Reckitt Benckiser Says Sales to Rise at High End of Forecast

Reckitt Benckiser Group Plc, the maker of Durex condoms and Nurofen painkillers, said sales will rise at the upper end of its target this year after second-quarter revenue topped analysts’ estimates, driven by growth in cold and flu remedies.

Non-pharmaceutical revenue will advance at the upper end of the 5 percent to 6 percent guidance previously disclosed, the Slough, England-based company said today in a statement. Revenue on that basis, which excludes the effect of currency fluctuations, rose 6 percent in the period, faster than the 5.2 percent anticipated by analysts.

Reckitt Benckiser is looking to emerging markets such as Russia, China and the Middle East to compensate for more difficult conditions in Europe and North America, which make up about half of total revenue. The company is also grappling with declining sales and increased competition at its pharmaceuticals business. Chief Financial Officer Adrian Hennah said on a call that the health unit’s growth pace isn’t expected to continue.

“While it was a decent quarter in many aspects, the conference call threw up more questions than answers,” Eamonn Ferry, an analyst at Exane BNP Paribas, said in an interview. “There seemed to be much management uncertainty on the near-term direction of pharma sales and profits, and indeed on how growth would evolve from here in the core business against a more normalized flu season backdrop.”

The stock fell 1.3 percent to 4,564 pence at 2:02 p.m. in London trading, curbing its gain this year to 18 percent.

Durex Condoms

Sales in the quarter were driven by a 16 percent increase in the health business, which includes Durex condoms and Nurofen painkillers. The company benefited from “a more sustained flu season in the U.S.,” it said in the statement. Over the past year the company has made several deals to expand that business into new product categories including vitamins and further into emerging markets such as China and Latin America.

Sales beating estimates was “largely flu-related,” Graham Jones, an analyst at Panmure Gordon, said in a note.

Mars Trip

Like-for-like revenue rose 3 percent in Europe and North America, which are reported as one unit, helped by sales of Mucinex cold remedies and Lysol disinfectants, the company said. That result bested peers like Unilever, the maker of Axe body spray, which said July 25 that so-called underlying sales in developed markets fell 1.3 percent in its second quarter. Colgate-Palmolive Co., the maker of toothpaste, said organic sales in the unit that includes Europe fell 2 percent in the same period.

Reckitt Benckiser Chief Executive Officer Rakesh Kapoor said conditions in Europe “remain challenging” yet have stabilized, and are better in Northern Europe than in southern regions.

“If you went to Mars for 10 years and just came back to Earth you would say nothing has changed in Germany and Scandinavia, but it’s much different in Southern Europe,” he told reporters on a conference call today.

Pharmaceutical sales fell 12 percent in the second quarter at constant rates of exchange, hurt by the company’s decision to stop making tablet versions of its Suboxone opioid-dependency drug, which now faces generic competition that has grabbed 13 percent share of the buprenorphine market in the U.S. Suboxone film’s market share remained unchanged at 69 percent. Reckitt Benckiser shares tumbled earlier this month when CVS Caremark Corp. said it would remove the film version of Suboxone from its list of medications covered by insurance beginning next year.

‘No Guarantees’

Hennah said in a teleconference with reporters that there were “no guarantees” that other prescription-management companies such as UnitedHealth Group Inc. would not follow suit. The adjusted operating profit margin for Suboxone narrowed to 57 percent in the first half, from 63.6 percent in the same period a year ago, as Suboxone film generates more narrow margins than the tablets.

“Pharma like-for-like revenue declined more than expected and margins dropped substantially, adding to the lack of visibility on the division’s long-term prospects,” Dirk Van Vlaanderen, an analyst at Jefferies International, said in a note to clients.

Competitive Pressure

The company said Woodcliff Lake, New Jersey-based drugmaker Par Pharmaceutical Cos Inc has filed an abbreviated new drug application with the U.S. Food & Drug Administration for a generic Suboxone film. Liberum Capital analyst Pablo Zuanic called the news “concerning.” Reckitt Benckiser said it’s challenging the product with a patent infringement lawsuit. Hennah declined to comment on whether the company was considering a sale of the business, a move advocated by Zuanic.

“There is clearly uncertainty about its precise value with the recent entry of generic tablets so we’re in a period of uncertainty,” Hennah said.

The Suboxone business “will be under increased competitive pressure in 2014,” Seth Peterson, an analyst at Berenberg Bank, said in a note to clients last week. “When and by how much sales of Reckitt’s pharma business will decline is subject to significant conjecture.”

Adjusted net income rose 6 percent to 864 million pounds ($1.3 billion) in the first half. The average estimate of eight analysts compiled by Bloomberg was 867 million pounds. The adjusted operating margin, excluding the pharmaceutical business, was unchanged at 20.4 percent.

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