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Perrigo: contract manufacturing down as OTC client restarts in-house

By Dan Stanton , 10-Feb-2014
Last updated on 10-Feb-2014 at 15:36 GMT2014-02-10T15:36:42Z

Johnson & Johnson's return to OTCs suggested by analysts as reason behind drop in Perrigo's sales

Johnson & Johnson's return to OTCs suggested by analysts as reason behind drop in Perrigo's sales

Perrigo Company has reported a 40% drop in contract manufacturing revenue year-on-year due to a key client, assumed by analysts to be J&J, returning to OTC in-house production.

For the second quarter 2014, the company reported net sales from its consumer healthcare business of $536m (€393m), down just 1% on the same period last year. Whilst revenue increased by $41m due to sales of smoking cessation and gastrointestinal OTCs as well as new product lines, this was offset by a $46m drop in existing sales, primarily in the contract manufacturing and analgesics categories.

“The biggest contributor of this decrease was a certain contract customer to whom we supplied significant product in the past year,” said CFO Judy Brown during a conference call to discuss results last week.

According to Brown, the client “resumed production at one of [its] own facilities” and thus reduced the need to outsource from Perrigo. “While we continue to supply a sizable amount of product to this customer, the volume of sales compared to last year is down significantly. Such is the nature of the contract manufacturing business.”

J&J’s returning OTCs

The client and product returning to in-house production were not named by Perrigo, but in a Q&A analysts David Buck from The Buckingham Research Group and Marc Harold Goodman from UBS Investment Bank both speculated that it was Johnson & Johnson, which Brown and CEO Joseph Papa did not deny.

“The expectation of the return to one of the large branded companies was something we fully expected, and that's really not something that has been a surprise,” Papa said. “I think I would say the return to that product category has gone well for the brand.”

J&J received a warning letter from the US Food and Drug Administration (FDA) in 2010 at its McNeil Consumer Healthcare Facility in Fort Washington, Pennsylvania, following a number of GMP violations. The facility – which manufactures Tylenol - temporarily closed and received a consent decree the following year.

However, speaking last month to discuss its own financial situation, J&J CEO Alex Gorsky said the firm had achieved certain success at both remediation and relaunch from the McNeil site, amongst a number of other troubled facilities.

“In OTC, our priority for the past several years has been to deliver a reliable supply of products to the marketplace,” he told stakeholders (transcript here), “and last year, very importantly, we met our objective of returning approximately 75% of our planned portfolio to the store shelves.” contacted Perrigo for further information but was told the firm does not comment on its contract business.

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