PART I. FINANCIAL INFORMATION
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.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019. In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation of the unaudited Condensed Consolidated Financial Statements have been included and include our accounts and the accounts of all majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt, revolving credit agreements, promissory notes related to our equity method investment in Kazmira, and variable rate long-term debt, approximate their fair value.
The below tables indicate the effects of all derivative instruments on the Condensed Consolidated Financial Statements. All amounts exclude income tax effects and are presented in millions.effects.
The balance sheet location and gross fair value of our outstanding derivative instruments were as follows:follows (in millions):
We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in the above table under "Other financing". There were no balancesThe balance outstanding under the facilities atwas $0.3 million as of September 30, 2017 and26, 2020. There were 0 borrowings outstanding under the facilities as of December 31, 2016.2019.
A reconciliation of the numerators and denominators used in the basic and diluted earnings per share ("EPS") calculation is as follows (in millions):
* In the period of a net loss, diluted shares equal basic shares.
Perrigo Company plc - Item 1
Note 12
NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in our AOCI balances, net of tax were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Fair Value of Derivative Financial Instruments, net of tax | | Foreign Currency Translation Adjustments(1) | | Post-Retirement and Pension Liability Adjustments, net of tax | | Total AOCI |
Balance at December 31, 2019 | $ | 12.7 |
| | $ | 132.9 |
| | $ | (6.2 | ) | | $ | 139.4 |
|
OCI before reclassifications | (11.2 | ) | | 34.6 |
| | (4.3 | ) | | 19.1 |
|
Amounts reclassified from AOCI | (1.2 | ) | | 46.4 |
| | 0 |
| | 45.2 |
|
Other comprehensive income (loss) | $ | (12.4 | ) | | $ | 81.0 |
| | $ | (4.3 | ) | | $ | 64.3 |
|
Balance at September 26, 2020 | $ | 0.3 |
| | $ | 213.9 |
| | $ | (10.5 | ) | | $ | 203.7 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | Fair value of derivative financial instruments, net of tax | | Fair value of investment securities, net of tax | | Post-retirement and pension liability adjustments, net of tax | | Total AOCI |
Balance at December 31, 2016 | $ | (67.9 | ) | | $ | (19.5 | ) | | $ | 15.1 |
| | $ | (9.5 | ) | | $ | (81.8 | ) |
OCI before reclassifications | 289.9 |
| | 4.4 |
| | (22.8 | ) | | (1.2 | ) | | 270.3 |
|
Amounts reclassified from AOCI | — |
| | 4.3 |
| | (1.6 | ) | | — |
| | 2.7 |
|
Other comprehensive income (loss) | 289.9 |
| | 8.7 |
| | (24.4 | ) | | (1.2 | ) | | 273.0 |
|
Balance at September 30, 2017 | $ | 222.0 |
| | $ | (10.8 | ) | | $ | (9.3 | ) | | $ | (10.7 | ) | | $ | 191.2 |
|
(1) Refer to Note 3 Rosemont Pharmaceuticals business divestiture for information regarding amounts reclassified from AOCI.
NOTE 13 – INCOME TAXES
The effective tax rates were as follows:
|
| | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 26, 2020 | | September 28, 2019 | | September 26, 2020 | | September 28, 2019 |
(21.1 | )% | | 5.2 | % | | 78.9 | % | | 19.6 | % |
|
| | | | | | | | | | |
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 three and nine months ended September 30,26, 2020 increased compared to the prior period primarily due to non-deductible goodwill impairments and Base Erosion and Anti-Abuse Tax ("BEAT"), offset by additional interest deductions provided for in the U.S. Coronavirus Aid, Relief, and Economic Security ("CARES") Act and the early adoption of the final and proposed business interest expense deduction limitation regulations in the current period.
The Tax Cuts and Jobs Act of 2017 was negatively impacted by non-deductible fees relatedintroduced a new tax on U.S. corporations that derive benefits from certain deductible payments to our debt cancellation, discrete tax items,non-U.S. affiliates called the Base Erosion and additionalAnti-Abuse Tax ("BEAT"). BEAT applies when base eroding payments exceed three percent of total deductions and where BEAT exceeds adjusted regular income tax.
We recorded a valuation allowances recordedallowance against all U.S. deferred tax assets.
Ourassets as of December 31, 2016. We have continued to maintain a full valuation allowance against all U.S. deferred tax rateassets since and intend to continue maintaining this valuation allowance until there is subjectsufficient evidence to adjustment oversupport the balancereversal of all or some portion of these allowances. Given our current earnings and anticipated future earnings, we believe there is a reasonable possibility that within the next twelve months, sufficient positive evidence may become available that all or a portion of the fiscal year due to, among other things:valuation allowance against the jurisdictions in which our profits are determined toU.S. deferred tax assets will no longer be earned and taxed; changesneeded. Release of the valuation allowance would result in the valuationrecognition of ourcertain deferred tax assets and liabilities; adjustmentsa decrease to estimated taxes upon finalization of variousincome tax returns; adjustments based on differing interpretationsexpense in the period of the applicable transfer pricing standards; changesrelease. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we actually achieve.
Perrigo Company plc - Item 1
Note 13
IRS Audit of Fiscal Years Ended June 29, 2013, June 28, 2014, and June 27, 2015
In connection with its audits of Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company plc, for the fiscal years ended June 29, 2013, June 28, 2014, and June 27, 2015 the IRS issued a draft Notice of Proposed Adjustment ("NOPA") on August 22, 2019, reducing Perrigo Company’s deductible interest expense for fiscal tax years 2014-2015 on $7.5 billion in availabledebts owed by it to Perrigo Company plc. A final NOPA was issued in early May 2020 without change. The debts were incurred in connection with the Elan merger transaction in 2013. The final NOPA caps the interest rate on the debts for U.S. federal tax credits, grantspurposes at 130.0% of the Applicable Federal Rate (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 final NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and other incentives; changes2015. If the IRS were to prevail in stock-based compensation expense; changesits proposed adjustment, the Company estimates an increase in tax laws or the interpretationexpense 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 $454.9approximately $170.0 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 recognizeexcluding interest and penalties, relatedfor fiscal years ended June 28, 2014 through June 27, 2015. In addition, we expect the IRS to uncertainseek similar adjustments for the period from June 28, 2015 through December 31, 2018 with potential section 163(j) carryover impacts beyond December 2018. If those further adjustments were sustained, based on preliminary calculations and subject to further analysis, the Company's current best estimate is that the additional tax positions as a component of income tax expense. The total amount accrued forexpense will not exceed $200.0 million, excluding interest and penaltiespenalties. No further adjustments beyond this period are expected. The Company strongly disagrees with the IRS position, as reflected in its detailed written response to the draft NOPA on September 20, 2019. At this stage, we are unable to estimate the liability, for uncertain tax positions was $79.0 millionif any, associated with this matter.
IRS Audit of Fiscal Years ended June 27, 2009, June 26, 2010, June 25, 2011, and $63.5 million as of SeptemberJune 30, 2017 and December 31, 2016, respectively.2012
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”),IRS, plus statutory interest thereon from the dates of payment, for the fiscal tax 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). In response to our complaint, the United States District Court for Western District of Michigan scheduled a new trial date for January 26, 2021. 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
Note 13
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. OurUpon the disallowance of such refund claims, for refund were disallowed by certified letters dated August 18, 2015 and July 11, 2017, forwe timely filed the 2009-2010 tax years and 2011-2012 tax years, respectively. Theabove complaint, was timely, based upon the refund claim denials, andwhich 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.year, for a total of $163.6 million. 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. The total cumulative deferred charge that the Company is seeking to receive in this litigation is approximately $101.8 million, which reflects (i) a deduction of $29.7 million from the total reflected above due to overpayments credited to succeeding years and (ii) the impact of a previously conceded royalty due to Perrigo U.S. on all omeprazole sales that equates to 24.0% of the above refund claims. That 24.0% concession would also apply to any omeprazole adjustments that may be asserted by the IRS for future years.
IRS Audit of Fiscal Years Ended December 31, 2011, December 31, 2012, and December 31, 2013
On December 22, 2016,April 26, 2019, we received a notice of proposed adjustment forrevised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena Neurosciences, Inc. (“Athena”("Athena"), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. The NOPA carries 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, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a
Perrigo acquired Elan inCompany plc - Item 1
Note 13
payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and any potential interest that may be imposed. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. Accordingly, on April 14, 2020, we filed a request for Competent Authority Assistance with the IRS. The request was accepted and is under review. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation.
On December 2013. This proposed adjustment relates to22, 2016, we received a NOPA from the IRS regarding the deductibility of litigation costs. We disagree with the IRS’s position asserted in the notice of proposed adjustment and intendcosts related 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 strongly disagree with the IRS’s position as asserted in the draft noticeNOPA and are contesting it.
Irish Revenue Audit of proposed adjustmentFiscal Years Ended December 31, 2012 and intendDecember 31, 2013
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to contest it.the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment (“NoA”) on November 29, 2018 which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We have ongoing auditsstrongly disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, we filed an appeal of the NoA on December 27, 2018 in multiple other jurisdictions the resolutionTax Appeals Commission which is the statutory body charged with considering whether the NoA is properly founded as a matter of which remains uncertain. These jurisdictions include, but aretax law. Separately, we were also granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue.
The judicial review case is based on our belief that, by issuing the NoA, Irish Revenue breached Elan Pharma's rights and legitimate expectations as a taxpayer. The Irish High Court heard the judicial review case in June 2020 and, on November 4, 2020, the High Court ruled that the issuance of the NoA did not limitedviolate the Company’s rights and legitimate expectations. Because the Irish High Court did not quash the NoA, absent an appeal by Elan Pharma, the amended assessment can be examined on its merits by the Irish Tax Appeals Commission. Our case before the Irish Tax Appeals Commission has been stayed since February 2019 by Order of the Irish High Court pending determination of the judicial review case. We will now assess the Irish High Court's decision before deciding whether to pursue an appeal of the judicial review case to the United States, Irish Court of Appeal or reactivate our appeal before the Tax Appeals Commission. Any appeal against the judgment of the High Court in the judicial review case would have to be filed within 28 days of the Order made by the High Court consequent upon the judgment delivered on November 4, 2020. That Court Order is expected to be made within a period of weeks once the question of liability for the litigation costs of the judicial review case has been decided by the High Court.
NaN payment will be required unless both the judicial review case and the appeal pending before the Tax Appeals Commission are finally determined against Elan Pharma.
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, andTax Authority Audit of Fiscal Year Ended June 27, 2015. 2015 and Calendar Years Ended December 31, 2015 through December 31, 2017
The Israel Tax Authority is currently auditing our fiscal yearsyear ended June 29, 201327, 2015, and June 28, 2014. The French Tax Authority is currently auditing thecalendar years ended December 2014,31, 2015, December 2015,31, 2016 and December 2016.31, 2017.
Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable 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, which could be material.
Perrigo Company plc - Item 1
Note 13
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 September 26, 2020. 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 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, 2017,26, 2020, 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, 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.
Perrigo Company plc - Item 1
Note 14
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
Perrigo is a defendant in several cases in the generic pricing multidistrict litigation MDL No. 2724 (United States District Court for Eastern District of Pennsylvania). This multidistrict litigation, which has many cases that do not include Perrigo, includes class action and opt-out cases for federal and state antitrust claims, as well as complaints filed by various of the States alleging violations of state antitrust laws.
On July 14, 2020, the court issued an order designating the following cases to proceed on a more expedited basis than the other cases in MDL No. 2724: (a) the States’ May 2019 case alleging an overarching conspiracy involving more than 120 products (which does not name Perrigo a defendant) and (b) class actions alleging “single drug” conspiracies involving Clomipramine, Pravastatin, and Clobetasol. Perrigo is a defendant in the Clobetasol cases but not the others.
Class Action Complaints
(a) Single Drug Conspiracy Class Actions
We have been named as a co-defendant with certain other generic pharmaceutical manufacturers in a number of casesclass actions alleging that we and other manufacturers of the same product engaged in anti-competitive behaviorsingle-product conspiracies to fix or raise the prices of certain drugs and/or allocate customers for those products starting, in some instances, as early as June 2013. The class actions were filed on behalf of putative classes of (a) direct purchasers, (b) end payors, and (c) indirect resellers. The products in question are Clobetasol gel, Desonide, and Econazole. TheseThe court denied motions to dismiss each of the complaints along withalleging “single drug” conspiracies involving Perrigo, and the cases are proceeding in discovery. As noted above, the Clobetasol cases have been designated to proceed on a more expedited schedule than the other cases. That schedule has not yet been set.
(b) “Overarching Conspiracy” Class Actions
The same 3 putative classes, including (a) direct purchasers, (b) end payors, and (c) indirect resellers, have filed 2 sets of class action complaints filed againstalleging that Perrigo and other companies alleging pricemanufacturers (and some individuals) entered into an “overarching conspiracy” that involved allocating customers, rigging bids and raising, maintaining, and fixing withprices for various products. Each class brings claims for violations of Sections 1 and 3 of the Sherman Antitrust Act as well as several state antitrust and consumer protection statutes.
Perrigo Company plc - Item 1
Note 14
Filed in June 2018, and later amended in December 2018 (with respect to 15direct purchasers) and April 2019 (with respect to end payors and indirect resellers), the first set of “overarching conspiracy” class actions include allegations against Perrigo and approximately 27 other manufacturers involving 135 drugs have been consolidated for pretrial proceedings as partwith allegations dating back to March 2011. The allegations against Perrigo concern only 2 formulations (cream and ointment) of 1 of the products at issue, Nystatin. The court denied motions to dismiss the first set of “overarching conspiracy” class actions, and they are proceeding in discovery. NaN of these cases are included in the group of cases on a case captioned In re Generic Pharmaceuticals Pricing Antitrust Litigation, MDL No. 2724. Pursuantmore expedited schedule pursuant to the court’s schedule stagingJuly 14, 2020 order.
In December 2019, both the end payor and indirect reseller class plaintiffs filed a second set of "overarching conspiracy” class actions against Perrigo, dozens of other manufacturers of generic prescription pharmaceuticals, and certain individuals dating back to July 2009 (end payors) or January 2010 (indirect resellers). The direct purchaser plaintiffs filed their second round overarching conspiracy complaint in February 2020 with claims dating back to July 2009. On March 11, 2020, the indirect reseller plaintiffs filed a motion to amend their second round December 2019 complaint, and that motion was granted. On September 4, 2020, the end payor plaintiffs amended their second round complaint. On October 21, 2020, the direct purchaser plaintiffs amended their second round complaint.
This second set of overarching complaints allege conspiracies relating to the sale of various casesproducts that are not at issue in phases, we havethe earlier-filed overarching conspiracy class actions, the majority of which Perrigo neither makes nor sells. The amended indirect reseller complaint alleges that Perrigo conspired in connection with its sales of Betamethasone Dipropionate lotion, Imiquimod cream, Desonide cream and ointment, and Hydrocortisone Valerate cream. The amended end payor complaint alleges that Perrigo conspired in connection with its sale of the following drugs: Adapalene, Ammonium Lactate, Betamethasone Dipropionate, Bromocriptine Mesylate, Calcipotriene Betamethasone Dipropionate, Ciclopirox, Clindamycin Phosphate, Erythromycin, Fenofibrate, Fluocinonide, Fluticasone Propionate, Halobetasol Proprionate, Hydrocortisone Acetate, Hydrocortisone Valerate, Imiquimod, Methazolamide, Mometasone Furoate, Permethrin, Prochlorperazine Maleate, Pormethazine HCL, Tacrolimus, and Triamcinolone Acetonide. The amended direct purchaser complaint alleges that Perrigo conspired in connection with its sale of the following drugs: Adapalene, Ammonium Lactate, Betamethasone Dipropionate, Bromocriptine Mesylate, Ciclopirox, Clindamycin Phosphate, Fenofibrate, Fluocinonide, Halobetasol Proprionate, Hydrocortisone Valerate, Methazolamide, Permethrin, Prochlorperazine Maleate, Promethazine HCL, Tacrolimus, and Triamcinolone Acetonide.
Perrigo has not yet responded to the second set of overarching conspiracy complaints, and responses are currently or will be stayed.
Opt-Out Complaints
On January 22, 2018, Perrigo was named a co-defendant along with 35 other manufacturers in a complaint filed by 3 supermarket chains alleging that defendants conspired to fix prices of 31 generic prescription pharmaceutical products starting in 2013. On December 21, 2018, an amended complaint was filed that adds additional products and allegations against a total of 39 manufacturers for 33 products. The only allegations specific to Perrigo relate to Clobetasol, Desonide, Econazole, Nystatin cream, and Nystatin ointment. Perrigo moved to dismiss this complaint on February 21, 2019. The motion was denied on August 15, 2019. The case is proceeding in discovery. On February 3, 2020, the plaintiffs requested leave to file a second amended complaint. The proposed amended complaint adds dozens of additional products and allegations to the original complaint. Perrigo is discussed in connection with allegations concerning an additional drug, Fenofibrate. Defendants opposed the motion for leave to file a second amended complaint and the court has yet to rule on the issue.
On August 3, 2018, a large managed care organization filed a complaint against Perrigo alleging price-fixing and customer allocation concerning 17 different products among 27 manufacturers including Perrigo. The only allegations specific to Perrigo concern Clobetasol. Perrigo moved to dismiss this complaint on February 21, 2019. Plaintiff filed a second amended complaint in April 2019 that adds additional products and allegations. The amended allegations that concern Perrigo include: Clobetasol, Desonide, Econazole, and Nystatin. The motion to dismiss was denied on August 15, 2019. The case is proceeding in discovery.
On January 16, 2019, a similar suit was brought by a health insurance carrier in the U.S. District Court for the District of Minnesota alleging a conspiracy to fix prices of 30 products among 30 defendants. The only
Perrigo Company plc - Item 1
Note 14
allegations specific to Perrigo concern Clobetasol gel, Desonide, Econazole, Nystatin cream, and Nystatin ointment. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On July 18, 2019, 87 health plans filed a Praecipe to Issue Writ of Summons in Pennsylvania state court to commence an action against 53 generic pharmaceutical manufacturers and 17 individuals, alleging antitrust violations concerning generic pharmaceutical drugs. While Perrigo was named as a defendant, no complaint has been filed and the precise allegations and products at issue have not been identified. Proceedings in the case, including the filing of a complaint, have been stayed at the request of the plaintiffs.
On December 11, 2019, a health care service company filed a complaint against Perrigo and 38 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. The product conspiracies allegedly involving Perrigo focus on the same products as those involved in other multi-district litigation ("MDL") complaints relatingnaming Perrigo: Clobetasol, Desonide, Econazole, and Nystatin cream/ointment. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On December 16, 2019, a Medicare Advantage claims recovery company filed a complaint against Perrigo and 39 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. The product conspiracies allegedly involving Perrigo focus on the same products as those involved in other MDL complaints naming Perrigo: Clobetasol, Desonide, and Econazole. The complaint was originally filed in the District of Connecticut but will be consolidated into the MDL. Perrigo has not yet had the opportunity to respond to the complaint, and responses are currently stayed.
On December 23, 2019, several counties in New York filed an amended complaint against Perrigo and 28 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens products, most of which Perrigo neither makes nor sells. 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. The complaint was originally filed in New York State court but was removed to federal court and will likely be consolidated into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On December 27, 2019, a healthcare management organization filed a complaint against Perrigo and 25 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. 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. The complaint was filed originally in the Northern District of California but will be consolidated into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On March 1, 2020, Harris County of Texas filed a complaint against Perrigo New York, Inc. and 29 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. The products at issue that plaintiffs claim Perrigo manufacturers or sells include: Adapalene, Betamethasone Dipropionate, Ciclopirox, Clindamycin, Clobetasol, Desonide, Econazole, Ethinyl Estradiol/Levonorgestrel, Fenofibrate, Fluocinolone, Fluocinonide, Gentamicin, Glimepiride, Griseofulvin, Halobetasol Propionate, Hydrocortisone Valerate, Ketoconazole, Mupirocin, Nystatin, Olopatadine, Permethrin, Prednisone, Promethazine, Scopolamine, and Triamcinolone Acetonide. The complaint was originally filed in the Southern District of Texas but has been transferred to the MDL. Harris County amended its complaint in May 2020. Perrigo has not yet responded to the complaint, and responses are currently stayed.
In May 2020, 7 health plans filed a writ of summons in the Pennsylvania Court of Common Pleas in Philadelphia concerning an as-yet unfiled complaint against Perrigo, 3 dozen other manufacturers, and 17 individuals, concerning alleged antitrust violations in connection with the pricing and sale of generic prescription pharmaceutical products. No complaint has yet been filed, so the precise allegations and products at issue are not yet clear. In addition, Defendants are in the process of being served, and proceedings in the case will likely be stayed.
On June 9, 2020, a health insurance carrier filed a complaint against Perrigo New York, Inc. and 25 other manufacturers alleging an overarching conspiracy to allocate customers and/or fix, raise or stabilize prices of
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dozens of products, most of which Perrigo neither makes nor sells. 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. The complaint was filed in the Eastern District of Pennsylvania and has been transferred into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On July 9, 2020, a drugstore chain filed a complaint against Perrigo New York, Inc. and 39 other pharmaceutical companies alleging an overarching conspiracy to fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. 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. Perrigo is also listed in connection with Fenofibrate. The complaint was filed in the Eastern District of Pennsylvania and will be transferred into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On August 27, 2020, Suffolk County of New York filed a complaint against Perrigo New York, Inc. and 35 other manufacturers alleging an overarching conspiracy to allocate customers and/or fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. 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 cream and ointment. The other products at issue that plaintiffs claim Perrigo manufacturers or sells include: Adapalene gel; Albuterol; Benazepril HCTZ; Clotrimazole; Diclofenac Sodium; Fenofibrate; Fluocinonide; Glimepiride; Ketoconazole; Meprobamate; Imiquimod; Triamcinolone Acetonide; Erythromycin/Ethyl Solution; Betamethasone Valerate; Ciclopirox Olamine; Terconazole; Hydrocortisone Valerate; Fluticasone Propionate; Desoximetasone; Clindamycin Phosphate; Halobetasol Propionate; Hydrocortisone Acetate; Promethazine HCL, Mometasone Furoate; and Amiloride HCTZ. The complaint was filed in the Eastern District of New York and will be transferred into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
On September 4, 2020, a drug wholesaler and distributor filed a complaint against Perrigo New York, Inc. and 39 other manufacturers alleging an overarching conspiracy to allocate customers and/or fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. The product conspiracies allegedly involving Perrigo focus on Adapalene Cream, Ammonium Lactate cream and lotion, Betamethasone Dipropionate lotion, Bromocriptine tablets, Calcipotriene Betamethasone Dipropionate (Cal Beta Dip) Ointment, Ciclopirox shampoo cream and solution, Clindamycin solution, Clobetasol, Desonide cream and ointment, Econazole cream, Erythromycin base alcohol solution, Fenofibrate, Fluticasone lotion, Halobetasol cream and ointment, Hydrocortisone Acetate suppositories, Hydrocortisone valerate cream, Imiquimod cream, Methazolamide tablets, Mometasone furoate cream, ointment and solution, Nystatin, Prochlorperazine suppositories, Promethazine HCL suppositories, Tacrolimus ointment, and Triamcinolone cream and ointment. The complaint was filed in the Eastern District of Pennsylvania and will be transferred into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
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 other generic pharmaceutical manufacturers, and certain individuals (including 1 former and 1 current Perrigo employee), alleging an overarching conspiracy to allocate customers and/or fix, raise or stabilize prices of eighty products. The allegations against Perrigo focus on the following drugs: Adapalene Cream, Ammonium Lactate cream and lotion, Betamethasone dipropionate lotion, Bromocriptine tablets, Calcipotriene Betamethasone Dipropionate (Cal Beta Dip) Ointment, Ciclopirox cream and solution, Clindamycin solution, Desonide cream and ointment, Econazole cream, Erythromycin base alcohol solution, Fluticasone cream and lotion, Halobetasol cream and ointment, Hydrocortisone Acetate suppositories, Hydrocortisone Valerate cream, Imiquimod cream, Methazolamide tablets, Nystatin ointment, Prochlorperazine suppositories, Promethazine HCL suppositories, Tacrolimus ointment, and Triamcinolone cream and ointment. The Complaint was filed in the District of Connecticut, but has been transferred into the MDL. Perrigo has not yet responded to the complaint, and responses are currently stayed.
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Canadian Class Action Complaint
In June 2020, an end payor filed a class action in Ontario, Canada against Perrigo and 29 other manufacturers alleging an overarching conspiracy to allocate customers and/or fix, raise or stabilize prices of dozens of products, most of which Perrigo neither makes nor sells. 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. Perrigo has not yet responded to the complaint.
At this stage, we cannot reasonably predictestimate the outcome of the liability if any, associated with these claims.the claims listed above.
Securities Litigation
In the United States (cases related to events in 2015-2017)
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.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 the 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 Fundcase and the Wilson case. TheIn the amended complaint, the lead plaintiffs seek to represent a class3 classes of shareholders: (i) shareholders forwho purchased shares during the period from April 21, 2015 through May 3, 2017 and identifies three subclasses - shareholders who traded during the entire period on the U.S. exchanges; (ii) shareholders who tradedpurchased shares during the entiresame period on the Tel Aviv exchange; and (iii) shareholders who traded during the period whileowned shares on November 12, 2015 and held such stock through at least 8:00 a.m. on November 13, 2015 (the final day of the Mylan tender offer was pending (April 21, 2015 through November 13, 2015).offer) regardless of whether the shareholders tendered their shares. 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‑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 and at Omega, alleges price fixing activities with respect to six6 generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. The amended complaint does not include an estimate of damages. In AugustDuring 2017, the defendants filed motions to dismiss, which the amended complaint. The plaintiffs filed their oppositionopposed. On July 27, 2018, the court issued an opinion and order granting the defendants’ motions to dismiss in October 2017. The defendants filed replies in support ofpart and denying the motions to dismiss in November 2017.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 Perrigo Company plc, Joe Papa, and Judy Brown. The claims (described above) that were not dismissed relate to the integration issues regarding the Omega acquisition, the defense against the Mylan tender offer, and the alleged price fixing activities with respect to 6
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generic prescription pharmaceuticals. The defendants who remain in the case (the Company, Mr. Papa, and Ms. Brown) have filed answers denying liability, and the discovery stage of litigation has not indicated whether there will be oral argument ofbegun. Discovery in the motions or whether the court will decide the motions on the papers.class action is currently scheduled to end in January 2021. We intend to defend the lawsuit vigorously.
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On November 1,14, 2019, the court granted the lead plaintiffs’ motion and certified 3 classes for the case: (i) all those who purchased shares between April 21, 2015 through May 2, 2017 Carmignac Gestion, S.A.,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"). Defendants filed a securities lawsuit against uspetition for leave to appeal in the Third Circuit challenging the certification of the tender offer class. On April 30, 2020, the Third Circuit denied leave to appeal. The District Court has approved the issuance of a notice of the pendency of the class action, and three individuals (former Chairman and CEO Joseph Papa, former CFO Judy Brown, and former Executive Vice President and Board member Marc Coucke). This lawsuitthe notice has been sent to shareholders who are eligible to participate in the classes.
Unless otherwise noted, each of the lawsuits discussed in the following sections is not a securities class action. The case is styled Carmignac Gestion, S.A. v. Perrigo Company plc, et al., and was filedpending in the U.S. District Court for the District of New Jersey.Jersey and has been assigned to the same judges hearing the Roofers’ Pension Fund case. The allegations in the complaints relate to events during certain portions of the 2015 through 2017 calendar years, including the period of the Mylan tender offer. All but one of these lawsuits allege violations of federal securities laws, but none are class actions. NaN lawsuit (Highfields) alleges only state law claims. Discovery in all these cases, except Highfields, is underway and currently scheduled to end in early September 2021. We intend to defend all these lawsuits vigorously.
Carmignac, First Manhattan and Similar Cases. The following 7 cases were filed by the same law firm and generally make the same factual assertions but, at times, differ as to which securities laws violations they allege:
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| |
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 |
The original complaints in the Carmignac case and the First Manhattan case named Perrigo, Mr. Papa, Ms. Brown, and Mr. Coucke as defendants. Mr. Coucke was dismissed as a defendant after the plaintiffs agreed to apply the July 2018 ruling in the Roofers' Pension Fund case to these two cases. The complaints in each of the other cases name only Perrigo, Mr. Papa, and Ms. Brown as defendants.
Each complaint asserts claims under Securities Exchange Act sectionsSections 10(b) (and Rule 10b-5),10b-5 thereunder) and all cases except Aberdeen assert claims under Section 14(e), and 18 of the Securities Exchange Act against all defendants, as well as 20(a) control person liability under Section 20(a) of the Securities Exchange Act against the individual defendants. In general,The control person claims against the plaintiff’s allegations focus on events duringindividual defendants are limited to the period from April 2015 through April 2016. Plaintiff contends that2016 in the defendants providedCarmignac case. The complaints in the Carmignac and First Manhattan cases also assert claims under Section 18 of the Exchange Act.
Each complaint alleges inadequate disclosure throughout the perioddisclosures concerning the valuation and integration of Omega, the financial guidance we 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 2015.2015, and, in each of the cases other than Carmignac, alleged price fixing activities with respect to 6 generic prescription pharmaceuticals. The First Manhattan complaint also alleges improper accounting for the Tysabri® asset. With the exception of Carmignac, each of these cases relates to events during the period from April 2015 through May 2017. Many of the allegations in this newly-filed casethese cases overlap with the allegations of the June 2017 amended complaint in the Roofers’ Pension Fund case, though the Nationwide Mutual, Schwab Capital, Aberdeen, Principal Funds and Kuwait complaints do
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not include the factual allegations that the court dismissed in the July 2018 ruling in the Roofers' Pension Fund case.
After the court issued its July 2018 opinion in the Roofers’ Pension Fund case, the parties in Carmignac and First Manhattan conferred and agreed that the ruling in the Roofers’ Pension Fund case would apply equally to the common allegations in their cases. The later filed cases adopted a similar posture. The defendants in the Carmignac and other cases listed above filed motions to dismiss addressing the additional allegations in such cases. On July 31, 2019, the court granted such motions to dismiss in part and denied them in part. That ruling applies to each of the above cases. The defendants have filed answers in each case denying liability. Each case is currently in the discovery phase.
Mason Capital, Pentwater and Similar Cases. The following 8 cases were filed by the same law firm and generally make the same factual allegations:
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Case | Date Filed |
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 |
The complaints in the Mason Capital case and the Pentwater case originally named Perrigo and 11 current or former directors and officers of Perrigo as defendants. In the July 2018 Roofers’ Pension Fund ruling, the court dismissed without prejudice each of the defendants other than Perrigo, Mr. Papa and Ms. Brown from that case; these plaintiffs later agreed that this ruling would apply to their cases as well. The complaints in each of the other cases in the above table name only Perrigo, Mr. Papa, and Ms. Brown as defendants.
Each complaint asserts claims under Section 14(e) of the Securities Exchange Act against all defendants, as well as control person liability under Section 20(a) of the Securities Exchange Act against the individual defendants. The complaints in the WCM case and the Universities Superannuation Scheme case also assert claims under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Each complaint alleges inadequate disclosure during the tender offer period in 2015 and at various times concerning valuation and integration of Omega, the financial guidance provided by us during that period, alleged price fixing activities with respect to 6 generic prescription pharmaceuticals, and alleged improper accounting for the Tysabri® asset. The WCM complaint also makes these allegations for the period through May 2017 and the Universities Superannuation Scheme complaint also concerns certain times during 2016. Many of the factual allegations in these cases overlap with the allegations of the June 2017 amended complaint in the Roofers’ Pension Fund case, and the Mason Capital and Pentwater cases include factual allegations similar to those in the Carmignac case described above.
After the court issued its July 2018 opinion in the Roofers’ Pension Fund case, the parties in each of the above casesconferred and agreed that the ruling in the Roofers’ Pension Fund case would apply equally to the common allegations in their cases. The plaintiff doesdefendants in each of these cases have filed answers denying liability, and each of the cases is currently in the discovery phase.
Harel Insurance and TIAA-CREF Cases. The following 2 cases were filed by the same law firm and generally make the same factual allegations relating to the period from February 2014 through May 2017 (in the Harel case) and from August 2014 through May 2017 (in the TIAA-CREF case):
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Case | Date Filed |
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 |
The complaints in the Harel and TIAA-CREF cases originally named Perrigo and 13 current or former directors and officers of Perrigo as defendants (adding 2 more individual defendants not providesued in the other cases described in this section). In the July 2018 Roofers’ Pension Fund ruling, the court dismissed without prejudice 8 of the 11 defendants other than Perrigo, Mr. Papa and Ms. Brown from that case. These plaintiffs later agreed that that ruling would apply to these cases as well and also dismissed their claims against the two additional individuals that only these plaintiffs had named as defendants.
Each complaint asserts claims under Sections 10(b) and 14(e) of the Securities Exchange Act and Rule 10b-5 thereunder against all defendants, as well as control person liability under Section 20(a) of the Securities Exchange Act against the individual defendants. The complaint in the Harel case also asserts claims based on Israeli securities laws.
Each of the complaints alleges inadequate disclosure around the tender offer events in 2015 and at various times during the relevant periods concerning valuation and integration of Omega, the financial guidance provided by us during that period, alleged price fixing activities with respect to 6 generic prescription pharmaceuticals, and alleged improper accounting for the Tysabri® asset from February 2014 until the withdrawal of past financial statements in April 2017.
After the court issued its July 2018 opinion in the Roofers’ Pension Fund case, the parties in the Harel and TIAA-CREF cases conferred and agreed that such ruling would apply equally to the common allegations in their cases. The defendants in each of these cases have filed answers denying liability, and each of the cases is currently in the discovery phase.
Other Cases Related to Events in 2015-2017. Certain allegations in the following 3 cases also overlap with the allegations of the June 2017 amended complaint in the Roofers' Pension Fund case and with allegations in one or more of the other individual cases described in the sections above:
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| |
Case | Date Filed |
Sculptor Master Fund (f/k/a OZ Master Fund, Ltd.), et al. v. Perrigo Company plc, et al. | 2/6/2019 |
Highfields Capital I LP, et al. v. Perrigo Company plc, et al. | 6/4/2020 |
BlackRock Global Allocation Fund, Inc., et al. v. Perrigo Co. plc, et al. | 4/21/2020 |
Each of the above complaints names Perrigo, Mr. Papa, and Ms. Brown as defendants.
The Sculptor Master Fund (formerly OZ) complaint asserts claims under Sections 10(b) and 14(e) of the Securities Exchange Act and Rule 10b-5 thereunder against all defendants, as well as control person liability under Section 20(a) of the Securities Exchange Act against the individual defendants. The parties have agreed that the court's rulings in July 2018 in the Roofers' Pension Fund case and in July 2019 in the Carmignac and related cases will apply to this case as well. The defendants have filed answers denying liability. The plaintiffs are participating in the discovery proceedings in the Roofers' Pension Fund case and the various individual cases described above.
The BlackRock Global complaint also asserts claims under Securities Exchange Act section 10(b) (and SEC Rule 10b-5) and section 14(e) against all defendants and section 20(a) control person claims against the individual defendants largely based on the same events during the period from April 2015 through May 2017. Plaintiffs contend that the defendants provided inadequate disclosure during the tender offer period in 2015 and point to disclosures at various times during the period concerning valuation and integration of Omega, the financial guidance provided by us during that period, alleged price fixing activities with respect to 6 generic prescription pharmaceuticals, alleged lower performance in the generic prescription drug business during 2015 and alleged improper accounting for the Tysabri® asset. The parties have begun discussions about the schedule for how this case should proceed.
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The Highfields federal case complaint asserted claims under Sections 14(e) and 18 of the Securities Exchange Act against all defendants, as well as control person liability under Section 20(a) of the Securities Exchange Act against the individual defendants. As originally filed in the U.S. District Court for the District of Massachusetts, the Highfields complaint also alleged 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. The factual allegations 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. In March 2020, the District of Massachusetts court granted defendants’ motion and transferred the case to the U.S. District Court for the District of New Jersey so that the activities in the case could proceed in tandem with the other cases in the District of New Jersey described above. After the transfer, in June 2020, the Highfields plaintiffs voluntarily dismissed their federal lawsuit. The same Highfields plaintiffs the same day then filed a new lawsuit in Massachusetts State Court asserting the same factual allegations as in their federal lawsuit and alleging only 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 September 2020, the defendants submitted a motion to dismiss' plaintiffs filed an estimate of damages. We intend to defend the lawsuit vigorously. opposition in late October; defendants’ reply is due in mid-November 2020.
In Israel (cases related to events in 2015-2017)
Because our shares are traded on the Tel Aviv exchange under a dual trading arrangement, we are potentially subject to securities litigation in Israel. ThreeNaN cases are currently pending.were filed; 1 was voluntarily dismissed in each of 2017 and 2018 and 1 was stayed in 2018. We are consulting Israeli counsel about our response to these allegations and we intend to defend these casesthis case 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 inpurchased Perrigo stock on the Tel Aviv exchange during the period from April 24, 2015 through May 3, 2017.2017 and also a claim for those that owned shares on the final day of the Mylan tender offer (November 13, 2015). The amended complaint names as defendants the Company, EYErnst & 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 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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6 generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri®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)0.28 cents). After the other 2 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 the United States (cases related to Irish Tax events)
On July 12, 2017,January 3, 2019, a shareholder filed a complaint against the plaintiffCompany, our CEO Murray Kessler, and our former CFO Ronald Winowiecki in the U.S. District Court for the Southern District of New York (Masih v. Perrigo Company, et al.). Plaintiff purported to represent a class of shareholders for the period November 8, 2018 through December 20, 2018, inclusive. The complaint alleged violations of Securities Exchange Act section 10(b) (and Rule 10b‑5) against all defendants and section 20(a) control person liability against the individual defendants. In general the allegations contended that the Company, in its Form 10‑Q filed November 8, 2018, disclosed information about an October 31, 2018 audit finding letter received from Irish tax authorities but failed to disclose enough material information about that letter until December 20, 2018, when we filed a current report on Form 8‑K about Irish tax matters. The plaintiff did not provide an estimate of class damages. The court selected lead plaintiffs and changed the name of the case to In re Perrigo Company plc Sec. Litig. The lead plaintiffs filed an amended complaint on April
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12, 2019, which named the same defendants, asserted the same class period, and invoked the same Exchange Act sections. The amended complaint generally repeated the allegations of the original complaint with a few additional details and adds that the defendants also failed to timely disclose the Irish tax authorities’ Notice of Amended Assessment received on November 29, 2018. Defendants filed a motion to dismiss on May 3, 2019. On May 31, 2019, the plaintiffs filed a second amended complaint, which asserted a longer class period (March 1, 2018 through December 20, 2018) and added 1 additional individual defendant, former CEO Uwe Roehrhoff. In general, the second amended complaint contends that Perrigo’s disclosures about the Irish tax audit were inadequate beginning with Perrigo’s 10-K filed on March 1, 2018 through December 20, 2018 and repeats many of the allegations of the April 2019 amended complaint. The second amended complaint alleges violations of Securities Exchange Act section 10(b) (and SEC Rule 10b-5) against all defendants and section 20(a) control person liability against the 3 individual defendants. All defendants filed a joint motion to dismiss, and the motion was fully briefed. On January 23, 2020, the court granted the motion to dismiss in part and denied it in part, dismissing Mr. Roehrhoff as a defendant and dismissing allegations of inadequate disclosures related to the audit by Irish Revenue during the period March 2018 through October 30, 2018. The court permitted the plaintiffs to pursue their claims against us, Mr. Kessler, and Mr. Winowiecki related to disclosures after Perrigo received the October 30, 2018 audit findings letter and later events through December 20, 2018. The defendants filed answers on February 13, 2020 denying liability, and the court held a scheduling conference on February 28, 2020, and issued a scheduling order on March 3, 2020. Discovery on the remaining issues is underway. Plaintiffs filed a motion for class certification, which was granted in September 2020. We intend to defend the lawsuit vigorously.
In Israel Elec. Corp. Employees’ Educ. Fund(case related to Irish Tax events)
On December 31, 2018, a shareholder filed an action against the Company, our CEO Murray Kessler, and our former CFO Ronald Winowiecki in Tel Aviv District Court (Baton v. Perrigo Company plc, et al.et. al.). The case is a securities class action brought in Israel making similar factual allegations for the same period as those asserted in the In re Perrigo Company plc Sec. Litig case in New York federal court. This case alleges that persons who invested through the Tel Aviv stock exchange 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. In 2019, the court granted 2 requests by Perrigo to stay the proceedings pending the resolution of proceedings in the United States. Perrigo filed a further request for a stay in February 2020, and the court granted the stay indefinitely. The plaintiff has filed a motion to have all three cases pending in Israel either consolidated orlift the other two cases dismissed so thatstay; Perrigo has filed an opposition; 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 aroserequested further briefing 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.plaintiff. 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.lawsuit vigorously.
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)"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
Perrigo Company plc - Item 1
Note 14
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 a warranty in the SPA and breached the duty of good faith in performing the SPA. Alychlo subsequently filed papers seeking permission to introduce an additional counterclaim theory of recovery related to the Irish tax issues disclosed by the Company such that if the position of the Irish tax authorities prevails, Alychlo would have further basis for its counterclaim against Perrigo. In June 2019, the Tribunal denied permission for Alychlo to introduce the additional counterclaim and dismissed certain aspects of the original Alychlo counterclaim. There can be no assurance that our Claim will be successful, and the Sellers deny liability for the Claim. WeTo the extent that aspects of Alychlo’s counterclaim survived the Tribunal’s ruling in June 2019, 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.
Other Matters
Our Board of Directors received a shareholder demand letter dated October 30, 2018 relating to the allegations in the securities cases and price fixing lawsuits described above. The letter demands that the Board of Directors initiate an action against certain current and former executives and Board members to recover damages
Perrigo Company plc - Item 1
Note 14
allegedly caused to the Company. In response, the Company reminded the shareholder that any derivative claim can only proceed in accordance with Irish law, the law that governs the Company’s internal affairs. The shareholder responded that he would file a lawsuit asserting derivative claims.
On October 2, 2019, the shareholder filed a derivative action in the U.S. District Court for the District of New Jersey styled Krueger derivatively on behalf of nominal defendant Perrigo Company plc v. Alford, et al. The case was assigned to the same judges who are handling the Roofers' Pension Fund securities class action and related opt out cases described above. In addition to the Company, the lawsuit names as defendants current Board members Alford, Classon, Karaboutis, Kindler, O’Connor, Parker, and Samuels, current CEO Kessler, former Board members Smith, Brlas, Cohen, Fouse, Hoffing, Jandernoa, Kunkle, and Morris, former CEO Hendrickson, former CEO Papa, former CFO Brown, former CFO Winowiecki, and former Executive Vice Presidents Boothe and Coucke. The lawsuit seeks to authorize the shareholder to pursue claims on behalf of the Company against all the individual defendants for breach of their fiduciary duties and for unjust enrichment, and against the current director defendants, former director Mr. Smith, and current CEO Mr. Kessler for violations of Securities Exchange Act §§ 14(a) (proxy statement disclosures) and 29(b) (disgorgement as a result of alleged violations of § 14(a)). The complaint alleges that the following events indicate that the individuals in their respective capacities failed to exercise appropriate control over the management of the Company and made inadequate public disclosures concerning the integration of Omega after acquisition; the Company’s past and prospective organic growth; the defense against the Mylan 2015 tender offer; the alleged collusive pricing activities regarding generic prescription products; the accounting by the Company for the Tysabri® royalty stream; the 2018 Irish tax audit including potential liabilities for Irish taxes; and the April 2019 assertion of tax liabilities by the U.S. Internal Revenue Service (many of these factual events also underlie the multiple securities cases discussed earlier in this Note 14). All defendants have filed motions to dismiss asserting various reasons to dismiss. Plaintiff filed his opposition in March 2020. Defendants’ filed replies in support of dismissal in June 2020. The court granted the motion to dismiss without prejudice on August 21, 2020. No appeal or other proceedings have been filed by the plaintiff. Therefore, we consider this case to have ended.
Talcum Powder
The Company has been named, together with other manufacturers, in product liability lawsuits in state courts in California, Florida, Missouri, New Jersey and Illinois and in the Southern District of Mississippi 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 a legacy talcum powder product that has not been manufactured by the Company since 1999. One of the pending actions involves a current prescription product that contains talc as an excipient. The Company has been named in 32 individual lawsuits seeking compensatory and punitive damages and has accepted a tender for a portion of the defense costs and liability from a retailer for 1 additional matter. The Company has several defenses and intends to aggressively defend these lawsuits.
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. This MDL now includes 3 master complaints. The Company is named in 2 of those: the Master Personal Injury Complaint and the Consolidated Consumer Class Action Complaint.
Perrigo Company plc - Item 1
Note 14
As of October 6, 2020, the Company has been named in NaN of the MDL’s consolidated personal injury lawsuits in various federal courts alleging that plaintiffs developed various types of cancers or are placed at higher risk of developing cancer as a result of ingesting products containing ranitidine. The Company is named in these lawsuits with manufacturers of the national brand Zantac® and other manufacturers of ranitidine products 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 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. This action has been noticed to the MDL, but the New Mexico Attorney General is opposing consolidation. 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 and other consolidated cases. We intend to defend all of these lawsuits vigorously.
Acetaminophen
The Company has received requests for indemnification and defense of several consumer fraud claims involving its store brand infants’ and children’s acetaminophen products. In September 2020, the Company was directly named as a defendant in 1 suit filed in the Central District of California. The Company has also received 14 different claims for indemnification or defense from 9 different retailers for lawsuits filed in California, Illinois and Pennsylvania, with nationwide class action allegations.
The Plaintiffs generally allege that the children’s and infants’ acetaminophen products have identical drug concentration amounts, yet the infants’ product costs more than the children’s product and consumers have been misled into purchasing the more expensive product. The Company will aggressively defend the suit in which it is named and is continuing to assess whether, or to what extent, the Company may contribute in the lawsuits filed against its retail customers.
NOTE 15 – RESTRUCTURING CHARGES
We periodically take action to reduce redundant expenses and improve operating efficiencies. Restructuring activity includes severance, lease exit costs, and related consulting fees. The following reflects our restructuring activity (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2020 | | September 28, 2019 | | September 26, 2020 | | September 28, 2019 |
Beginning balance | $ | 9.8 |
| | $ | 23.8 |
| | $ | 19.6 |
| | $ | 24.0 |
|
Additional charges | 0.8 |
| | 5.2 |
| | 1.9 |
| | 23.3 |
|
Payments | (2.9 | ) | | (7.0 | ) | | (13.8 | ) | | (25.0 | ) |
Non-cash adjustments | 0.2 |
| | (0.5 | ) | | 0.2 |
| | (0.8 | ) |
Ending balance | $ | 7.9 |
| | $ | 21.5 |
| | $ | 7.9 |
| | $ | 21.5 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
Restructuring activity includes severance, lease exit costs, and asset impairments. The charges incurred during the three and nine months ended September 30, 201726, 2020 were primarily associated with actions we tooktaken to streamline our organization as announced on February 21, 2017. Duringthe organization.
The charges incurred during the three and nine months ended September 30, 2017, $3.8 million28, 2019 were primarily associated with the reorganization of our executive management team and $54.7 million of restructuring expenses were recorded, respectively.other actions taken to streamline the organization. Of the amount recorded during the nine months ended September 30, 2017, $27.228, 2019, $10.8 million was related primarily to the CHCAsales force reorganization in France within the CSCI segment.
There were no other material restructuring programs that significantly impacted any other reportable segments.segments for the three and nine months ended September 26, 2020 or September 28, 2019. All charges are recorded in Restructuring expense on the Condensed Consolidated Statements of Operations. The remaining $22.4$7.9 million liability for employee severance benefits is expected to be paid within the next year, while the remaining $3.7 million liability for lease exit costs is expected to be incurred over the remaining terms of the applicable leases.year.
Perrigo Company plc - Item 1
Note 16
NOTE 16 – 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 chiefmanagement makes operating decision maker reviews our operating resultsdecisions, allocates resources, and allocates resources.manages the growth and profitability of the Company.
Perrigo Company plc - Item 1
Note 16
The tables below tables show select financial measures by reporting segment (in millions):
|
| | | | | | | | |
| | 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 |
|
|
| | | | | | | | |
| | Total Assets |
| | September 26, 2020 | | December 31, 2019 |
CSCA | | $ | 4,747.2 |
| | $ | 3,990.2 |
|
CSCI | | 4,606.9 |
| | 4,682.7 |
|
RX | | 2,221.9 |
| | 2,628.5 |
|
Total | | $ | 11,576.0 |
| | $ | 11,301.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 26, 2020 | | September 28, 2019 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CSCA | $ | 664.0 |
| | $ | 123.6 |
| | $ | 12.4 |
| | $ | 613.3 |
| | $ | 81.3 |
| | $ | 12.6 |
|
CSCI | 339.0 |
| | 10.2 |
| | 40.2 |
| | 347.5 |
| | 13.2 |
| | 43.3 |
|
RX | 210.7 |
| | (180.6 | ) | | 21.3 |
| | 230.3 |
| | 19.7 |
| | 22.8 |
|
Unallocated | 0 |
| | (48.7 | ) | | 0 |
| | 0 |
| | (59.8 | ) | | 0 |
|
Total | $ | 1,213.7 |
| | $ | (95.5 | ) | | $ | 73.9 |
| | $ | 1,191.1 |
| | $ | 54.4 |
| | $ | 78.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 26, 2020 | | September 28, 2019 |
| Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization | | Net Sales | | Operating Income (Loss) | | Intangible Asset Amortization |
CSCA | $ | 1,992.2 |
| | $ | 354.5 |
| | $ | 38.6 |
| | $ | 1,777.2 |
| | $ | 283.3 |
| | $ | 31.9 |
|
CSCI | 1,042.8 |
| | 45.7 |
| | 116.9 |
| | 1,025.8 |
| | 18.4 |
| | 130.4 |
|
RX | 738.8 |
| | (81.2 | ) | | 63.8 |
| | 711.6 |
| | 95.0 |
| | 65.4 |
|
Unallocated | 0 |
| | (151.4 | ) | | 0 |
| | 0 |
| | (185.0 | ) | | 0 |
|
Total | $ | 3,773.8 |
| | $ | 167.6 |
| | $ | 219.3 |
| | $ | 3,514.6 |
| | $ | 211.7 |
| | $ | 227.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements included in this Form 10-Q and our Form 10-K for the year ended December 31, 20162019 (the “2016“2019 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 20162019 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 Overview
We are a leading global healthcare companydedicated to making lives better by bringing quality, affordable self-care products 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.trust everywhere they are sold. 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 OTC products throughout Europeover-the-counter ("OTC") health and the U.S., as well aswellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic standardprescription pharmaceutical topical products such as creams, lotions, and gels as well as inhalantsnasal sprays and injections ("extended topical") prescription drugs. We are headquartered in Ireland,inhalers.
Our Segments
Our reporting and sell our products primarily in North America and Europe, as well as in other markets, including Australia, Israel and China.
Our reportingoperating segments are as follows:
Consumer Healthcare Americas ("CHCA"), comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
Consumer Healthcare International("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.
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
We also have an "Other" reporting segment, which comprises our legacy Active Pharmaceutical Ingredients ("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 our former Specialty Sciences segment were moved to unallocated expenses. For results by segment, see "Segment Results" below and Item 1. Note 16.
2017 Year-to-Date Highlights
| |
• | On March 27, 2017, we completed the sale ofConsumer Self-Care Americas ("CSCA") comprises our Tysabri® financial asset, effective January 1, 2017, to Royalty Pharma for up to $2.85 billion, which consists of $2.2 billion in cashconsumer self-care business (OTC, contract manufacturing, infant formula, and up to $250.0 millionoral self-care categories 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 ($15.1 million), inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 1. Note 2). |
Perrigo Company plc - Item 2
Consolidated
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Results
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ 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 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 $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 income 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 to 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 segment for the foreseeable future.
| |
• | We completed the sale of thedivested animal health pet treats plant fixed assets on February 1, 2017 and received $7.7 million in proceeds (refer to Item 1. Note 2). |
Perrigo Company plc - Item 2
CHCA
Segment Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ 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 $12.4 million, or 2%, 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 sales in the gastrointestinal and animal health categories and in our Mexico business;
Pricing pressures in the cough/cold, and analgesics categories; and
Lower volumes in the nicotine replacement category; and
Discontinued products of $2.7 million.
Operating income increased $25.3 million, or 26%, as a result of:
An increase of $6.9 million in gross profit due to:
Favorable product mix in certain categories; 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 takencategory) 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 byU.S., Mexico and Canada. |
| |
• | A $2.0 million gain related to contingent consideration (refer to Item 1. Note 6Consumer Self-Care International ("CSCI"). |
Gross profit as a percentage of net sales was 1.8% higher due primarily to favorable product mix and supply chain efficiencies as discussed above.
Perrigo Company plc - Item 2
CHCA
Operating income as a percentage of net sales was 4.6% higher due primarily to favorable product mix as discussed above and decreased operating expenses.
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ 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 relatedcomprises our branded consumer self-care business primarily toin Europe, our consumer self-care businesses in the launches of fluticasone nasal spray (store brand equivalent to Flonase®), smoking cessationUnited Kingdom and Australia, and our divested liquid licensed products and Esomemprazole Magnesium (store brand equivalent to Nexium®); more than offset bybusiness in the United Kingdom.
|
| |
• | The absence of $110.1 millionPrescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in sales attributable to the U.S. VMS business (refer to Item 1. Note 2);, predominantly generics, and our pharmaceuticals and diagnostic businesses in Israel. |
Our segments reflect the way in which our management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Financial information related to our business segments and geographic locations can be found in Item 1. Note 2 and Note 16. For results by segment, see "Segment Results" below.
Highlights
Effective July 29, 2020, our board of directors appointed Katherine C. Doyle to serve as a director of the Company and a member of its Audit Committee.
On June 19, 2020, Perrigo Finance Unlimited Company (“Perrigo Finance”) issued $750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 (the “2020 Notes") and received net proceeds of $737.1 million after fees and market discount. Interest on the 2020 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2020 Notes will mature on June 15, 2030. The 2020 Notes are governed by the 2020 Indenture. The 2020 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo and, no other subsidiary of Perrigo guarantees the 2020 Notes. There are no restrictions under the 2020 Notes on Perrigo's ability to obtain funds from its subsidiaries. Perrigo Finance may redeem the 2020 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2020 Indenture. On July 6, 2020, the net proceeds of the 2020 Notes were used to fund the redemption of Perrigo Finance's $280.4 million of 3.500% Senior Notes due March 15, 2021 and $309.6 million of 3.500% Senior Notes due December 15, 2021 (collectively, the "2021 Notes"). The balance will be used for general corporate purposes which may include the repayment or redemption of additional indebtedness. As a result of the early redemption of the 2021 Notes, during the three months ended September 26, 2020, we recorded a loss of $20.0 million in Loss on extinguishment of debt on the Condensed Consolidated Statements of Operations, consisting of the premium on debt repayments, the write-off of deferred financing fees, and the write-off of the remaining bond discounts.
We previously announced a plan to separate our RX business, which, if completed, would enable us to focus solely on our consumer-focused businesses. A netseparation of the RX business could include a possible sale, spin-off, merger or other form. We have incurred significant preparation costs due to the announced plan to separate, and if completed we could incur total costs in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on timing and structure of a transaction. We have not committed to a time frame for a separation.
Perrigo Company plc - Item 2
Executive Overview
Impact of COVID-19 Pandemic
We have been impacted by the novel coronavirus (COVID-19) global pandemic and the responses by government entities to combat the virus. We currently continue to operate in all our jurisdictions and are complying with the rules and guidelines prescribed in each jurisdiction. We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies. Our first priority has been, and will continue to be, the safety of our employees who continue to come to work and are dedicated to keeping our essential products flowing into the market. We have taken extra precautions at our facilities to help ensure the health and safety of our employees that are in line with guidance from global and local health authorities. Among other precautions implemented, we have generally restricted access to our production facilities worldwide to essential employees only and permitted a limited number of nonessential employees into other facilities with a strict approval process, implemented a multi-step pre-screening access process before an employee can enter a facility, communicated regularly with employees and provided education and implemented controls related to physical distancing and hygiene measures, implemented remote work arrangements where appropriate, restricted business travel, and prioritized production of essential products for several months following the initial outbreak. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Both the outbreak of the disease and the actions to slow its spread have had an adverse impact on our operations by, among other things, increasing absenteeism, affecting the supply of raw materials and third party supplied finished goods, and preventing many of our employees from coming to work. We have responded to such impacts by, among other things, implementing protocols to protect the health of factory workers, adjusting production schedules, and seeking alternate suppliers where available, and so far, most of our facilities have continued to produce at high levels despite these challenges. However, a number of jurisdictions that relaxed such restrictions, or have experienced limited public adherence with suggested safety measures, have experienced new surges in COVID-19 cases. Many of these jurisdictions are now contemplating or implementing new or renewed restrictions. As such, as the pandemic continues or intensifies, it is possible that these or other challenges may begin having a larger impact on our operations. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has adversely impacted, and may continue to adversely impact our stock price and our ability to access capital markets. The situation surrounding COVID-19 remains fluid, and we are actively managing our response and assessing potential impacts to our financial condition, supply chains and other operations, employees, results of operations, consumer demand for our products, and our ability to access capital. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19 (refer to Item 1A. Risk Factors for related risks).
During the nine months ended September 26, 2020, we have experienced a number of changes in product sales mix across all our Segments, which we attribute to consumer and customer behavior surrounding the COVID-19 pandemic. In March and April of 2020, we experienced a surge in demand for certain of our essential health-care and self-care products in both the CSCA and CSCI segments. This was followed by a slow-down in demand in May and June in both the CSCA and CSCI segments for some of the products in which we previously saw surges, which we attribute primarily to consumer pantry de-load. In the third quarter, demand in our CSCA segment normalized and was not significantly impacted by the pandemic. Our CSCI segment also experienced lower consumer demand during the second and third quarters, with some improvement in the third quarter, for certain other self-care products that were impacted by the movement and social distancing restrictions put in place to combat spreading of the virus, such as travel bans, country lock-downs and school closings. In March and April of 2020 our RX segment saw strong demand for Albuterol. In the latter half of the second quarter, our RX segment experienced a decrease in demand for base products due to lower volume of U.S. prescriptions from pandemic and lock down-related reductions in doctor visits, which partially rebounded in the third quarter. Also in the third quarter, we voluntarily recalled Albuterol and established an estimated recall reserve. Consequently, on a year-to-date basis, after accounting for both the positive and negative sales impacts related to the pandemic, excluding Albuterol, we believe COVID-19 did not significantly impact our consolidated net sales.
In the same time frame, we had incremental operating costs of existingapproximately $11.0 million related to COVID-19 and estimate that full year incremental operating costs will be between $15.0 million to $20.0 million, primarily related to the precautions implemented to keep our employees safe and properly rewarded during the pandemic as well as increased material costs. We also experienced a decrease in our effective tax rate due to
Perrigo Company plc - Item 2
Executive Overview
additional interest and depreciation deductions provided for in the CARES Act enacted on March 27, 2020 resulting in a reduction of income tax expense by approximately $30.8 million during the nine months ended September 26, 2020. Given our financial strength, we expect to continue to maintain sufficient liquidity as we manage through the current environment.
Moving forward, whether the trends we've experienced in our segments will continue or change is uncertain and will likely depend on the duration and severity of the COVID-19 pandemic and the annual cold and flu season. If the pandemic intensifies or there is a second wave, it is possible that we could see another surge in demand for our essential self-care products. However, this could lead to continued lower demand for certain self-care products in our CSCI segment, as well as products in our RX segment. Additionally, we could experience continued slow-down in demand for our essential products sold in the initial sales surge if consumers continue to pantry de-load, all of which could depend on the duration and severity of the COVID-19 pandemic and related illnesses.
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Financial Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 1,213.7 |
| | $ | 1,191.1 |
|
Gross profit | $ | 428.1 |
| | $ | 412.8 |
|
Gross profit % | 35.3 | % | | 34.7 | % |
Operating income (loss) | $ | (95.5 | ) | | $ | 54.4 |
|
Operating income (loss) % | (7.9 | )% | | 4.6 | % |
* Total net sales by geography is derived from the location of the entity that sells to a third party.
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales increased $22.6 million, or 2%, due to:
Higher$19.8 million, or 2%, net increase due primarily to an increase in the CSCA segment of $48.0 million, which includes $24.5 million of demand driven growth across most product categories led by continued consumer channel shifting from traditional brick and mortar outlets to e-commerce and $23.5 million from the acquisition of the oral care assets of High Ridge Brands ("Dr. Fresh"). These gains were partially offset by a $20.5 million decline in net sales in the cough/cold category and Mexico business;our RX segment as $23.0 million in pre-recall albuterol sulfate inhalation
Perrigo Company plc - Item 2
Consolidated
aerosol ("Albuterol") sales were more than offset by
Lower the establishment of the estimated Albuterol recall reserve of $31.2 million and $8.7 million from discontinued lower margin distribution products. Due primarily to pandemic-related consumer behavior, net sales in our infant nutrition and animal health categories;
Pricing pressuresCSCI segment decreased $7.8 million as lower demand in the cough/cold, analgesics, and gastrointestinalcertain product categories more than offset increased demand in other 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$2.8 million or 4%, as a result of:
A decrease of $16.8 million in gross profitincrease due primarily to:
Favorable product mix in certain categories; and
Positive contributions from supply chain efficiencies; more than offset by
| |
•◦ | The absence of $17.6$10.0 million in gross profit as a result of the sale of the U.S. VMS business (refer to Item 1. Note 2);increase primarily from favorable Euro foreign currency translation; 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$9.2 million increase due to the absence of $21.5 million related primarily to strategic organizational enhancements (refer to Item 1. Note 15); and the Ranitidine retail market withdrawal included in the prior year period; partially offset by |
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$16.4 million decrease due to our Russiandivested Rosemont pharmaceuticals business which wasand Canoderm prescription product, both previously classified as held-for-sale, to Alvogen Pharma LLCincluded in our CSCI segment, and Alvogen CEE Kft. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resultedour divested animal health business previously included in an immaterial gain in the segment (refer to Item 1. Note 2). our CSCA segment. |
The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
Segment Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ 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:decreased $149.9 million, or 276%, due to:
An$15.3 million increase of $10.7 million in gross profit due primarily to:
Favorable foreign currency translation movement;
Improved product mixto increased net sales as described above, which were partially offset by the net charge of $22.5 million from the Albuterol recall and an increase in commodity costs for sales of existing products; and
Operational efficiencies across the organization.
A decrease of $1.6 billion in operating expenses due primarily to:
The absence of $1.6 billion of impairment charges ona certain indefinite-lived and definite-lived intangible brand category assets and goodwill impairments in the Branded Consumer Healthcare - Rest of World ("BCH-ROW") and Branded Consumer Healthcare - Belgium ("BCH-Belgium")
reporting units recorded in the prior year period (refer to Item 1. Note 3); andA decrease of $4.6 million in selling and administrative expenses 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
| |
• | Increased restructuring charges totaling $1.2 million related to strategic organizational enhancements (refer to Item 1. Note 15). |
OTC brand. Gross profit as a percentage of net sales was 4.3% higherincreased 60 basis points due primarily to improved product mix primarily driven by the cancellationabsence of certain unprofitable distribution contracts, as described above.
| |
• | Operating income as a percentage of net sales was 429.3% higher due primarily to the absence of $1.6 billion of intangible asset and goodwill impairment charges as discussed above (refer to Item 1. Note 3). |
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ 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 | % |
Nine Months EndedSeptember 30, 2017 vs. Nine Months EndedOctober 1, 2016
Net sales decreased $115.9 million, or 9%, overthe Ranitidine retail market withdrawal included in the prior year period, due primarily to:
Newpartially offset by the net charge from the Albuterol recall and unfavorable product sales of $50.4 million;mix; more than offset by
The absence of $118.4
$165.2 million in sales attributable to the cancellation of unprofitable distribution contracts;
Unfavorable foreign currency translation movement of $25.2 million;
A decrease in sales of existing products of $17.4 million primarily in the anti-parasites and vitamins categories; and
Discontinued products of $5.0 million.
Perrigo Company plc - Item 2
CHCI
Operating income increased $2.0 billion due to:
A decrease of $32.7 million in gross profit due primarily to:
Improved product mix for sales of existing products; and
Operational efficiencies across the organization; more than offset by
Lower margins in our U.K. store brand business; and
Unfavorable foreign currency translation movement.
A decrease of $2.1 billionincrease 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 in 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$202.4 million goodwill impairment charge in the current year period related to RX goodwill, partially offset by the absence of a $10.8 million impairment charge recorded related to a definite-lived intangible asset in the Russian business (refer to Item 1. Note 2) and In-Process Research and Development ("IPR&D"); and prior year period; partially offset by |
| |
•◦ | Increased restructuring expenseThe absence of $2.8$12.5 million in acquisition and integration-related charges related to strategic organizational enhancements (referthe acquisition of Ranir in the prior year period;
|
| |
◦ | The absence of a $7.1 million asset abandonment charge related to Item 1. Note 15).our waste water treatment plant in Vermont recorded in the prior year period; |
| |
◦ | $4.4 million decrease in restructuring expenses that were related primarily to the reorganization of our executive management team; and |
| |
◦ | $4.0 million insurance reimbursement received in the current year period. |
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 3,773.8 |
| | $ | 3,514.6 |
|
Gross profit | $ | 1,346.0 |
| | $ | 1,292.5 |
|
Gross profit % | 35.7 | % | | 36.8 | % |
Operating income | $ | 167.6 |
| | $ | 211.7 |
|
Operating income % | 4.4 | % | | 6.0 | % |
Perrigo Company plc - Item 2
Consolidated
* Total net sales by geography is derived from the location of the entity that sells to a third party.
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $259.2 million, or 7% due to:
$334.6 million, or 10%, net increase due primarily to an increase in the CSCA segment of $259.5 million, including $142.0 million from our acquisitions of Ranir and Dr. Fresh and $117.5 million of demand driven growth across most product categories, which was due primarily to increased consumer COVID-19 related demand and benefited from strong e-commerce performance, and the incremental impact of new product sales. In our CSCI segment, net sales increased $50.4 million due primarily to Ranir and Dr. Fresh contributing $40.6 million and an overall increase from the incremental impact of new product sales and increased demand in certain product categories more than offsetting the decrease in demand of other categories, both due to pandemic-related factors, and discontinued products of $5.3 million. The $24.7 million increase in the RX segment was due primarily to pre-recall Albuterol sales of $142.7 million and an increase of $24.4 million in other new product offerings. These increases were partially offset by pricing pressure, a decline in the base business due to lower prescription volumes related to the pandemic and lock down-related reductions in doctor visits, $31.2 million for the establishment of the estimated Albuterol recall reserve, and $24.4 million of discontinued lower margin distribution products; further partially offset by
$75.4 million decrease due primarily to:
| |
◦ | $65.3 million decrease due to our divested Rosemont pharmaceuticals business and Canoderm prescription product, both previously included in our CSCI segment, and our divested animal health business previously included in our CSCA segment; and |
| |
◦ | $19.3 million decrease primarily from unfavorable Euro and Peso foreign currency translation; partially offset by |
| |
◦ | $9.2 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period. |
Operating income decreased $44.1 million, or 21%, due to:
$53.5 million increase in gross profit due primarily to increased net sales as described above, which were partially offset by the net charge of $22.5 million from the Albuterol recall, operational inefficiencies, increased labor and overhead costs associated with the COVID-19 pandemic, and an increase in commodity costs for a certain OTC brand. Gross profit as a percentage of net sales was 1.6% higherdecreased 110 basis points due primarily to improvedthe gross profit factors discussed above and unfavorable product mix primarily drivenmix; more than offset by the cancellation of certain unprofitable distribution contracts, as described above.
| |
• | 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 $23.0 million.
Perrigo Company plc - Item 2
RXConsolidated
Segment Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
($ 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
Net sales decreased $1.3$97.6 million or 1%, due 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 sales of existing products of $21.5 million due primarily to pricing pressure across the portfolio; and
| |
• | Lower Entocort® sales of $10.2 million.
|
Segmentincrease in operating income increased $7.7 million, or 10%, as a result of:
A decrease of $4.2 million in gross profitexpenses due primarily to:
| |
•◦ | Lower Entocort® sales as discussed above; and
|
Pricing pressure as discussed above.
A decrease of $11.9 million in operating expenses due primarily to:
Decreased selling and administrative expenses of $8.4 million due primarily to the prior year specialty pharmaceuticals sales force restructuring initiative; and
Decreased R&D expenses 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 assets in the current period.
| |
• | 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 costsA $202.4 million goodwill impairment charge in the current year period related to RRX goodwill, partially offset by the absence of $42.9 million of impairment charges related to definite-lived intangible assets and IPR&D spend and restructuring initiatives takenassets in the prior year;year period; further offset partially by lower sales of Entocort®.
|
Perrigo Company plc - Item 2
RX
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ 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 $68.5 million, or 9%, due to:
| |
• | 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®$25.7 million decrease in restructuring expenses related primarily to the reorganization of our sales force in France and the reorganization of $61.4 million;
|
Decreased sales of existing products of $58.0 million due to decreased sales volume of certain products and pricing pressure across the portfolio; and
Discontinued products of $2.3 million.
Operating income decreased $18.7 million, or 7%, as a result of:
A decrease of $48.1 million in gross profit due primarily to:
| |
• | Lower Entocort® sales as noted above; and
|
Pricing pressure as discussed above.
A decrease of $29.4 million in operating expenses due to:
A $23.0 million gain on sales of certain ANDAs;
| |
• | A $17.0 million gain related to contingent consideration (refer to Item 1. Note 6); |
Decreased selling and administrative expenses of $18.3 million due primarily to the prior year specialty pharmaceuticals sales force restructuring initiative; and
Decreased R&D expenses of $14.1 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 our executive management team in the prior year; |
| |
•◦ | Increased restructuring$26.5 million decrease in administration expenses due primarily to a reduction in legal and professional fees, the absence of $5.9 millionacquisition and integration-related charges related to strategic organizational enhancements (referthe acquisition of Ranir, the absence of expenses from the divested animal health business, and a reduction in employee related expenses, partially offset by an increase in insurance expense, the inclusion of expenses from our acquisitions of Ranir and Dr. Fresh, and incremental costs of operating in the current COVID-19 environment, including employee bonuses and costs related to Item 1. Note 15). measures implemented to keep employees safe; |
| |
•◦ | Gross profit as a percentage of net sales was 2.0% lower$8.1 million decrease in selling expense due primarily to lower salesthe reduction in selling, advertising, and promotion expenses in response to consumer sentiment and behavior during the COVID-19 pandemic in the CSCI segment and the absence of Entocort® as discussed above. expenses from the divested animal health business, partially offset by the inclusion of expenses from our acquisitions of Ranir and Dr. Fresh; and |
| |
◦ | The absence of a $7.1 million asset abandonment charge related to our waste water treatment plant in Vermont taken in the prior year period. |
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 $110.0 million in cash, inclusive of a net debt adjustment. We expect to finalize the sale within the next three months, and the sale is not expected to have a material impact on our operations (refer to Item 1. Note 9).
Segment Results
Three Month Comparison
Internal Revenue Service Complaint
|
| | | | | | | |
| Three Months Ended |
($ 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 million due primarily to increased competitionAs previously disclosed, 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 absence of a $6.5 million impairment charge recorded on the India API business in the prior year; offset partially by a $3.3 million impairment charge recorded on the Israel API business in the current period (refer to Item 1. Note 9).
Perrigo Company plc - Item 2
Other
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
($ 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 million due to a $1.0 million increase in gross profit driven by favorable product mix and a $5.8 million decrease in operating expenses. The decrease in operating expenses related primarily to the absence of a $10.8 million impairment charge recorded on the India API business 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).
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded above Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
|
| | | | | | | | | | | | | | |
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, due to the sale of the Tysabri® financial asset, all legal expenses associated with the former Specialty Sciences segment were moved to unallocated expenses.
The increase of $20.5 million in unallocated expenses during the three months ended September 30, 2017 compared to the prior year period was due primarily to an increase in share-based compensation expense of $4.7 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 million in unallocated expenses during the nine months ended September 30, 2017 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 royalties 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.
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 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® late in the first quarter of 2017 (refer to Item 1. Note 6).
Interest Expense, Net
Interest expense, net was $34.7 million and $133.1 millionduring the three and nine months ended September 30, 2017, respectively, compared to $54.6 million and $163.2 million for the three and nine months ended October 1, 2016, respectively. The $19.9 million and $30.1 million decreases were the result of the early debt repayments made during the nine months ended September 30, 2017 (refer to the "Borrowings and Capital Resources" section below and Item 1. Note 10).
Other (Income) Expense, Net
Other (income) expense, net was $3.6 million income for the three months ended September 30, 2017, compared to $1.0 million expense for the three months ended October 1, 2016. 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 million income during the nine months ended September 30, 2017, compared to $32.4 million expense for the nine months ended October 1, 2016. The $33.5 million decrease in expenses was due primarily to the absence 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 extinguishment of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts related to 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).
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 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.
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”),IRS, plus statutory interest thereon from the dates of payment, for the fiscal
tax 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 audits2012. In response to our complaint, the United States District Court for Western District of
those years culminated in the issuancesMichigan scheduled a new trial date for January 26, 2021 (refer to Item 1. Note 13).
Internal Revenue Service Notice of two statutory notices of deficiency: (1) on August 27, 2014 for the 2009 and 2010 tax years and (2)Proposed Adjustment
As previously disclosed, 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, 2016,26, 2019, we received a noticerevised Notice of proposed adjustment forProposed Adjustment ("NOPA") from 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 withregarding transfer pricing positions forrelated to 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 strongly disagree with the IRS’sIRS position as asserted inand will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. Accordingly, on April 14, 2020, we filed a request for Competent Authority Assistance with the IRS (refer to Item 1. Note 13). The request was accepted and is under review.
Internal Revenue Service Notice of Proposed Adjustment
On May 7, 2020, we received a final NOPA from the IRS, which was unchanged from the draft noticeNOPA previously received, regarding the deductibility of proposed adjustment and intendinterest related to contest it.
the IRS audit of Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
We have ongoing audits in multiple other jurisdictionsfor 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 IsraelWe strongly disagree with the IRS position and are pursuing all available administrative and judicial remedies (refer to Item 1. Note 13).Irish Tax Authority is currently auditing our fiscal years ended June 29, 2013 and June 28, 2014. The French Tax Authority is currently auditingAppeals Commission Notice of Amended Assessment
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 2014, December 2015,31, 2012 and December 2016.31, 2013 relating to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® to Biogen Idec from Elan Pharma. We strongly disagree with this assessment and believe that the Notice of Amended Assessment ("NoA") is without merit and incorrect as a matter of law and appealed the assessment to the Tax Appeals Commission. Separately, we were granted leave by the Irish High Court on February 25, 2019 to seek
Perrigo Company plc - Item 2
Consolidated
judicial review of the issuance of the NoA by Irish Revenue. The High Court held a hearing in June 2020 regarding the judicial review case and on November 4, 2020 ruled that the NoA did not violate our rights and legitimate expectations as a taxpayer. Because the Irish High Court did not quash the NoA in the judicial review case, absent an appeal by Elan Pharma in the judicial review case, the amended assessment can be examined on its merits by the Irish Tax Appeals Commission (refer to Item 1. Note 13).
CONSUMER SELF-CARE AMERICAS
Recent Trends and Developments
In March and April of 2020, we experienced a surge in demand for many of our OTC and infant nutrition products, which we attributed to consumer reaction to the outbreak of COVID-19. In May and June, the initial surge slowed, and we experienced a decrease in demand for some of these products, which we attributed primarily to consumers' de-load of pantry stocking that occurred during the initial March and April surge. During the third quarter, demand normalized and COVID-19 did not have a significant impact on our net sales. It is possible that we could still experience a lower demand for some of the products sold in the initial surge if consumers continue to pantry de-load, however, this could depend on the duration and severity of the COVID-19 pandemic and related illnesses. Alternatively, it is possible that we could experience another surge in demand if a concentrated wave of COVID-19 occurs.
| |
• | On June 17, 2020, we announced our entrance into the CBD market through a strategic investment in and long-term supply agreement with Kazmira LLC ("Kazmira"), a leading supplier of hemp-based, THC-free CBD products. In addition to the supply agreement, we acquired an approximate 20% equity stake in Kazmira for $50.0 million with $15.0 million paid at close of the transaction and the balance due within 18 months. Our minority equity investment initiates the first phase of the partnership in which we will collaborate to scale-up Kazmira’s facilities and laboratories, in accordance with current Good Manufacturing Practices and to produce THC-free CBD from industrial hemp that meets our standards for reliability and consistency. In the second phase of the partnership, we will work to launch THC-free, hemp-based CBD products in a number of global markets, while leveraging our supply agreement with Kazmira, which is exclusive for the U.S. store brand market (refer to Item 1. Note 7 and Note 10). |
| |
• | On April 6, 2020, we received approval from the U.S. Food and Drug Administration on our abbreviated new drug application ("ANDA") for OTC diclofenac sodium topical gel 1%, the store brand equivalent to Voltaren® gel. On September 8, 2020, we launched this product to our retail partners under store brand labels, which provides consumers with a high-quality, value alternative for the temporary relief of arthritis pain. |
| |
• | On April 1, 2020, we acquired Dr. Fresh for total purchase consideration of $113.0 million, subject to customary post-closing adjustments, including a working capital settlement. After post-closing adjustments as of September 26, 2020, total cash consideration paid was $106.0 million. This acquisition includes the children’s oral care value brand, Firefly®, in addition to the REACH® and Dr. Fresh® brands, and a licensing portfolio. The addition of these brands positions us as the number one fastest-growing value brand player in the children’s oral care category and the licensing portfolio will enable creative solutions for our customers (refer to Item 1. Note 3). |
| |
• | On January 3, 2020, we acquired Steripod®, a leading toothbrush accessory brand and innovator in the toothbrush protector market, from Bonfit America Inc. Total consideration paid was $26.0 million. The transaction was accounted for as an asset acquisition, in which we capitalized $25.1 million as a brand-named intangible asset. The remainder of the purchase price was allocated to working capital. The acquisition, which includes a portfolio of antibacterial toothbrush protectors, kids’ toothbrush protectors and tongue cleaners, complements our current portfolio of oral self-care products, and leverages our manufacturing and marketing platform (refer to Item 1. Note 3). |
Perrigo Company plc - Item 2
CSCA
Segment Financial Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 664.0 |
| | $ | 613.3 |
|
Gross profit | $ | 217.1 |
| | $ | 185.1 |
|
Gross profit % | 32.7 | % | | 30.2 | % |
Operating income | $ | 123.6 |
| | $ | 81.3 |
|
Operating income % | 18.6 | % | | 13.3 | % |
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales increased $50.7 million, or 8%, due to:
| |
• | $48.0 million, or 8%, net increase due primarily to an increase of $23.5 million from our acquisition of Dr. Fresh and demand driven growth across most product categories benefiting from e-commerce growth as consumers continued to shift purchasing towards online where we have greater market share, which more than offset lower traditional brick and mortar purchases. More specifically, OTC net sales growth of $15.5 million was driven by strong demand in the pain, allergy, and digestive health categories, resulting from strong e-commerce growth and incremental new product sales including Prevacid®, Diclofenac sodium topical gel 1%, and Esomeprazole Mini. These increases were partially offset by a decrease in sales of cough and cold products included in our upper respiratory category due to a weaker start to the cough and cold season and normal pricing pressure. Nutrition net sales growth of $5.5 million was due primarily to new product sales from an infant formula launch at a major retailer in the prior year, greater shipments in the infant formula contract manufacturing business, and e-commerce growth, which were partially offset by multi-year pricing contracts. Growth in the oral self-care category was driven by strong e-commerce performance and |
$2.7 million increase due primarily to:
| |
◦ | $7.4 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period; partially offset by |
| |
◦ | $2.9 million decrease from unfavorable Mexican peso foreign currency translation; and |
| |
◦ | $1.8 million decrease related to our divested animal health business. |
Operating income increased $42.3 million, or 52%, due primarily to:
$32.0 million increase in gross profit due primarily to increased net sales as described above. Gross profit as a percentage of net sales increased 250 basis points due primarily to the absence of the Ranitidine retail market withdrawal included in the prior year period and higher margin new product sales, partially offset by normal pricing pressure; and
$10.3 million decrease in operating expenses due primarily to the absence of a $7.1 million asset abandonment charge related to our waste water treatment plant in Vermont taken in the prior year period and a $4.0 million insurance reimbursement received in the current year period.
Nine Month Comparison
Perrigo Company plc - Item 2
CSCA
|
| | | | | | | |
| Nine Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 1,992.2 |
| | $ | 1,777.2 |
|
Gross profit | $ | 632.2 |
| | $ | 565.9 |
|
Gross profit % | 31.7 | % | | 31.8 | % |
Operating income | $ | 354.5 |
| | $ | 283.3 |
|
Operating income % | 17.8 | % | | 15.9 | % |
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $215.0 million, or 12%, due to:
| |
• | $259.5 million, or 15%, net increase due primarily to an increase of $142.0 million from our acquisitions of Ranir and Dr. Fresh and demand driven growth across most product categories, which was due primarily to increased consumer COVID-19 related demand and benefited from strong e-commerce performance. More specifically, OTC net sales growth of $100.5 million across most product categories was due primarily to the net increase of consumer COVID-19 related demand, overall market growth, favorable consumer conversion in digestive health products, and the incremental impact of new product sales led by Prevacid®, Diclofenac sodium topical gel 1%, and Esomeprazole Mini. All of these drivers benefited from continued robust e-commerce growth. These increases were partially offset by normal pricing pressure on certain products. Nutrition net sales growth of $11.4 million was due primarily to new product sales from an infant formula launch at a major retailer in the prior year, partially offset by multi-year pricing contracts and a $5.8 million decrease due to discontinued products. In the oral self-care category, growth was driven by the incremental impact of new product sales benefiting from e-commerce growth; partially offset by |
$44.5 million decrease due primarily to:
| |
◦ | $43.7 million decrease due to our divested animal health business; and |
| |
◦ | $8.2 million decrease from unfavorable Mexican peso foreign currency translation; partially offset by |
| |
◦ | $7.4 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period. |
Operating income increased $71.2 million, or 25%, due to:
$66.3 million increase in gross profit due primarily to increased net sales as described above, partially offset by operating inefficiencies at one of our infant nutrition facilities as well as increased labor and overhead costs associated with the COVID-19 pandemic. Gross profit as a percentage of net sales decreased 10 basis points due primarily to the operating inefficiencies described above, pricing pressure on certain products, and the divested animal health business, partially offset by the absence of the Ranitidine retail market withdrawal included in the prior year period, and higher margin new product sales; and
$4.9 million decrease in operating expenses due primarily to:
| |
◦ | The absence of a $7.1 million asset abandonment charge related to our waste water treatment plant in Vermont taken in the prior year period and a $4.0 million insurance reimbursement received in the current year period; partially offset by |
| |
◦ | $6.3 million increase in selling and administration expenses due primarily to the inclusion of expenses from our acquisitions of Ranir and Dr. Fresh and an increase in promotion expenses on branded products, partially offset by a reduction in employee related expenses and the absence of expenses from the divested animal health business. |
CONSUMER SELF-CARE INTERNATIONAL
Recent Trends and Developments
Perrigo Company plc - Item 2
CSCI
Throughout the year, we experienced demand shifts for certain products, which we attributed to consumer reactions related to the COVID-19 pandemic and the movement and social distancing restrictions put in place to combat spreading of the virus, such as travel bans, and country lock-downs. Certain products in our pain and sleep-aids and vitamins, minerals and supplements ("VMS") categories increased, while products in our skincare and personal hygiene, and healthy lifestyle categories decreased. It is possible that demand in our skincare and personal hygiene, and healthy lifestyle categories may continue to decrease due to continued movement and social distancing restrictions, which could depend on the duration and severity of the COVID-19 pandemic and related illnesses.
| |
• | On August 7, 2020, we entered into a definitive agreement to acquire three Eastern European OTC dermatological skincare and hair loss treatment brands, Emolium®, Iwostin®, and Loxon® from Sanofi for €52.0 million and additional consideration for the transfer of related inventory on hand. On October 30, 2020, the transaction closed for €53.3 million (approximately $62.0 million), subject to post-closing conditions. The acquisition will be accounted for as a business combination. This transaction builds on our self-care transformation and strengthens our skincare and personal hygiene portfolio. |
| |
• | Consistent with our strategy to reconfigure our portfolio to focus on our consumer self-care businesses, on June 19, 2020, we completed the sale of our U.K.- based Rosemont Pharmaceuticals business, a generic prescription pharmaceuticals manufacturer focused on liquid medicines, to a U.K. headquartered private equity firm for cash consideration of £155.6 million (approximately $195.0 million), which resulted in a pre-tax loss of $18.7 million (refer to Item 1. Note 3). |
| |
• | On February 13, 2020, we acquired Dexsil®,a silicon supplement brand, from RXW Group NV, for total cash consideration paid of approximately $8.0 million. The transaction was accounted for as an asset acquisition, in which we capitalized the consideration paid as a brand-named intangible asset. The acquisition provides additional opportunities for growth through new product launches and geographic expansion (refer to Item 1. Note 3). |
Segment Financial Results
Three Month Comparison
|
| | | | | | | |
| Three Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 339.0 |
| | $ | 347.5 |
|
Gross profit | $ | 154.1 |
| | $ | 156.3 |
|
Gross profit % | 45.5 | % | | 45.0 | % |
Operating income | $ | 10.2 |
| | $ | 13.2 |
|
Operating income % | 3.0 | % | | 3.8 | % |
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales decreased $8.5 million, or 2%, due to:
$7.8 million, or 2%, net decrease due primarily to lower sales of cough and cold OTC products in the upper respiratory category and lower consumer demand for anti-parasite products in the skincare and personal hygiene category due to pandemic-related consumer behavior, travel bans, social distancing measures, country lock-downs, and school closings, and a $2.9 million decrease from discontinued products. These decreases were partially offset by incremental new product sales including line extensions in the ACO dermatology product and the XLS Forte-Five weight management brand in the skincare and personal hygiene and healthy lifestyle categories, respectively, and higher net sales in our pain and sleep-aids and VMS categories due to pandemic-related consumer behavior; and
$14.6 million decrease due to our divested Rosemont pharmaceuticals business and Canoderm prescription product previously included in the Nordic region; partially offset by
Perrigo Company plc - Item 2
CSCI
$12.1 million increase from favorable foreign currency translation primarily related to the Euro; and
$1.8 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period.
Operating income decreased $3.0 million, or 23%, due to:
$2.2 million decrease in gross profit due primarily to the decrease in net sales as described above and higher commodity costs for a certain OTC brand. Gross profit as a percentage of net sales increased 50 basis points due primarily to the absence of the Ranitidine retail market withdrawal included in the prior year period, partially offset by the divested Rosemont pharmaceuticals business, unfavorable product mix, and higher commodity costs for a certain OTC brand; and
$0.8 million increase in operating expenses due primarily to unfavorable Euro foreign currency translation, partially offset by the absence of expenses from the divested Rosemont pharmaceuticals business and a decrease in administration and restructuring expenses.
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 1,042.8 |
| | $ | 1,025.8 |
|
Gross profit | $ | 483.3 |
| | $ | 480.0 |
|
Gross profit % | 46.3 | % | | 46.8 | % |
Operating income | $ | 45.7 |
| | $ | 18.4 |
|
Operating income % | 4.4 | % | | 1.8 | % |
Nine Months EndedSeptember 26, 2020 vs. Nine Months EndedSeptember 28, 2019
Net sales increased $17.0 million, or 2%, due to:
$50.4 million, or 5%, net increase due primarily to a $40.6 million increase from our acquisitions of Ranir and Dr. Fresh and an increase in demand for products in our pain and sleep-aids and VMS categories due to pandemic-related consumer behavior. The segment also benefited from the incremental impact of new product sales, including line extensions in the ACO dermatology product line and the XLS Forte-Five weight management brand in the skincare and personal hygiene and healthy lifestyle categories, respectively. These increases were partially offset by lower consumer demand of certain self-care products in the upper respiratory, skincare and personal hygiene and healthy lifestyle categories due to pandemic-related consumer behavior, travel bans, social distancing measures as well as country lock-downs and discontinued products of $5.3 million; partially offset by
$33.4 million decrease due primarily to:
| |
◦ | $21.6 million decrease due to our divested Rosemont pharmaceuticals business and Canoderm prescription product previously included in the Nordic region; and |
| |
◦ | $13.6 million decrease from unfavorable foreign currency translation primarily related to the Euro; partially offset by |
| |
◦ | $1.8 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period. |
Perrigo Company plc - Item 2
CSCI
Operating income increased $27.3 million, or 148%, due to:
$3.3 million increase in gross profit due primarily to increased net sales as described above, partially offset by higher commodity costs for a certain OTC brand. Gross profit as a percentage of net sales decreased 50 basis points due primarily to the addition of the oral self-care category, which has a relatively lower gross margin than the overall portfolio, unfavorable product mix, and an increase in commodity costs, partially offset by positive pricing trends and the absence of the Ranitidine retail market withdrawal included in the prior year period; and
$24.0 million decrease in operating expenses due primarily to:
| |
◦ | $18.1 million decrease in selling and administration expenses due primarily to a reduction in selling, advertising, and promotion expenses in response to consumer sentiment and behavior during the COVID-19 pandemic, partially offset by the inclusion of expenses from our acquisitions of Ranir and Dr. Fresh; and |
| |
◦ | $10.4 million decrease due to the absence of restructuring expenses related to the reorganization of our sales force in France; partially offset by |
| |
◦ | $4.1 million increase in R&D expenses towards continued innovation efforts. |
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
| |
• | We experienced more moderate pricing reductions compared to the prior year in our RX segment, but pricing erosion continues due to approvals for products competing with our portfolio and overall competitive pressures. We expect some softness in pricing to continue to impact the segment for the foreseeable future. |
On September 17, 2020, we initiated a voluntary nationwide recall to the retail level of Albuterol as a result of complaints from patients that some units may not dispense due to clogging. Corrective action plans are underway and a definitive time-line for product reintroduction has not been determined at this time. As a result of the recall, we recorded a net charge of $22.5 million in our Condensed Consolidated Statements of Operations during the third quarter. We launched Albuterol in the first quarter of 2020 after receiving approval from the U.S. Food and Drug Administration on our abbreviated new drug application on February 24, 2020, along with our partner Catalent Pharma Solutions.
During the three months ended September 26, 2020, our RX U.S. reporting unit had an indication of potential impairment primarily from the stoppage of production and distribution of Albuterol and voluntary nationwide recall at the retail level, combined with a decline in market multiples. We prepared an impairment test as of September 26, 2020, determined the carrying value of the RX U.S. reporting unit exceeded its estimated fair value and recorded a goodwill impairment of $202.4 million.
Starting in the second quarter, with a partial rebound in the third quarter, we experienced a reduction in demand for certain of our existing base products due to lower prescription volumes related to pandemic and lock-down-related reductions in doctor visits. The decrease in demand of existing base products was market-wide and did not result in market share loss.
Segment Financial Results
Three Month Comparison
Perrigo Company plc - Item 2
RX
|
| | | | | | | |
| Three Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 210.7 |
| | $ | 230.3 |
|
Gross profit | $ | 57.0 |
| | $ | 71.4 |
|
Gross profit % | 27.0 | % | | 31.0 | % |
Operating income (loss) | $ | (180.6 | ) | | $ | 19.7 |
|
Operating income (loss) % | (85.7 | )% | | 8.5 | % |
Three Months Ended September 26, 2020 vs. Three Months Ended September 28, 2019
Net sales decreased $19.6 million, or 9%, due primarily to:
$20.5 million, or 9%, net decrease due primarily to $23.0 million in pre-recall Albuterol sales being more than offset by the establishment of the estimated Albuterol recall reserve of $31.2 million, $8.7 million from discontinued lower margin distribution products, and a slight decline in the base business. Net sales increased from other new products by $3.0 million, mainly from the Scopolamine patch relaunch.
Operating income decreased $200.3 million, or 1,017%, primarily due to:
$14.4 million decrease in gross profit, and a 400 basis point decrease in gross profit as a percentage of net sales, due primarily to the net charge of $22.5 million from the Albuterol recall; and
$185.9 million increase in operating expenses due primarily to the $202.4 million goodwill impairment charge in the current year period, partially offset by the absence of a $10.8 million impairment charge related to a definite-lived intangible asset in the prior year period and a decrease in R&D expenses driven by lower clinical study costs.
Nine Month Comparison
|
| | | | | | | |
| Nine Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 |
Net sales | $ | 738.8 |
| | $ | 711.6 |
|
Gross profit | $ | 230.6 |
| | $ | 246.5 |
|
Gross profit % | 31.2 | % | | 34.6 | % |
Operating income (loss) | $ | (81.2 | ) | | $ | 95.0 |
|
Operating income (loss) % | (11.0 | )% | | 13.4 | % |
Nine Months Ended September 26, 2020 vs. Nine Months Ended September 28, 2019
Net sales increased $27.2 million, or 4%, due primarily to:
$24.7 million, or 3%, net increase due primarily to $142.7 million from Albuterol sales prior to the recall and an increase of $24.4 million in other new product sales driven by the Scopolamine relaunch and Diclofenac sodium topical gel 1%. These increases were partially offset by pricing pressure, including for testosterone gel 1.62% (which still had 180-day market exclusivity in the prior year period), a decline in the base business, which was due to lower prescription volumes related to pandemic and lock-down-related reductions in doctor visits, $31.2 million for the establishment of the estimated Albuterol recall reserve, and $24.4 million of discontinued lower margin distribution products.
Operating income decreased $176.2 million, or 185%, due to:
$15.9 million decrease in gross profit due primarily to the net charge of $22.5 million from the Albuterol recall and third party operational inefficiencies on partnered products, offset by the increase in net sales as
Perrigo Company plc - Item 2
RX
described above. Gross profit as a percentage of net sales decreased 340 basis points, due primarily to the gross profit factors discussed above and pricing pressure; and
$160.3 million increase in operating expenses due primarily to the $202.4 million goodwill impairment in the current year period, partially offset by the absence of $38.7 million of impairment charges related to definite-lived intangible assets in the prior year period and a decrease in selling and administration costs related primarily to a reduction in employee related expenses.
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded in Operating income on the Condensed Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
|
| | | | | | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 26, 2020 | | September 28, 2019 | | September 26, 2020 | | September 28, 2019 |
$ | 48.6 |
| | $ | 59.8 |
| | $ | 151.3 |
| | $ | 185.1 |
|
The decrease of $11.2 million in unallocated expenses during the three months ended September 26, 2020 compared to the prior year period was due primarily to the absence of $12.5 million in acquisition and integration-related charges related to the acquisition of Ranir and a $5.6 million decrease in legal and consulting fees, partially offset by an increase of $3.2 million in insurance related expenses.
The decrease of $33.8 million in unallocated expenses during the nine months ended September 26, 2020 compared to the prior year period was due primarily to a $27.9 million decrease in legal and consulting fees, a $13.3 million decrease in Restructuring expense related primarily to the reorganization of our executive management team, and the absence of $12.5 million in acquisition and integration-related charges related to the acquisition of Ranir, partially offset by an increase of $12.8 million in employee incentive compensation expenses, which included COVID-19 bonuses for production employees, and an increase of $11.7 million in insurance related expenses.
Change in Financial Assets, Interest expense, net, Other (income) expense, net and Loss on extinguishment of debt (Consolidated)
|
| | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
(in millions) | September 26, 2020 | | September 28, 2019 | September 26, 2020 | | September 28, 2019 |
Change in financial assets | $ | (22.2 | ) | | $ | (2.6 | ) | $ | (25.9 | ) | | $ | (18.5 | ) |
Interest expense, net | $ | 34.0 |
| | $ | 30.5 |
| $ | 97.6 |
| | $ | 90.4 |
|
Other (income) expense, net | $ | 0.4 |
| | $ | (71.0 | ) | $ | 17.1 |
| | $ | (65.6 | ) |
Loss on extinguishment of debt | $ | 20.0 |
| | $ | 0.2 |
| $ | 20.0 |
| | $ | 0.2 |
|
Change in Financial Assets
The proceeds from our 2017 sale of the Tysabri® financial asset consisted of $2.2 billion in upfront cash and up to $250.0 million and $400.0 million in contingent milestone payments related to 2018 and 2020, respectively. During the year ended December 31, 2019 we received the $250.0 million contingent milestone payment.
During the three and nine months ended September 26, 2020, the fair value of the Royalty Pharma contingent milestone payment related to 2020 increased by $22.2 million and $25.9 million, respectively to $121.2 million, which is recorded on the Condensed Consolidated Balance Sheets within Prepaid expenses and other current assets. The adjustments were driven by higher projected global net sales of Tysabri® compared to the estimates in the prior period, and the estimated probability of achieving the earn-out. During the three and nine months ended September 28, 2019, the fair value of the Royalty Pharma contingent milestone payments increased by $2.6 million and $18.5 million, respectively. These adjustments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the earn-out.
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
The Royalty Pharma payments from Biogen for Tysabri® were $337.5 million in 2018, which triggered the $250.0 million milestone payment received during the first quarter of 2019. There is no contingent milestone based on 2019 sales of Tysabri®. In order for us to receive the remaining contingent milestone payment of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales, as defined in the agreement, in 2020 must exceed $351.0 million. If Royalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write off the $121.2 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $278.8 million in Change in financial assets on the Condensed Consolidated Statements of Operations (refer to Item 1. Note 6).
Interest Expense, Net
The $3.5 million increase for the three months ended September 26, 2020, compared to the prior year period was due primarily to a reduction in interest income received and changes in our underlying hedge exposure.
The $7.2 million increase for the nine months ended September 26, 2020, compared to the prior year period was due primarily to changes in our underlying hedge exposure and the addition of interest expense on our 2020 Notes and two Promissory Notes related to our equity method investment in Kazmira.
Other (Income) Expense, Net
The $71.4 million increase in expense during the three months ended September 26, 2020 compared to the prior year period was due primarily to the absence of the pre-tax gain of $71.7 million on the sale of our animal health business (refer to Item 1. Note 3).
The $82.7 million increase in expense during the nine months ended September 26, 2020 compared to the prior year period was due primarily to the absence of the pre-tax gain of $71.7 million on the sale of our animal health business and the $18.7 million pre-tax loss on the divestiture of our Rosemont Pharmaceuticals business, partially offset by a decrease of $5.3 million in losses on investment securities (refer to Item 1. Note 3).
Loss on Extinguishment of Debt
During the three months ended September 26, 2020, we recorded a loss of $20.0 million as a result of the early redemption of the 2021 Notes, consisting of the premium on debt repayments, the write-off of deferred financing fees, and the write-off of the remaining bond discounts (refer to Item 1. Note 10).
Income Taxes (Consolidated)
The effective tax rates were as follows:
|
| | | | | | | | | | |
Three Months Ended | | Nine Months Ended |
September 26, 2020 | | September 28, 2019 | | September 26, 2020 | | September 28, 2019 |
(21.1 | )% | | 5.2 | % | | 78.9 | % | | 19.6 | % |
The effective tax rate for the three and nine months ended September 26, 2020 increased compared to the prior period primarily due to non-deductible goodwill impairments and the Base Erosion and Anti-Abuse Tax ("BEAT"), offset by additional interest deductions provided for in the CARES Act and the early adoption of the final and proposed business interest expense deduction limitation regulations in the current period. The CARES Act reduced income tax expense by approximately $30.8 million in the nine months ended September 26, 2020, of which $15.9 million relates to retroactive adjustments to the 2019 tax year while $14.9 million relates to the first, second and third quarters of the 2020 tax year (refer to Item 1. Note 13 for more information on income taxes).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
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 Notice of Assessment ("NoA") and the Notices of Proposed Adjustment ("NOPAs"), the current COVID-19 pandemic, and other contingencies. We note that no payment of the additional amounts assessed by Irish Revenue pursuant to the NoA or proposed by the IRS in the NOPAs is currently required, and no such payment is expected to be required, unless and until a final determination of the matter is reached that is adverse to us (refer to Item 1. Note 13 for additional information on the NoA and NOPAs). 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, could ultimately require the use of corporate assets to pay such assessments, damages resulting from third-party claims, and related interest and/or penalties, 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 market opportunities become available, or any change in conditions relating to the NoA, the NOPAs, the COVID-19 pandemic or other contingencies have a material impact on our capital requirements.
Cash and Cash Equivalents
*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, including due to the COVID-19 pandemic, 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.
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) 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 |
|
The $227.5 million increase in operating cash inflow was due primarily to:
We generated $482.0
$118.5 million ofincrease in cash from operating activities during the nine months ended September 30, 2017, a $33.3change in accounts receivable, due primarily to timing of sales and receipt of payments;
$56.8 million increase overin cash from the change in accrued income taxes, due primarily to the CARES Act and adoption of final and proposed 163(j) regulations, as well as the absence of tax liability on the Royalty Pharma contingent milestone payment received in the prior year period,year;
$47.2 million increase in cash from the change in accrued customer programs, due primarily to pricing dynamics in our RX segment, as well as timing of rebate and chargeback payments in our RX and CSCA segments; and
$47.0 million increase in cash from the following:
Increasedchange in net earnings after adjustments for items such asincluding deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, share-based compensation, loss on extinguishment of debt, amortization of debt premium, loss (gain) on sale of business, and depreciation and amortization; partially offset by
Changes$19.1 million decrease in accrued liabilities due to deferred revenue associated with BCH-Belgium distribution contracts andcash from the absence of accruals related to the sale of our U.S. VMS business;
Changeschange in accrued customer-related programsprepaid expenses, due primarily to an increase in our directors and officers prepaid insurance, payments made for annual prepaid expenses, and a payment made for a transitional service agreement, partially offset by payments received related to our cross currency swap; and
$18.5 million decrease in cash from the pricing dynamics in the RX segment; and
Changeschange in accounts payable, due primarily to changes to the Omega accounts payable structure that occurred in the prior year period; offset primarily by
Changes in accounts receivable due primarily to timing of receipt of payments and the absencemix of receivables related to the sale of our U.S. VMS business;payment terms.
Changes in inventory due to the build up of inventory levels to support customer demands in the current period; offset by improved inventory management in the comparable prior year period; and
| |
• | Changes in accrued income taxes due primarily to a U.S. Federal tax obligation payment made in the current year period, offset by expected tax refunds (refer to Item 1. Note 13). |
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Investing Activities
|
| | | | | | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Investing Activities |
Proceeds from royalty rights | $ | 259.5 |
| | $ | 86.4 |
| | $ | (173.1 | ) |
Acquisitions of businesses, net of cash acquired | (436.8 | ) | | — |
| | 436.8 |
|
Asset acquisitions | (65.1 | ) | | — |
| | 65.1 |
|
Additions to property, plant and equipment | (84.6 | ) | | (55.2 | ) | | 29.4 |
|
Net proceeds from sale of business and other assets | 58.5 |
| | 46.7 |
| | (11.8 | ) |
Proceeds from sale of the Tysabri® financial asset | — |
| | 2,200.0 |
| | 2,200.0 |
|
Other investing, net | (1.0 | ) | | (5.8 | ) | | (4.8 | ) |
Net cash from (for) investing activities | $ | (269.5 | ) | | $ | 2,272.1 |
| | $ | 2,541.6 |
|
Cash generated from investing activities totaled $2.3 billion for the nine months ended September 30, 2017, compared to cash used of $269.5The $429.5 million in the prior year period. The inflow in the current year was due primarily to the completed divestment of our Tysabri® financial asset to Royalty Pharma, for which we received $2.2 billion in cash at closing (refer toItem 1. Note 6). The outflow in the prior year was due primarily to the acquisition of a portfolio of generic dosage forms and strengths of Retin-A® ("Tretinoin"), a topical prescription acne treatment from Mattawan Pharmaceuticals, LLC, which used $416.4 million in cash. The prior year outflow was offset partially by proceeds from royalty rights of $259.5 million. Cash used for capital expenditures totaled $55.2 million during the nine months ended September 30, 2017 compared to $84.6 million in the prior year period. The decrease in cash used for capital expendituresin investing cash flow was due primarily to:
| |
• | $643.5 million increase in cash due to the absence of the cash paid for the acquisition for Ranir, partially offset by the cash paid for the acquisition of Dr. Fresh (refer to Item 1. Note 3); |
| |
• | $52.1 million increase in cash due to the decrease in spending on asset acquisitions, primarily related to the purchase of the Steripod® brand for $25.1 million and theDexsil® brand for approximately $8.0 million, offset by prior year acquisitions, including two ANDAs for generic products for $15.7 million and $49.0 million, and Budesonide Nasal Spray and Triamcinolone Nasal Spray for $14.0 million (refer to Item 1. Note 3); and |
| |
• | $4.4 million increase in cash due primarily to the net proceeds from the sale of our Rosemont Pharmaceuticals business, partially offset by the proceeds from the sale of our animal health business (refer to Item 1. Note 3); partially offset by |
| |
• | $250.0 million decrease in cash due to the absence of the Royalty Pharma contingent milestone proceeds received in the prior year period(refer to Item 1. Note 6); |
| |
• | $15.0 million decrease in cash for the purchase of our equity method investment in Kazmira LLC (refer to Item 1. Note 7); and |
$14.0 million decrease in cash due to the decreasechange in the number of projects in the current year comparedcapital spending, primarily to the prior year period.increase tablet and infant formula capacity and for software and technology initiatives.
Cash Generated by (Used in) Financing Activities
|
| | | | | | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2016 | | September 30, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Financing Activities |
Issuances of long-term debt | $ | 1,190.3 |
| | $ | — |
| | $ | (1,190.3 | ) |
Borrowings (repayments) of revolving credit agreements and other financing, net | (803.6 | ) | | — |
| | 803.6 |
|
Payments on long-term debt | (545.8 | ) | | (2,243.7 | ) | | (1,697.9 | ) |
Deferred financing fees | (2.8 | ) | | (4.2 | ) | | (1.4 | ) |
Premium on early debt retirement | (0.6 | ) | | (116.1 | ) | | (115.5 | ) |
Issuance of ordinary shares | 8.2 |
| | 0.5 |
| | (7.7 | ) |
Repurchase of ordinary shares | — |
| | (191.5 | ) | | (191.5 | ) |
Cash dividends | (62.4 | ) | | (68.7 | ) | | (6.3 | ) |
Other financing | (17.4 | ) | | 2.7 |
| | 20.1 |
|
Net cash (for) financing activities | $ | (234.1 | ) | | $ | (2,621.0 | ) | | $ | (2,386.9 | ) |
Cash used forThe $13.0 million decrease in financing activities totaled $2.6 billion for the nine months ended September 30, 2017, compared to $234.1 million for the comparable prior year period. In the current year period, cash used for financing included $2.2 billion of repayments on long-term debt and $116.1 million of discounts on early debt retirement related to the current year debt extinguishment and $191.5 million in share repurchases, as discussed below. In the prior year period, the cash used for financing activitiesflow was due primarily to:
$114.0 million decrease in cash due to
borrowings of $1.2 billion ofthe increase in payments on long-term
debt, more than offset by net repayments on our revolving credit agreements and other short-term financing of $803.6 million and net repayments on our long-term debt of $545.8 million (refer to "Borrowings and Capital Resources" below and Item 1. Note 10).
debt;
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
$19.0 million decrease in cash due to payment of premiums on the early redemption of the 2021 Notes;
$9.4 million decrease in cash due to an increase in dividend payments; and
$5.7 million decrease in cash due to an increase in deferred financing fees related to the issuance of long-term debt; partially offset by
| |
• | $143.8 million increase in cash for the issuance of long-term debt (refer to Item 1. Note 10). |
Dividends
The declaration and payment of dividends, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements, and other factors our Board of Directors may consider relevant.
OnShare Repurchases
In October 22, 2015,2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors approved aDirectors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase plan of up to $2.0 billion (the "2015 Authorization"). Duringprogram. We did not repurchase any shares during the three and nine months ended September 30, 2017, we repurchased 1.9 million and 2.7 million ordinary shares at an average repurchase price of $71.73 and $71.72 per share, for a total of $133.3 million and $191.5 million, respectively. As of September 30, 2017, there was $1.3 billion still available to be repurchased through December 31, 2018 under the 2015 Authorization. We did not repurchase any shares under the share repurchase plan during the nine months ended October 1, 2016.26, 2020.
Borrowings and Capital Resources
Revolving Credit Agreements
On March 8, 2018, we entered into a $1.0 billion revolving credit agreement maturing on March 8, 2023 (the "2018 Revolver"). There were no borrowings outstanding under the 2018 Revolver as of September 26, 2020 or December 31, 2019.
Term Loans and Notes
On June 19, 2020, Perrigo Finance issued $750.0 million in aggregate principal amount of 3.150% Senior Notes due 2030 and received net proceeds of $737.1 million after fees and market discount. Interest on the 2020 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2020 Notes will mature on June 15, 2030. The 2020 Notes are governed by the 2020 Indenture. The 2020 Notes are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo and, no other subsidiary of Perrigo guarantees the 2020 Notes. There are no restrictions under the 2020 Notes on Perrigo's ability to obtain funds from its subsidiaries. Perrigo Finance may redeem the 2020 Notes in whole or in part at any time for cash at the make-whole redemption prices described in the 2020 Indenture. On July 6, 2020, the proceeds of the 2020 Notes were used to fund the redemption of the 2021 Notes. The balance will be used for general corporate purposes, which may include the repayment or redemption of additional indebtedness. As a result of the early redemption of the 2021 Notes, during the three months ended September 26, 2020, we recorded a loss of $20.0 million in Loss on extinguishment of debt on the Condensed Consolidated Statements of Operations,
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
consisting of the premium on debt repayments, the write-off of deferred financing fees, and the write-off of the remaining bond discounts.
On March 8, 2018, we refinanced the €350.0 million outstanding under the previous term loan with the proceeds of a new €350.0 million ($431.0 million) term loan, maturing on March 8, 2020 (the "2018 Term Loan"). During the nine months ended September 28, 2019, we made $24.7 million in scheduled principal repayments on the 2018 Term Loan. On August 15, 2019, we refinanced the €284.4 million ($317.1 million) outstanding under the 2018 Term Loan with the proceeds of a new $600.0 million term loan, maturing on August 15, 2022 (the "2019 Term Loan"). As a result of the refinancing, during the three months ended September 28, 2019, we recorded a loss of $0.2 million, consisting of the write-off of deferred financing fees in Loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.
We had $2.9 billion and $2.8 billion outstanding under our notes and bonds as of September 26, 2020 and December 31, 2019, respectively. We had $600.0 million outstanding under our 2019 Term Loan as of both September 26, 2020 and December 31, 2019.
Other Financing
On June, 17 2020, we incurred debt of $34.3 million related to our equity method investment in Kazmira pursuant to two Promissory Notes, with $3.7 million, $5.8 million and $24.8 million to be settled in November 2020, May 2021, and November 2021, respectively (refer to Item 1. Note 7).
Overdraft Facilities
We have overdraft facilities available that we use to support our cash management operations. There were no balancesThe balance outstanding under the facilities atwas $0.3 million as of September��26, 2020. There were no borrowings outstanding under the facilities as of December 31, 2019.
Leases
We had $164.8 million and $158.2 million of lease liabilities and $161.4 million and $157.5 million of lease assets as of September 30, 201726, 2020 and December 31, 2016.2019, respectively.
Accounts Receivable Factoring
We have multiple accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee ranging from 0.14% to 0.15% per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus 70 basis points. The total amount factored on a non-recourse basis and excluded from accounts receivable was $24.3$6.0 million and $50.7$10.0 million at September 30, 2017 and December 31, 2016, respectively.
Revolving Credit Agreements
On December 9, 2015, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"), entered into a $750.0 million revolving credit agreement (the "2015 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below to repay the $750.0 million then outstanding under the 2015 Revolver and terminated the facility.
On December 5, 2014, Perrigo Finance entered into a $600.0 million revolving credit agreement, which increased to $1.0 billion on March 30, 2015 (the "2014 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below to repay the $435.0 million then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 2014 Revolver as of September 30, 2017.
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
Term Loans and Notes
On March 7, 2016, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes due 2021 and $700.0 million in aggregate principal amount of 4.375% senior notes due 2026 (together, the "2016 Notes") and received net proceeds of $1.2 billion after fees and market discount, which were used to repay the amounts outstanding under the 2015 Revolver and 2014 Revolver mentioned above.
We had $3.3 billion and $5.4 billion outstanding under our notes and bonds, and $428.3 million and $420.7 million outstanding under our term loan, as of September 30, 201726, 2020 and December 31, 2016,2019, respectively. On September 29, 2016, we repaid the 1.300% senior notes due 2016 in full.
On December 5, 2014, Perrigo Finance entered into a term loan agreement consisting of a €500.0 million ($614.3 million) tranche, with the ability to draw an additional €300.0 million ($368.6 million) tranche, maturing December 5, 2019, and we entered into a $300.0 million term loan tranche maturing December 18, 2015, which we repaid in full on June 25, 2015.
Debt Repayments
During the nine months ended September 30, 2017, we reduced our outstanding debt through a variety of transactions (in millions):
|
| | | | | | | | |
Date | | Series | | Transaction Type | | Principal Retired |
April 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | $ | 13.3 |
|
July 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.3 |
|
September 30, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.8 |
|
May 8, 2017 | | $600.0 2.300% senior notes due 2018 | | Early redemption | | 600.0 |
|
May 23, 2017 | | €180.0 4.500% retail bonds due 2017 | | Scheduled maturity | | 201.3 |
|
June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 190.4 |
|
June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 219.6 |
|
June 15, 2017 | | $800.0 4.000% senior notes due 2023 | | Tender offer | | 584.4 |
|
June 15, 2017 | | $400.0 5.300% senior notes due 2043 | | Tender offer | | 309.5 |
|
June 15, 2017 | | $400.0 4.900% senior notes due 2044 | | Tender offer | | 96.1 |
|
| | | | | | $ | 2,243.7 |
|
As previously disclosed, during the three months ended April 1, 2017 we entered into amendments to the 2014 Revolver and the 2014 term loan to modify provisions of such agreements necessary as a result of the correction in accounting related to the Tysabri® financial asset, as well as waivers of any default or event of default that may have arisen from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. We are in compliance with all covenants under our debt agreements as of September 30, 2017.
See 26, 2020 (refer to Item 1. Note 9 and Note 10 for more information on all of the above lease activity and debt facilities.facilities, respectively).
Credit Ratings
Our credit ratings on September 30, 201726, 2020 were Baa3 (stable) and BBB- (stable) by Moody's Investors Service and Standard and Poor'sS&P Global Ratings, respectively.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in operating performance, the economic environment, our financial position, and changes in business strategy. If changes in our credit ratings were to occur, they could impact, among other things, future borrowing costs, access to capital markets, and vendor financing terms.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential
Perrigo Company plc - Item 2
Financial Condition, Liquidity and Capital Resources
products still in development and enter into R&D arrangements with third parties that often require milestone payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the product. Because of the contingent nature of these payments, they are not included in our table of contractual obligations included in our 2019 Form 10-K and referred to below.
Contractual Obligations and Commitments
Other than the obligations related to the changes toin our debt structure from the addition of the 2020 Notes and Promissory Notes related to our equity method investment in relation toKazmira and redemption of the repayments,2021 Notes, as discussed in Item 1. Note 10, there were no material changes in contractual obligations as of September 30, 201726, 2020 from those provided in our 20162019 Form 10-K. See below forBelow is a revised schedule of our enforceable and legally binding obligations as of September 30, 201726, 2020 related to our short and long-term debt arrangements. |
| | | | | | | | | | | | | | | | | | | |
| Payment Due by Period (in millions) |
| 2017(1) | | 2018 - 2019 | | 2020 - 2021 | | After 2021 | | Total |
Short and long-term debt(2) | $ | 406.5 |
| | $ | 811.5 |
| | $ | 812.5 |
| | $ | 2,859.6 |
| | $ | 4,890.1 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Payment Due |
| 2020 (2) | | 2021-2022 | | 2023-2024 | | After 2024 | | Total |
Short and long-term debt (1) | $ | 37.3 |
| | $ | 888.5 |
| | $ | 1,290.4 |
| | $ | 2,399.4 |
| | $ | 4,615.6 |
|
(1) Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at September 26, 2020.
(2) Reflects remaining three months of 2017.2020.
| |
(2)
| Short and long-term debt includes interest payments, which were calculated using the effective interest rate at September 30, 2017. |
Significant Accounting Policies
Other than the adoption of ASU 2016-13 Financial Instruments - Credit Losses (refer to Item 1. Note 1) and ASU 2018-13 Fair Value Measurement Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (refer to Item 1. Note 6), there have been no material changes to the accounting policies disclosed in our 2019 Form 10-K.
Critical Accounting Estimates
The determination of certain amounts in our financial statements requires the use of estimates. These estimates are based upon our historical experiences combined with management’s understanding of current facts and circumstances. Although the estimates are considered reasonable based on the currently available information, actual results could differ from the estimates we have used. Below are the updates regarding critical accounting estimates which required judgment in the preparation of our financial statements during the three and nine months ended September 26, 2020. The below disclosures should be read in conjunction with our 2019 Form 10-K.
Change in Financial Assets
We valued our contingent milestone payments from Royalty Pharma 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 until the contingent milestones are resolved. As of September 26, 2020, volatility and the estimated fair value of the milestones had a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. Rate of return and the estimated fair value of the milestones had an inverse relationship, such that a lower rate of return correlates with a higher estimated fair value of the contingent milestone payments. 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. The table below represents the volatility and rate of return:
|
| | | | | |
| Three Months Ended |
| September 26, 2020 | | September 28, 2019 |
Volatility | 30.0 | % | | 30.0 | % |
Rate of return | 6.84 | % | | 7.99 | % |
We also consider Biogen’s quarterly Tysabri earnings along with forecasts from third party analysts in our royalty projections. In our estimation process as of September 26, 2020, we considered risks associated with
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
COVID-19 on Tysabri sales in 2020, including but not limited to, the potential for disruptions and delays in dosing of Tysabri in physician office and hospital settings. We will continue monitoring Tysabri earnings and the development of COVID-19 impacts in our quarterly valuation assessment. In order for us to receive the remaining contingent milestone payment of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales, as defined in the agreement, in 2020 must exceed $351.0 million. If Royalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write off the $121.2 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $278.8 million in Change in financial assets on the Condensed Consolidated Statements of Operations (refer to Item 1. Note 6).
Goodwill
Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received. After completing the divestiture of our Rosemont Pharmaceuticals business, we have five reporting units subject to impairment testing annually, which we perform on the first day of the fourth quarter of the fiscal year. We perform impairment testing more frequently if events suggest an impairment may exist. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows that include assumptions about future performance. The discount rates used in testing each of our reporting units’ goodwill for impairment during our interim and annual testing are based on the weighted average cost of capital determined for each of our reporting units.
The discounted cash flow forecasts used for our reporting units include assumptions about future activity levels in the near term and longer-term. If growth in our reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in one or more reporting units is impaired in future impairment tests. An increase in the discount rate could negatively impact the estimated fair value of the reporting units and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in performance of our reporting units, such as lower than expected revenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis.
We reviewed our reporting units for impairment indicators during the three months ended September 26, 2020. We evaluated the weighted average cost of capital, market multiples, and forecasted cash flows of each reporting unit, among other factors.
Our RX U.S. reporting unit had an indication of potential impairment during the three months ended September 26, 2020 driven primarily by the stoppage of production and distribution of albuterol sulfate inhalation aerosol and voluntary nationwide recall to the retail level, after we learned that some units may not dispense due to clogging, combined with a decline in market multiples. We prepared a quantitative analysis as of September 26, 2020 and determined the carrying value of the RX U.S. reporting unit exceeded its estimated fair value. We recognized a goodwill impairment of $202.4 million, leaving $811.1 million of goodwill in this reporting unit after the impairment. The RX U.S. reporting unit is at risk for future impairments if it experiences further deterioration in business performance or market multiples or increases in discount rates.
Our Branded Consumer Self-care ("BCS") reporting unit included in the CSCI segment had an indication of potential impairment during the three months ended June 27, 2020 driven by a decrease in forecasted cash flows in the second half of 2020 related to impacts from the COVID-19 pandemic. We prepared a quantitative analysis as of June 27, 2020 and determined that the fair value of the BCS reporting unit continued to exceed net book value by less than 10%. As a result of the relatively narrow margin between fair value and net book value during the three months ended June 27, 2020, this reporting unit is at risk for future impairments if it experiences deterioration in business performance or market multiples or increases in discount rates. We performed sensitivity analysis on the discounted cash flow valuation that was prepared to estimate the enterprise value of the BCS reporting unit. Discount rates and perpetual revenue growth rates were increased and decreased by increments of 25 or 50 basis points. A 75 basis point increase in the discount rate, or a 50 basis point increase in the discount rate combined with a 25 basis point decrease in the residual growth rate, would indicate potential impairment for this reporting unit. Our sensitivities for the BCS reporting unit assume a corresponding decrease in market valuation multiples. Based on the sensitivity of the discount rate assumption on this analysis, an increase in the discount rate over the next twelve
Perrigo Company plc - Item 2
Unallocated, Interest, Other, and Taxes
months could negatively impact the estimated fair value of the reporting unit and lead to a future impairment. Certain macroeconomic factors which are not controlled by the BCS reporting unit, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in performance of the BCS reporting unit over the next twelve months, such as lower than expected revenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis. There was no indication of impairment during the three months ended September 26, 2020. Goodwill remaining in this reporting unit was $995.5 million as of September 26, 2020.
We continue to monitor the progress of our reporting units and assess them for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our quantitative or qualitative disclosures found in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of our Annual Report on2019 Form 10-K for the year ended December 31, 2016.10-K.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2017.26, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were notare effective as of September 30, 2017 because of thein ensuring that all material weaknessesinformation relating to us and our consolidated subsidiaries required to be included in our internal control over financial reporting described below.
All systems of internal control, no matter how well designed, have inherent limitations. Therefore, evenperiodic SEC filings would be made known to them by others within those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. A material weakness is a deficiency, or combination of deficiencies,entities in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.manner and that no changes are required at this time.
Evaluation of the Effectiveness of Internal Control over Financial Reporting
We conducted an evaluation ofOur management assessed the effectiveness of our internal control over financial reporting based upon theas of September 26, 2020. The framework establishedused in carrying out our evaluation was the 2013 Internal Control - Integrated Framework issued published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission (“COSO”).
Perrigo Company plc - Item 4
Controls and Procedures
Tysabri® Contingent Payments
We acquired the Tysabri® royalty stream inCommission. In evaluating our acquisition of Elan Pharmaceuticals plc (“Elan”) in December 2013, and at the timeinformation technology controls, we also used components of the acquisition,framework contained in the Control Objectives for Information and related Technology, which was developed by the Information Systems Audit and Control Association’s IT Governance Institute, as a complement to the COSO internal control framework. Management has concluded that the right to receive quarterly royalty payments from Biogen Idec Inc. should be an intangible asset and such payments recognized as revenue in our financial statements. As discussed in Item 4.02 of our Form 8-K filed on April 25, 2017, during the 2016 year-end close process, and in anticipation of our potential sale of the Tysabri® royalty rights and the 2018 adoption of ASC 606 Revenue from Contracts with Customers, we re-evaluated the historical classification of the Tysabri® royalty stream as an intangible asset and concluded that it should have been reflected in the financial statements as a financial asset as of its 2013 acquisition date. As part of this evaluation, management determined that its control over the review of the application of the accounting guidance in ASC 805 Business Combinations did not operate effectively in the appropriate identification of the assets acquired and liabilities assumed in connection with the Elan acquisition in December 2013.All of our originally filed financial statements through the filing of the Form 10-Q for the quarter ended October 1, 2016, as originally filed on November 10, 2016, included the disclosure of the Elan acquisition with the Tysabri® royalty stream presented as an intangible asset. In addition, due to the fact that the asset was historically classified as an intangible asset, we did not design or implement controls around the fair value accounting for the Tysabri® royalty stream as a financial asset, so these controls were not in place at any quarter end subsequent to the acquisition, including the date of the quarterly and annual assessment of internal control. Accordingly, management concluded that these control deficiencies represent material weaknesses. As discussed in our Form 10-Q for the quarter ended July 1, 2017, the material weakness related to the fair value accounting for the Tysabri® royalty stream as a financial asset was remediated during that period. See below for our discussion of the remediation efforts related to our acquisition of the Tysabri® royalty rights.
Income Taxes
Management has determined that we did not design or maintain effective management review controls related to our (1) evaluation of non-routine transactions that impact our effective tax rate on an annual and interim basis and (2) determination of our deferred taxes in connection with business combinations.
During our quarterly and annual fiscal 2016 close processes, management determined that the design and operating effectiveness of our controls around the evaluation of non-routine events did not operate appropriately. As disclosed in our Form 10-Q for the quarterly period ended April 2, 2016, our management review controls did not operate at a sufficient level of precision to ensure interim income taxes were properly recorded and disclosed in our condensed consolidated financial statements in connection with the recording of an indefinite-lived intangible asset impairment and estimated goodwill impairment as part of the Company’s controls to evaluate non-routine events that occur during a quarterly period and the related income tax impacts. These control deficiencies resulted in a material misstatement in income taxes in the preliminary financial statements for the quarter ended April 2, 2016. Additionally, these controls remained unremediated as of September 30, 2017, as they were in February 2017 when we identified that these controls did not appropriately evaluate the need for a valuation allowance. ASC 740, Income Taxes, requires a company to record a valuation allowance to reduce a deferred tax asset to its net realizable value. Our controls related to consideration of non-routine transactions or events were not designed and did not operate appropriately and identify whether a valuation allowance was needed as they did not identify that we entered into a three year cumulative loss and did not consider the positive and negative evidence in evaluating the potential sources of taxable income in determining whether a valuation allowance was required in the consolidated financial statements.
In February 2017, management identified the existence of tax basis in certain acquired intangible assets (“tax amortization benefits”) that existed at the time of the acquisition of Omega Pharma Invest N.V. (“Omega”) on March 30, 2015. Upon evaluating the tax amortization benefits, management concluded that the purchase accounting for Omega should have included the tax basis in the intangible assets in calculating the deferred tax liability in the opening balance sheet. This omission of existing tax basis in calculating the deferred tax liability on the acquisition date indicated that management’s review over the opening balance sheet deferred income tax accounts was not designed or operating appropriately.
Accordingly, management concluded that these control deficiencies represent material weaknesses.
Perrigo Company plc - Item 4
Controls and Procedures
Impairment
In connection with our long-lived asset impairment testing, management determined that the controls around the identification of the relevant asset group under ASC 360, Impairment and Disposal of Long-lived Assets, did not operate effectively. In determining the level to evaluate the long-lived assets in our animal health reporting unit for impairment testing, we inappropriately grouped the assets that constituted the asset group in applying the guidance in ASC 360.
Accordingly, management concluded that this control deficiency represented a material weakness.
Remediation Plan for the Material Weaknesses
We are committed to remediating the control deficiencies that gave rise to the material weaknesses described above. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.
Tysabri® Contingent Payments
To remediate the material weakness related to the acquisition of the Tysabri® royalty rights, we, with oversight from the Audit committee, designed certain controls around the identification of assets acquired and liabilities assumed in our business combination process. As part of the re-design of the controls, we: (1) considered our controls around the review of the related contracts and agreements and our application of ASC 805 to identify the type of assets acquired and liabilities assumed and (2) evaluated and enhanced management review controls related to business acquisitions. Based on the evaluation of the design and changes to our business acquisition process performed during the second and third quarters of 2017 on these newly implemented controls, we have concluded that these controls have been designed and implemented appropriately. As a result, we consider this material weakness to be remediated as of September 30, 2017.
Income Taxes
To remediate the material weaknesses in internal control over financial reporting related to income taxes, we have, with oversight from the Audit Committee, completed the review of the organizational structure, resources, processes and controls in place to measure and record income taxes to enhance the effectiveness of the design and operation of those controls. In addition, we continue to:
Evaluate the design and operating effectiveness of our controls related to income taxes for business acquisitions and non-routine transactions on an interim and annual basis;
Enhance monitoring activities related to income taxes; and
Evaluate and enhance the level of precision in the management review controls related to income taxes.
We have begun to implement the remediation actions and expect to complete the implementation as part of our 2017 fiscal year closing process. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses related to income taxes described above will continue to exist.
Impairment
We, with oversight from the Audit Committee, designed and initiated certain controls around the financial reporting related to the identification of asset groups as part of our impairment testing. Controls we implemented include: (1) reviewing the design and operation of our controls related to asset group determination in our impairment process on an interim and annual basis and (2) evaluating and enhancing the management review controls related to impairment. Based on the testing performed during the second and third quarters of 2017 on these newly implemented controls around the identification of asset groups as part of our impairment testing, we have concluded that these controls have been designed appropriately and are operating effectively. As a result, we consider this material weakness to be remediated as of September 30, 2017.
Perrigo Company plc - Item 4
Controls and Procedures
We are committed to achieving and maintaining a strong internal control environment and believe the remediation measures will strengthen our internal control over financial reporting and remediate the material weaknesses identified. We continue to review the remaining un-remediated material weaknesses and intend to add resources and improvewas effective as of September 26, 2020. The results of management’s assessment have been reviewed with our processes to achieve and maintain a strong control environment. We will continue to monitor the effectiveness of our remediation measures and will make any changes and take such other actions that we deem appropriate given the circumstances.Audit Committee.
Changes in Internal Control over Financial Reporting
Other than as described above under "Remediation PlanWe acquired Ranir during the third quarter of 2019 and the oral care assets of High Ridge Brands during the second quarter of 2020 (refer to Item 1. Note 3). As permitted by Securities and Exchange Commission Staff interpretive guidance for Material Weaknesses," there have been no changes in ournewly acquired businesses, management excluded Ranir and the oral care asset of High Ridge Brands from its evaluation of internal control over financial reporting duringas of September 26, 2020. We are in the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect,process of documenting and testing both Companies' internal controls over financial reporting. We will incorporate Ranir and the oral care assets of High Ridge Brands into our annual reports on internal control over financial reporting.reporting for our years ending December 31, 2020 and December 31, 2021, respectively. As of September 26, 2020, assets excluded from management’s assessment totaled $1.0 billion and contributed $261.9 million of Net sales and $16.5 million of Operating incomein our Condensed Consolidated Statements of Operations for the nine months ended September 26, 2020.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
Our Annual Report on Form 10-K for the year ended December 31, 20162019 includes a detailed discussion of our risk factors. At the time of this filing, there have been no material changes to the risk factors that were included in the Form 10-K, other than as described below.
We identified material weaknesses in our internal controls over financial reporting; failureAdverse Economic Impacts of Coronavirus Pandemic
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, as the new coronavirus, unknown to remediatehealth officials just three months earlier, spread rapidly from Asia to the material weaknesses could negatively impact our businessMiddle East, Europe, and the price of our ordinary shares.
In connection with our review of certain material misstatements relatedUnited States. As the pandemic continues, many actions taken to reduce the characterizationspread of the Tysabri® royalty stream acquiredcoronavirus remain in effect, including quarantines, government restrictions on movement, business closures and suspensions, canceled events and activities, self-isolation, and other voluntary and/or mandated changes in behavior. Both the Elan transaction, as well as material misstatements related to the calculation of deferred tax liabilities that existed at the timeoutbreak of the acquisition of Omega,disease and the evaluation of long-lived assets in our animal health reporting unit for impairment testing, in each case contained in certain of our historical financial statements, we concluded that there were material weaknesses in our internal control over financial reporting that contributed to those misstatements. As a result of the material weaknesses, which existed at December 31, 2016 and some of which remained at September 30, 2017, we have concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, April 1, 2017, July 1, 2017 or September 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The failure to maintain effective control over financial reporting in turn resulted in material deficiencies in our disclosure controls and procedures.
We have identified and begun the implementation of actions, and continue to identify and implement, actions to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures, but there can be no assurance that such remediation efforts will be successful. Weslow its spread have also incurred and will continue to incur substantial accounting, legal, consulting, and other costs in connection with identifying and remediating the material weaknesses. Failure to remediate the material weaknesses could have a negativehad an adverse impact on our businessoperations by, among other things, increasing absenteeism, affecting the supply of raw materials and third party supplied finished goods, and preventing many of our employees from coming to work. The Company has responded to such impacts by, among other things, implementing protocols to protect the health of factory workers, adjusting production schedules, and seeking alternate suppliers where available, and so far, most of our facilities have continued to produce at high levels despite these challenges. However, a number of jurisdictions that relaxed such restrictions, or have experienced limited public adherence with suggested safety measures, have experienced new surges in COVID-19 cases. Many of these jurisdictions are now contemplating or implementing new or renewed restrictions. Going forward, the continued spread of the disease and the market for our ordinary shares. For more information on our material weaknesses and the status of our remediation efforts, See Part I, Item 4 - Controls and Procedures.
We are currently involved in a search for a new Chief Executive Officer and a subsequent search for a permanent Chief Financial Officer. If these searches are delayed, our business could be negatively impacted.
On June 5, 2017, we announced the forthcoming retirement of John T. Hendrickson as our Chief Executive Officer. Mr. Hendrickson will continueactions to serve as our Chief Executive Officer and a member of our Board until such time as a successor has been appointed. Our Board of Directors has initiated a Chief Executive Officer search process and has retained an executive search and leadership advisory firm to assist with the process of identifying and evaluating candidates.
Perrigo Company plc - Item 1A
Risk Factors
In addition, on February 21, 2017, we announced the resignation of Judy L. Brown as our Executive Vice President, Business Operations and Chief Financial Officer, effective February 27, 2017. Since that time, Ronald L. Winowiecki has served as our acting Chief Financial Officer. Although Mr. Winowiecki remains a key candidate for our permanent Chief Financial Officer, our Board of Directors has suspended its Chief Financial Officer search during its search for Mr. Hendrickson’s successor as Chief Executive Officer. There are no assurances concerning the timing or outcome of our search for a new Chief Executive Officer or subsequent search for a permanent Chief Financial Officer. If there are any delays in this process, or if any transition is not successful, our business could be negatively impacted.
The resolution of uncertain tax positions could be unfavorable, whichslow it could have an adverse effectimpact on our business.
Although we believe thatfinancial condition, our tax estimates are reasonablesupply chains and thatother operations, our tax filings are prepared in accordance with all applicable tax laws, the final determination with respectresults of our operations, consumer demand for our products and our ability to access capital. The magnitude of any tax audit and any related litigationsuch adverse impacts cannot currently be determined, but such adverse impacts could be materially differentmaterial, depending on: the duration, intensity, and continued spread of the disease; the duration of business closure and similar government orders; the process by which government authorities permit businesses to reopen and employees to return to work and the publics willingness to adhere to suggested safety measures; the scale and timing of any additional waves of the outbreak as restrictions on community movement are relaxed; the severity of any economic downturn resulting from the pandemic; the effectiveness of the Company's efforts at mitigation; and other factors, both known and unknown, many of which are likely to be outside our estimates or fromcontrol. In addition, to the extent that any increased sales of our historical income tax provisionsproducts during the initial stages of the outbreak may reflect "pantry stocking", consumer demand for such products in future periods may be correspondingly reduced. Further, lower consumer demand for certain other self-care products in our CSCI segment may continue and accruals. The resultsvolume of an audit or litigationU.S. prescriptions could havedecrease in our RX segment in future periods depending on the course of the pandemic and related responses to combat the virus. It is also possible that a material effect on operating results or cash flowschange in the course of the pandemic may affect consumer demand for products in future periods for which that determination is made. in ways we do not currently anticipate.
In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments.
On August 15, 2017, we filed a complaintconnection with delays in the United States District Court forimplementation of the Western DistrictEU's Medical Device Regulation due to the COVID-19 pandemic, the designation of Michigan to recover $163.6 milliona Notified Body certifying certain of Federal income tax, penalties, and interest assessed and collected by the Internal Revenue Service (“IRS”), plus statutory interest thereon from the datesour products expired, which could adversely affect our sales 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 pharmaceuticalthese products in the United States. In addition,EU.
We market certain products that are subject to the statutory noticeEU’s Medical Device Directive (“MDD”) and will be subject to the EU’s Medical Device Regulation (“MDR”), both of deficiency for the 2011 and 2012 tax years included the capitalizationwhich require that products be certified by designated assessment entities (“Notified Bodies”) prior to sale. The date 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 in the second quarterapplication of the year ending December 31, 2017.
On December 22, 2016, we receivedMDR, and as a noticeresult the date of proposed adjustment forrepeal of the IRS audit of Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan Corporation plc (“Elan”) acquired in 1996, for the years ended December 31, 2011, December 31, 2012 and December 31, 2013. We acquired Elan in December 2013. This proposed amendment relatesMDD, has been deferred by 12 months to May 26, 2021 due to the deductibilitypandemic. In connection with this extension, Notified Bodies designated under the prior MDD regime were allowed to continue their related governance of litigation costs. We disagreemedical devices for one additional year, until May 25, 2021, subject to them having a designation under MDD in place throughout this time. During this time, the MDD designation of a Notified Body that certifies certain products in our portfolio has expired. The current regulations are not clear on the treatment of the existing certificates granted by such a Notified Body during this period, and we have engaged in detailed discussions with the IRS’s position asserted in the noticerelevant authorities to enable continuity of proposed adjustment and intend to contest it.
On July 11, 2017,supply. While 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 1A
Risk Factors
There are numerous other income tax jurisdictions for which tax returns aredo not yet settled, none of which are individually significant. At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable resolutions of the audit matters discussed above could haveexpect a material impact on our consolidated financial statementsbusiness, there can be no assurances that our ability to sell these products in future periods.the EU will not be interrupted, slowed or otherwise adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share repurchase activity during the three months ended September 30, 2017 was as follows:
|
| | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Value of Shares Available for Purchase(1) |
July 2 - July 31, 2017 | 484,860 |
| | $ | 72.27 |
| | 484,860 |
| | |
August 1 - August 31, 2017 | 1,354,721 |
| | $ | 71.46 |
| | 1,354,721 |
| | |
September 1 - September 30, 2017 | 19,124 |
| | $ | 77.50 |
| | 19,124 |
| | |
Total | 1,858,705 |
| | | | | | $ | 1.30 | billion |
(1) The remaining $1.30 billion in the table represents the amount available to be repurchased under our 2015 Authorization as of September 30, 2017.
ITEM 5. OTHER INFORMATION
Our Board of Directors has established May 4, 2018 as the date of our 2018 Annual General Meeting of Shareholders (the “2018 Annual Meeting”). Because the date of the 2018 Annual Meeting will be more than 30 days before the anniversary of our 2017 Annual General Meeting of Shareholders, we are informing shareholders of the change in accordance with Rule 14a-5(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
For shareholders who wish to present a proposal to be considered for inclusion in our proxy materials for the 2018 Annual Meeting, we have set a new deadline for the receipt of those proposals in accordance with Rule 14a-8 under the Exchange Act. To be considered timely, shareholders must submit their proposals, in writing, to our Company Secretary at our principal executive offices located at Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland by December 19, 2017, which we have determined to be a reasonable time before we expect to begin to print and mail our proxy materials. Shareholder proposals must also comply with all applicable requirements of Rule 14a-8.
Because the 2018 Annual Meeting will be more than 30 days before the anniversary of the 2017 Annual General Meeting of Shareholders, our Articles of Association (the “Articles”) provide that shareholders who wish to bring a proposal or nominate a director at the 2018 Annual Meeting, but who are not requesting that the proposal or nomination be included in our proxy materials, must notify our Company Secretary, in writing, not earlier than the close of business on February 3, 2018 and not later than the close of business on February 23, 2018. Shareholders are advised to review the Articles, which contain additional requirements about advance notice of shareholder proposals and director nominations.
Perrigo Company plc - Part II - Item 6
Exhibits
ITEM 6. EXHIBITS
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Exhibit Number | | Description |
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3.1 | | |
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3.2 | | |
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10.1 | | |
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10.2 | | |
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10.3 | | |
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10.4 | | |
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10.5 | | |
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31.1 | | |
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31.2 | | |
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32 | | |
| | |
101.INS101. INS | | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
104 | | Cover Page Interactive Date File, formatted in Inline XBRL (contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | | PERRIGO COMPANY PLC |
| | | (Registrant) |
| | | |
Date: | November 9, 20175, 2020 | | By: /s/ John T. Hendrickson/s/ Murray S. Kessler |
| | | John T. HendricksonMurray S. Kessler |
| | | Chief Executive Officer and President |
| | | (Principal Executive Officer) |
| | | |
Date: | November 9, 20175, 2020 | | By: /s/ Ronald L. Winowiecki/s/ Raymond P. Silcock |
| | | Ronald L. WinowieckiRaymond P. Silcock |
| | | Acting Chief Financial Officer |
| | | (Principal Accounting and Financial Officer) |