revenues — despite growing volumes that have pushed production to capacity.
Perrigo today remains “a great company in growing categories … with the exception that we let the innovation engine bleed out on us as we focused on other places,” Kessler told investors.
Sales from innovations at one point covered 150 percent of the costs of pricing pressures, he said. Now it offsets just 30 percent.
“In the absence of innovation, customers look across the desk and they say, ‘You have nothing else to offer. I want more price.’ You lose your leverage. That is what has happened,” he said. “Perrigo is good at this. We know how to innovate. We just took our eye off the ball for a few years. We’ll ramp it up, and do it quickly.”
Directors at Perrigo have committed more than $1 billion to carry out the transformation plan to restore growth and improve profitability, both of which have suffered in recent years and taken a toll on the company’s shares, which today trade at about one-third of the price of four years ago.
Key elements of the transformation plan include:
• Investing more than $250 million in capacity and technology over four years in infant nutrition and tablet manufacturing to meet growing demand.
• Driving growth in e-commerce.
• Initiating a $100 million, two-year cost savings program called “Project Momentum” to help drive performance higher.
• “Power brand” partnerships through licensing agreements with a “global leader” in natural products.
• Centralizing R&D by creating an innovation group that has identified 40 new initiatives with about $500 million in potential future pipeline products.
• Investing in what the company called “transformative innovations.” Perrigo cites as an example a letter of intent for a small investment in vapor dosing technology that includes a device that learns a patient’s behavior.
• “Actively pursuing” CBD, or cannabidiol, from cannabis plants, in what Kessler called a “responsible way.”
Divesting pet care
A day prior to unveiling the transformation plan, Perrigo announced the sale of its animal health business for $185 million in cash to PetIQ LLC, an Eagle, Idaho-based pet health and wellness company. Perrigo’s animal health business generated $93.9 million in net sales in 2018, down from $141.3 million in 2017, with adjusted earnings of 8 cents per share.
Perrigo entered the animal health business in the 2000s through a series of acquisitions made under then-CEO Joe Papa. The division includes the PetArmor, Sentry and Sergeant’s brands.
The deal with PetIQ should close in the third quarter. Perrigo intends to use proceeds from the sale for the Ranir acquisition.
“It was hard for me strategically to see how (animal health) fit in with our new self-care vision,” Kessler said.
Perrigo this month reported $1.17 billion in first quarter sales, down slightly from $1.21 billion in the same period a year earlier. Perrigo recorded $63.9 million in quarterly net income, or 47 cents per diluted share, which compares to $80.8 million, or 57 cents per diluted share, in the first three months of 2018.
The company issued guidance for $4.6 billion to $4.7 billion in sales for all of 2019, with net income of $1.24 to $1.54 per share.
For 2018, Perrigo generated $4.7 billion in sales and reported net income of $131 million, or 95 cents per diluted share.