Perrigo shows up downtrodden peers with surprise Q2 generics beat

Perrigo building
Perrigo's generics unit posted $240 million in second-quarter revenue, passing consensus estimates of $224 million.

Perrigo Thursday delivered something that’s gotten pretty scarce as of late: a generics beat.

The company’s branded generics unit delivered $240 million in second-quarter revenue, passing the Street’s $224 million expectations on the back of increased sales of higher-margin products, timing of R&D investments and more, Goldman Sachs analyst Jami Rubin wrote in a note to clients. The unit’s gross margin was well above estimates, too, helping push its adjusted operating margin to the 46.5% mark.

The performance immediately raised eyebrows from Rubin and other analysts, who cited a wealth of negative data points—dismal showings from Perrigo’s generics peers, as well as signs portending a “step up in generic drug price deflation”—as reason to question how sustainable Perrigo’s generics strength would be. (RBC Capital Markets’ Randall Stanicky, for one, called the showing “somewhat vexing.”)

Company CEO John Hendrickson, though, pointed to “earlier than an anticipated launches,” particularly within the copycat business, as reason to take new product guidance up by $25 million. And the company bumped up its generics revenue guidance by the same amount, pushing it to $950 million.

RELATED: Perrigo drops forecast 17% as pricing pressure gutkicks growth

So what’s Perrigo doing right that others, who fell on the generics sword in recent weeks, are doing wrong? For starters, making better predictions, Hendrickson told investors on the second-quarter conference call. Going back over the last six or so quarters, the company has honed its process, taking “deep dives into what we know, what we think we know and then what we don’t know” from a pricing standpoint, he said.

And thanks to that experience, “we feel like the last four quarters or so, we’ve been able to be in the ballpark of predicting what we thought we would see, and our models have proved out.” Of course, there’s always some variability to plug in, he noted, but overall, “our portfolio seems to be playing out and giving us some decent visibility.”

Perrigo also sees itself as benefiting from a diversified portfolio, acting CFO Ron Winowiecki added. Not one knockoff boasts any more than 5% of the sales distribution within the unit, and some of Perrigo’s products are difficult and expensive to compete with—particularly its topicals.

“Listen, obviously we’re subject to the same competitive environment as anybody else, but that diversification is something we think we benefit from,” he said, adding that it’s also “why we can hold those margins within a tight, tight zone.”

That’s not to say the company isn’t feeling the same price-erosion burn its peers are feeling. The $240 million in revenue it posted marked a 13% decrease from the year-ago quarter, and the company is predicting 9% to 11% price erosion on its base business going forward. “We are not forecasting that it’s going to get any easier at this point,” Hendrickson noted.

Still, though, the company feels well-equipped to weather the storm, and it has diversification in its broader business to thank as well. Perrigo also boasts an OTC unit, and while that segment isn’t immune to pricing pressure, either, it’s not seeing the same havoc as the U.S. generics market.

The company’s sentiments echo those of generics giant Mylan, which reported its own second-quarter earnings Wednesday and similarly cited diversification as a saving grace. In particular, the company called out its own OTC business—recently bolstered through a buyout of Sweden’s Meda, which Mylan pursued after a failed hostile play for Perrigo—as a positive.

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