PERRIGO Co plc - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-36353
_______________________________________________
Perrigo Company plc
(Exact name of registrant as specified in its charter)
_______________________________________________
Ireland | Not Applicable | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
The Sharp Building, Hogan Place, Dublin 2, Ireland D02 TY74
+353 1 7094000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Ordinary shares | PRGO | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | |||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
As of October 30, 2020, there were 136,491,307 ordinary shares outstanding.
PERRIGO COMPANY PLC
FORM 10-Q
INDEX
PAGE NUMBER | ||
PART I. FINANCIAL INFORMATION | ||
1 | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
9 | ||
10 | ||
11 | ||
12 | ||
13 | ||
14 | ||
15 | ||
16 | ||
PART II. OTHER INFORMATION | ||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions, future events or future performance contained in this report, including certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” "forecast," “predict,” “potential” or the negative of those terms or other comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control, including: the effect of the novel coronavirus (COVID-19) pandemic and the associated economic downturn and supply chain impacts on the Company's business, the timing, amount and cost of any share repurchases; future impairment charges; customer acceptance of new products; competition from other industry participants, some of whom have greater marketing resources or larger market shares in certain product categories than we do; pricing pressures from customers and consumers; resolution of uncertain tax positions, including the Company's appeal of the Notice of Assessment ("NoA") issued by the Irish Office of the Revenue Commissioners (“Irish Revenue”) and the Notices of Proposed Adjustment ("NOPAs") issued by the U.S. Internal Revenue Service and the impact that an adverse result in any such proceeding could have on operating results, cash flows and liquidity; potential third-party claims and litigation, including litigation relating to alleged price-fixing in the generic pharmaceutical industry, alleged class action and individual securities law claims, and alleged product liability claims and litigation relating to uncertain tax positions, including the NoA and NOPAs; potential impacts of ongoing or future government investigations and regulatory initiatives; potential costs and reputational impact of product recalls and sales halts; the impact of tax reform legislation and healthcare policy; general economic conditions; fluctuations in currency exchange rates and interest rates; the consummation of announced acquisitions or dispositions and the success of such transactions, and our ability to realize the desired benefits thereof; and our ability to execute and achieve the desired benefits of announced cost-reduction efforts, and strategic and other initiatives. An adverse result with respect to our appeal of any material outstanding tax assessments or litigation, could ultimately require the use of corporate assets to pay such assessments, damages 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. Statements regarding the separation of the RX business, including the expected benefits, anticipated timing, form of any such separation and whether the separation ultimately occurs, are all subject to various risks and uncertainties, including future financial and operating results, our ability to separate the business, the effect of existing interdependencies with our manufacturing and shared service operations, and the tax consequences of the planned separation to us or our shareholders. These and other important factors, including those discussed in our form 10-K for the year-ended December 31, 2019, this report under “Risk Factors” and in any subsequent filings with the United States Securities and Exchange Commission, may cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements in this report are made only as of the date hereof, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
This report contains trademarks, trade names and service marks that are the property of Perrigo Company plc, as well as, for informational purposes, trademarks, trade names, and service marks that are the property of other organizations. Solely for convenience, certain trademarks, trade names, and service marks referred to in this report appear without the ®, ™ and SM symbols, but those references are not intended to indicate that we or the applicable owner, as the case may be, will not assert, to the fullest extent under applicable law, our or their rights to such trademarks, trade names, and service marks.
1
Perrigo Company plc - Item 1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Net sales | $ | 1,213.7 | $ | 1,191.1 | $ | 3,773.8 | $ | 3,514.6 | |||||||
Cost of sales | 785.6 | 778.3 | 2,427.8 | 2,222.1 | |||||||||||
Gross profit | 428.1 | 412.8 | 1,346.0 | 1,292.5 | |||||||||||
Operating expenses | |||||||||||||||
Distribution | 26.1 | 23.4 | 73.8 | 70.5 | |||||||||||
Research and development | 42.6 | 44.0 | 131.6 | 128.0 | |||||||||||
Selling | 138.5 | 134.1 | 413.9 | 422.8 | |||||||||||
Administration | 116.4 | 131.9 | 357.8 | 384.2 | |||||||||||
Impairment charges | 202.4 | 10.9 | 202.4 | 42.9 | |||||||||||
Restructuring | 0.8 | 5.2 | 1.9 | 26.7 | |||||||||||
Other operating expense (income) | (3.2 | ) | 8.9 | (3.0 | ) | 5.7 | |||||||||
Total operating expenses | 523.6 | 358.4 | 1,178.4 | 1,080.8 | |||||||||||
Operating income (loss) | (95.5 | ) | 54.4 | 167.6 | 211.7 | ||||||||||
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 | |||||||||||
Income (loss) before income taxes | (127.7 | ) | 97.3 | 58.8 | 205.2 | ||||||||||
Income tax expense | 26.9 | 5.1 | 46.4 | 40.1 | |||||||||||
Net income (loss) | $ | (154.6 | ) | $ | 92.2 | $ | 12.4 | $ | 165.1 | ||||||
Earnings (loss) per share | |||||||||||||||
Basic | $ | (1.13 | ) | $ | 0.68 | $ | 0.09 | $ | 1.21 | ||||||
Diluted | $ | (1.13 | ) | $ | 0.67 | $ | 0.09 | $ | 1.21 | ||||||
Weighted-average shares outstanding | |||||||||||||||
Basic | 136.5 | 136.0 | 136.3 | 136.0 | |||||||||||
Diluted | 136.5 | 136.8 | 137.5 | 136.4 | |||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
2
Perrigo Company plc - Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Net income (loss) | $ | (154.6 | ) | $ | 92.2 | $ | 12.4 | $ | 165.1 | ||||||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation adjustments | 86.5 | (74.0 | ) | 81.0 | (63.0 | ) | |||||||||
Change in fair value of derivative financial instruments, net of tax | (2.3 | ) | 31.6 | (12.4 | ) | 36.0 | |||||||||
Change in post-retirement and pension liability, net of tax | (1.2 | ) | (0.5 | ) | (4.3 | ) | (1.0 | ) | |||||||
Other comprehensive income (loss), net of tax | 83.0 | (42.9 | ) | 64.3 | (28.0 | ) | |||||||||
Comprehensive income (loss) | $ | (71.6 | ) | $ | 49.3 | $ | 76.7 | $ | 137.1 | ||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
Perrigo Company plc - Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
September 26, 2020 | December 31, 2019 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 849.4 | $ | 354.3 | |||
Accounts receivable, net of allowance for credit losses of $6.3 and $6.7, respectively | 1,097.7 | 1,243.2 | |||||
Inventories | 1,100.7 | 967.3 | |||||
Prepaid expenses and other current assets | 350.5 | 165.8 | |||||
Total current assets | 3,398.3 | 2,730.6 | |||||
Property, plant and equipment, net | 918.8 | 902.8 | |||||
Operating lease assets | 132.2 | 129.9 | |||||
Goodwill and indefinite-lived intangible assets | 3,854.1 | 4,185.5 | |||||
Definite-lived intangible assets, net | 2,895.4 | 2,921.2 | |||||
Deferred income taxes | 7.3 | 5.4 | |||||
Other non-current assets | 369.9 | 426.0 | |||||
Total non-current assets | 8,177.7 | 8,570.8 | |||||
Total assets | $ | 11,576.0 | $ | 11,301.4 | |||
Liabilities and Shareholders’ Equity | |||||||
Accounts payable | $ | 536.4 | $ | 520.2 | |||
Payroll and related taxes | 155.4 | 156.4 | |||||
Accrued customer programs | 370.1 | 394.4 | |||||
Other accrued liabilities | 237.0 | 229.2 | |||||
Accrued income taxes | 20.9 | 32.2 | |||||
Current indebtedness | 16.5 | 3.4 | |||||
Total current liabilities | 1,336.3 | 1,335.8 | |||||
Long-term debt, less current portion | 3,543.6 | 3,365.8 | |||||
Deferred income taxes | 313.5 | 280.6 | |||||
Other non-current liabilities | 562.2 | 515.1 | |||||
Total non-current liabilities | 4,419.3 | 4,161.5 | |||||
Total liabilities | 5,755.6 | 5,497.3 | |||||
Commitments and contingencies - Refer to Note 14 | |||||||
Shareholders’ equity | |||||||
Controlling interests: | |||||||
Preferred shares, $0.0001 par value per share, 10 shares authorized | — | — | |||||
Ordinary shares, €0.001 par value per share, 10,000 shares authorized | 7,299.7 | 7,359.9 | |||||
Accumulated other comprehensive income | 203.7 | 139.4 | |||||
Retained earnings (accumulated deficit) | (1,683.1 | ) | (1,695.5 | ) | |||
Total controlling interests | 5,820.3 | 5,803.8 | |||||
Noncontrolling interest | 0.1 | 0.3 | |||||
Total shareholders’ equity | 5,820.4 | 5,804.1 | |||||
Total liabilities and shareholders' equity | $ | 11,576.0 | $ | 11,301.4 | |||
Supplemental Disclosures of Balance Sheet Information | |||||||
Preferred shares, issued and outstanding | — | — | |||||
Ordinary shares, issued and outstanding | 136.5 | 136.1 | |||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
Perrigo Company plc - Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions, except per share amounts)
(unaudited)
Ordinary Shares Issued | Accumulated Other Comprehensive Income | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||
Shares | Amount | |||||||||||||||||
Balance at December 31, 2018 | 135.9 | $ | 7,421.7 | $ | 84.6 | $ | (1,838.3 | ) | $ | 5,668.0 | ||||||||
Adoption of new accounting standards | — | — | — | (3.4 | ) | (3.4 | ) | |||||||||||
Net income | — | — | — | 63.9 | 63.9 | |||||||||||||
Other comprehensive loss | — | — | (15.6 | ) | — | (15.6 | ) | |||||||||||
Restricted stock plan | 0.2 | — | — | — | — | |||||||||||||
Compensation for stock options | — | 1.8 | — | — | 1.8 | |||||||||||||
Compensation for restricted stock | — | 14.2 | — | — | 14.2 | |||||||||||||
Cash dividends, $0.19 per share | — | (25.9 | ) | — | — | (25.9 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (2.4 | ) | — | — | (2.4 | ) | ||||||||||
Balance at March 30, 2019 | 136.0 | $ | 7,409.4 | $ | 69.0 | $ | (1,777.8 | ) | $ | 5,700.6 | ||||||||
Net income | — | — | — | 9.0 | 9.0 | |||||||||||||
Other comprehensive income | — | — | 30.5 | — | 30.5 | |||||||||||||
Stock options exercised | — | 0.3 | — | — | 0.3 | |||||||||||||
Compensation for stock options | — | 1.3 | — | — | 1.3 | |||||||||||||
Compensation for restricted stock | — | 14.2 | — | — | 14.2 | |||||||||||||
Cash dividends, $0.21 per share | — | (28.9 | ) | — | — | (28.9 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | — | (0.8 | ) | — | — | (0.8 | ) | |||||||||||
Balance at June 29, 2019 | 136.0 | $ | 7,395.5 | $ | 99.5 | $ | (1,768.8 | ) | $ | 5,726.2 | ||||||||
Net income | — | — | — | 92.2 | 92.2 | |||||||||||||
Other comprehensive loss | — | — | (42.9 | ) | — | (42.9 | ) | |||||||||||
Stock options exercised | — | 0.4 | — | — | 0.4 | |||||||||||||
Restricted stock plan | 0.1 | — | — | — | — | |||||||||||||
Compensation for stock options | — | 0.9 | — | — | 0.9 | |||||||||||||
Compensation for restricted stock | — | 11.9 | — | — | 11.9 | |||||||||||||
Cash dividends, $0.21 per share | — | (28.8 | ) | — | — | (28.8 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | — | (1.1 | ) | — | — | (1.1 | ) | |||||||||||
Balance at September 28, 2019 | 136.1 | $ | 7,378.8 | $ | 56.6 | $ | (1,676.6 | ) | $ | 5,758.8 | ||||||||
5
Perrigo Company plc - Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)
(in millions, except per share amounts)
(unaudited)
Ordinary Shares Issued | Accumulated Other Comprehensive Income | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||
Shares | Amount | |||||||||||||||||
Balance at December 31, 2019 | 136.1 | $ | 7,359.9 | $ | 139.4 | $ | (1,695.5 | ) | $ | 5,803.8 | ||||||||
Net income | — | — | — | 106.4 | 106.4 | |||||||||||||
Other comprehensive loss | — | — | (103.5 | ) | — | (103.5 | ) | |||||||||||
Restricted stock plan | 0.3 | — | — | — | — | |||||||||||||
Compensation for stock options | — | 0.8 | — | — | 0.8 | |||||||||||||
Compensation for restricted stock | — | 15.4 | — | — | 15.4 | |||||||||||||
Cash dividends, $0.23 per share | — | (30.9 | ) | — | — | (30.9 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (5.6 | ) | — | — | (5.6 | ) | ||||||||||
Balance at March 28, 2020 | 136.3 | $ | 7,339.6 | $ | 35.9 | $ | (1,589.1 | ) | $ | 5,786.4 | ||||||||
Net income | — | — | — | 60.6 | 60.6 | |||||||||||||
Other comprehensive income | — | — | 84.8 | — | 84.8 | |||||||||||||
Restricted stock plan | 0.3 | — | — | — | — | |||||||||||||
Compensation for stock options | — | 0.4 | — | — | 0.4 | |||||||||||||
Compensation for restricted stock | — | 13.1 | — | — | 13.1 | |||||||||||||
Cash dividends, $0.23 per share | — | (31.0 | ) | — | — | (31.0 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | (0.1 | ) | (3.9 | ) | — | — | (3.9 | ) | ||||||||||
Balance at June 27, 2020 | 136.5 | $ | 7,318.2 | $ | 120.7 | $ | (1,528.5 | ) | $ | 5,910.4 | ||||||||
Net loss | — | — | — | (154.6 | ) | (154.6 | ) | |||||||||||
Other comprehensive income | — | — | 83.0 | — | 83.0 | |||||||||||||
Compensation for stock options | — | 0.4 | — | — | 0.4 | |||||||||||||
Compensation for restricted stock | — | 13.8 | — | — | 13.8 | |||||||||||||
Cash dividends, $0.23 per share | — | (31.1 | ) | — | — | (31.1 | ) | |||||||||||
Shares withheld for payment of employees' withholding tax liability | — | (0.5 | ) | — | — | (0.5 | ) | |||||||||||
Minority share purchase | — | (1.1 | ) | — | — | (1.1 | ) | |||||||||||
Balance at September 26, 2020 | 136.5 | $ | 7,299.7 | $ | 203.7 | $ | (1,683.1 | ) | $ | 5,820.3 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
Perrigo Company plc - Item 1
PERRIGO COMPANY PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended | |||||||
September 26, 2020 | September 28, 2019 | ||||||
Cash Flows From (For) Operating Activities | |||||||
Net income (loss) | $ | 12.4 | $ | 165.1 | |||
Adjustments to derive cash flows: | |||||||
Depreciation and amortization | 284.7 | 293.5 | |||||
Loss (Gain) on sale of business | 18.6 | (72.4 | ) | ||||
Share-based compensation | 43.9 | 40.9 | |||||
Impairment charges | 202.4 | 42.9 | |||||
Change in financial assets | (25.9 | ) | (18.5 | ) | |||
Loss on extinguishment of debt | 20.0 | 0.2 | |||||
Restructuring charges | 1.9 | 26.7 | |||||
Deferred income taxes | 25.7 | 10.1 | |||||
Amortization of debt premium | (1.7 | ) | (3.8 | ) | |||
Other non-cash adjustments, net | (12.0 | ) | 38.3 | ||||
Subtotal | 570.0 | 523.0 | |||||
Increase (decrease) in cash due to: | |||||||
Accounts receivable | 106.4 | (12.1 | ) | ||||
Inventories | (93.2 | ) | (78.3 | ) | |||
Prepaid expenses | (23.8 | ) | (4.7 | ) | |||
Accounts payable | 15.2 | 33.7 | |||||
Payroll and related taxes | (2.2 | ) | (10.6 | ) | |||
Accrued customer programs | (35.5 | ) | (82.7 | ) | |||
Accrued liabilities | (16.0 | ) | (24.8 | ) | |||
Accrued income taxes | (9.0 | ) | (65.8 | ) | |||
Other, net | 13.9 | 20.6 | |||||
Subtotal | (44.2 | ) | (224.7 | ) | |||
Net cash from (for) operating activities | 525.8 | 298.3 | |||||
Cash Flows From (For) Investing Activities | |||||||
Proceeds from royalty rights | 3.2 | 2.2 | |||||
Purchase of equity method investment | (15.0 | ) | — | ||||
Acquisitions of businesses, net of cash acquired | (106.0 | ) | (749.5 | ) | |||
Proceeds from the Royalty Pharma contingent milestone | — | 250.0 | |||||
Asset acquisitions | (34.1 | ) | (86.2 | ) | |||
Additions to property, plant and equipment | (104.3 | ) | (90.3 | ) | |||
Net proceeds from sale of business | 187.8 | 183.4 | |||||
Other investing, net | 8.1 | 0.6 | |||||
Net cash from (for) investing activities | (60.3 | ) | (489.8 | ) | |||
Cash Flows From (For) Financing Activities | |||||||
Issuances of long-term debt | 743.8 | 600.0 | |||||
Payments on long-term debt | (590.0 | ) | (476.0 | ) | |||
Borrowings (repayments) of revolving credit agreements and other financing, net | 0.1 | 0.8 | |||||
Deferred financing fees | (6.7 | ) | (1.0 | ) | |||
Premiums on early debt retirement | (19.0 | ) | — | ||||
Issuance of ordinary shares | — | 0.7 | |||||
Cash dividends | (93.0 | ) | (83.6 | ) | |||
Other financing, net | (14.9 | ) | (7.6 | ) | |||
Net cash from (for) financing activities | 20.3 | 33.3 | |||||
Effect of exchange rate changes on cash and cash equivalents | 9.3 | 5.6 | |||||
Net increase (decrease) in cash and cash equivalents | 495.1 | (152.6 | ) | ||||
Cash and cash equivalents, beginning of period | 354.3 | 551.1 | |||||
Cash and cash equivalents, end of period | $ | 849.4 | $ | 398.5 | |||
See accompanying Notes to the Condensed Consolidated Financial Statements.
7
Perrigo Company plc - Item 1
Note 1
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information
The Company
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.
We are dedicated to making lives better by bringing Quality, Affordable Self-Care Products that consumers trust everywhere they are sold. We are a leading provider of over-the-counter ("OTC") health and wellness 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 prescription pharmaceutical topical products such as creams, lotions, and gels as well as nasal sprays and inhalers.
Basis of Presentation
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 Statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 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.
Segment Reporting
Our reporting and operating segments are as follows:
• | Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
• | Consumer Self-Care International ("CSCI") comprises our branded consumer self-care business primarily in Europe, our consumer self-care businesses in the United Kingdom and Australia, and our divested liquid licensed products business in the United Kingdom. |
• | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S., predominantly generics, and our pharmaceuticals and diagnostic businesses in Israel. |
Reclassifications
Certain prior period amounts have been reclassified from other current assets to other non-current assets on our balance sheet to conform to the current period presentation. Such reclassification had no impact on net income or earnings per share.
8
Perrigo Company plc - Item 1
Note 1
Recent Accounting Standard Pronouncements
Below are recent Accounting Standard Updates ("ASU") that we are still assessing to determine the effect on our Condensed Consolidated Financial Statements. We do not believe that any other recently issued accounting standards could have a material effect on our Condensed Consolidated Financial Statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Recently Issued Accounting Standards Not Yet Adopted | ||||||
Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |||
ASU 2018-14: Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans | This guidance amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other post-retirement plans. | December 31, 2020 | Upon adoption, we will no longer be required to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. We will be required to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period, if applicable. | |||
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | This guidance enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. | January 1, 2021 | Upon adoption, we do not expect a material impact on the Consolidated Financial Statements. | |||
Recently Adopted Accounting Standard Update
On January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss ("CECL") methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, which includes trade receivables and contract assets. The cumulative effect of adopting ASC 326 was not material.
Allowance for Credit Losses
Expected credit losses on trade receivables and contract assets are measured collectively by geographic location. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and for reasonable and supportable forecasts. Historical credit loss experience provides the primary basis for estimation of expected credit losses. Adjustments to historical loss information may be made for significant changes in a geographic location’s economic conditions. Receivables that do not share risk characteristics are evaluated on an individual basis. These receivables are not included in the collective evaluation.
The allowance for credit losses is a valuation account that is deducted from the instruments’ cost basis to present the net amount expected to be collected. Trade receivables and contract assets are charged off against the allowance when the balance is no longer deemed collectible.
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Note 1
The following table presents the allowance for credit losses activity (in millions):
Three Months Ended | Nine Months Ended | ||||||
September 26, 2020 | September 26, 2020 | ||||||
Beginning balance | $ | 6.2 | $ | 6.7 | |||
Provision for credit losses, net | 0.6 | 1.5 | |||||
Receivables written-off | (0.7 | ) | (1.7 | ) | |||
Recoveries collected | — | — | |||||
Currency translation adjustment | 0.2 | (0.2 | ) | ||||
Ending balance | $ | 6.3 | $ | 6.3 | |||
NOTE 2 – REVENUE RECOGNITION
Revenue is recognized when or as a customer obtains control of promised products. The amount of revenue recognized reflects the consideration we expect to be entitled to receive in exchange for these products.
Disaggregation of Revenue
We generated net sales in the following geographic locations(1) (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
U.S. | $ | 820.8 | $ | 785.9 | $ | 2,571.1 | $ | 2,323.2 | |||||||
Europe(2) | 326.6 | 334.6 | 1,011.0 | 991.3 | |||||||||||
All other countries(3) | 66.3 | 70.6 | 191.7 | 200.1 | |||||||||||
Total net sales | $ | 1,213.7 | $ | 1,191.1 | $ | 3,773.8 | $ | 3,514.6 | |||||||
(1) Derived from the location of the entity that sells to a third party.
(2) Includes Ireland net sales of $10.8 million and $22.3 million for the three and nine months ended September 26, 2020, respectively, and $5.2 million and $17.3 million for the three and nine months ended September 28, 2019, respectively.
(3) Includes net sales generated primarily in Israel, Mexico, Australia and Canada.
Product Category
We re-aligned our product categories in our CSCA and CSCI segments as of December 31, 2019. The re-alignment standardizes our categories and product level detail to provide consistency. This transformative step will optimize the way in which management reports and evaluates our business.
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Note 2
The following is a summary of our net sales by category (in millions); the comparative periods reflect the product category re-alignment:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
CSCA(1) | |||||||||||||||
Upper respiratory | $ | 114.2 | $ | 123.4 | $ | 385.5 | $ | 377.4 | |||||||
Digestive health | 107.1 | 85.0 | 326.1 | 293.6 | |||||||||||
Pain and sleep-aids | 100.6 | 89.4 | 318.7 | 272.0 | |||||||||||
Nutrition | 100.1 | 97.1 | 290.9 | 282.6 | |||||||||||
Healthy lifestyle | 86.1 | 87.9 | 253.4 | 250.0 | |||||||||||
Oral self-care | 81.1 | 54.2 | 199.6 | 54.2 | |||||||||||
Skincare and personal hygiene | 49.2 | 45.4 | 138.8 | 136.7 | |||||||||||
Vitamins, minerals, and supplements | 6.3 | 6.2 | 19.1 | 18.7 | |||||||||||
Animal health | — | 1.8 | — | 43.7 | |||||||||||
Other CSCA(2) | 19.3 | 22.9 | 60.1 | 48.3 | |||||||||||
Total CSCA | 664.0 | 613.3 | 1,992.2 | 1,777.2 | |||||||||||
CSCI | |||||||||||||||
Skincare and personal hygiene | 83.1 | 88.9 | 275.4 | 296.5 | |||||||||||
Upper respiratory | 62.3 | 72.1 | 191.9 | 193.9 | |||||||||||
Vitamins, minerals, and supplements | 52.9 | 46.2 | 139.9 | 133.1 | |||||||||||
Pain and sleep-aids | 49.0 | 40.5 | 136.0 | 120.3 | |||||||||||
Healthy lifestyle | 40.6 | 38.2 | 124.7 | 134.2 | |||||||||||
Oral self-care | 25.2 | 24.3 | 68.8 | 27.7 | |||||||||||
Digestive health | 6.8 | 5.3 | 17.9 | 19.3 | |||||||||||
Other CSCI(3) | 19.1 | 32.0 | 88.2 | 100.8 | |||||||||||
Total CSCI | 339.0 | 347.5 | 1,042.8 | 1,025.8 | |||||||||||
RX | 210.7 | 230.3 | 738.8 | 711.6 | |||||||||||
Total net sales | $ | 1,213.7 | $ | 1,191.1 | $ | 3,773.8 | $ | 3,514.6 | |||||||
(1) Includes net sales from our OTC contract manufacturing business.
(2) | Consists primarily of diagnostic products and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales. |
(3) | Consists primarily of liquid licensed products, our distribution business and other miscellaneous or otherwise uncategorized product lines and markets, none of which is greater than 10% of the segment net sales. |
While the majority of revenue is recognized at a point in time, certain of our product revenue is recognized on an over time basis. Predominately, over time customer contracts exist in contract manufacturing arrangements, which occur in both the CSCA and CSCI segments. Contract manufacturing revenue was $76.7 million and $190.7 million for the three and nine months ended September 26, 2020, respectively, and $73.9 million and $207.0 million for the three and nine months ended September 28, 2019, respectively.
We also recognize a portion of the store brand OTC product revenues in the CSCA segment on an over time basis; however, the timing difference between over time and point in time revenue recognition for store brand contracts is not significant due to the short time period between the customization of the product and shipment or delivery.
Contract Balances
The following table provides information about contract assets from contracts with customers (in millions):
Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Short-term contract assets | Prepaid expenses and other current assets | $ | 21.2 | $ | 26.3 | ||||
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Note 3
NOTE 3 – ACQUISITIONS AND DIVESTITURES
Acquisitions During the Nine Months Ended September 26, 2020
Sanofi Brands
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 and operating results attributable to the products will be included in our CSCI segment. This transaction builds on our self-care transformation and strengthens our skincare and personal hygiene portfolio.
Oral Care Assets of High Ridge Brands
On April 1, 2020, we acquired the oral care assets of High Ridge Brands ("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, net of $2.0 million that we allocated as prepayment of contract consideration for transitional services to be received related to the transaction.
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 U.S. operations, which represent a significant portion of the business, will be reported in our CSCA segment and the remaining non-U.S. operations will be reported in our CSCI segment.
During the three and nine months ended September 26, 2020, we incurred $0.1 million and $4.2 million of general transaction costs (legal, banking and other professional fees), respectively. The amounts were recorded in Administration expenses within the CSCA segment.
The acquisition of Dr. Fresh was accounted for as a business combination and has been reported in our Condensed Consolidated Statements of Operations as of the acquisition date. From April 1, 2020 through September 26, 2020, the acquisition generated Net sales of $44.4 million and Net income of $0.7 million, which included $2.0 million related to inventory costs stepped up to acquisition date fair value.
We are in the process of gathering significant relevant information needed to complete the valuation for the assets acquired and liabilities assumed. As a result, the initial accounting for the acquisition is incomplete. The provisional acquisition amounts recognized for assets acquired and liabilities assumed will be finalized as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized.
During the three months ended September 26, 2020, we recorded measurement period adjustments relating to valuation updates that reduced the acquisition basis of definite lived intangibles by $0.7 million and reduced goodwill by $0.4 million with an offsetting increase to working capital.
The following table summarizes the consideration paid for Dr. Fresh and the provisional amounts of the assets acquired and liabilities assumed (in millions):
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Note 3
Oral Care Assets of High Ridge Brands (Dr. Fresh) | |||
Purchase price paid | $ | 106.0 | |
Assets acquired: | |||
Accounts receivable | 13.1 | ||
Inventories | 23.4 | ||
Prepaid expenses and other current assets | 0.4 | ||
Property, plant and equipment, net | 0.7 | ||
Operating lease assets | 2.6 | ||
Goodwill | 15.9 | ||
Distribution and license agreements and supply agreements | $ | 2.2 | |
Developed product technology, formulations, and product rights | 0.1 | ||
Customer relationships and distribution networks | 20.6 | ||
Trademarks, trade names, and brands | 43.2 | ||
Total intangible assets | $ | 66.1 | |
Total assets | $ | 122.2 | |
Liabilities assumed: | |||
Accounts payable | $ | 6.0 | |
Other accrued liabilities | 4.0 | ||
Payroll and related taxes | 0.7 | ||
Accrued customer programs | 3.0 | ||
Other non-current liabilities | 2.5 | ||
Total liabilities | $ | 16.2 | |
Net assets acquired | $ | 106.0 | |
The goodwill of $15.9 million arising from the acquisition consists largely of the anticipated growth from new product sales, sales to new customers, the assembled workforce, and the synergies expected from combining the operations of Dr. Fresh into Perrigo. Preliminarily, goodwill of $14.1 million and $1.8 million was allocated to our CSCA and CSCI segments, respectively. We are currently evaluating the tax deductibility of the provisional goodwill. We expect some portion to be deductible for income tax purposes. The definite-lived intangible assets acquired consisted of trademarks and trade names, license agreements, and customer relationships which are being amortized over a weighted average useful life of approximately 17.8 years. Customer relationships were valued using the multi-period excess earnings method. Trademarks and trade names and developed technology were valued using the relief from royalty method. Significant judgment was applied in estimating the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the timing and amounts of cash flow projections, including revenue growth rates, projected profit margins, and discount rates.
Dexsil®
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. We began amortizing the brand intangible over a 25-year useful life. Operating results attributable to the product are included within our CSCI segment.
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Note 3
Steripod®
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. We began amortizing the brand intangible over a 25-year useful life. Operating results attributable to the product are included within our CSCA segment.
Acquisition Accounted for as a Business Combination During the Year Ended December 31, 2019
Ranir Global Holdings, LLC
On July 1, 2019, we acquired 100% of the outstanding equity interest in Ranir Global Holdings, LLC ("Ranir"), a privately-held company, for total base consideration of $750.0 million in a debt-free, cash-free transaction. After post-closing adjustments, total cash consideration paid was $747.7 million, net of $11.5 million cash acquired. We funded the transaction with cash on hand and borrowings under the 2018 Revolver (as defined in Note 10).
Ranir is headquartered in Grand Rapids, Michigan and is a leading global supplier of private label and branded oral self-care products. Ranir's U.S. operations are reported in our CSCA segment and its non-U.S. operations are reported in our CSCI segment.
The acquisition of Ranir was accounted for as a business combination and has been reported in our Consolidated Statements of Operations as of the acquisition date. From July 1, 2019 through December 31, 2019, Ranir generated Net sales of $151.4 million and had $7.6 million of Net income, which is inclusive of a non-recurring charge of $5.7 million related to inventory costs stepped up to acquisition date fair value.
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Note 3
The following table summarizes the consideration paid for Ranir and the amounts of the assets acquired and liabilities assumed (in millions):
Ranir | |||
Purchase price paid | $ | 759.2 | |
Assets acquired: | |||
Cash and cash equivalents | $ | 11.5 | |
Accounts receivable | 40.6 | ||
Inventories | 59.0 | ||
Prepaid expenses and other current assets | 4.0 | ||
Property, plant and equipment, net | 40.8 | ||
Operating lease assets | 3.7 | ||
Goodwill | 292.7 | ||
Definite-lived intangibles: | |||
Developed product technology, formulations, and product rights | $ | 48.6 | |
Customer relationships and distribution networks | 260.0 | ||
Trademarks, trade names, and brands | 41.0 | ||
Indefinite-lived intangibles: | |||
In-process research and development | 39.7 | ||
Total intangible assets | $ | 389.3 | |
Other non-current assets | 2.8 | ||
Total assets | $ | 844.4 | |
Liabilities assumed: | |||
Accounts payable | $ | 17.6 | |
Other accrued liabilities | 7.7 | ||
Payroll and related taxes | 5.5 | ||
Accrued customer programs | 5.7 | ||
Deferred income taxes | 45.9 | ||
Other non-current liabilities | 2.8 | ||
Total liabilities | $ | 85.2 | |
Net assets acquired | $ | 759.2 | |
The goodwill of $292.7 million arising from the acquisition consists largely of the anticipated growth from new product sales, sales to new customers, the assembled workforce, and the synergies expected from combining the operations of Perrigo and Ranir. Goodwill of $212.6 million and $80.1 million was allocated to our CSCA and CSCI segments, respectively. We expect $252.3 million to be deductible for income tax purposes. The definite-lived intangible assets acquired consisted of trademarks and trade names, developed product technologies, and customer relationships. Trademarks and trade names were assigned useful lives that ranged from 20 to 25 years. Developed product technologies were assigned 10-year useful lives and customer relationships were assigned 24-year useful lives. Customer relationships were valued using the multi-period excess earnings method. Trademarks and trade names, developed technology, and in-process research and development ("IPR&D") were valued using the relief from royalty method. Significant judgment was applied in estimating the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the timing and amounts of cash flow projections, including revenue growth rates, projected profit margins, and discount rates. The opening balance sheet is final.
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Note 3
Acquisitions During the Nine Months Ended September 28, 2019
Generic Product Acquisitions
On July 2, 2019, we purchased the Abbreviated New Drug Application ("ANDA") for a generic gel product for $49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 and began amortizing it over a 20-year useful life. Operating results attributable to the product are included within our RX segment.
On May 17, 2019, we purchased the ANDA for a generic product used to relieve pain, for $15.7 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019 and began amortizing it over a 20-year useful life. Operating results attributable to the product are included within our RX segment.
Budesonide Nasal Spray and Triamcinolone Nasal Spray
On April 1, 2019, we purchased product ANDAs and other records and registrations of Budesonide Nasal Spray, a generic equivalent of Rhinocort Allergy®, and Triamcinolone Nasal Spray, a generic equivalent of Nasacort Allergy®, from Barr Laboratories, Inc. ("Barr"), a subsidiary of Teva Pharmaceuticals, for $14.0 million in cash. We previously developed and marketed the products in collaboration with Barr under a development, marketing and commercialization agreement that originated in August 2003. Under this prior agreement, we paid Barr a percentage of net income from products sold by Perrigo in the U.S. By purchasing the assets from Barr and terminating the original development, marketing and commercialization agreement, we are now entitled to 100% of the income from sales of the product. Operating results attributable to these products are included within our CSCA segment. The intangible assets acquired are classified as developed product technology with a 10-year useful life.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma information as if the Ranir acquisition had occurred on January 1, 2018 and as if the acquisition of Dr. Fresh had occurred on January 1, 2019 and had been combined with the results reported in our Condensed Consolidated Statements of Operations for all periods presented (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
(Unaudited) | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||
Net sales | $ | 1,213.7 | $ | 1,217.1 | $ | 3,803.4 | $ | 3,732.6 | |||||||
Net income (loss) | $ | (154.5 | ) | $ | 108.1 | $ | 18.6 | $ | 180.7 | ||||||
The unaudited pro forma information is presented for information purposes only and is not indicative of the results that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma information presented above includes adjustments primarily for amortization charges for acquired intangible assets, depreciation of property, plant and equipment that have been revalued, certain acquisition-related charges, and related tax effects.
Divestitures During the Nine Months Ended September 26, 2020
Rosemont Pharmaceuticals Business
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). The sale resulted in a pre-tax loss of $18.7 million recorded in our CSCI segment in Other (income) expense, net on the Condensed Consolidated Statements of Operations. The charge included professional fees and a $46.4 million write-off of foreign currency translation adjustment from Accumulated other comprehensive income.
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Note 3
Divestitures During the Nine Months Ended September 28, 2019
Animal Health Business
On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, which resulted in a pre-tax gain of $71.7 million recorded in our CSCA segment in Other (income) expense, net on the Consolidated Statements of Operations.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill, by reportable segment, were as follows (in millions):
December 31, 2019 | Purchase accounting adjustments | Business acquisitions | Business divestitures | Impairments | Currency translation adjustments | September 26, 2020 | ||||||||||||||||||||||
CSCA | $ | 1,899.1 | $ | (10.4 | ) | $ | 14.1 | $ | — | $ | — | $ | (4.0 | ) | $ | 1,898.8 | ||||||||||||
CSCI(1) | 1,203.7 | 12.0 | 1.8 | (115.6 | ) | — | 27.5 | 1,129.4 | ||||||||||||||||||||
RX(2) | 1,013.9 | — | — | — | (202.4 | ) | (0.4 | ) | 811.1 | |||||||||||||||||||
Total goodwill | $ | 4,116.7 | $ | 1.6 | $ | 15.9 | $ | (115.6 | ) | $ | (202.4 | ) | $ | 23.1 | $ | 3,839.3 | ||||||||||||
(1) We had accumulated goodwill impairments of $868.4 million as of each of December 31, 2019 and September 26, 2020.
(2) We had accumulated goodwill impairments of $109.2 million and $311.6 million as of December 31, 2019 and September 26, 2020, respectively.
RX U.S. Reporting Unit Goodwill
During the three months ended September 26, 2020, our RX U.S. reporting unit had an indication of potential impairment driven primarily by the stoppage of production and distribution of albuterol sulfate inhalation aerosol and voluntary U.S. 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 an impairment test 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 change in fair value from previous estimates was driven by the financial impact of the recall in the current period and related changes in estimates of future cash flows (refer to Note 6).
Other Reporting Unit Goodwill
During the three months ended June 27, 2020, our Branded Consumer Self-care ("BCS") reporting unit included in the CSCI segment had an indication of potential impairment which was driven by a decrease in forecasted cash flows in the second half of 2020 related to impacts from the COVID-19 pandemic. We prepared an impairment test as of June 27, 2020 and determined that the fair value of the BCS reporting unit exceeded net book value by less than 10%, consistent with our last annual impairment test as of October 1, 2019. While no impairment was recorded as of June 27, 2020, future developments such as deterioration in business performance or market multiples could reduce the fair value of this reporting unit and lead to impairment in a future period. 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.
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Note 4
Intangible Assets
Intangible assets and related accumulated amortization consisted of the following (in millions):
September 26, 2020 | December 31, 2019 | ||||||||||||||
Gross | Accumulated Amortization | Gross | Accumulated Amortization | ||||||||||||
Indefinite-lived intangibles: | |||||||||||||||
Trademarks, trade names, and brands | $ | 4.0 | $ | — | $ | 18.8 | $ | — | |||||||
In-process research and development | 10.8 | — | 50.0 | — | |||||||||||
Total indefinite-lived intangibles | $ | 14.8 | $ | — | $ | 68.8 | $ | — | |||||||
Definite-lived intangibles: | |||||||||||||||
Distribution and license agreements and supply agreements | $ | 134.7 | $ | 83.8 | $ | 126.7 | $ | 81.1 | |||||||
Developed product technology, formulations, and product rights | 1,335.7 | 731.8 | 1,392.8 | 755.3 | |||||||||||
Customer relationships and distribution networks | 1,866.8 | 776.0 | 1,805.6 | 671.4 | |||||||||||
Trademarks, trade names, and brands | 1,462.7 | 313.1 | 1,353.5 | 250.1 | |||||||||||
Non-compete agreements | 5.2 | 5.0 | 6.5 | 6.0 | |||||||||||
Total definite-lived intangibles | $ | 4,805.1 | $ | 1,909.7 | $ | 4,685.1 | $ | 1,763.9 | |||||||
Total intangible assets | $ | 4,819.9 | $ | 1,909.7 | $ | 4,753.9 | $ | 1,763.9 | |||||||
We recorded amortization expense of $73.9 million and $219.3 million for the three and nine months ended September 26, 2020, respectively, and $78.7 million and $227.7 million for the three and nine months ended September 28, 2019, respectively.
Evamist Branded Product
During the three months ended September 28, 2019, we identified impairment indicators related to our Evamist branded product, which is a definite-lived intangible asset in our RX segment. The indicators related to a decline in sales volume and a corresponding reduction in our long-range revenue forecast. We recorded an asset impairment of $10.8 million.
Generic Product
During the three months ended June 29, 2019, we identified impairment indicators for a certain definite-lived intangible asset related to changes in pricing and competition in the market, which lowered the projected cash flows we expect to generate from the asset. We recorded an asset impairment of $27.8 million in our RX segment.
In-process R&D
We recorded impairment charges of $4.3 million on certain IPR&D assets in the CSCA and RX segments during the nine months ended September 28, 2019, due to changes in projected development and regulatory timelines.
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Note 5
NOTE 5 – INVENTORIES
Major components of inventory were as follows (in millions):
September 26, 2020 | December 31, 2019 | ||||||
Finished goods | $ | 618.9 | $ | 530.3 | |||
Work in process | 201.3 | 186.9 | |||||
Raw materials | 280.5 | 250.1 | |||||
Total inventories | $ | 1,100.7 | $ | 967.3 | |||
NOTE 6 – FAIR VALUE MEASUREMENTS
On January 1, 2020, we adopted ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("Topic 820"). The amendments in this ASU remove disclosure requirements in Topic 820 related to the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. Additionally, Topic 820 adds disclosure requirements for the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. We have amended certain of our quantitative Level 3 fair value measurement disclosures to add the range and weighted average of significant unobservable inputs used.
The table below summarizes the valuation of our financial instruments carried at fair value by the applicable pricing categories (in millions):
September 26, 2020 | December 31, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Measured at fair value on a recurring basis: | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Investment securities | $ | 3.3 | $ | — | $ | — | $ | 6.6 | $ | — | $ | — | ||||||||||||
Foreign currency forward contracts | — | 8.7 | — | — | 4.3 | — | ||||||||||||||||||
Cross-currency swap | — | 7.7 | — | — | 26.3 | — | ||||||||||||||||||
Funds associated with Israeli severance liability | — | 14.2 | — | — | 14.6 | — | ||||||||||||||||||
Royalty Pharma contingent milestone | — | — | 121.2 | — | — | 95.3 | ||||||||||||||||||
Total assets | $ | 3.3 | $ | 30.6 | $ | 121.2 | $ | 6.6 | $ | 45.2 | $ | 95.3 | ||||||||||||
Liabilities: | ||||||||||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 8.8 | $ | — | $ | — | $ | 8.4 | $ | — | ||||||||||||
Contingent consideration payments | — | — | 12.8 | — | — | 11.9 | ||||||||||||||||||
Total liabilities | $ | — | $ | 8.8 | $ | 12.8 | $ | — | $ | 8.4 | $ | 11.9 | ||||||||||||
Measured at fair value on a non-recurring basis: | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Goodwill(1) | $ | — | $ | — | $ | 811.1 | $ | — | $ | — | $ | 1,013.1 | ||||||||||||
Definite-lived intangible assets(2) | — | — | — | — | — | 23.3 | ||||||||||||||||||
Total assets | $ | — | $ | — | $ | 811.1 | $ | — | $ | — | $ | 1,036.4 | ||||||||||||
(1) | During the three months ended September 26, 2020, goodwill with a carrying amount of $1,013.5 million was written down to a fair value of $811.1 million. During the year ended December 31, 2019, goodwill with a carrying amount of $1,122.3 million was written down to a fair value of $1,013.1 million. |
(2) | During the year ended December 31, 2019, definite-lived intangible assets with a carrying amount of $55.3 million were written down to a fair value of $23.3 million. |
19
Perrigo Company plc - Item 1
Note 6
There were no transfers within Level 3 fair value measurements during the three and nine months ended September 26, 2020 or the year ended December 31, 2019.
Royalty Pharma Contingent Milestone Receipts
The table below summarizes the change in fair value of the Royalty Pharma contingent milestone (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Beginning balance | $ | 99.0 | $ | 89.1 | $ | 95.3 | $ | 323.2 | |||||||
Payments received | — | — | — | (250.0 | ) | ||||||||||
Change in fair value | 22.2 | 2.6 | 25.9 | 18.5 | |||||||||||
Ending balance | $ | 121.2 | $ | 91.7 | $ | 121.2 | $ | 91.7 | |||||||
We value our contingent milestone payment 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 | % | |
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.
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.
20
Perrigo Company plc - Item 1
Note 6
Contingent Consideration Payments
The table below summarizes the change in fair value of contingent consideration payments (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Beginning balance | $ | 12.1 | $ | 12.1 | $ | 11.9 | $ | 15.3 | |||||||
Changes in value | 0.7 | 1.1 | 0.9 | (0.9 | ) | ||||||||||
Settlements and other adjustments | — | — | — | (1.2 | ) | ||||||||||
Ending balance | $ | 12.8 | $ | 13.2 | $ | 12.8 | $ | 13.2 | |||||||
Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions, including the competitive landscape and regulatory approvals that may impact the future sales of a product. The fair value adjustments are recorded in Other operating expense (income) on the Condensed Consolidated Statements of Operations.
As of September 26, 2020, the contingent consideration payments liability was primarily comprised of sales-based milestones related to an IPR&D asset acquired in a prior transaction in our RX segment. The contingent consideration payments liability also included certain event-based milestones, which were immaterial. The fair value of our contingent consideration sales-based milestones as of September 26, 2020, was calculated using the following significant unobservable inputs:
Nine Months Ended | |||||||
September 26, 2020 | |||||||
Valuation Technique | Unobservable Input | Range (Weighted Average)(1) | |||||
Contingent consideration payments: sales-based milestones | Discounted cash flow | Projected royalties | $ | 36.8 | |||
Projected year of payment of sales-based milestones | 2021 - 2036 (2027) | ||||||
Discount rate | 26.0 | % | |||||
(1) | Unobservable inputs were weighted based on the relative estimated milestone payments. |
The discount rate of 26.0% was based on our assessment of the rate of return and development and commercialization risk of the related IPR&D project. We reevaluate the significant unobservable inputs of the sales-based milestones quarterly based on project developments and changes in contingent elements of the liability.
Non-recurring Fair Value Measurements
The non-recurring fair values represent only those assets whose carrying values were adjusted to fair value during the reporting period.
Goodwill
RX U.S. Reporting Unit Goodwill
When determining the fair value of our RX U.S. reporting unit for the three months ended September 26, 2020, we utilized a combination of comparable company and discounted cash flow techniques. In our comparable company market approach, we considered observable market information and transactions for companies that we deemed to be of a comparable nature, scope, and size of our RX U.S. reporting unit (Level 2 inputs). Our cash flow projections included revenue assumptions related to new and existing products, plus gross margin and operating expenses based on the reporting unit’s growth plans (Level 3 inputs). In our discounted cash flow analysis, we used a long-term growth rate of 0.0%, which assumes new product launches will, over time, offset decreases in cash
21
Perrigo Company plc - Item 1
Note 6
flows of existing portfolio products with definite lives. We used a discount rate of 10.3% in this analysis. The discount rate correlates with the required investment return and risk that we believe market participants would apply to the projected growth rate. In addition, we burdened projected free cash flows with the capital spending deemed necessary to support the cash flows and applied blended jurisdictional tax rates ranging from 19.1% to 21.7%. We weighted indications of fair value resulting from the market approach and present value techniques, considering the reasonableness of the range of measurements and the point within the range that we determined was most representative of fair market conditions (refer to Note 4).
Fixed Rate Long-term Debt
Our fixed rate long-term debt consisted of the following (in millions):
September 26, 2020 | December 31, 2019 | ||||||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | ||||||||||||
Public Bonds | |||||||||||||||
Carrying Value (excluding discount) | $ | 2,760.0 | $ | — | $ | 2,600.0 | $ | — | |||||||
Fair value | $ | 2,969.9 | $ | — | $ | 2,618.4 | $ | — | |||||||
Private placement note | |||||||||||||||
Carrying value (excluding premium) | $ | — | $ | 157.1 | $ | — | $ | 151.4 | |||||||
Fair value | $ | — | $ | 168.0 | $ | — | $ | 168.4 | |||||||
The fair values of our public bonds for all periods were based on quoted market prices. The fair values of our private placement note for all periods were based on interest rates offered for borrowings of a similar nature and remaining maturities.
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.
22
Perrigo Company plc - Item 1
Note 7
NOTE 7 – INVESTMENTS
The following table summarizes the measurement category, balance sheet location, and balances of our equity securities (in millions):
Measurement Category | Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Fair value method | Prepaid expenses and other current assets | $ | 3.3 | $ | 6.6 | |||||
Fair value method(1) | Other non-current assets | $ | 1.8 | $ | 2.3 | |||||
Equity method | Other non-current assets | $ | 69.5 | $ | 17.8 | |||||
(1) | Measured at fair value using the Net Asset Value practical expedient. |
The following table summarizes the expense (income) recognized in earnings of our equity securities (in millions):
Three Months Ended | Nine Months Ended | ||||||||||||||||
Measurement Category | Income Statement Location | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Fair value method | Other (income) expense, net | $ | (0.4 | ) | $ | 0.9 | $ | 2.2 | $ | 8.8 | |||||||
Equity method | Other (income) expense, net | $ | (1.1 | ) | $ | (0.3 | ) | $ | (2.6 | ) | $ | (2.1 | ) | ||||
On June 17, 2020, we announced our entrance into the cannabidiol (“CBD”) market through a strategic investment in and long-term supply agreement with Kazmira LLC ("Kazmira"), a leading supplier of hemp-based CBD products free of tetrahydrocannabinol (“THC-free”) based in Watkins, Colorado. 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 thereafter. 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, 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. We will report our equity method earnings from Kazmira in our Condensed Consolidated Financial Statements on a quarterly lag.
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Cross Currency Swaps
On August 15, 2019, we entered into a cross-currency swap designated as a net investment hedge to hedge the EUR currency exposure of our net investment in European operations. This agreement is a contract to exchange floating-rate Euro payments for floating-rate U.S. dollar payments. The payments are based on a notional basis of €450.0 million ($498.0 million) and settle quarterly.
Interest Rate Swaps
There were no active designated or non-designated interest rate swaps as of September 26, 2020 and December 31, 2019.
Foreign Currency Forwards
Net Investment Hedge
On June 19, 2020, we entered into a foreign currency forward contract designated as a net investment hedge of the GBP currency exposure of our net investment in certain of our U.K. operations. The hedge had a notional basis of £155.0 million ($194.5 million) and was settled during the three months ended September 26, 2020.
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Perrigo Company plc - Item 1
Note 8
Foreign currency forward contracts were as follows (in millions):
Notional Amount | ||||||||
September 26, 2020 | December 31, 2019 | |||||||
Israeli Shekel (ILS) | $ | 398.0 | $ | 712.7 | ||||
European Euro (EUR) | 193.5 | 157.6 | ||||||
United States Dollar (USD) | 83.1 | 92.4 | ||||||
Danish Krone (DKK) | 59.1 | 51.7 | ||||||
British Pound (GBP) | 56.9 | 86.9 | ||||||
Swedish Krona (SEK) | 45.9 | 42.0 | ||||||
Chinese Yuan (CNY) | 40.3 | 20.9 | ||||||
Canadian Dollar (CAD) | 27.5 | 41.3 | ||||||
Polish Zloty (PLZ) | 16.6 | 21.5 | ||||||
Mexican Peso (MPX) | 13.7 | 9.7 | ||||||
Norwegian Krone (NOK) | 7.7 | 6.6 | ||||||
Switzerland Franc (CHF) | 4.9 | 4.1 | ||||||
Romanian New Leu (RON) | 4.1 | 2.3 | ||||||
Other | 10.0 | 7.5 | ||||||
Total | $ | 961.3 | $ | 1,257.2 | ||||
The maximum term of our forward currency exchange contracts is 18 months.
Effects of Derivatives on the Financial Statements
The below tables indicate the effects of all derivative instruments on the Condensed Consolidated Financial Statements. All amounts exclude income tax effects.
The balance sheet location and gross fair value of our outstanding derivative instruments were as follows (in millions):
Asset Derivatives | |||||||||
Fair Value | |||||||||
Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Designated derivatives: | |||||||||
Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 4.5 | $ | 1.0 | ||||
Cross-currency swap | Other non-current assets | 7.7 | 26.3 | ||||||
Total designated derivatives | $ | 12.2 | $ | 27.3 | |||||
Non-designated derivatives: | |||||||||
Foreign currency forward contracts | Prepaid expenses and other current assets | $ | 4.2 | $ | 3.3 | ||||
Liability Derivatives | |||||||||
Fair Value | |||||||||
Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Designated derivatives: | |||||||||
Foreign currency forward contracts | Other accrued liabilities | $ | 6.7 | $ | 4.7 | ||||
Non-designated derivatives: | |||||||||
Foreign currency forward contracts | Other accrued liabilities | $ | 2.1 | $ | 3.7 | ||||
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Perrigo Company plc - Item 1
Note 8
The following tables summarize the effect of derivative instruments designated as hedging instruments in Accumulated Other Comprehensive Income ("AOCI") (in millions):
Three Months Ended | ||||||||||||||||
September 26, 2020 | ||||||||||||||||
Instrument | Amount of Gain/(Loss) Recorded in OCI | Classification of Gain/(Loss) Reclassified from AOCI into Earnings | Amount of Gain/(Loss) Reclassified from AOCI into Earnings | Classification of Gain/(Loss) Recognized into Earnings Related to Amounts Excluded from Effectiveness Testing | Amount of Gain/(Loss) Recognized in Earnings on Derivatives Related to Amounts Excluded from Effectiveness Testing | |||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swap agreements | $ | — | Interest expense, net | $ | (0.4 | ) | Interest expense, net | $ | — | |||||||
Foreign currency forward contracts | (2.6 | ) | Net sales | (0.1 | ) | Net sales | — | |||||||||
Cost of sales | 1.1 | Cost of sales | 0.3 | |||||||||||||
$ | (2.6 | ) | $ | 0.6 | $ | 0.3 | ||||||||||
Net investment hedges: | ||||||||||||||||
Cross-currency swap | $ | (0.3 | ) | Interest expense, net | $ | 0.9 | ||||||||||
Foreign currency forward contract | (11.7 | ) | Interest expense, net | (0.1 | ) | |||||||||||
$ | (12.0 | ) | $ | 0.8 | ||||||||||||
Nine Months Ended | ||||||||||||||||
September 26, 2020 | ||||||||||||||||
Instrument | Amount of Gain/(Loss) Recorded in OCI(1) | Classification of Gain/(Loss) Reclassified from AOCI into Earnings | Amount of Gain/(Loss) Reclassified from AOCI into Earnings | Classification of Gain/(Loss) Recognized into Earnings Related to Amounts Excluded from Effectiveness Testing | Amount of Gain/(Loss) Recognized in Earnings on Derivatives Related to Amounts Excluded from Effectiveness Testing | |||||||||||
Cash flow hedges: | ||||||||||||||||
Treasury locks | $ | — | Interest expense, net | $ | (0.1 | ) | Interest expense, net | $ | — | |||||||
Interest rate swap agreements | — | Interest expense, net | (1.3 | ) | Interest expense, net | — | ||||||||||
Foreign currency forward contracts | 7.4 | Net sales | (0.1 | ) | Net sales | 0.1 | ||||||||||
Cost of sales | 0.3 | Cost of sales | 0.9 | |||||||||||||
$ | 7.4 | $ | (1.2 | ) | $ | 1.0 | ||||||||||
Net investment hedges: | ||||||||||||||||
Cross-currency swap | $ | (18.6 | ) | Interest expense, net | $ | 5.6 | ||||||||||
Foreign currency forward contract | (11.2 | ) | Interest expense, net | (0.1 | ) | |||||||||||
$ | (29.8 | ) | $ | 5.5 | ||||||||||||
(1) Net loss of $9.4 million is expected to be reclassified out of AOCI into earnings during the next 12 months.
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Perrigo Company plc - Item 1
Note 8
Three Months Ended | ||||||||||||||||
September 28, 2019 | ||||||||||||||||
Instrument | Amount of Gain/(Loss) Recorded in OCI | Classification of Gain/(Loss) Reclassified from AOCI into Earnings | Amount of Gain/(Loss) Reclassified from AOCI into Earnings | Classification of Gain/(Loss) Recognized into Earnings Related to Amounts Excluded from Effectiveness Testing | Amount of Gain/(Loss) Recognized in Earnings on Derivatives Related to Amounts Excluded from Effectiveness Testing | |||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swap agreements | $ | — | Interest expense, net | $ | (0.4 | ) | Interest expense, net | $ | — | |||||||
Foreign currency forward contracts | 2.6 | Net sales | 0.5 | Net sales | (0.2 | ) | ||||||||||
Cost of sales | 0.5 | Cost of sales | 0.3 | |||||||||||||
$ | 2.6 | $ | 0.6 | $ | 0.1 | |||||||||||
Net investment hedges: | ||||||||||||||||
Cross-currency swap | $ | 30.1 | Interest expense, net | $ | 1.7 | |||||||||||
Nine Months Ended | ||||||||||||||||
September 28, 2019 | ||||||||||||||||
Instrument | Amount of Gain/(Loss) Recorded in OCI | Classification of Gain/(Loss) Reclassified from AOCI into Earnings | Amount of Gain/(Loss) Reclassified from AOCI into Earnings | Classification of Gain/(Loss) Recognized into Earnings Related to Amounts Excluded from Effectiveness Testing | Amount of Gain/(Loss) Recognized in Earnings on Derivatives Related to Amounts Excluded from Effectiveness Testing | |||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swap agreements | $ | — | Interest expense, net | $ | (1.3 | ) | Interest expense, net | $ | — | |||||||
Foreign currency forward contracts | 2.6 | Net sales | 0.8 | Net sales | (0.2 | ) | ||||||||||
Cost of sales | (0.9 | ) | Cost of sales | (1.9 | ) | |||||||||||
$ | 2.6 | $ | (1.4 | ) | $ | (2.1 | ) | |||||||||
Net investment hedges: | ||||||||||||||||
Cross-currency swap | $ | 30.1 | Interest expense, net | $ | 1.7 | |||||||||||
The amounts of (income)/expense recognized in earnings related to our non-designated derivatives on the Condensed Consolidated Statements of Operations were as follows (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||||
Non-Designated Derivatives | Income Statement Location | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
Foreign currency forward contracts | Other (income) expense, net | $ | 8.5 | $ | (14.7 | ) | $ | 1.4 | $ | (27.8 | ) | |||||||
Interest expense, net | 1.7 | (0.5 | ) | 5.9 | 1.3 | |||||||||||||
$ | 10.2 | $ | (15.2 | ) | $ | 7.3 | $ | (26.5 | ) | |||||||||
26
Perrigo Company plc - Item 1
Note 8
The classification and amount of gain/(loss) recognized in earnings on fair value and hedging relationships were as follows (in millions):
Three Months Ended | ||||||||||||||||
September 26, 2020 | ||||||||||||||||
Net Sales | Cost of Sales | Interest Expense, net | Other (Income) Expense, net | |||||||||||||
Total amounts of income and expense line items presented on the Condensed Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | $ | 1,213.7 | $ | 785.6 | $ | 34.0 | $ | 0.4 | ||||||||
The effects of cash flow hedging: | ||||||||||||||||
Gain (loss) on cash flow hedging relationships | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | (0.1 | ) | $ | 1.1 | $ | — | $ | — | |||||||
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | $ | — | $ | 0.3 | $ | — | $ | — | ||||||||
Interest rate swap agreements | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | — | $ | — | $ | (0.4 | ) | $ | — | |||||||
Nine Months Ended | ||||||||||||||||
September 26, 2020 | ||||||||||||||||
Net Sales | Cost of Sales | Interest Expense, net | Other (Income) Expense, net | |||||||||||||
Total amounts of income and expense line items presented on the Condensed Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | $ | 3,773.8 | $ | 2,427.8 | $ | 97.6 | $ | 17.1 | ||||||||
The effects of cash flow hedging: | ||||||||||||||||
Gain (loss) on cash flow hedging relationships | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | (0.1 | ) | $ | 0.3 | $ | — | $ | — | |||||||
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | $ | 0.1 | $ | 0.9 | $ | — | $ | — | ||||||||
Treasury locks | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | — | $ | — | $ | (0.1 | ) | $ | — | |||||||
Interest rate swap agreements | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | — | $ | — | $ | (1.3 | ) | $ | — | |||||||
27
Perrigo Company plc - Item 1
Note 8
Three Months Ended | ||||||||||||||||
September 28, 2019 | ||||||||||||||||
Net Sales | Cost of Sales | Interest Expense, net | Other (Income) Expense, net | |||||||||||||
Total amounts of income and expense line items presented on the Condensed Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | $ | 1,191.1 | $ | 778.3 | $ | 30.5 | $ | (71.0 | ) | |||||||
The effects of cash flow hedging: | ||||||||||||||||
Gain (loss) on cash flow hedging relationships | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | 0.5 | $ | 0.5 | $ | — | $ | — | ||||||||
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | $ | (0.2 | ) | $ | 0.3 | $ | — | $ | — | |||||||
Interest rate swap agreements | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | — | $ | — | $ | (0.4 | ) | $ | — | |||||||
Nine Months Ended | ||||||||||||||||
September 28, 2019 | ||||||||||||||||
Net Sales | Cost of Sales | Interest Expense, net | Other (Income) Expense, net | |||||||||||||
Total amounts of income and expense line items presented on the Condensed Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | $ | 3,514.6 | $ | 2,222.1 | $ | 90.4 | $ | (65.6 | ) | |||||||
The effects of cash flow hedging: | ||||||||||||||||
Gain (loss) on cash flow hedging relationships | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | 0.8 | $ | (0.9 | ) | $ | — | $ | — | |||||||
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach | $ | (0.2 | ) | $ | (1.9 | ) | $ | — | $ | — | ||||||
Interest rate swap agreements | ||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into earnings | $ | — | $ | — | $ | (1.3 | ) | $ | — | |||||||
28
Perrigo Company plc - Item 1
Note 9
NOTE 9 – LEASES
The balance sheet locations of our lease assets and liabilities were as follows (in millions):
Assets | Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Operating | Operating lease assets | $ | 132.2 | $ | 129.9 | |||||
Finance | Other non-current assets | 29.2 | 27.6 | |||||||
Total | $ | 161.4 | $ | 157.5 | ||||||
Liabilities | Balance Sheet Location | September 26, 2020 | December 31, 2019 | |||||||
Current | ||||||||||
Operating | Other accrued liabilities | $ | 31.6 | $ | 32.0 | |||||
Finance | Current indebtedness | 6.5 | 3.4 | |||||||
Non-Current | ||||||||||
Operating | Other non-current liabilities | 106.9 | 101.7 | |||||||
Finance | Long-term debt, less current portion | 19.8 | 21.1 | |||||||
Total | $ | 164.8 | $ | 158.2 | ||||||
The below table shows our lease assets and liabilities by reporting segment (in millions):
Assets | Liabilities | |||||||||||||||||||||||||||||||
Operating | Financing | Operating | Financing | |||||||||||||||||||||||||||||
September 26, 2020 | December 31, 2019 | September 26, 2020 | December 31, 2019 | September 26, 2020 | December 31, 2019 | September 26, 2020 | December 31, 2019 | |||||||||||||||||||||||||
CSCA | $ | 22.5 | $ | 22.4 | $ | 15.8 | $ | 16.8 | $ | 22.8 | $ | 22.8 | $ | 16.0 | $ | 16.6 | ||||||||||||||||
CSCI | 32.8 | 41.6 | 5.7 | 5.8 | 33.5 | 42.4 | 2.5 | 2.9 | ||||||||||||||||||||||||
RX | 30.7 | 35.1 | 0.7 | 0.8 | 31.9 | 36.3 | 0.7 | 0.8 | ||||||||||||||||||||||||
Unallocated | 46.2 | 30.8 | 7.0 | 4.2 | 50.3 | 32.2 | 7.1 | 4.2 | ||||||||||||||||||||||||
Total | $ | 132.2 | $ | 129.9 | $ | 29.2 | $ | 27.6 | $ | 138.5 | $ | 133.7 | $ | 26.3 | $ | 24.5 | ||||||||||||||||
Lease expense was as follows (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
Operating leases(1) | $ | 10.6 | $ | 11.0 | $ | 32.1 | $ | 33.9 | ||||||||
Finance leases | ||||||||||||||||
Amortization | $ | 1.2 | $ | 0.9 | $ | 3.4 | $ | 2.3 | ||||||||
Interest | 0.2 | 0.2 | 0.6 | 0.4 | ||||||||||||
Total finance leases | $ | 1.4 | $ | 1.1 | $ | 4.0 | $ | 2.7 | ||||||||
(1) Includes short-term leases and variable lease costs, which are immaterial.
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Perrigo Company plc - Item 1
Note 9
The annual future maturities of our leases as of September 26, 2020 are as follows (in millions):
Operating Leases | Finance Leases | Total | ||||||||||
2020 | $ | 9.6 | $ | 1.4 | $ | 11.0 | ||||||
2021 | 33.2 | 6.9 | 40.1 | |||||||||
2022 | 25.3 | 4.2 | 29.5 | |||||||||
2023 | 18.7 | 2.5 | 21.2 | |||||||||
2024 | 16.0 | 1.4 | 17.4 | |||||||||
After 2024 | 54.6 | 14.3 | 68.9 | |||||||||
Total lease payments | 157.4 | 30.7 | 188.1 | |||||||||
Less: Interest | 18.9 | 4.4 | 23.3 | |||||||||
Present value of lease liabilities | $ | 138.5 | $ | 26.3 | $ | 164.8 | ||||||
Our weighted average lease terms and discount rates are as follows:
September 26, 2020 | September 28, 2019 | |||||
Weighted-average remaining lease term (in years) | ||||||
Operating leases | 6.54 | 6.58 | ||||
Finance leases | 9.03 | 10.90 | ||||
Weighted-average discount rate | ||||||
Operating leases | 3.80 | % | 4.17 | % | ||
Finance leases | 3.20 | % | 3.50 | % | ||
Our lease cash flow classifications are as follows (in millions):
Nine Months Ended | ||||||||
September 26, 2020 | September 28, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows for operating leases | $ | 31.2 | $ | 33.6 | ||||
Operating cash flows for finance leases | $ | 0.6 | $ | 0.4 | ||||
Financing cash flows for finance leases | $ | 3.1 | $ | 2.2 | ||||
Leased assets obtained in exchange for new finance lease liabilities | $ | 4.7 | $ | 19.0 | ||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 26.2 | $ | 5.3 | ||||
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Perrigo Company plc - Item 1
Note 10
NOTE 10 – INDEBTEDNESS
Total borrowings outstanding are summarized as follows (in millions):
September 26, 2020 | December 31, 2019 | ||||||||||
Term loan | |||||||||||
2019 Term loan due August 15, 2022 | $ | 600.0 | $ | 600.0 | |||||||
Notes and Bonds | |||||||||||
Coupon | Due | ||||||||||
3.500% | March 15, 2021 | — | 280.4 | ||||||||
3.500% | December 15, 2021 | — | 309.6 | ||||||||
5.105% | July 28, 2023(1) | 157.1 | 151.4 | ||||||||
4.000% | November 15, 2023 | 215.6 | 215.6 | ||||||||
3.900% | December 15, 2024 | 700.0 | 700.0 | ||||||||
4.375% | March 15, 2026 | 700.0 | 700.0 | ||||||||
3.150% | June 15, 2030 | 750.0 | — | ||||||||
5.300% | November 15, 2043 | 90.5 | 90.5 | ||||||||
4.900% | December 15, 2044 | 303.9 | 303.9 | ||||||||
Total notes and bonds | 2,917.1 | 2,751.4 | |||||||||
Other financing | 61.1 | 24.6 | |||||||||
Unamortized premium (discount), net | (0.2 | ) | 7.3 | ||||||||
Deferred financing fees | (17.9 | ) | (14.1 | ) | |||||||
Total borrowings outstanding | 3,560.1 | 3,369.2 | |||||||||
Current indebtedness | (16.5 | ) | (3.4 | ) | |||||||
Total long-term debt less current portion | $ | 3,543.6 | $ | 3,365.8 | |||||||
(1) Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate.
We are in compliance with all covenants under our debt agreements as of September 26, 2020.
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
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. 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.
Notes and Bonds
2020 Notes and 2021 Notes Redemption
On June 19, 2020, Perrigo Finance Unlimited Company, a public unlimited company incorporated under the laws of Ireland ("Perrigo Finance") and an indirect wholly-owned finance subsidiary of Perrigo whose primary
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Perrigo Company plc - Item 1
Note 10
purpose is to finance the business and operations of Perrigo and its affiliates, 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 a base indenture and a third supplemental indenture (collectively, 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 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.
Other Financing
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". The balance outstanding under the facilities was $0.3 million as of September 26, 2020. There were no borrowings outstanding under the facilities as of December 31, 2019.
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 Note 7).
We have financing leases that are reported in the above table under "Other financing" (refer to Note 9).
NOTE 11 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Earnings per Share
A reconciliation of the numerators and denominators used in the basic and diluted earnings per share ("EPS") calculation is as follows (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||
Numerator: | ||||||||||||||
Net income (loss) | $ | (154.6 | ) | $ | 92.2 | $ | 12.4 | $ | 165.1 | |||||
Denominator: | ||||||||||||||
Weighted average shares outstanding for basic EPS | 136.5 | 136.0 | 136.3 | 136.0 | ||||||||||
Dilutive effect of share-based awards* | — | 0.8 | 1.2 | 0.4 | ||||||||||
Weighted average shares outstanding for diluted EPS | 136.5 | 136.8 | 137.5 | 136.4 | ||||||||||
Anti-dilutive share-based awards excluded from computation of diluted EPS* | — | 1.5 | 1.5 | 1.8 | ||||||||||
* In the period of a net loss, diluted shares equal basic shares.
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Perrigo Company plc - Item 1
Note 11
Shareholders' Equity
Share Repurchases
In October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares during the three and nine months ended September 26, 2020 and September 28, 2019.
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 | — | 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 | ||||||
(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 | % | |||
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 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 introduced a new tax on U.S. corporations that derive benefits from certain deductible payments to non-U.S. affiliates called the Base Erosion and Anti-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 allowance against all U.S. deferred tax assets as of December 31, 2016. We have continued to maintain a full valuation allowance against all U.S. deferred tax assets since and intend to continue maintaining this valuation allowance until there is sufficient evidence to support the reversal 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 valuation allowance against the U.S. deferred tax assets will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period of the release. 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.
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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 debts 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 purposes 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 2015. If the IRS were to prevail in its proposed adjustment, the Company estimates an increase in tax expense of approximately $170.0 million, excluding interest and penalties, for fiscal years ended June 28, 2014 through June 27, 2015. In addition, we expect the IRS to seek 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 expense will not exceed $200.0 million, excluding interest and penalties. 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, if any, associated with this matter.
IRS Audit of Fiscal Years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012
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 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 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. Upon the disallowance of such refund claims, we timely filed the above complaint, which 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, 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 April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena Neurosciences, Inc. ("Athena") 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
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Perrigo Company 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 22, 2016, we received a NOPA from the IRS regarding the deductibility of litigation costs related to the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012, and December 31, 2013. We strongly disagree with the IRS’s position asserted in the NOPA and are contesting it.
Irish Revenue Audit of Fiscal Years Ended December 31, 2012 and December 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 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 strongly 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 the Tax Appeals Commission which is the statutory body charged with considering whether the NoA is properly founded as a matter of tax 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 violate 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 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.
No 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 Tax Authority Audit of Fiscal Year Ended June 27, 2015 and Calendar Years Ended December 31, 2015 through December 31, 2017
The Israel Tax Authority is auditing our fiscal year ended June 27, 2015, and calendar years ended December 31, 2015, December 31, 2016 and December 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.
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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 – 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 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, have a material adverse effect on our financial condition, results of operations, or cash flows.
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 class actions alleging single-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. The court denied motions to dismiss each of the complaints alleging “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 three putative classes, including (a) direct purchasers, (b) end payors, and (c) indirect resellers, have filed two sets of class action complaints alleging that Perrigo and other manufacturers (and some individuals) entered into an “overarching conspiracy” that involved allocating customers, rigging bids and raising, maintaining, and fixing prices for various products. 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.
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Perrigo Company plc - Item 1
Note 14
Filed in June 2018, and later amended in December 2018 (with respect to direct 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 with allegations dating back to March 2011. The allegations against Perrigo concern only two formulations (cream and ointment) of one 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. None of these cases are included in the group of cases on a more expedited schedule pursuant to the court’s July 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 products that are not at issue in the 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 three 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
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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 naming 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, seven health plans filed a writ of summons in the Pennsylvania Court of Common Pleas in Philadelphia concerning an as-yet unfiled complaint against Perrigo, three dozen other manufacturers, and seventeen 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 one former and one 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 estimate the outcome of the liability if any, associated with 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.). 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 Fund case and the Wilson case. In the amended complaint, the lead plaintiffs seek to represent three classes of shareholders: (i) shareholders who purchased shares during the period from April 21, 2015 through May 3, 2017 on the U.S. exchanges; (ii) shareholders who purchased shares during the same period on the Tel Aviv exchange; and (iii) shareholders who owned 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) 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‑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 six generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. The amended complaint does not include an estimate of damages. During 2017, the defendants filed motions to dismiss, which the plaintiffs opposed. On July 27, 2018, the court issued an opinion and order granting the defendants’ motions to dismiss in part and denying the motions to dismiss in part. The court dismissed without prejudice defendants Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, Donal O’Connor, and Marc Coucke. The court also dismissed without prejudice claims arising from the Tysabri® accounting issue described above and claims alleging incorrect disclosure of organic growth described above. The defendants who were not dismissed are 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 six
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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 begun. Discovery in the class action is currently scheduled to end in January 2021. We intend to defend the lawsuit vigorously.
On November 14, 2019, the court granted the lead plaintiffs’ motion and certified three classes for the case: (i) all those who purchased shares between April 21, 2015 through May 2, 2017 inclusive on a U.S. exchange and were damaged thereby; (ii) all those who purchased shares between April 21, 2015 through May 2, 2017 inclusive on the Tel Aviv exchange and were damaged thereby; and (iii) all those who owned shares as of November 12, 2015 and held such stock through at least 8:00 a.m. on November 13, 2015 (whether or not a person tendered shares in response to the Mylan tender offer) (the "tender offer class"). Defendants filed a petition 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 the 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 pending in the U.S. District Court for the District of New 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. One 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 seven 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:
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 Sections 10(b) (and Rule 10b-5 thereunder) and all cases except Aberdeen assert 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 control person claims against the individual defendants are limited to the period from April 2015 through April 2016 in the Carmignac case. The complaints in the Carmignac and First Manhattan cases also assert claims under Section 18 of the Exchange Act.
Each complaint alleges inadequate disclosures concerning the valuation and integration of Omega, the financial guidance we provided, 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, and, in each of the cases other than Carmignac, alleged price fixing activities with respect to six 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 these 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 eight cases were filed by the same law firm and generally make the same factual allegations:
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 six 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 cases conferred and agreed that the ruling in the Roofers’ Pension Fund case 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.
Harel Insurance and TIAA-CREF Cases. The following two 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 two more individual defendants not sued 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 six 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 three 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:
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 six 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 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. Three cases were filed; one was voluntarily dismissed in each of 2017 and 2018 and one was stayed in 2018. We are consulting Israeli counsel about our response to these allegations and we intend to defend this case 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 purchased Perrigo stock on the Tel Aviv exchange during the period from April 24, 2015 through May 3, 2017 and also a claim for those that owned shares on the final day of the Mylan tender offer (November 13, 2015). The amended complaint names as defendants the Company, Ernst & Young LLP (the Company’s auditor), and 11 current or former directors and officers of Perrigo (Mses. Judy Brown, Laurie Brlas, Jacqualyn Fouse, Ellen Hoffing, and Messrs. Joe Papa, Marc Coucke, Gary Cohen, Michael Jandernoa, Gerald Kunkle, Herman Morris, and Donal O’Connor). The complaint alleges violations under 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 generic prescription pharmaceuticals, and alleges improper accounting for the Tysabri® royalty stream. The plaintiff indicates an initial, preliminary class damages estimate of 2.7 billion NIS (approximately $760.0 million at 1 NIS = 0.28 cents). After the other two cases filed in Israel were voluntarily dismissed, the plaintiff in this case agreed to stay this case pending the outcome of the Roofers’ Pension Fund case in the U.S. (described above). The Israeli court approved the stay, and this case is now stayed. We intend to defend the lawsuit vigorously.
In the United States (cases related to Irish Tax events)
On January 3, 2019, a shareholder filed a complaint against the Company, 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 one 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 three 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 (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.). 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 two 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 lift the stay; Perrigo has filed an opposition; the court has requested further briefing from the plaintiff. We intend to defend the 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 (together the "Sellers") in accordance with clause 26.2 of the Share Purchase Agreement dated November 6, 2014 ("SPA") and the rules of the Belgian Centre for Arbitration and 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. To 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). 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
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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 one 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 three master complaints. The Company is named in two of those: the Master Personal Injury Complaint and the Consolidated Consumer Class Action Complaint.
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Perrigo Company plc - Item 1
Note 14
As of October 6, 2020, the Company has been named in forty-two 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 one 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 | |||||||
The charges incurred during the three and nine months ended September 26, 2020 were primarily associated with actions taken to streamline the organization.
The charges incurred during the three and nine months ended September 28, 2019 were primarily associated with the reorganization of our executive management team and other actions taken to streamline the organization. Of the amount recorded during the nine months ended September 28, 2019, $10.8 million related primarily to the sales force reorganization in France within the CSCI segment.
There were no other material restructuring programs that significantly impacted any other reportable 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 $7.9 million liability for employee severance benefits is expected to be paid within the next year.
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Perrigo Company plc - Item 1
Note 16
NOTE 16 – SEGMENT INFORMATION
Our segments reflect the way in which our management makes operating decisions, allocates resources, and manages the growth and profitability of the Company.
The tables below show select financial measures by reporting segment (in millions):
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 | — | (48.7 | ) | — | — | (59.8 | ) | — | |||||||||||||||
Total | $ | 1,213.7 | $ | (95.5 | ) | $ | 73.9 | $ | 1,191.1 | $ | 54.4 | $ | 78.7 | ||||||||||
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 | — | (151.4 | ) | — | — | (185.0 | ) | — | |||||||||||||||
Total | $ | 3,773.8 | $ | 167.6 | $ | 219.3 | $ | 3,514.6 | $ | 211.7 | $ | 227.7 | |||||||||||
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, 2019 (the “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 2019 Form 10-K and Part 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.
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Perrigo Company plc - Item 2
Executive Overview
We are dedicated to making lives better by bringing quality, affordable self-care products that consumers trust everywhere they are sold. We are a leading provider of over-the-counter ("OTC") health and wellness 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 prescription pharmaceutical topical products such as creams, lotions, and gels as well as nasal sprays and inhalers.
Our Segments
Our reporting and operating segments are as follows:
• | Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
• | Consumer Self-Care International ("CSCI") comprises our branded consumer self-care business primarily in Europe, our consumer self-care businesses in the United Kingdom and Australia, and our divested liquid licensed products business in the United Kingdom. |
• | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S., 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 separation 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. |
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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 approximately $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
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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:
• | $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 our RX segment as $23.0 million in pre-recall albuterol sulfate inhalation |
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Perrigo Company plc - Item 2
Consolidated
aerosol ("Albuterol") sales were more than offset by 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 CSCI segment decreased $7.8 million as lower demand in certain product categories more than offset increased demand in other categories; and
• | $2.8 million increase due primarily to: |
◦ | $10.0 million increase primarily from favorable Euro foreign currency translation; and |
◦ | $9.2 million increase due to the absence of the Ranitidine retail market withdrawal included in the prior year period; partially offset by |
◦ | $16.4 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. |
Operating income decreased $149.9 million, or 276%, due to:
• | $15.3 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 and an increase in commodity costs for a certain OTC brand. Gross profit as a percentage of net sales increased 60 basis points due primarily to the absence of the Ranitidine retail market withdrawal included in the prior year period, partially offset by the net charge from the Albuterol recall and unfavorable product mix; more than offset by |
• | $165.2 million increase in operating expenses due primarily to: |
◦ | A $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 related to a definite-lived intangible asset in the prior year period; partially offset by |
◦ | The absence of $12.5 million in acquisition and integration-related charges related to the acquisition of Ranir in the prior year period; |
◦ | The absence of a $7.1 million asset abandonment charge related to 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 | % | |||
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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 decreased 110 basis points due primarily to the gross profit factors discussed above and unfavorable product mix; more than offset by |
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Perrigo Company plc - Item 2
Consolidated
• | $97.6 million increase in operating expenses due primarily to: |
◦ | A $202.4 million goodwill impairment charge in the current year period related to RX goodwill, partially offset by the absence of $42.9 million of impairment charges related to definite-lived intangible assets and IPR&D assets in the prior year period; further offset by |
◦ | $25.7 million decrease in restructuring expenses related primarily to the reorganization of our sales force in France and the reorganization of our executive management team in the prior year; |
◦ | $26.5 million decrease in administration expenses due primarily to a reduction in legal and professional fees, the absence of acquisition and integration-related charges related to the 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 measures implemented to keep employees safe; |
◦ | $8.1 million decrease in selling expense due primarily to the 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 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. |
Recent Developments
Internal Revenue Service Complaint
As previously disclosed, 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 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. In response to our complaint, the United States District Court for Western District of Michigan scheduled a new trial date for January 26, 2021 (refer to Item 1. Note 13).
Internal Revenue Service Notice of Proposed Adjustment
As previously disclosed, on April 26, 2019, we received a revised Notice of Proposed Adjustment ("NOPA") from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, December 31, 2012 and December 31, 2013. 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 (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 NOPA previously received, regarding the deductibility of interest related to the IRS audit of Perrigo Company for the years ended June 28, 2014 and June 27, 2015. We strongly disagree with the IRS position and are pursuing all available administrative and judicial remedies (refer to Item 1. Note 13).
Irish Tax Appeals 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 31, 2012 and December 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
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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). |
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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
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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
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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 |
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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 Ended September 26, 2020 vs. Nine Months Ended September 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. |
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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
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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 |
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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.
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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
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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 our liquidity and capital 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.
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Cash Generated by (Used in) Operating Activities
The $227.5 million increase in operating cash inflow was due primarily to:
• | $118.5 million increase in cash from the change in accounts receivable, due primarily to timing of sales and receipt of payments; |
• | $56.8 million increase in 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; |
• | $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 change in net earnings after adjustments for items including 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 |
• | $19.1 million decrease in cash from the change in prepaid 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 change in accounts payable, due primarily to the timing of payments and mix of payment terms. |
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Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Investing Activities
The $429.5 million decrease in cash used in 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 the Dexsil® 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 change in capital spending, primarily to increase tablet and infant formula capacity and for software and technology initiatives. |
Cash Generated by (Used in) Financing Activities
The $13.0 million decrease in financing cash flow was due primarily to:
• | $114.0 million decrease in cash due to the increase in payments on long-term debt; |
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• | $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 |
• |
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.
Share Repurchases
In October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares during the three and nine months ended September 26, 2020.
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,
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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. The balance outstanding under the facilities was $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 26, 2020 and December 31, 2019, respectively.
Accounts Receivable Factoring
The total amount factored on a non-recourse basis and excluded from accounts receivable was $6.0 million and $10.0 million at September 26, 2020 and December 31, 2019, respectively.
We are in compliance with all covenants under our debt agreements as of September 26, 2020 (refer to Item 1. Note 9 and Note 10 for more information on all of the above lease activity and debt facilities, respectively).
Credit Ratings
Our credit ratings on September 26, 2020 were Baa3 (stable) and BBB- (stable) by Moody's Investors Service and S&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
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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 in our debt structure from the addition of the 2020 Notes and Promissory Notes related to our equity method investment in Kazmira and redemption of the 2021 Notes, as discussed in Item 1. Note 10, there were no material changes in contractual obligations as of September 26, 2020 from those provided in our 2019 Form 10-K. Below is a revised schedule of our enforceable and legally binding obligations as of September 26, 2020 related to our short and long-term debt arrangements.
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 2020.
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
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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
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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 2019 Form 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 26, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that all material information relating to us and our consolidated subsidiaries required to be included in our periodic SEC filings would be made known to them by others within those entities in a timely manner and that no changes are required at this time.
Evaluation of the Effectiveness of Internal Control over Financial Reporting
Our management assessed the effectiveness of our internal control over financial reporting as of September 26, 2020. The framework used in carrying out our evaluation was the 2013 Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. In evaluating our information technology controls, we also used components of the 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 our internal control over financial reporting was effective as of September 26, 2020. The results of management’s assessment have been reviewed with our Audit Committee.
Changes in Internal Control over Financial Reporting
We 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 newly acquired businesses, management excluded Ranir and the oral care asset of High Ridge Brands from its evaluation of internal control over financial reporting as of September 26, 2020. We are in the 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 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 income in our Condensed Consolidated Statements of Operations for the nine months ended September 26, 2020.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Refer to Item 1. Note 13 and Item 1. Note 14 of the Notes to the Condensed Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
Our Annual Report on Form 10-K for the year ended December 31, 2019 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.
Adverse 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 health officials just three months earlier, spread rapidly from Asia to the Middle East, Europe, and the United States. As the pandemic continues, many actions taken to reduce the spread of the coronavirus 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 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. 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 actions to slow it could have an adverse impact on our financial condition, our supply chains and other operations, our results of our operations, consumer demand for our products and our ability to access capital. The magnitude of any such adverse impacts cannot currently be determined, but such adverse impacts could be material, 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 control. In addition, to the extent that any increased sales of our products 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 volume of U.S. prescriptions could decrease 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 change in the course of the pandemic may affect consumer demand for products in future periods in ways we do not currently anticipate.
In connection with delays in the implementation of the EU's Medical Device Regulation due to the COVID-19 pandemic, the designation of a Notified Body certifying certain of our products expired, which could adversely affect our sales of these products in the EU.
We market certain products that are subject to the EU’s Medical Device Directive (“MDD”) and will be subject to the EU’s Medical Device Regulation (“MDR”), both of which require that products be certified by designated assessment entities (“Notified Bodies”) prior to sale. The date of application of the MDR, and as a result the date of repeal of the MDD, has been deferred by 12 months to May 26, 2021 due to the pandemic. In connection with this extension, Notified Bodies designated under the prior MDD regime were allowed to continue their related governance of medical 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 relevant authorities to enable continuity of supply. While we do not expect a material impact on our business, there can be no assurances that our ability to sell these products in the EU will not be interrupted, slowed or otherwise adversely affected.
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Perrigo Company plc - Item 6
Exhibits
ITEM 6. EXHIBITS
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101. INS | XBRL Instance 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. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Date File, formatted in Inline XBRL (contained in Exhibit 101). | |
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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.
PERRIGO COMPANY PLC | |||
(Registrant) | |||
Date: | November 5, 2020 | /s/ Murray S. Kessler | |
Murray S. Kessler | |||
Chief Executive Officer and President | |||
(Principal Executive Officer) | |||
Date: | November 5, 2020 | /s/ Raymond P. Silcock | |
Raymond P. Silcock | |||
Chief Financial Officer | |||
(Principal Accounting and Financial Officer) | |||
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