Perrigo Company PLC (PRGO) 2009 Q3 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo's Fiscal Year 2009 Third Quarter Earnings Results Conference call. (Operator Instructions) Mr. Shannon, you may begin your conference.

Thank you very much, Crystal. Welcome to Perrigo's Third Quarter 2009 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. Also, we are webcasting this call with a slide presentation. You can either follow along with the webcast or access the presentation on Perrigo.com in the Investor Relation Presentation section.

Before we proceed with the call I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference 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 created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 28, 2008. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art, and welcome everyone to Perrigo's Third Quarter Fiscal 2009 Earnings Conference call. Joining me today is Judy Brown, EVP and Chief Financial Officer. For our agenda today, first, I will provide a brief perspective on the quarter and then I will provide an overview of our cost management efforts in the quarter and our decision to exit the Consumer Products business in Israel.

Next, Judy will walk you through the detailed financials and I will give you an update on our earnings guidance and new products as well as an update on other business units. This will be followed by an opportunity for Q&A.

This quarter reflected the strength of our private label store-brand Consumer Healthcare business while we will work to mitigate some of the challenges in our other business segments. We achieved record third quarter sales and record adjusted third quarter earnings from continuing operations, led by our store brand private label over-the-counter business.

Total new product sales, which includes Consumer Healthcare products launched in the last 18 months, were $93 million in the quarter as Omeprazole, Cetirizine and the launch of Famotidine Complete continue to meet or beat our expectations.

Now if you look at side 1 in our presentation, the second row shows the overall domestic OTC consumer market was down 3.1% in the quarter versus last year and national brands fells 7.3% while store brands gained 11.7%. I'd also like to highlight that the cough/cold category was down 5.5% while store brand grew more than 11%. This shows that consumers are realizing the value of store brand in a challenging economy and that Perrigo is uniquely positioned to deliver that value to consumers and deliver quality, affordable healthcare products to meet the world's growing needs.

Last quarter I told you that we bid and would be focused on controlling costs in the difficult economy. During the quarter we reduced operating expenses by 14% compared to last year at this time. To be fair, part of that was a result of reduced spending compared to last year's Omeprazole launch but most of the reduced expense was in the Rx and API groups. Even with these cutbacks we, though, are continuing to invest in quality and research and development.

As we previously communicated to you, Perrigo continuously evaluates all of its business based on the overall strategic fit for the Company and on return on invested capital. As a result of this review we now view the Consumer Products business in Israel as a non-core to the Company. We have engaged two investment banking firms, William Blair and Poalim Capital Markets, to help us find the right buyer. Judy will explain our reporting of that business shortly.

Overall, I've been delighted with the quarter, with the performance by the team, by growing store brand sales and our ability to manage expenses and obtain productivity improvements to meet the increased demand for store brand. This quarter also represented another important milestone. It is the first time in our history that we have achieved $0.50 earnings per share in a quarter. I'm sure you will you have plenty of questions about our revised guidance and our market share gains so I'll get into that detail shortly but let me turn the call over to Judy to go through more details. Judy?

Thanks, Joe. Good morning, everyone. This quarter the team was successful in implementing a number of improvement initiatives and we ended the quarter in line with our expectations. That being said, we recognize that a number of challenges remain and are focused on driving improvements in those areas.

On our second quarter earnings call we outlined several factors that would influence our performance through the remainder of the fiscal year and those factors are playing out much as we had expected. During the next few minutes I'd like to provide some quick highlights of the financial results for the quarter as well as update you on our expectations for the remainder of the year.

Before we discuss the numbers for the third quarter, however, I want to first point to the introduction of the discontinued operations line on the face of the income statement. As Joe just mentioned, in March 2009 as part of our strategic business portfolio review the Company committed to a plan to sell its Israel Consumer Products business. The financial results, which were previously reported as part of the Company's Other category, has been classified for all periods presented as discontinued operations in the condensed consolidated statements of income which can be found in our 10-Q which will be filed later today.

Sales for the quarter for this business were $18 million this year down from $23 million last year and gross profit was $5 million this year down from $8 million last year. The Consumer Products business had an operating loss of $2 million versus $500,000 last year.

The net impact to the third quarter of segregating the results of Israel Consumer Products into discontinued operations was a $0.01 benefit to earnings per share from continuing operations. Please also note that as you now look at the financial information for continuing operations per US GAAP, a portion of general corporate overhead expenses which had previously been allocated to Consumer Products business is now presented fully in consolidated unallocated expenses.

So before we move on I want to underscore again that all of the rest of my comments this morning are based on the continuing operations of the Perrigo business and do not include the Israel Consumer Products business which is now presented as discontinued operations.

Year-over-year we had a strong quarter. As you can see on slide number 2, consolidated net sales increased 5% to $506 million. Consolidated GAAP gross profit was $150 million, nearly flat versus last year. Consolidated GAAP income from continuing operations was $46 million, up $6 million from last year.

After reviewing the figures we released this morning you'll see that there was one item in the third fiscal quarter of 2009 and three in 2008 which we have excluded from our analyses of the adjusted operating basis financials. As you can see on slide number 3 we incurred a pre-tax charge of $700,000 to cost of sales for the remaining step up in value of inventory related to the Diba acquisition this year.

Similarly, last year related to the Galpharm acquisition, we incurred a pre-tax charge of $3 million for the step-up in value of the acquired inventory along with another $3 million pre-tax dollars of in process research and development expenses. Additionally, last year we incurred a restructuring charge of $300,000 before tax.

Please note that you can view the impact of these items on the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in Table 2 of the Appendix to our press release sent this morning.

Now I'll take you through the financial analysis of our fiscal third quarter based on adjusted results from continuing operations, that is the GAAP figures excluding the previously mentioned charges.

Looking at slide 3, consolidated net sales from continuing operations were strong at $506 million, an increase of $25 million or 5% from a year ago. The sales growth was driven by the Consumer Healthcare segment reflecting incremental new product sales, higher unit sales of existing products and the inclusion of sales from JB Labs, Unico, Diba and Brunel. This growth was partially offset by two one-time items that benefited the fiscal year 2008 third quarter, a $9 million one-time cash payment in Rx and an accrual reversal in API of $5 million.

In addition, sales were offset by unfavorable changes in foreign currency exchange rates and sales mix in certain segments which will be discussed in more detail shortly.

Adjusted consolidated gross profits from continuing operations was $150 million, down 2% from a year ago reflecting the absence of the one-time items in Rx and API just discussed as well as the raw material pricing pressure in the nutrition business.

Adjusted gross margin was 29.7% compared with 31.9% last year. Adjusted consolidated operating income was $73 million, up $7 million or 10% from last year, due primarily to our focus on controlling operating expenses. Through better SG&A leverage we were able to increase adjusted operating margins 70 basis points from last year, up to 14.4%.

Adjusted consolidated income from continuing operations was $47 million compared with $45 million last year. Adjusted earnings per share from continuing operations were $0.50, up from $0.47 last year.

Now on to the business segments. On slide 4 you will see the Consumer Healthcare's third quarter net sales increased $46 million or 12% to $419 million. It is worthwhile to note that this quarter is the anniversary of our very successful launches of Omeprazole and Cetirizine last year so I point out that this 12% growth is on top of the launches last year. The net sales increase resulted from approximately $31 million of new and existing product sales, primarily in the gastrointestinal, couch/cold, smoking cessation and nutritional categories and another $39 million in organic increase from the acquisitions of JB Labs, Unico, Diba and Brunel. These increases were partially offset by unfavorable changes in foreign currency exchange rates of $12 million as well as the absence of $10 million of net sales from the UK's Vitamin, Mineral and Supplement business which was divested at the beginning of fiscal 2009.

In total, inorganic growth and new product sales are strong and our base business remains healthy.

Adjusted gross profit of $117 million was up $6 million from last year. The adjusted gross margin of 27.9% was a decrease of 180 basis points from last year due primarily to lower gross margins this year associated with nutritional product category and higher relative production costs.

In addition there was some downward pressure on gross margins due to the inclusion of the relatively lower margin JB Labs and Diba businesses added to the Consumer Healthcare portfolio this year. These pressures were partially offset by favorable product sales mix, both foreign and domestic, as well as margin contributions from the acquisition of Unico.

Third quarter adjusted operating expenses for fiscal 2009 decreased 4% or $2 million compared to fiscal 2008. Both administrative and selling expenses decreased year-over-year while spending increased in research and development by $2 million. The decrease in administrative expenses was due primarily to lower insurance costs and a one-time reimbursement of legal expense partially offset by the inclusion of expenses related to the new acquisition.

The majority of the decrease in selling costs related to lower sales commission, promotional costs and marketing costs versus fiscal 2008 which, if you remember, included higher promotional costs related to the launches of Omeprazole and Cetirizine. These decreases were partially offset by the inclusion of expenses for Unico.

As a percentage of sales, third quarter fiscal 2009 adjusted operating expenses decreased 220 basis points compared to third fiscal quarter 2008 as the team has been focused on controlling costs throughout their business.

In total, Consumer Healthcare had adjusted operating income for the third quarter of $63 million, up $8 million or 15% from last year. Adjusted operating margin in this segment was 15% of net sales, up 30 basis points from last year, reflecting the team's hard work in implementing productivity initiatives and managing costs.

Looking next at Rx pharmaceuticals on slide 5. Third quarter net sales in Rx were $42 million, down $7 million or 15% compared to last year. This decrease was due primarily to the absence of the fiscal 2008 receipt of a one-time cash payment of $9 million from a customer in lieu of expected future minimum royalty payments. The decrease in net sales was also due to a $2 million reduction in non-product revenue as well as pricing pressure in the competitive marketplace for generic drugs. Despite these pressures we increased sales in our existing portfolio of products by $5 million.

And finally it should be noted that we have not yet received approval for our Triamcinolone generic Nasacort filing which is necessary to receive the next milestone payment.

Gross profit in Rx was $16 million, down $6 million from last year. Gross margin was 38.7%, a decrease from 44.3% a year ago, reflecting the absence of the $5 million gross profit contribution from the one-time customer payment in fiscal 2008.

Operating income was $8 million, down from $11 million last year on reduced gross profit contribution offset by a $2 million reduction in Rx operating expenses.

Overall we're very pleased with the results of the Rx business this quarter in light of continuous pricing and competitive pressures coupled with the absence of a milestone payment in the quarter related to Triamcinolone. Sales of our existing portfolio were up $5 million and we reduced our operating costs by $2 million. We're confident this segment is in a strong position to capitalize on a new product pipeline ahead and remain a solid contributor to our Perrigo business portfolio.

Now looking at the API segment on slide 6. API net sales in the third quarter were $31 million, down from $38 million last year primarily due to the absence of a one-time $5 million accrual reversal related to a long-standing customer contract negotiation which was recognized in fiscal 2008. Additionally, API sales were negatively impacted by $2 million due to unfavorable changes in foreign exchange rates and another $2 million from lower sales volumes of existing products. These decreases were partially offset by $2 million in new product sales and payments from partners related to international product development agreements.

Gross profit was $11 million, down from $3 million last year due primarily to the absence of the one-time, $5 million accrual reversal I just mentioned as well as a $1 million unfavorable change in foreign currency exchange rates. These decreases were partially offset by favorable contributions from new products and some positive pricing activity on the quarter.

Operating expenses were $7 million, down 18% from last year due primarily to lower employee-related costs, favorable changes in foreign currency exchange rates and a decline in research and development costs.

API operating income was $4 million, down from $6 million last year due primarily to the absence of the one-time $5 million accrual reversal I just mentioned.

In the Other category which now includes only continuing operations of our Israel-based pharmaceutical and diagnostic business, third quarter net sales were $14 million, down 32% or $7 million from last year. The decrease was driven primarily by a $4 million impact related to a change in a customer contract whereby fiscal 2009 sales are now being recognized on a net basis. In addition, sales were unfavorably impacted by $1 million related to changes in the foreign currency exchange rates, lower sales in the diagnostic product line and changes in the sales mix of existing products in the remaining portfolio.

Third quarter gross profit remained relatively flat at $6 million. Gross profit margin for fiscal 2009 increased 1310 basis points compared to fiscal 2008 though due to the change I mentioned a moment ago in a customer contract being recognized now on a net basis.

Third quarter operating expenses for fiscal 2009 decreased 30% compared to fiscal 2008 due primarily to lower employee-related expenses and a slightly favorable change in the foreign exchange rate.

Adjusted unallocated corporate expenses for the quarter were $5 million, down from $8 million in the third quarter of last year. This decrease was due to lower incentive-related employee wages and benefits versus fiscal 2008.

Now some comments on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $375 million at the end of the quarter versus $348 million at this time last year. Accounts receivable were $331 million compared with $347 million a year ago reflecting more normalized sales patterns in the quarter versus last year which, you may remember, when we were in the middle of our Omeprazole launch near quarter end.

Inventories were $383 million, up from $336 million at this time last year. The increase was driven primarily by the acquisitions of JB Labs, Unico, Diba and Brunel as well as some higher priced raw materials on hand in nutrition.

Accounts payable were $233 million compared with $216 million a year ago, tied mainly to the inventory cycle.

Cash provided by operations was $66 million in the third quarter compared with $39 million last year. This is a record for a fiscal third quarter. For the first nine months of fiscal 2009 cash provided by operations was $102 million, down from $132 million a year ago due mainly to an additional $34 million of incremental tax payments this year versus last.

At the end of the third quarter cash and investment securities were $198 million, up $133 million from $65 million the same period last year. As of the end of the quarter we had an additional $200 million of untapped capacity on our existing bank revolver. Our total current and long-term debt on the face of the balance sheet is $891 million but includes a $400 million back-to-back loan which is completely offset by the $400 million restricted cash deposit in non-current assets.

Net of the back-to-back loan, our external debt was $491 million. As of March 28th our debt to total capital was 36.9% and our net debt to total capital was 22%. Both of these ratios have increased from the end of fiscal 2008 as we have put our cash to work through the purchases of JB Labs, Diba and Unico. While our debt to total capital ratio is higher than prior periods, we still have access to additional liquidity and believe that our current balance sheet and capital structure remain strong.

In the first nine months of fiscal 2009, we paid cash dividends of $15 million, or $0.16 per share and yesterday our Board of Directors approved another quarterly dividend of $0.055 to shareholders of record on May 19th.

In summary, looking to slide 7 we are on track to meet our guidance provided on the February earnings call. We told you in February that you could expect consolidated Perrigo revenue growth of between 13% and 18% for the full year. We expect to make this range, even with the change in discontinued and continuing operations.

We stated that we expected the consolidated adjusted gross margin to be down 100 to 200 basis points form last year and that guidance remains intact. We are still expecting to maintain our annual consolidated R&D spending level of approximately 4% of net sales as quoted in February in order to keep moving toward more new product launches in the future.

Also, as stated in February, we expect distribution, selling, general and administrative expenses for the full year to be approximately 13.5% of sales driven by cost containment initiatives. We continue to expect total operating margins to be in the 11% to 13% range.

With that said, we are revising our full year fiscal 2009 adjusted earnings guidance and narrowing the earnings per share from continuing operations from the previously quoted range. In our second fiscal quarter earning release we quoted a range of $1.75 to $1.90 adjusted earnings per share. We are now narrowing that range to be $1.80 to $1.90 adjusted earnings per share from continuing operations. This implies an improvement in earnings per share from continuing operations of between 15% and 22% on an adjusted basis year-over-year. This range is based on an updated, effective tax rate for the full year of approximately 26%, down slightly from the 28% annual effective tax rate we quoted last quarter due to updated projections on the mix of income and recent resolution of several tax audits.

Please note that this full year earnings guidance excludes any contribution from the discontinued operations of the Israel Consumer Product business which, in our previous annual February guidance had been expected to contribute $0.03 earnings per share for the full year.

For the year we're reaffirming our operating cash flow to be between $190 million to $220 million. Our full year CapEx projection remains in the range of $65 million to $70 million and will include expenditures at our newly acquired Michigan and Mexican facilities as well as production expansion projects underway in South Carolina and Allegan, Michigan.

And now let me turn it back to Joe.

Thank you, Judy. Now that Judy has given you all the details of the quarter I'd like to talk about our guidance and the recent developments in our OTC and Rx business and then talk about our operations.

First, let me talk about our revised earnings from our continuing operations guidance. We revised our range as a result of the performance of our private label store brand operating unit Consumer Healthcare. New products are clearly driving our business. Sales of Omeprazole, Cetirizine, Famotidine Complete and the launch of Ibuprofen PM are going as we expected.

As we have previously communicated, our domestic nutritional product category continues to be impacted by costs for raw materials purchased earlier this year. You will notice that impact to our gross margin in Consumer Healthcare. We have made progress but we are still not satisfied with this product category and will continue to focus on nutritional operating improvements.

Our margin would be in line with our original guidance of 30% if not for the higher costs in the nutritional product category. This is a near-term issue that we are in the process of reversing but it impacted the quarter and expect it will continue through the end of the fiscal year.

Second, we continue to execute on building our portfolio of products with the addition of new products in our pipeline. If you would please look at slide 8, during the third quarter we added $93 million in new product sales. Cetirizine, the store brand comparable to Zyrtec, continues to perform well. Our data currently shows that store brands are selling more than the national brand with more than a 50% market share. Also, we have maintained our 80 plus percent market share of the store brand Cetirizine market despite numerous competitors.

On slide 9 you can see that our store brand version of Omeprazole OTC is capturing nearly 40% of the market. Recent sales data shows that we are on track to reach the high end of our original annual sales guidance range of $150 million to $200 million.

Also, we received final approval from the FDA for OTC Ibuprofen and Diphenhydramine Citrate tablets. We began product shipment to retailers during the quarter and the launch has gone well. This product is comparable to [wise] Consumer Healthcare Advil PM tablets indicated as a pain reliever and a nighttime sleep aid. Estimated brand sales for the product for the 12 months ended December 21st were $71 million.

The smoking cessation category, we expected to have competition in coated nicotine gum. Watson announced that it was coming to market with coated mint gum product but did not enter the market during this quarter. They have been competing with us in the coated -- uncoated gum category for several years. We expected them to enter the coated gum product line this calendar year so this was already factored into our guidance.

The couch/cold season was very weak this year. In fact, it was very similar to the past couple of years and this was factored into our original guidance. The H1N1 influenza outbreak is a cause for concern for all of us. We have seen increased cough/cold product reorders for some of our products but do not expect any material changes in this business segment at this time. As a reminder, the cough/cold category represents approximately 12% of our Perrigo revenues.

There was some confusion last quarter when I talked about our inventories at our retailers. You may recall that I said we achieved strong sales last quarter despite the average inventory -- our retailers being down 8% as compared to the same period last year. To anticipate your question, this quarter inventory levels were relatively flat compared to last year.

On the Rx side of the business we told you last quarter about the settlement of patent litigation related to Nasacort AQ brought by Sanofi-Aventis against Barr Laboratories, our partner in this product launch. We are awaiting final approval from the FDA at this time. We have received some additional comments from the FDA and do not expect this approval in our current fiscal year which means the milestone payments are not included in our guidance for fiscal year 2009. Nasacort AQ had sales of approximately $325 million for the 12 months ended November 2008.

On March 17th we announced that our partner, Cobrek Pharmaceuticals filed an ANDA for Clindamycin Phosphate Foam 1%, a generic version of Evoclin Foam 1%. We believe that Cobrek is the first to file an ANDA with paragraph 4 certification against Evoclin. Evoclin Foam 1% is a topical antibiotic indicated for topical application in the treatment of acne and has sales of approximately $44 million for the 12 months ended January 2009.

As you know, we are constantly striving to be first to market in our Rx and OTC business units. We have exclusive product offerings of more than $1 billion over the next year and we are investing in R&D to keep the pipeline robust. As a reminder, we believe more than $10 billion in branded prescription sales today will switch from Rx to OTC in the next five years and our goal is to be the first to market with those products.

Next, I want to talk briefly about our API business segment. The quarterly results are still weakened by a sales mix of existing products. This was somewhat offset by more than $2 million in new product sales. Our team is focused on making the necessary expense adjustments to be on track to make the revised plan.

The team has managed expenses effectively during the quarter and we expect that to continue for the remainder of the fiscal year while we will continue to make progress with our new product dossiers.

Finally, our operations have been able to meet the demand caused by our success. We are setting Perrigo records for making over-the-counter Ibuprofen tablets and we are on track to make more tablets than at any time in our Company's history.

As we have previously communicated, we will continue to focus on execution, the retail data for our new products is encouraging and we are optimistic about the future of Famotidine Complete, Omeprazole, Cetirizine and other products in the pipeline including the launch of Ibuprofen PM in this fiscal year.

On the Rx side of the business we increased third quarter net sales on existing products by $5 million while reducing our costs by $2 million. In a difficult environment, the team has been able to meet its goals without the benefits of new products in that Rx group.

In this challenging economy we are working together with our customers to make consumers more aware of the store brand proposition. Unlike other private label products, OTC healthcare products and generic prescription drugs are FDA approved. The data is showing that consumers are making the value judgment as store brand share continues to grow. In a world with rising healthcare costs, coupled with an aging population, Perrigo is uniquely positioned to meet the need for quality, affordable healthcare products.

Now let's take your questions. Operator, could we open up the lines for questions, please? Crystal?

(Operator Instructions) Greg Gilbert, Banc of America.

Nice to see some operating margin improvement versus last quarter even with that vitamin drag but other than managing raw material costs and bringing packaging fully in-house, which I think you are already doing, what else are you talking about doing to improve the margin structure there?

Hi Greg, Joe Papa. Thanks for your question.

Clearly the big part of what we've got to do is work through the inventory of raw materials that were previously at the higher price of the -- from a cost of goods raw material cost. That was really the -- we've got to just work through that inventory, Greg, on the raw materials. As we work through that raw material that's in our inventory, that will bring down the effective cost to goods of our products.

So you're not talking about the need to do additional things beyond what you've already articulated, then?

No. I think that's the primary portion. Obviously, we are continuing -- the other part of what I said before, just to remind you, is that we are also seeking an additional sourcing of raw materials to seek better cost of goods by bringing in alternate suppliers for those raw materials.

Okay. And my second question is about new launches. What does your guidance require in terms of Rx and/or consumer launches for the remainder of this year and can you offer a sneak preview on what could be launched in those businesses next year?

Well, as you know Greg, we really don't talk about our next fiscal year until the August timeframe so I can't really speak much about that but I do think that there are some products that you are aware of in terms of expirations of 30 month stays and other things that will happen over the next 12 months.

Relative though, going back to the first part of your question, the current fiscal year, there are a few small product introductions but they are very limited. The majority of the products will just be performance of our existing products. Primary driver for our remaining three months will be the performance of our existing products and as they gain incremental market share in their respective markets.

Thanks. And one more on the business you plan to divest. Can you -- do you have a sense for the level of interest yet? And as you look ahead to having some proceeds there, how are you prioritizing the use of those funds? Thanks.

Thank you, Greg. Relative to our Israel Consumer Products business which we have announced that we are divesting this morning it's still too early for us to make any comments about the interest level in that business. It is a good business. It is actually a business that has a good history, has got some good brands in that business. The [Caroline] brands are a very strong brand in Israel so we do expect to see interest in the business but it really is too early to make any specific comments towards the process of selling that business.

Relative to the use of funds for that, clearly there will be opportunities for us to either look to additional tuck-in acquisitions such as the ones we've done in the past and/or just general cash for our operations. There really is no specific comment I can offer at this time about any other opportunities with that cash.

Judy, anything else on the cash side you want to make a comment on?

I would go into the -- as the uses that Joe laid out focusing on internal investments and we talked about an increase CapEx this year and we've been doing investments in our own operations to handle enhanced capacity with the success of the business over the last few years as well as, obviously to Joe's point, on looking at M&A opportunities as they arise.

Thank you.

Randall Stanicky, Goldman Sachs.

Thanks very much for the questions. Just a follow-up on Greg's question. Judy, I get the cost allocation on the divestiture of the Israeli business but are there any implications once that's actually divested either from a cost allocation or a tax perspective?

Great question. As we move forward in this process we'll be able to be ever more clear. Once the divestiture would be completed what I would expect is that we will continue as Joe highlighted in his comments the process of organizing the cost centers into functional support costs for Israel and that process is happening right now. You already see the cost savings reflected a bit in the SG&A reductions in the remaining businesses there. And that will continue.

And then to add to that there were some general corporate overhead costs that are added back into the general corporate line as I made the comment. But as you can see, those are also down overall as well.

In terms of overall profitability, the remainder of the businesses that's in line with the forecast that we just laid out for the remainder of the year.

And on the tax side?

On the tax side, the Israel Consumer Products business on a standalone basis actually had a higher relative tax rate. This was not in a -- a low tax zone in Israel. So their average tax rate was in the high 20s, about 29%. So it actually had a slightly negative impact for us compared to our overall blended rate globally. So the divestiture of that business would have a benefit to us on a go-forward basis but only to the extent of 50 to 100 basis points.

And then, Joe, just a question on the API business. Was that or is that a part of the strategic review when you think about the portfolio of businesses that you want to be in?

Yes, Randall, good question. Yes, we continue to look at our strategic planning process. Look at all of our business in terms of where we are moving the business. We looked at all the business. The other thing, as we highlighted, we always do is look at the return on invested capital for all of our businesses. We believe the API business still has synergies with both our Rx business and our over-the-counter business.

As an example, one of the things I think you may recall, we look to source our raw material Cetirizine from our API business as an example and we think those kind of synergies help us as well as it helps us with the opportunity to just be a better procurer of raw materials as we utilize some of the knowledge and expertise in our API business. So we always continue to evaluate businesses as we go forward but at this time we feel the API business is a good business for us and has good synergy with the remaining Consumer Healthcare and Rx business.

And then just a quick one, $0.10 range implied for next quarter, any rationale behind the, I guess, the width of that range? Why it's not tightened up a little bit more?

Well, I think both -- maybe Judy wants to make some comments on this as well. I think, really, what we are just simply reflecting is right now we are seeing very strong demand for our Consumer Healthcare business. It's certainly our largest business. We just want to always make sure that -- there could be some uncertainty in the economic conditions in the -- certainly in the United States and foreign exchange so we just want to make sure we keep ourselves with a little bit of range there reflecting just general market conditions.

We still feel very good about our business. We feel that we are executing very well. We are executing on the cost containment side. We have great demand for our products but I think we really just want to reflect just the general economic conditions in foreign exchange.

Judy?

And I'd like to add to that by just noting, as we have spoken last quarter, as you know we talked about the API business being heavily weighted to the second half of the year, sequentially you've seen improved performance certainly in this third fiscal quarter and we mentioned the activity and the contribution this quarter of the dossier sales.

I'd like to add, though, that there are additional sales expected in the fourth quarter and since those are finite, discreet items that's part of the maintaining a range, a smaller range. But, albeit to your point, it's still a $0.10 range to make sure that we can consider both the economic pieces as well as some discreet items that are in our fourth quarter forecast.

Got it. Last quick one and then I'll jump out, Joe, would you be willing to put any color around what you are expecting in terms of you've done a great job, obviously, growing your Omeprazole and Cetirizine share. Potential for an Indian-based competitor coming on Omeprazole? Would you put any color on what you're expecting when that occurs? Thanks.

Sure. Good question. Omeprazole has obviously been an important product for us and we feel very good about our performance with Omeprazole. I think the issue on this potential product, the only one that I'm aware is the [Dr. Reddy] product. As we look at the product we look at it as more of a line extension product rather than a direct competitor product to us. Is there issues with competition? Yes, there could be. But if you think about it, one product is the magnesium salt, the other product is a base. One product has a capsule formulation, our product is a tablet as well as the national brand is a tablet. We view this as being potentially a line extension for even just the regulatory pathway considerations.

But we are aware of their status. We are obviously closely monitoring that. We will be prepared and I just remind you that just even if you look at our product Cetirizine where we entered the market with numerous competitor - I think at the time there were six to seven competitors including Perrigo - and yet we still hold over an 80% market share of Cetirizine store brand. We expect that we will continue to hold a dominant market share -- a significant market share of our Omeprazole. Certainly the competitive Omeprazole product could be more viewed as a line extension product.

Great. Thanks. Operator: Linda Bolton-Weiser, Caris & Company.

Can you is there any way to quantify how much your 12% Consumer Healthcare growth rate in sales was impacted by pipeline -- fill in the prior year period from the new products?

On a year-over-year basis. So our inventory levels in the channel are flat and if I look at -- if I roll forward as we did in the prepared comments we roll forward incremental new sales. Incremental new sales were still contributing in Consumer Healthcare in the quarter approximately $40 million. So our incremental new products and base volume growth were about 150 basis points increase year-over-year.

So in terms of, if you remember, the Omeprazole launch was in March of last year, and we said at that time that it was approximately a quarter's worth of sales, and that has in fact proven to be true. We have an increase in our overall Omeprazole numbers from our original guidance but year-over-year one month sales were about one quarter versus last year versus a one full quarter this year.

And then you -- is there any way to -- I mean the reallocation of the expense in Consumer Healthcare into unallocated expense. What would the operating margin in Consumer Healthcare have been if you hadn't done that? Like, would it still have been up 30 basis points or did that change the year-over-year change in that margin because of the reallocation?

Let me make sure, first of all, that I understand your question. You are referencing the comment I made about the previously absorbed cost for the Israel Consumer Products business that are now part of the general unallocated costs. Correct?

Well, you mentioned that there was some reallocation from -- yeah.

Correct. So the full year, for the full year just if you think about how to model this going forward, that business absorbed approximately, or was expected to absorb, approximately $1 million of general corporate costs. None of that will touch Consumer Healthcare. It all goes into the unallocated corporate expense bucket which is, as you know from looking at the P&L, its own section in the segment. It does not impact the Consumer Healthcare comparables, the margins, etc.

Okay. And then can you comment -- I mean you had originally had some statements that Omeprazole would be $180 million to $200 million of sales, I guess, in this year. Has it reached the upper end of that or can you give us some sense about how it's doing relative to that original guidance?

Just a reminder, Linda, it's Joe Papa. Just as a reminder, we've always said the annual sales guidance for Omeprazole would be $150 million to $200 million and I think the best answer I can give you right now is we continue to reflect that kind of range. We were at the higher end of the range but clearly we are -- still believe it will be $150 million to $200 million.

And then just in terms of the API and the Rx profit margin, I know you might not want to say much about next year of the sustainability of those margins but at least going into the fiscal fourth quarter can we assume that flat sequentially is at least a minimum expectation?

Do you want to comment on that one?

As I commented earlier on Randall's question, particularly with API, API was going to be very heavily weighted to the second half of the year and so our expectation is that operating margins in the fourth quarter would actually be ticking up. I just made, also, the comment about our expectations of some discreet dossier related activity in the fourth quarter. So by definition that would tick up the fourth quarter margins growth and operating margins in that business. And that is then how we get to our expectations of the earlier quoted full year rates for the API business.

In terms of Rx, sequentially I would not expect a significant change quarter-over-quarter in that particular business unit in terms of the percent margins on operating margin or gross margin.

And then just on the industry, like on the -- it seems like in vitamins that store brand is gaining less share than in some of the other categories and national brand is holding up a little better. Is there some reason for that in vitamins?

Well, actually the data that we have actually would say that store brand is outgrowing the national brands, albeit at a slower pace than the rest of the category, if that is your comment. I do think that that is true.

I think the issue really on the nutritional side of the portfolio, especially as it would relate to national brands, is there is a significant amount of new products. But if I give you the specifics on that, we look at the category data from my slide 1, nutritional category growth is 6.1%, the national brand is 5.8% and store brand is up 7%. So we're still seeing slightly better growth in store brand however, clearly, nutritional products from national brand are up more than any other category of OTC and nutrition. So there is some good national brand growth. It's mostly coming from new products but we look at that as certainly an opportunity for the future for store brand.

Thanks very much.

Derek Leckow, Barrington Research.

Good morning and congratulations. I'm just doing some work on sort of longer-term organic growth rate of the store brand industry and then reflecting on your large market share of that industry. You've got 80% share and how do we think about the longer-term? How do you define that three years out, let's say. Is this industry still going to gain that share from the national brands and then, also, we're looking at 1% or 2% price inflation and so the real organic growth rate right around that 5% mark? Is that reasonable?

You've got a lot of great questions in there, Derek. Let me just comment back at your starting hypothesis. We would say that we have over a 70% market share of the store brand market. We wouldn't say over 80%, just from a starting point, point of view.

So relative to the question, though, where is that growth - if I understand your comment - where is the growth going to come from? We think it's going to come from a couple of important characteristics.

Number one, first and foremost it's all going to be about new products. The strength of new products and the switching from products that are prescription today that are expected to go over-the-counter is really going to be one of the primary drivers for the growth in the store brand over-the-counter market.

You remember I always cite it's a $10 billion of branded products that are prescription today that will switch to over-the-counter status. So I think the first place to start with, the product categories in there are clearly the proton pump inhibitors, the rest is non-sedating anti-histamines, potentially also some products in the topical or dermatology space we think are candidates to switch to over-the-counter status and I think that's going to be the biggest driver.

Second driver though, clearly, whether you look at the current economic conditions or just in general, as consumers get more comfortable with the value proposition of store brand we do expect the store brand share of the total over-the-counter market to continue to rise from where it is today. We expect to see continued growth into store brand utilization as consumers feel more comfortable with the value equation that store brands offer knowing that our products are also approved by the FDA as having the same active ingredients, the same formulations and therefore delivering the same efficacy as national brands.

I those would be the primary drivers of our expectations.

Overall store brand category right now is probably around, what, a quarter of the industry?

Somewhere close to that, yes.

Alright. So as you guys look at your plan here for the next three years, what sort of internal growth rate do you use? Is it really this $10 billion? Is this we're going to see maybe half of that come in the next three years or is it a smaller number than that do you think? And just any kind of commentary around what's the right level of internal growth to expect from that business, obviously it's growing faster than most other categories.

Yes. I think we'll have a chance to talk a little bit more about this in August, I think is the first comment I would offer. But just try to give you some general comments right now. As we look to it we do think that those products will switch in the next five years. Now the only thing I want to give you caution about, there is a dramatic variable on how quickly that affects Perrigo's sales.

In the case of a product like a non-sedating anti-histamine, if that product switches like a [Clarinex] just as an example, that product will likely be a product that we will have immediate access to the market with that product because we have a submission for that product and there will not likely be a three year exclusivity based on historical non-sedating anti-histamines.

However, in the case of the proton pump inhibitors that switched -- so for example, we expect [Prevacid] to switch some time later this year. It is likely that that product, if it does switch later this year, would likely get a three year exclusivity based on the data that was submitted, associated with that switch.

Now these are just general assumptions that we utilize as we do modeling and try to put a probability factor on when we can launch products but those are the things that we try to think about relative to any individual product and/or category switch that could occur.

Now, obviously, we're never perfectly correct. We just try to get a probability factor that allows us to give a good indication of what's going to happen with any new product launch in a category.

Thanks. And one final question, then. If I use a 15% operating margin, after that takes place what you just mentioned, is that out of the question?

So growing our operating margin from the 13.5% to somewhere around the 15% area. That's a strong increase, I will be candid. But we obviously are going to continue to try to strive to leverage our P&L with the operating margin but I think the new products are clearly going to be one of the things that drives our success in improving that operating margin as evidenced by what we've done in the past quarter and what we've done over the last eight quarters.

Thanks very much.

Louise Chen, Collins Stewart.

Just had a few questions. First one is with respect to fiscal 2010, maybe can you talk qualitatively about some of your opportunities with respect to 30 month stays, approvals that you are expecting such as in for Monistat 1, Mucinex, Luxiq and maybe Xyzal?

You've got my list! I always joke about it. Good comments. As I said, I really reserve comments for the fiscal year 2010 until our August timeframe is really when we talk about the next fiscal year but I you picked out certainly some of the important categories. We believe the Guifenacin end of the stay is a February 2010 event, the 30 month stay. And as I said before, we are very -- feel good about our prospects for that intellectual property relative to what's happened in terms of their intellectual property being a bi-layer tablet and our product not being a bi-layer tablet.

Relative to some of the other products that you've certainly mentioned we do believe we've got good opportunities on the Monistat product and other products -- the launched product.

The other thing I would refer to you, I can't go into individual products but I would always remind you that as other products have switched in the past that there are some products out there that switched recently and the end of their three-year expiration date has or will expire in the near future, that will give us some good opportunities to launch our version of those products into the marketplace in the near future.

So there's some good opportunities out there. We're going to go into more detail but if you look at some of the more recent over-the-counter switches that occurred two to three years ago I think it will give you some indication of what we'll expect -- which product areas we will expect for next year.

Thank you. And then maybe you could talk a little bit about some of your key drivers for growth in 2010, just broadly speaking?

Sure. Clearly, one of the areas that we will continue to focus on is new products. And new products are so important to our franchise as they are with every over-the-counter and Rx franchise so new products will always be a part of what we are doing. I think the second thing that you're seeing in our current quarter and beyond is the operating expense leverage that we are executing on and that's something that will help to drive our bottom line portfolio of what we are doing. So that's part of it.

I think I've spoken about in the past that we have -- seek to stabilize the pricing environment and in a pricing environment that has in the past declined in terms of pricing. We are now seeking to hold that flat to slightly up-tick in the pricing environment.

And without -- I could not leave this topic without also saying that the nutritional profitability will be an important driver for our fiscal year 2010. We've taken some very significant hits to that business this year but we do believe that once again, as I've said in the past call, that nutrition over the next six months we think can improve in profitability and that will certainly help be a driver for our fiscal year 2010 performance. And mostly importantly we will talk about that in August.

And maybe just one last question on your consumer business overseas. You've mentioned some intention to enter other markets than just Brazil and Canada. Can you talk a little bit more about that?

Yes. Well, that's pretty straight forward. We have a business in the Consumer Healthcare business in England. We have a business in Mexico. We have relationships in Canada. What we are seeking to do is say we've got a great portfolio of assets being the products that we have, approved products, the formulations that we have. We believe that we could take the product formulations and bring them overseas to other locations.

As we look at what we have done in England, what we see as an opportunity is that we take the product portfolio we have in England and expand that to the rest of Europe. It's not going to be something that's going to happen overnight to be clear, but we do think that, especially as the branded companies like the [Rick Ben Kaiser] of the world take the Mucinex product from Adams here in the United States to Europe, there will be an opportunity for us to take our store brand equivalent of that product into Europe as an opportunity.

I will be happy to also say that we at Perrigo are working very hard in this. We have a dedicated team led by a gentleman by the name of Ron [Yish] at Perrigo working on this opportunity. He's a very seasoned, experienced person at Perrigo with previous experience at GE and other locations. So we're selecting the markets, working on it to see what are the best opportunities for us to move forward with leveraging our current franchise and bringing it to other countries around the world.

Thank you very much.

Greg Gilbert, Banc of America.

Just two quick follow-ups for Judy. You said the business to be divested was originally slated to generate $0.03 in EPS for the year. Can you give us for each of the quarters of this year the sales contribution and the EPS contribution so far?

And the second question is on your guidance slide where you talk about growth rates, are those growth rates apples-to-apples considering the divestiture or not? Thanks.

Sure. Commenting specifically on consumer products, so the first -- I'll just say the year-to-date contribution, bottom line, from consumer products in 2009 has been minimal. Typically that is a very back-end loaded business as well. Their biggest quarters in the year are normally the first and the fourth related to seasonal holidays in Israel. Year-to-date, I don't have the first and second quarter specifically broken out here but we will provide that to everyone to create visibility for updating your model certainly subsequent to this call. But just to give you some flavor, top line in that business in the quarter, as I mentioned, was $18 million. And year-to-date was $67 million. It was forecasted to be approximately $90 million for the year which was in our original guidance at the beginning.

When you talk about bottom line contribution, operating income year-to-date in that business was actually a loss of about $2.5 million and operating income in the third quarter specifically again was a loss of about $1.5 million. So the contributions, there was expected to be a strong fourth quarter with seasonal sales and that was going to be the big compensation to drive profitability in the fourth quarter and thereby create that original $0.03 of EPS which was built into our February number.

When I provided the guidance update on slide, I believe it is, 7 those growth rates have been adjusted to reflect -- I should say our forecast and the guidance we are providing you is adjusted to reflect like-for-like, so it's apples-to-apples, excluding consumer products in both years. But let me reiterate that with the exclusion of that business, these ranges that were originally provided still hold. So the 15% to 22% growth rate of adjusted EPS from continuing operations is on a like-for-like basis.

Thanks. That's helpful.

Ladies and gentlemen, I think that's going to conclude our call for today. I thank you very much for your interest in Perrigo and we look forward to talking to you next quarter. Thank you. Have a good day.

This concludes today's Perrigo's Fiscal Year 2009 Third Quarter Earnings Results. You may now disconnect.