Pricing pressure on copycat drugs is really making it difficult to be in the generic drug business these days. Just ask Perrigo, which stunned markets today by reducing its second half forecast by 17% as generics pricing gets squeezed. Or ask Sandoz or Mylan, which have also pointed to pricing pressures.
Dublin-based Perrigo ($PRGO) today reported net sales of $1.48 billion, down 3% but beating analyst expectations in many categories, like prescription generic drugs, where it reported sales of $293 million compared to analyst expectations of $289 million.
But Perrigo's new CEO, John Hendrickson, was blunt about the fact that that trend will not continue as price pressures will come seriously into play in the second half of the year. Perrigo dropped its earnings forecast for 2016 to a range of $6.85 to $7.15, down from its previous range of $7 to $8.40, midpoint to midpoint.
“To be clear, our financial results were below our expectations primarily due to competition and price erosion in the Rx business,” Hendrickson said.
The irony in this, RBC Capital Markets analyst Randall Stanicky told investors in a note, is that the category that helped drive Q2 results “is responsible for the majority of the guidance cut.”
As Leerink Research analyst Jason Gerberry sees it, the pressure on Perrigo’s generics business has increased from growing competition in its historically niche subsegment of the generics market as the FDA has reduced a backlog of drug applications. That in turn drives down prices.
It is no surprise to Gerberry that competitors are gunning for Perrigo products, given that it “has enjoyed one of the highest selling price points per generic unit,” he told investors in a note today. “While the revenue result was above our expectation, the adjusted gross margin did step down as we had feared to 57.6% versus management's view that it could hold the 61% 1Q level.”
The sucky pricing picture for generics was noted this earnings season by a number of players. Mylan ($MYL), which failed last year in its attempt to buy Perrigo, reported yesterday that third-party net sales in North America were up 6% to $1.01 billion in Q2. But it said that the increase was principally due to “significant new products launched since July 1, 2015.” That growth in new product sales, however, was offset by lower pricing and volumes on existing products, it said.
Shares of Perrigo, which has struggled since rejecting Mylan’s $205-per-share bid last year, were trading down 10% to $85.03 after today’s forecast reset. There was a report that Perrigo might get a second chance at a buyout, that a U.K. company was giving it a look. So far nothing has materialized and some analysts dismissed the unsourced report as the usual market “noise.”
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