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Perrigo's strength in generics surprises investors, shares soar

(Reuters) - Perrigo Co Plc's PRGO.N shares surged as much as 20.4 percent on Thursday after the drugmaker surprised Wall Street with strong quarterly generic drug sales due to new product launches and raised its full-year adjusted profit forecast.

FILE PHOTO: Birds are seen on the logo of generic drugmaker Perrigo Co outside their new factory in the city of Yeruham, in southern Israel March 2, 2016. REUTERS/Amir Cohen/File Photo

Perrigo's smaller-than-expected decline in its generic drug business, which contributed 13 percent to second-quarter net sales, comes at a time when larger rivals Teva TEVA.TA and Mylan MYL.O have been hit by persistent generic price erosion.

The business of selling generic drugs in the United States has suffered as the Food and Drug Administration expedites the pace of new approvals to spur competition and buyers demand big discounts.

Perrigo said on Thursday it had launched five new generic products in 2017, helping it outpace losses from lower prices. Gross margins of 58.8 percent in the unit beat analyst estimates.

“This was somewhat vexing. The strength was broad based and not expected,” RBC Capital Market’s Randall Stanicky said.

CEO John Hendrickson said on a conference call the company’s pipeline of generic products would drive growth in the segment in 2018.

Perrigo, however, continues to expect generic price erosion in the range of 9 percent to 11 percent this year. For 2018, Hendrickson said “I don’t see a softening. I don’t see it tailing away.”

The company’s second-quarter adjusted profit handsomely beat estimates, helped by strength across its businesses and higher-than-expected margins.

Perrigo, which also sells consumer healthcare products, said it expected to sustain its high margins by keeping up the pace of new approvals, divesting unprofitable products and cutting costs.

On Thursday, the company said it reached an agreement to divest its Israel Active Pharmaceutical Ingredient business for $110 million in cash.

The drugmaker also lifted its full-year adjusted earnings forecast range to between $4.45 and $4.70 per share from a previous range of $4.15 to $4.50 per share.

Perrigo’s strong performance follows a period of struggle during which the company reduced its earnings forecasts more than once under CEO Hendrickson, prompting activist hedge fund Starboard Value LP to pressure the company to sell some assets.

Hendrickson, who announced in June his plans to retire, took over the helm in April last year, a few months after Perrigo convinced investors to reject an unsolicited takeover bid from Mylan.

Shares of Perrigo were up 18.6 percent at $78.71. Teva's TEVA.N shares were up 1.8 percent and Mylan's nearly 1 percent in trading on Thursday.

Reporting by Manas Mishra, Akankshita Mukhopadhyay and Anuron Kumar Mitra in Bangalore; Editing by Anil D’Silva and Arun Koyyur