Perrigo F4Q14 – Diabetes Care revenue totals ~$18 million; US diabetes store brands up 7%, national brands down 9% – August 19, 2014

Last week, Perrigo CEO Mr. Joseph Papa led the company’s F4Q14 financial update. Perrigo’s Diabetes Care business was mentioned briefly in both the prepared remarks and Q&A. Below, we enclose our top three highlights from the call.

1. By our estimates, Perrigo Diabetes Care revenues totaled ~$18 million in F4Q14, up ~7% year-over-year and 13% sequentially. Perrigo has not broken out this figure in nearly two years, so it’s tricky to know exactly how well the business is doing. BGM sales make up the vast majority of the company’s Diabetes Care business.

2. According to 52-week IRI retail data (through July 27, 2014), total US diabetes care sales (not Perrigo-specific) fell 2% year-over-year (YOY); sales declined 9% YOY among national brands compared to 7% YOY growth in store brands. Among the seven over-the-counter (OTC) segments that Perrigo listed, the 7% growth in diabetes care store brands was the second best, far outperforming the overall OTC market (-1%).

3. During Q&A, management commented on its continued interest (“… we’re really active …”) in M&A, including the addition of bolt-on products to the Diabetes Care business.

Top Three Highlights

1. By our estimates, Perrigo Diabetes Care revenue totaled ~$18 million in F4Q14, representing growth of ~7% year-over-year and ~13% sequential growth. The revenue approximation is based on: (i) 2014 Analyst Day slide deck from February 28, which highlighted that Diabetes Care made up 3% of the Consumer Healthcare segment; (ii) the F4Q14 press release, which placed Consumer Healthcare revenue at $607 million; and (iii) our ~$16 million estimate of sales in F3Q14. We note that Perrigo has not broken out Diabetes Care revenue since F1Q13. On the growth side, we assumed that Perrigo’s growth was consistent with the 7% growth in over-the-counter diabetes care store brands, as noted in the highlight below. These estimates assume that Diabetes Care has maintained a static proportion of Consumer Healthcare revenue and that Perrigo’s business grew at the same rate as the overall store brand market (lots of assumptions, admittedly!).

• At JPM 2014, management confirmed that BGM sales make up the vast majority of the company’s Diabetes Care business. The division of Diabetes Care broke down as follows: 48% BGM, 7% insulin delivery; 4% lancets; 3% glucose; 16% diabetic drinks (higher than we imagined), 22% other (seems high). BGM includes the company’s ONsync Meter Technology. During the 2014 Analyst Day, the company broke out the components of the ONsync Meter Technology component: 62% BGM, 24% hypoglycemia, 9% insulin delivery, and 5% lancets.

2. According to 52-week IRI retail data (through July 27, 2014), total US diabetes care sales (not Perrigo-specific) fell 2% year-over-year (YOY); sales declined 9% YOY among national brands compared to 7% YOY growth in store brands. Among the seven over-the-counter (OTC) segments that Perrigo listed, the 7% growth in diabetes care store brands was the second best, far outperforming the overall OTC market (-1%). Diabetes care store brands were second only to store brand infant formula (8%) and ahead of all other store brands listed on the slide (smoking cessation, gastrointestinal, vitamins, cough/cold/allergies/sinus, and analgesics). Notably, the 9% decline in Diabetes OTC national brands was the largest on the slide, far outpacing the 5% decline in smoking cessation.

• These numbers – sourced from IRI MULO data – were reported in the F4Q14 slide deck (slide 7). As we understand it, IRI MULO data captures retail data from a number of outlets, including food/grocery stores, drug stores, and many other channels. Like Nielsen market research is is to media, IRI collects data on market and shopper information in the consumer packaged goods, retail, and over-the-counter industries.

3. During Q&A, management commented on their continued interest (“We’re really active”) in Mergers & Acquisition (M&A), including looking to expand the Diabetes Care business. More generally, management said that “this is the most dynamic M&A market” of the past three decades, which is similar to F3Q14 when Perrigo also called M&A “dynamic.”

• As a reminder, Perrigo acquired CanAm Care in early January 2012 for $35 million. The deal gave Perrigo: (i) Dex4 hypoglycemia products (tabs, liquids, and gels); (ii) insulin delivery syringes and pen needles; (iii) wound care; and (iv) compression stockings. This acquisition broadened Perrigo Diabetes Care, which had previously consisted of its ONSync blood glucose monitor business launched in 2011 via an exclusive agreement with AgaMatrix.

Questions and Answers

Q: The acquisitions you made before the Elan deal were in the small-to-medium size category. And is it fair to say that the deals you’re considering now are similar in flavor and size to those you’ve done pre-Elan? Or would you add any other context to set expectations for folks?

A: I've been in pharmaceuticals for 31 years. This is the most dynamic M&A market I've ever seen in the 31 years of being in the pharmaceutical business. I think from our point of view, everything that we said a year ago is going very well, relative to our plans to de-lever. With respect to our targets and the size of the targets, there are certainly adjacent categories that I think would fit very much along the lines of what we've done historically in terms of bolt-on product categories, things like pet care, ophthalmics, diabetes, adult nutrition. Those are all clearly categories in which we are very excited to bolt on some additional products and sell more to our existing customers.

-- by Varun Iyengar, Hannah Martin, Adam Brown, and Kelly Close