Perrigo Company PLC (PRGO) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Jerrod, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo First Quarter 2007 Earnings Conference Call. (Operator Instructions.) It is now my pleasure to turn the floor over to your host, Art Shannon. Sir, you may begin your conference.

Thank you, Jerrod. Welcome to Perrigo's First Quarter 2007 Earnings Conference Call. I hope you all had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website at www.perrigo.com.

Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor language created thereby. Please see the cautionary notes regarding the forward-looking statements section on page one of the Company's Form 10-K for the year-ended July 1, 2006.

I would like to now turn the call over to Perrigo's President and CEO, Joe Papa.

Thank you, Art. Good morning to everyone in the U.S., and if you're listening from Israel, good evening. And welcome to Perrigo's 2007 First Quarter Earnings Conference Call. Joining me today are Judy Brown, Executive Vice President and Chief Financial Officer, John Hendrickson, Executive Vice President and General Manager of our Consumer Healthcare business, and Moshe Arkin, our Vice Chairman and General Manager of Perrigo Global Generics and API.

Our plan for today's call is a straightforward agenda with three items. First, I will provide a broad overview of the quarter one FY07 performance; next, Judy will walk through quarter one '07 financials in detail; and then, our third item will be discussion of our new products and approvals. And, of course, we'll open it up for questions at the end.

It was a good start in the first quarter, as sales were up in all segments of our business reaching $341 million, up 7% versus year ago. New product launches accounted for more than $11 million in the quarter, and that is following record new product sales from the previous year. Since the beginning of last year, we have introduced into the market more than 50 new products in reformulation. New products will continue to be a primary focus for us. We are funding R&D to keep on this pace, and we expect new products and reformulations to add over $100 million of revenue in FY07.

Consolidated operating income was up in the quarter because of higher sales volume. Consumer Healthcare's margins benefited from the introduction of these new products, partially offset by an unfavorable product mix and inventory costs. Rx and API performed well, in a challenging pricing environment. Rx pharmaceuticals were up 8% and API sales grew 11%.

As we told you at the end of last year, this is going to be a challenging year for the segment, but we are pleased that these businesses are performing as expected. Overall, net income for the quarter was $18 million or $0.19 per share compared with $13 million, or $0.14 per share, last year.

To summarize, we are pleased with the first quarter results. And while we wish everyone good health, we are actively preparing for what we hope to be a busy cough and cold and flu season, as you can see by the build in inventory in anticipation of the cough and cold and flu season.

Also, I am delighted to inform you that consistent with our plans, we have begun shipping this week our exclusive store brand of coated nicotine mint gum. I'll discuss this information in more detail later in the call.

Now, I'll turn the call over to Judy for a more detailed financial review of the quarter.

Thanks, Joe. As Joe already noted, it was a solid quarter for Perrigo. Consolidated first quarter sales of $341 million increased $21 million, or 7%, from a year ago, with sales up in all segments. Consolidated gross profit of $96 million was an increase of $9 million from last year. And the gross margin percentage was 28.1% of net sales, up from 27.2% last year. Consolidated net income was $18 million this year, compared to $13 million in fiscal 2006.

This is the first quarter in some time where we haven't had non-GAAP adjustments to discuss. There was, however, one significant item in the first quarter of last year that I would like to note now, and then leave behind us for the rest of the financial analysis. The write-off of the step-up in the value of inventory acquired in the purchase of Agis of $5 million before tax reduced growth and operating margins in Consumer Healthcare by $300,000, in API by $2 million, and in the Other category by $3 million. After tax, this charge was $4 million, or $0.04 EPS, in the first quarter of 2006.

Earnings per share were $0.19 this year, versus $0.14 last year. Excluding the impact of the adjustment I just discussed, the EPS last year would have been $0.18. Now, for the rest of this analysis, I will exclude the impact of this adjustment on last year's results and focus on the core year-over-year operating results.

With that, I'd like to move you through a more detailed review of our business segment. Understanding the progress in each part of our portfolio will then give you a better picture, we feel, of the consolidated results. First, I'd like to start with a brief update of this quarter's market activity in the Consumer Healthcare business.

At Perrigo, we utilize IRI point-of-sale data for key product categories. This represents consumer sales, while our sales are to retailers. Also, the data we review excludes Wal-Mart, Dollar, and Club Store sales. For the 13 weeks ended October 1, the overall cough and cold market was up 7%. The growth in the category is reflective of the changing environment since the withdrawal of pseudoephedrine from over-the-counter products. The brands have taken a strong position in the cough and cold category this quarter with increased promotional support, especially for unique branded items, like Mucinex.

The overall market for analgesic products was up 7% this quarter. Perrigo had no significant new product introductions in this category this quarter, but still grew in the market. The gastrointestinal market for antacid and laxative products was up 8%, with retailers experiencing growth due to heavy promotion of branded Prilosec OTC and Pepcid products. The vitamin market, overall, was down 1%, but we continue to outperform the market with good sales gains and new products at existing accounts.

So, moving on to our financial performance. Sales growth in the Consumer Healthcare segment was all organic this year. Sales increased $15 million, or 7%, to $242 million, driven by $7 million in new product launches in the quarter, which included our introduction of Famotidine 20 milligram at the end of September.

Our international operations in the U.K. and Mexico also performed very well in the quarter, posting a sales increase of $5 million, or 19%. Sales of pseudoephedrine-containing products declined $19 million from last year. We're very pleased, however, by the fact that this decline was offset by the launch of over 20 reformulated products, resulting in $13 million of new cough and cold sales.

On an operating basis, consumer healthcare gross profit was up $4 million on increased sales volumes, an 8% increase over last year. Our gross margin was up just slightly - 23.6% versus last year's 23.3%. New products led by the smoking cessation category improved gross margin by approximately 100 basis points this quarter. This was partially mitigated by an unfavorable product mix and higher inventory costs on existing products.

Although sales increased, operating expenses in dollar terms remained relatively constant. Some variable promotional and selling expenses are expected to increase as we move into the peak seasonal business next quarter. All in all, the Consumer Healthcare segment had a solid first quarter with $18 million of operating income, up $4 million, or 33% over last year.

In the Rx pharmaceutical segment, net sales increased 8% to $31 million, from $29 million, and include $5 million of non-product revenue. New products, defined as those which have entered the market in the last 12 months, comprised $4 million of revenue this quarter. Operating expenses were relatively flat on a dollar basis. Operating income grew to $6 million, up from $4 million last year.

Next, let's review API. Sales in API increased 11% to $30 million, from $27 million last year, on sales of existing products. Gross profit declined from $14 million, or 51.3% of sales last year, to $12 million, or 39.9% of sales in the current quarter. This decrease in gross margin was due to both product and customer mix changes from first quarter last year, and fixed costs spread over lower production levels.

In dollar terms, R&D costs were up 50% as we continued to invest in the future of this business. On an operating basis, operating profit in API was $5 million, down from $8 million last year. Overall, the API segment performed as we had expected in their marketplace.

In the Other category, which represents our Israeli-based consumer products and pharma distribution businesses, sales were relatively flat at $37 million. Operating income grew 45% to $3 million, from $2 million last year, driven by operating cost control.

Unallocated corporate expenses for the quarter were $4 million, up from $2 million last year, primarily due to changes in wages and benefits. For the rest of the year, we would expect to maintain a quarterly run rate of approximately $4 million.

The effective tax rate for the quarter was 21%, down from 28% last year. The seasonality of our business will move the tax rate higher during cough/cold season, as more of our relative operating income will be generated in the U.S., and lower in other months, such as this quarter, when more of our income is generated internationally. We believe that overall, the tax rate for the year will be between 30 and 32%.

Now, some comments on the balance sheet. Working capital, excluding cash and investments, was $297 million at quarter-end, versus $238 million last year, an increase of $59 million. This increase was due to higher seasonal accounts receivable and the build of new products and reformulation inventory. However, we believe that we will return to more normalized working capital balances over the course of the year.

Accounts receivable were $231 million, compared with $212 million a year ago. This increase reflects higher sales in this year's first quarter versus last. Inventories were $327 million, an increase of $57 million from a year ago. In our businesses, CHC in particular, inventory levels tend to be higher in the first quarter, as the operations focus on preparing to better meet customers' delivery requirements during peak demand of cough/cold/flu season. Also, the new product development process has added to our inventory pipeline, as we prepare for upcoming launches and customer sell-in on products such as Famotidine and coated nicotine gum.

Accounts payable were $173 million, compared with $142 million a year ago. This $31 million increase partially mitigates the cash used for the year-over-year inventory build I just mentioned. Cash used for operations for the year was 6 million--for the quarter, was $6 million, compared with cash provided by operations of $18 million in the first quarter of last year.

Capital expenditures during the quarter were $8 million. We anticipate spending between $40 and $50 million for the year.

Throughout the first quarter, we repurchased 710,000 shares for $11 million for our 10b5-1 Stock Repurchase Plan.

In summary, it was another good quarter for Perrigo. We are in a position to take advantage of market growth in [key] product categories with our new products and reformulations. Now, let me turn it back to Joe.

Thanks, Judy. As you heard from Judy, our broad healthcare solutions portfolio is working in a challenging marketplace. Perrigo offers the market an affordable solution for store brand and prescription care products by focusing on quality with a low cost position, which we supplement with our vertically integrated API business. Looking towards the future, we will continue to invest today in the innovative niche product opportunities in both Rx and API that will help us drive our future profitability.

Now, let's go through our new product approvals at this time. On the OTC side, in September, we received final approval for the Famotidine 20-milligram tablet, which is the store brand equivalent of a Maximum Strength Pepcid AC, a $60 million branded product. We are in the first wave with this important store brand in the GI category. We started shipping in September, and have been pleased with the marketing of the product so far.

On the Rx side, we have three tentative approvals in the quarter. First, we received final approval for Terbinafine tablets, subject to the patent expiration and exclusivity to June 2007. This is the generic for Novartis Lamisil tablets, a $780 million brand. We should see earnings from this product impacting our bottom line in fiscal year 2008.

Second, we were granted tentative approval for Clobetasol Foam, the equivalent to Olux, a $78 million brand. A patent infringement suit was filed against us in the middle of October 2005, beginning the 30-month stay, which should end in April of 2008. We expect this generic product to contribute to the earnings in fiscal year 2008.

And third, we received tentative approval for Ciclopirox Topical Solution, a $125 million brand known as Penlac Nail Lacquer. The patent expiration for Penlac Nail Lacquer will be in September 2007.

As I mentioned earlier in the call, after the quarter ended, we began shipping coated nicotine mint gum. This is the store brand equivalent to Nicorette Fresh Mint Coated Gum, which has estimated sales--retail sales of more than $100 million. This exclusive new product is the latest growth driver in our Smoking Cessation category, and we are very excited about the prospects for this product.

In the area of reformulation products, I believe we are managing the transition to phenylephrine very well, with 24 products already in the market. It's still early in the season, but we are on target to meet our expectations for the combined pseudoephedrine/phenylephrine targets we gave you at the end of last year. We are well prepared for the cough, cold, and flu season with a build of inventory for promotion and customer volume. We are pleased with the results for Rx and API segments in a difficult year, and with the new product development work we have online.

Lastly, I wanted to give you some of my thoughts as I completed my first three weeks at Perrigo. The three weeks have passed very quickly. I've been out to meet the Perrigo employees at our manufacturing and R&D sites, and also visiting some of our key customers. Overall, I believe we have some great advantages in the markets in which we play.

First, our ability to market products to our customers utilizes mass customization that's unique in the industry. We manage over 12,000 SKUs for our [core] retail customers. We have critical mass in each of segments to be competitive in our market environment. We manufactured and packaged 25 billion tablets, capsules, and topical units last year. That works out to 80 tablets and capsules per person in America, just an extraordinary number.

In addition, our position in [finished] dose reform is supplemented with one of the largest API businesses in the world and we have a niche topical generic business that continues to search for opportunities to launch exclusive or semi-exclusive generic products. Perrigo's strategy is to remain focused to providing affordable healthcare solutions with our low cost position.

I'm looking forward to meeting many of you and others, investors and shareholders, over the next couple of months to share with you the exciting opportunities that I see at Perrigo.

Now, Operator, let's open up the lines for questions. Operator?

Thank you. (Operator Instructions.) The first question comes from Derek Leckow from Barrington Research. Please go ahead.

Thank you. Good morning.

Good morning.

Good morning, Derek.

Hi. Just a question on the PSE volume. I think you guys had said earlier that you expected that to stabilize in the range of 30 to 35 million. Is that still the case?

Yes. This is John Hendrickson, Derek. That's still the--our best approximation of where the behind-the-counter business will net out for us.

Okay, thanks. And then, as you head into your peak season right now, how do you feel about your retailers' inventory levels in your products, both the new products that you're shipping out to replace the older products, and as well, the brand new product I guess, the smoking cessation? Could you make a comment about that as well?

Yes. First, on the normal cough/cold seasonal, I think they're in a good position, not overly saturated with inventory, but a good position going into the season. We've got to have the season kind of hit in full board and really take advantage of that, but I think they're in good shape on the cough/cold side to deal with it, as are we, as Judy said earlier. We're ready with our inventory to handle surges.

I think on the nicotine side, the inventory is there at a good level for the products we've been shipping for a while. For the coated gum, which we just began shipping, we're just in their inventory build phase and will be in that phase over the next six weeks or so with our customers getting them up to their full inventory position.

Well, with that launch going on at the same time that you're expecting your peak volume for some of the older product shipments, are you expecting any kind of manufacturing bottlenecks at all?

No, those shouldn't affect us. They run in separate operating areas.

Okay, great.

Something I'd add to what John said. We--our expectations are by the first quarter of the calendar year '07 we should be in a leadership position in our nicotine business--nicotine replacement category business, which we think is very exciting.

That's great. Yes. And as you look at your inventory then, as I--if I look at the amount you have on your balance sheet, that is just the inventory. The difference there is the new inventory that you're shipping out. So, that's really some high quality inventory.

It's a combination of slightly higher than average at this first quarter of the year in I'll call it existing products inventories. And then, a sizable portion of that build is the new products that we commented on earlier.

Okay, great. Let me move on to the API segment. Any additional information you can share with us there about new products?

Well--it's Moshe Arkin. And with several important projects that they expect--that we would expect to enter the market in 2008 and '09, 2007 is an exceptional year in which we don't expect new products in the United States market compared to any other year coming from now on.

We have though one product got a new lease of life - that is [Tramedol], our API, which was sold until recently only to the generic market. But now, with the development of sustained release with Tramedol by our clients [indiscernible-accented] and others, we are shipping to the branded market Tramedol Once Daily Sustained Release.

So, this is like a new lease of life for Tramedol for us, and we expect a growing phase of this product in the next quarters, especially after we increase our capacity towards the end of this calendar year.

Oh, that's great. Thank you, Moshe. And can I then take a look at first quarter results and kind of add some to that for the next three quarters? Is that how you--how I should model that?

Well, in general, we stick to our previous focus of the operating income of API and our activities together with others would be around between $47 to $50 million.

Okay.

So, because of some erosion in other areas, including slight price erosion in the Rx business, we expect the total--well, we expect the increase in Tramedol, the total business, we expect to be around that level that we announced a few months ago, namely, $50 million total operating income in [indiscernible-accented].

That's great. Thank you. Let me just ask one quick question about the tax rate and I'll jump off. Judy, how do I better understand that as far as modeling purposes go? It sounds like you're going to have a lower tax rate than we anticipated at between 30 and 32%. I think I was using 32% for the year. And this--in this first quarter, it sounds like there is something to do with international shipments. Is that what you said about the tax rate?

Well, if I focus first of all on the quarter, before we talk about the year. If you look at the first quarter, our tax rate moves because of the change in the source of the income. So, depending on the balance of income between domestic and international, as you know, during the course of the year, now that we have a much broader international portfolio, our tax rate changes quarter-to-quarter. And that was a significant change this quarter.

If you see a 21% rate, of course, there's a question of how is the rate going for the year. The buckets of income were very heavily weighted internationally and that international bucket was also taxed at a lower overall rate this quarter. So, we are now talking 30 to 32% for the overall year. Earlier--in earlier conversations, we had talked about 31 to 32, just pulling that to 30 or 32 this quarter, as we look at that blended income around the world over the course of the year and our updated forecast.

Okay. Thank you very much.

Certainly.

Thank you. Before we get our next question, please, I want to remind everyone that we want to limit our questions to two per caller. Thank you. Your next question comes from Randall Stanicky of Goldman Sachs. Please go ahead.

Great. Thanks, guys, for taking the question. Joe and Judy, just first, a mini two-parter on the outlook. Any update - maybe I missed it - to the overall outlook for the year? And then, as we drill down into R&D spending, we're run rating sort of with last year's level. Should we expect that to ramp up sequentially as we move through the year?

Yes. Relative to the first part of the question on the outlook, our fiscal year 2007 earnings guidance on an operating basis is expected to be in the range of $0.86 to $0.91 per share, excluding the $0.02 per share restructuring costs. So, there is no change in that exactly as we had previously outlined in previous quarters. Judy, do you want to take the question on the R&D side?

Sure. Randall, with respect to the R&D, we're still projecting that our R&D spend for the full year will be as we originally forecasted, targeting a percent to sales in CHC closer to 4% versus its historical range in the low 3s. And on the Rx and API side, between 6 and 7% of sales, which we talked about being about a 25% dollar increase year-over-year. And you can see that ramping up on the API side, as we commented on earlier in the commentary.

But the spend in the other business units was not ramping at the same speed in this quarter, but for the full year we would expect it to be in that level.

Got it. And can I just ask Joe one more theoretical question? As you consider your diligence in getting acquainted with the consumer business, and obviously, you have a strong generics background with, obviously, the Watson experience. As you look at the business and think about the platform and some of the synergies, is there anything there that you--in terms of opportunities that you think maybe Perrigo in the past hasn't taken advantage of, or maybe just general thoughts on the platform and how, under your direction going forward, you think you can squeeze out some strategic opportunities?

Well, I think that's a great question. I think it's a little early in my time here--in my tenure with Perrigo still at three weeks. But I do clearly see some--what I think are some important synergies. First of all, I go to the great customer relationships that we have with the chains. The chains are obviously very important in both the generic and the store brand side of the business. I think leveraging those relationships with the chains I think are going to be very important.

I think the second thing I would say is just talk about critical mass. Mostly, on the OTC Consumer Healthcare side of the business, we have 25 billion units. I think that critical mass that we have on the operational side of our business in Consumer Healthcare can help us on our generic platform as we look at opportunities in the generic side. So, I think, clearly, I see the critical mass and the relationships we have with the customers as being two important avenues to try to look to continue to expand our total business, both on Consumer Healthcare and in the generic business.

And then, maybe one last point. I think one of the things that at least I think is critically important is that the API business that Moshe has been a part of for quite some time and has some great knowledge and understanding. And I think it's going to help us as we look to vertically integrate our business and really, importantly, go after some of the lower cost active pharmaceutical ingredients capabilities that we have both in Israel, but more importantly, utilizing the knowledge that Moshe's team has as we look to expand that into Asia where we can go after joint venture opportunities for the API business. So, using some of the knowledge and capabilities of Moshe's team on API to try to reduce our cost of goods on the total business.

Well, that's great. I look forward to seeing you in New York.

We look forward to being there.

Thank you. Your next question comes from Linda Bolten Weiser of Oppenheimer. Please go ahead.

Thanks. I just was hoping you'd clarify. Did you say the total new product sales in the quarter were 11 with 4 million being from reformulated cough/cold products?

No. Linda, this is Judy. $11 million in new products, 7 of which comes from Consumer Healthcare, 4 of which comes from sales in the Rx business.

So, the 7 in Consumer includes a mix of new products plus reformulated?

No. It's only new products, and on top of that, our reformulated products of $13 million in the quarter.

Linda, when we report--this is John Hendrickson. When we report new products, it does not include replacement products for the market.

Okay. So, I guess I'm a little confused. But your projection for 100 million of new product sales for the year, I had always thought included some reformulated.

That is correct. It was over 100 million of both new products and reformulations. So, when I--that's why, in the words I used there, I was really talking about the combination of new products and reformulations would be together over $100 million.

Okay. And can you just comment a little bit more on the gross margin, which I guess excluding the prior year's special item was actually down 60 basis points? And specifically, how was mix within Consumer Healthcare?

Excluding the--right. Okay--in Consumer Healthcare alone. The gross margin overall in Consumer Healthcare grew 40 basis points. And to your point, smoking and other new product categories contributed approximately 100 basis points. And the offset then was a combination of existing products--margins on existing products, and some inventory handling costs. So, the combination just there is timing of products coming to the market and cost changes on some of the products in the older part of our portfolio.

Okay. And I guess that was all. Thank you very much.

Thank you, Linda.

Thank you. (Operator Instructions.) Your next question comes from [Ari Kerschkovitz] from the [Steffler Fund]. Please go ahead.

Hey, guys. Congratulations for excellent report.

Thank you, Ari.

I have two questions. So I have two questions for the guys in the States and two questions for Moshe.

Okay.

For the guys in the States, can you give us like a heads-up on what's happening in the vitamins arena? Why is it weak and what do you expect forward? And the second thing is can you provide an update on omeprazole? I know there was nothing happening during the quarter. But since it's a very important product, if it's possible, kind of let us know how is it progressing.

And for Moshe, two questions regarding things that happened during the last quarter and might affect your pipeline. The first question is regarding the settlement between Watson and Solvay. Do you think it will in any way might influence your chance of getting in the market? And the second thing is can you tell me what's your thoughts regarding the price that was offered for Connetics? How does it apply on their strategic plans to save the current franchise? Thank you.

Okay. Why don't we start--John Hendrickson is going to talk about vitamins and the omeprazole first.

Okay. Excuse me. The vitamin category has been down for the quarter a percent or two versus overall. Perrigo as a company has done reasonably well against that market when you look overall. And I would say the vitamin industry, especially in the States, is an event driven industry. So, when you get big new product growth from the industry, it grows--drives it up. When you get other things not happening, it will drive it down a little bit. It tends to be a very event driven market overall.

So, our projection is that we will see vitamin market growth for the year in the very low, low single-digits, and that Perrigo will exceed that market growth from an overall business standpoint for the year. All right?

On the omeprazole, I would just say no change versus what we reported previously. Litigation is progressing. And--but we have nothing else new on the litigation front to report.

I think the only thing I would add, John, is the omeprazole product, the Prilosec OTC is growing dramatically. It's over $500 million--it reached $530 million in a 12-month period. So, it's growing quite nicely for the business.

Before I turn it over to Moshe to answer the question on the Watson-Solvay question, on the Connetics part of the question, I'm not sure we're really going to be able to add much the valuation. But Moshe, can you talk about the Watson-Solvay question and the Connetics? But I don't know really if we'll be able to say very much about Connetics pricing.

Yes. I guess we are not in a position to comment about the business between Stiefel and Connetics. It doesn't change our position. We have [indiscernible-accented] Connetics, and that [indiscernible-accented] is going to go on with a date of April 2008. In this respect, nothing changes from our perspective. And that is the only perspective that I can comment on.

Regarding the settlement between Watson and Solvay about AndroGel, again, what I can say without going into too specific [indiscernible-accented] are that it is part of our policy to cover all the topical type of products that are in the marketplace and to product brands in all our extended topical universe.

We are also developing a testosterone replacement therapy topical product, as we said in the past. And we are targeting all of the total--the testosterone replacing products in the marketplace. And that I think will be--I don't think it's really--I'm in a position now to analyze the competitive advantage or disadvantage that we have from this settlement. But only to restate we are going to target, as is part of our strategy, all of the testosterone replacement products in the market.

Moshe, thank you for that. I will, however, try to extract--I will try my luck to extract a little bit more information. I mean, if you guys had the chance to review the agreement or whatever part of it was made public--and I will try to be more specific. Did you see anywhere a part of this agreement that states that you may or may not be able in the future to become a part of this agreement, or is that agreement--so the minute there's a generic competitor in the market becomes generic, [we're involved like three ways]?

I don't know. Look, the best way to make--the straightforward way to make money, that is to have Perrigo to win the case because I think we have a stronger high [indiscernible-accented] based product. And to go into the market and [indiscernible-accented] rather than corporate or settle someone else's agreement, this is still the preferred way for us to go and I believe that this way is wide open to us.

Okay, you guys. Thank you very much for your answer. And good luck along the way.

Thank you, Ari.

Thanks, Ari.

Thank you. Your next question comes from [Jim Montreve] from Southport Capital. Please go ahead.

Hey, a great quarter. You guys have a lot of cash on the balance sheet. And assuming that the inventory gets worked off next quarter, the cash flow is going to improve that much more. What are your thoughts on the current capital structure, as far as would you rather increase the dividend, buy back--be more aggressive in buying back stock? What are your thoughts?

Joe Papa; Yes. On the--I'll start, then turn it over to Judy. I think really at this point, we're really very--we're looking at our balance sheet. We think it's an important strength of the Company. But I think we're really trying to maintain our flexibility to decide and I don't think we've had any specific discussions yet to go Direction A or Direction B at this point. Judy, anything else you'd like to add?

As far as previous discussions we've also had about our desire to use cash, it's to invest in the business. To the earlier points made about continuing investments in R&D and capital expenditures, it's about funding our day-to-day working capital and continuing to pay dividends. And then, looking for opportunities potentially beyond that that would allow us to drive our strategy.

Okay. So, kind of reading in between the lines of that, it's focused on maintaining the ability to really improve the turn on invested cap. Would that be correct?

That would be correct.

Absolutely.

Thank you.

Thank you. Your next question is a follow-up from Linda Bolten Weiser of Oppenheimer. Please go ahead.

Thanks. In looking at your Consumer Healthcare sales growth, if you exclude all of the stuff going on with reformulated and pseudoephedrine, if you exclude the new products, it looks like the rest of the core business had very--pretty good sales growth. And that's been the case for a couple of quarters now in a row. What's going on there? I mean, are you adding new accounts? Are you gaining share at major accounts? I mean, what's going on?

Yes, Linda. I think as we look at the overall business, first of all, we do business with most of the big retailers, in fact, with every one. I can't think of one that we don't do business with. So, we don't add [full] new accounts hardly ever. We do add new business, et cetera. I think our group is doing--been doing a good job of driving some of our key segments and taking advantage of those. So, we hopefully will continue to do that.

I'd also just like to add on top of that, as we commented earlier, the U.K. and Mexico operations have performed well this quarter. And if you look at what we--we haven't talked about hem specifically for several quarters with the focus having been on the acquisition. But if you look at those two areas, within John's business, they've been executing quite well against their stated strategy, which was to gain a presence as retailers were growing their positions within those markets to also really gain strength in those markets and the store brand positioning. They've done an excellent job of that, you can see, with the sales growth. And they've also been able to deliver operating income improvement year-on-year and have really been doing a great job of executing at that stated strategy. And we wanted to bring that out to the forefront as well this quarter, and that is also helping drive some of the revenue growth that John's seen.

And how much were sales outside North America up in the quarter?

Quarter-over-quarter, they were up $5 million.

So, that's Mexico and U.K.?

Correct. It's 19% growth for them year-over-year.

Okay, thank you.

Sure.

Thank you.

Thank you. Your next question comes from Greg Gilbert of Merrill Lynch. Please go ahead.

Thanks. Good morning. First, a couple for John. John, how confident are you that consumers will be satisfied with phenylephrine as an acceptable replacement? And also, do you expect Penlac to go over-the-counter before you get an opportunity to launch your version?

Yes. I will say in answer to your first one, I don't have a great answer for you. I know we have a number of products out there with phenylephrine. There's also pseudoephedrine behind-the-counter. And since we're just sort of in the early parts of the season, I think the season will tell what the acceptance of the one is or the move towards the pseudoephedrine products behind-the-counter and that being higher.

I believe in total that the need for decongestants is still out there in the marketplace and people will seek out and equilibrate to their own drug. But--and we've got both versions out there. I'm not sure exactly on phenylephrine. I know it works well for some people and not well for others. So, keep it at that. On Penlac, I'm probably not going to comment on specifically where we're able to market aside from it is a product we're definitely looking at.

And then, one follow-up for Joe. Joe, I know it's certainly early, but I think you can answer this one at least conceptually. I was wondering if you see Perrigo as a scale generic player like you are on the consumer side - three to five years from now or more of a niche player? Thanks.

Hi, Greg. Good to hear you. Relative to your question, it's a tough call. I think right now, as we look at the business, we have clear critical mass in our Consumer Healthcare with the 25 billion tablets and capsules. So, that clearly is there. Within the generic space, as I look at it, the business on the oral solids is getting--it's a hypercompetitive state in terms of pricing. And candidly, we like our position in what I would call the niche topical business.

I will say that I think topicals probably deserve some explanation. We look at topicals as being the true sense of the word topical. So, for example, it is the dermatology products, but it also is opportunities in nasal, respiratory, other ways one can deliver products topically to the body beyond just what I would call an oral solid tablet. So, we do believe that that niche opportunity is an important one for us, one that we really want to continue to expand on and put our focus on that area, rather than trying to be the--serve every market within the generic space.

But I do think that one of the things at least I see so far is our ability to leverage those relationships that we have with the important customers and just the critical mass of the tablets and capsules that comes out of our facilities here in Michigan. I would invite anybody on the call to come visit us. It truly is a remarkable facility that we have here in Western Michigan.

Thanks.

If I may add--it's Moshe--about this, I would say that if the niche [term] implies products like for a $50 to $100 million product, which is typically the brand size of a dermatological product, the products that we are aiming in the extended topical definition and nasal, respiratory, transdermal, [indiscernible-accented] products are typically products that are between $100 to $500 million a product.

So, while we still would like I guess--we will in the future concentrate more on the specialized product with a special emphasis on the topical products, we are now targeting products that are almost 10 times bigger in size potential than the typical dermatological products we were engaged until recently.

Thanks.

Thank you. Our least question comes from Derek Leckow of Barrington Research. Please go ahead.

Thank you very much for the question. I wanted to ask about the market share of store brand in each of the Mexico and U.K. markets. It's my understanding it's still a pretty small percentage. Do you happen to know what that is?

Yes. I would say--and Derek, I would say these are rougher estimates. But in Mexico, it's still--the store brand is still a very small market share. In Mexico, it's in the low single-digits as far as market share. In the U.K., it's just the opposite. The U.K. has a very developed overall market share and it is in the 30 to 40% range on average, higher than the U.S.

Okay.

And that's the market share, not necessarily Perrigo's share of that portion.

And who's the big competitor in the U.K.? Is it one company or are there lots of smaller companies?

Yes. There are a few other companies that we compete with. Again, it's the smaller markets. There are about three or four main players over there.

Great. Thank you very much.

Okay. Thank you--.

--Thank you, Derek.

Thank you, Derek, for your question. Let me conclude. Thank you very much for your interest in Perrigo today. I look forward to meeting many of you in the near future and all of our investors and shareholders over the next couple of months. Thank you today for your interest in our first quarter results. Have a great day.

Thank you.

Thank you. This concludes today's Perrigo Conference Call. You may now disconnect.