Perrigo F1Q15 – Estimated Diabetes Care falls ~8% year-over-year; Acquisition of Omega Pharma for $4.5 billion – November 17, 2014

Perrigo CEO Mr. Joseph Papa led the company’s F1Q15 financial update on November 6. The main focus of the call was Perrigo’s acquisition of Omega Pharma, a leading over-the-counter company based in Europe, for €3.6 billion ($4.5 billion). Below, we bring you our top four learnings from the financial update.

Top Four Highlights

1. By our estimates, Perrigo Diabetes Care revenue totaled ~$15 million, falling ~8% year-over-year (YOY). The company has not broken out its Diabetes Care figure in over two years, and we underscore that this value is an estimate.

2. Perrigo announced the acquisition of Omega Pharma, a leading over-the-counter (OTC) company based in Europe, for €3.6 billion ($4.5 billion). Implications for the Diabetes Care business were not mentioned, though it is possible that the acquisition could serve as a gateway to the obesity arena.

3. Management remarked in F4Q14 on its interest in expanding the Diabetes Care business via M&A – however, there were no additional comments on this front.

4. There was no mention of Perrigo’s Diabetes Care business in the prepared remarks, the slide deck, or Q&A; we believe this to be a reflection mostly of management’s focused on news of the acquisition of Omega Pharma.

Top Four Highlights

1. By our estimates, Perrigo Diabetes Care revenue totaled ~$15 million, falling ~8% year-over-year (YOY). This revenue approximation is based on: (i) the 2014 Analyst Day slide deck (slide 43) from February 28, which highlighted that Diabetes Care made up 3% of the Consumer Healthcare segment; (ii) the F1Q15 press release, which placed Consumer Healthcare revenue at $493 million; and (iii) our ~$16 million estimate of sales in F1Q14. As a reminder, Perrigo has not broken out its Diabetes Care figure in over two years, so it is impossible to know the revenue value precisely. Sequentially, we estimate that revenue fell 19% compared to sales in F4Q14 (~$18 million).

• Unlike past updates, the company did not publish 52-week IRI retail data, which typically provide us with a general view of over-the-counter (OTC) diabetes product sales in the US. While not Perrigo-specific, the data provide insight into national vs. store brand (Perrigo’s focus) OTC performance. As a reminder, we learned in F4Q14 that total US OTC diabetes care sales fell 2% year-over-year (YOY); sales declined 9% YOY among national brands compared to 7% YOY growth in store brands.

2. The main focus of the financial update was Perrigo’s acquisition of Omega Pharma, a leading over-the-counter company based in Europe, for €3.6 billion ($4.5 billion). According to management, Omega owns a “leading" weight management brand – XLS Medical – that will now be under Perrigo leadership. The company markets four weight loss tablets, three of which involve blocking calorie absorption and one of which involves reducing appetite. We are curious as to whether this brand will come to play a larger role in the larger Perrigo family, and, perhaps, serve as a gateway into the obesity arena.

• Said management, "The real key for this transaction is the immediate scale and broadened footprint this combination provides,” creating a “top five global” OTC company. In our view, Omega’s European-focused commercial OTC network nicely complements Perrigo’s US strength. Omega generated ~$1.6 billion in revenue during the twelve months ending September 30, 2014, making it the fifth largest player within the European OTC market behind, in order: (i) Novartis/GSK; (ii) Sanofi; (iii) Bayer; and (iv) Reckitt Benckiser. Indeed, prior to the acquisition, 81% of Perrigo revenue was generated stateside (Rest of World [RoW]: 19%); combined, the geographic distribution of sales is much more evenly split: 53% US vs. 47% RoW.
• The company did not comment on the implications for Perrigo’s Diabetes Care; however, we imagine that this could potentially help the business. Management highlighted a huge and “attractive” European OTC market opportunity (in excess of $30 billion). The company also alluded to the chance to expand “core segments” — which include its OTC portfolio (including Diabetes Care) — by taking advantage of access to a new commercial networks connected to 211,000 pharmacists, 105,000 retail stores and 3,900 para-pharmacies.

3. In F4Q14, management remarked on interest to expand its Diabetes Care business via M&A – however, management did not comment on this in F1Q15. As background, Perrigo had previously expanded its Diabetes Care business in such a manner– the company 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. We wonder if the acquisition of Omega will spur additional activity on the diabetes arena. Management did comment during F4Q14 that it was “the most dynamic M&A market” of the past three decades. 

4. Notably, there was no mention of Perrigo’s Diabetes Care business in the prepared remarks, the slide deck, or Q&A, as management was focused largely on the news of the Omega acquisition. We hope that the silence is more a reflection of investor interest in Omega rather than a particularly negative sign on the future of the Diabetes Care business.

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