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May 12, 2021, 5:02 p.m. EDT

10-Q: PERRIGO CO PLC

(EDGAR Online via COMTEX) -- 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, 2020 (the "2020 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 2020 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.

Our vision is to make 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.

In August 2018, we announced a plan to separate our RX business. On March 1, 2021, we announced a definitive agreement to sell our RX business to Altaris for total consideration of $1.55 billion, including $1.5 billion in cash and the assumption of more than $50.0 million in potential R&D milestone payments and contingent purchase obligations with third-party Rx partners. On March 8, 2021, we purchased an ANDA for a generic topical lotion for $53.3 million, which was the largest contingent purchase obligation to be assumed by Altaris and increased the cash consideration we will receive upon completion of the sale of the RX business to $1.55 billion. The transaction is subject to antitrust and other customary closing conditions and is expected to close in the third quarter of 2021.

The sale of the RX business will establish Perrigo as a pure-play consumer self-care company, which is an important step in our transformation plan and consistent with our vision. The financial results of the RX business, which were previously reported as part of our RX segment, have been classified as discontinued operations in the Condensed Consolidated Statements of Operations, and its assets and liabilities have been classified as held for sale for all periods presented. Unless otherwise noted, amounts and disclosures throughout this Management's Discussion and Analysis relate to our continuing operations. Refer to Item 1. Note 8 for additional information regarding discontinued operations.

Our Segments

Our reporting and operating segments are as follows:

Consumer Self-Care Americas ("CSCA") comprises our consumer self-care business

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 17 . For results by segment, see "Segment Results" below.

Highlights

Impact of COVID-19 Pandemic

We have been impacted by the 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 in all our global locations. 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, while many jurisdictions are relaxing COVID-19 related restrictions, some jurisdictions have experienced new surges in COVID-19 cases or new strains of the virus and may implement new or renewed restrictions. In addition, as conditions worldwide continue to evolve, uncertainty remains about the timing of widespread availability and acceptance of vaccines and the efficacy of current vaccines against evolving strains of the virus. As such, if 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 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.

During the three months ended April 3, 2021, our segments continued to experience a decline in net sales for cough and cold products in our upper respiratory and pain and sleeps aids categories, due to the very low incidence of cough and cold related illness this year. We believe the low incidence of cough and cold related illness is due to the social distancing measures and mask mandates still in place to combat spreading of the COVID-19 virus. We currently expect this impact to continue through the first half of 2021.

Also, during the three months ended April 3, 2021, we incurred additional operating costs related to COVID-19, due primarily to increased material costs and increased costs driven by pandemic-related global supply chain disruptions. These costs are in addition to the costs related to the ongoing precautions implemented in 2020 to keep our employees safe as well as known increased material costs carried over from 2020. We expect these costs will continue throughout calendar year 2021. Given our financial strength, we expect to continue to maintain sufficient liquidity as we continue to manage through the pandemic.

Moving forward, it is uncertain if the consumer and customer behavior surrounding COVID-19 that has impacted net sales will continue or change and if our incremental operating costs will continue or change. Any change will likely depend on the duration and severity of the COVID-19 pandemic, including if new strains of the virus become more prevalent, contagious or harmful, and each individual country's response to the pandemic. In addition, the dynamics we are experiencing now may continue or change as COVID-19 vaccines continue to be distributed. The impact of the current vaccination efforts on the evolution of the pandemic globally continues to remain uncertain at this time.







                                                            Perrigo Company plc - Item 2
                                                                            Consolidated
        RESULTS OF OPERATIONS
        CONSOLIDATED
        Consolidated Financial Results
        Three Month Comparison
                                                              Three Months Ended
                                                           April 3,       March 28,
                     (in millions, except percentages)       2021            2020
                     Net sales                           $ 1,010.0       $ 1,083.3
                     Gross profit                        $   368.4       $   393.7
                     Gross profit %                           36.5  %         36.3  %
                     Operating income                    $    51.4       $    86.4
                     Operating income %                        5.1  %          8.0  %
        [[Image Removed: prgo-20210403_g1.jpg]]
        [[Image Removed: prgo-20210403_g2.jpg]]
        


Three Months Ended April 3, 2021 vs. Three Months Ended March 28, 2020

Net sales decreased $73.3 million, or 7%, due to:

$10.9 million net increase due primarily to:

$14.3 million decrease due to our divested Rosemont pharmaceuticals business previously included in our CSCI segment.

Operating income decreased $35.0 million, or 41%, due primarily to:

$25.3 million decrease in gross profit due primarily to the decrease in net sales as described above. Gross profit as a percentage of net sales increased 20 basis points due primarily to favorable product mix; and

Recent Developments

Irish Revenue Notice of Amended Assessment

As described in more detail in Item 1. Note 14 , on November 29, 2018, Irish Revenue issued a Notice of Amended Assessment ("NoA") for the tax year ended December 31, 2013, in the amount of ?1,643 million, and claiming tax payable in the amount of ?1,636 million, not including any interest or applicable penalties. The NoA relates to the tax treatment of the 2013 sale of the Tysabri(R) intellectual property and related assets to Biogen Idec by Elan Pharma. We strongly believe that Elan Pharma's tax position is correct and would ultimately be confirmed through judicial process. However, in light of the risks and delays inherent in any litigation, representatives of Perrigo met with representatives of Irish Revenue on March 18, 2021 and April 14, 2021, to explore whether there may be a path forward toward resolving the dispute. On April 26, 2021, Perrigo, through its tax adviser, made a without prejudice written offer of settlement to Irish Revenue detailing a possible framework for such a resolution, which applied an alternative basis of taxation than the respective positions taken by Irish Revenue in the NoA and by Elan Pharma in its tax returns. On May 11, 2021, a representative of Irish Revenue verbally indicated to Perrigo's tax adviser that the written settlement offer would not be accepted as presented and that a formal response would be transmitted in due course. Perrigo will review Irish Revenue's formal response to Perrigo's offer when received and expects further discussions and correspondence with Irish Revenue prior to the TAC hearing in November. There can be no assurances that any settlement is possible on terms acceptable to Perrigo. Unless and until a final settlement is reached, Elan Pharma will vigorously pursue its tax appeal before the TAC, concurrently with any settlement discussions that may occur. No payment of any additional tax will be required unless and until required by a settlement or other final determination.

Internal Revenue Service Audits of Perrigo Company, a U.S. Subsidiary

As described in more detail in Item 1. Note 14 , Perrigo Company, our U.S. subsidiary ("Perrigo U.S."), is engaged in a series of tax disputes in the U.S. relating primarily to transfer pricing adjustments including income in connection with the purchase, distribution, and sale of store-brand OTC pharmaceutical products in the United States, including the heartburn medication omeprazole.

On May 7, 2020, we received final Notices of Proposed Adjustment ("NOPA") from the IRS regarding the deductibility of interest related to the IRS audit of Perrigo U.S. for the years ended June 28, 2014 and June 27, 2015. The NOPA capped 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. On May 3, 2021, the IRS notified us that it will no longer pursue the 130% of AFR position as indicated in the NOPA due to a change in IRS policy. The new proposed adjustment, if any, will be provided by the IRS in its rebuttal to our Protest which we filed on February 26, 2021.

Internal Revenue Service Audit of Athena Neurosciences, Inc., a U.S. Subsidiary

On April 26, 2019, we received a revised 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. Our request for Competent Authority Assistance with the IRS, which we made on April 14, 2020, was accepted. An opening conference with the IRS was held on May 6, 2021, and an opening conference with Irish Revenue is Perrigo Company plc - Item 2 Consolidated

scheduled for July 23, 2021 (refer to Item 1. Note 14).

Israeli Notice of Assessment

On December 29, 2020, we received a Stage A assessment from the Israeli Tax Authority for the tax years ended December 31, 2015 through December 31, 2017 in the amount of $63.8 million relating to attribution of intangible income to Israel, income qualifying for a lower preferential rate of tax, exemption from capital gains tax, and deduction of certain settlement payments. We timely filed our protest on March 11, 2021 to move the matter to Stage B of the assessment process. We strongly disagree with the assessment and will pursue all available administrative and judicial remedies necessary (refer to Item 1. Note 14).

CONSUMER SELF-CARE AMERICAS

Recent Trends and Developments

During the first quarter of 2021, net sales of cough and cold products decreased as a result of the very low incidence of cough and cold related illness this year. We believe the very low incidence of cough and cold related illness is attributed to social distancing and mask mandates put in place to combat the spread of COVID-19. With social distancing and mask mandates continuing, we currently anticipate that we will continue to experience lower demand for cough, cold and certain pain products through the first half of 2021. However, increased foot traffic at our retail customers suggests normalizing consumer purchasing routines could be expected in the second half of 2021.







        Segment Financial Results
        Three Month Comparison
                                                              Three Months Ended
                                                            April 3,       March 28,
                      (in millions, except percentages)       2021           2020
                      Net sales                           $   640.5       $  700.6
                      Gross profit                        $   194.5       $  213.8
                      Gross profit %                           30.4  %        30.5  %
                      Operating income                    $    95.6       $  122.1
                      Operating income %                       14.9  %        17.4  %
        


Three Months Ended April 3, 2021 vs. Three Months Ended March 28, 2020

Net sales decreased $60.1 million, or 9%, due primarily to:

$59.0 million, or 8%, net decrease due primarily to a decrease of $50.0 million resulting from the pandemic-related pantry load benefit in the prior year quarter. A further decrease of $35.0 million in sales of products in our upper respiratory and pain and sleep aids categories resulted from the very low incidence of cough and cold related illness this year. These declines were partially offset by an increase in sales of $23.8 million from our acquisition of Dr. Fresh in April of 2020.

In OTC, the net sales decrease of $71.9 million was due primarily to a decrease of $50.0 million resulting from the pandemic-related pantry load benefit in the prior year quarter. There was an additional $35.0 million decrease in sales of products in our upper respiratory and pain and sleep aids categories resulting from the very low incidence of cough and cold related illness this year. These decreases were partially offset by the following: strong e-commerce growth as consumers continued to shift purchases to online where we have greater market share than in-store, growth in the branded OTC product portfolio led by Prevacid(R) and ScarAway(R), growth in the digestive health category due primarily to favorable consumer conversion to our OTC products and the incremental new product sales from Esomeprazole Mini, and higher demand in the minoxidil franchise driving growth in our skincare and personal hygiene category. Perrigo Company plc - Item 2 CSCA

Nutrition net sales decreased $8.9 million due primarily to the pandemic-related pantry load benefit in the prior year quarter and an increase in governmental benefits that led to a decline in store brand market share. These declines were partially offset by growth in e-commerce and contract manufacturing sales.

Operating income decreased $26.5 million, or 22%, due primarily to:

$19.3 million decrease in gross profit due primarily to the decrease in net sales as described above, higher input costs on certain products, and unfavorable plant overhead absorption due primarily to lower production volumes compared to the prior year pandemic-related pantry load benefit. Gross profit as a percentage of net sales decreased 10 basis points due primarily to the unfavorable plant overhead absorption described above and normal pricing pressure, partially offset by favorable product mix; and

CONSUMER SELF-CARE INTERNATIONAL

Recent Trends and Developments

During the first quarter of 2021, net sales of cough and cold products decreased as a result of the very low incidence of cough and cold related illness this year. We believe the very low incidence of cough and cold related illness is attributed to social distancing and mask mandates put in place to combat the spread of COVID-19. With social distancing and mask mandates continuing, we currently anticipate that we will continue to experience lower demand for cough and cold products through the first half of 2021.







        Segment Financial Results
        Three Month Comparison
                                                              Three Months Ended
                                                            April 3,       March 28,
                      (in millions, except percentages)       2021           2020
                      Net sales                           $   369.5       $  382.7
                      Gross profit                        $   173.9       $  179.9
                      Gross profit %                           47.1  %        47.0  %
                      Operating income                    $    17.4       $   25.0
                      Operating income %                        4.7  %         6.5  %
        


Three Months Ended April 3, 2021 vs. Three Months Ended March 28, 2020

Net sales decreased $13.2 million, or 3%, due to:

$11.9 million increase due primarily to:







        Perrigo Company plc - Item 2
        CSCI
        


$26.2 million increase from favorable foreign currency translation primarily related to the Euro; partially offset by

Operating income decreased $7.6 million, or 30%, due to:

$6.0 million decrease in gross profit due primarily to the decrease in net sales as described above, partially offset by greater operating efficiencies. Gross profit as a percentage of net sales increased 10 basis points due primarily to greater operating efficiencies, partially offset by unfavorable product mix; and

$1.6 million increase in operating expenses due primarily to unfavorable Euro foreign currency translation, and an increase in employee-related costs, partially offset by a decrease in advertising and promotion 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
                                        April 3,          March 28,
                                          2021               2020
                                   $     61.6            $     60.7
        


The increase of $0.9 million in unallocated expenses during the three months ended April 3, 2021 compared to the prior year period was due primarily to an increase in employee-related expenses, partially offset by a decrease in expenses due to our current Project Momentum cost savings initiative and higher indirect costs in the prior year period relating to the RX business.

Change in Financial Assets, Interest expense, net, and Other (income) expense







                                                           Three Months Ended
                                                        April 3,          March 28,
                     (in millions)                        2021               2020
                     Change in financial assets    $        -            $     (1.6)
                     Interest expense, net         $     32.0            $     28.9
                     Other (income) expense, net   $      2.4            $      1.7
        


Change in Financial Assets

During the year ended December 31, 2020, Royalty Pharma payments from Biogen for Tysabri(R) sales, as defined in the agreement between the parties, did not exceed the 2020 global net sales threshold. Therefore, we were not entitled to receive the remaining contingent milestone payment. As of December 31, 2020, there are no contingent milestone payments outstanding.

During the three months ended March 28, 2020, the fair value of the Royalty Pharma contingent milestone payment related to 2020 increased by $1.6 million to $96.9 million, driven by higher volatility, higher projected global net sales of Tysabri(R) compared to the estimates in the prior period, and the estimated probability of achieving the earn-out (refer to Item 1. Note 6).

Interest Expense, Net

The $3.1 million increase for the three months ended April 3, 2021, compared . . .

May 12, 2021

COMTEX_386454293/2041/2021-05-12T17:02:04

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