Perrigo Company PLC (PRGO) 2010 Q1 法說會逐字稿

Good morning, my name is Latandria, and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo fiscal year 2010 first quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a Question and Answer Session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Art Shannon. Please go ahead, sir.

Thank you very much. Welcome to Perrigo's first quarter 2010 earnings conference call. I hope you all had a chance to review our press releases which we issued earlier this morning. Copies of the press releases are available on our website at Perrigo.com

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 the call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Reform 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 one of the Company's Form 10-K for the year ended June 27, 2009.

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

Thank you, Art, and welcome, everyone, to Perrigo's first quarter fiscal 2010 earnings conference call. Joining me today is also Judy Brown, Executive Vice President and Chief Financial Officer. For our agenda today I will provide a brief perspective on the quarter and discuss some of the positive tailwinds we experienced in the first quarter. Next, Judy will walk through the detailed financials and our increased fiscal 2010 guidance, and then I will give an update on our new product portfolio and launches plus an update on our other business units. This will be followed by an opportunity for Q&A.

Before I discuss the quarter, I would like to thank all of the 6,000 plus Perrigo employees for their excellent achievements during the quarter and year-to-date. Bottom line, we have tremendous results. We continue to execute on our plan with a strong focus on quality, customer service, new product, and our cost structure. We had record first quarter sales of more than a $500 million, surpassing our expectations, plus record adjusted operating income from continuing operations, up more than 45% from last year on 16% sales growth. On top of that, consolidated adjusted operating margin from continuing operations was 16.4% of both gross margin expansion and SG&A management, while generating $38 million in cash from operations in the quarter when the Company is historically a user of cash during the first quarter.

I am pleased to be able to say that in a tight economy we are growing well, even adding over 50 operating jobs in our Michigan facilities in anticipation of a busy cough/cold/flu season which is definitely happening in our second quarter. These results provide us with the data to raise our full year guidance.

Our Rx business unit had a very strong quarter in what continues to be a highly competitive environment. We grew Rx sales 42% while gross margin improved 1,440 basis points. Our new over-the-counter prescription sales or ORX continues to grow. Perrigo is uniquely positioned to capture this sustainable opportunity. This is the second straight strong quarter for this new innovative channel within our Rx business.

Our API segment continues to rebound with new product sales and improved plant efficiencies. Our Consumer Healthcare unit had an all time record first quarter sales. This was driven by the continued growth in Omeprazole with out the presence of competition and strong sales in our nicotine lozenge products. Additionally, at the end of the quarter we launched the cherry flavored nicotine lozenge.

Looking at slide three, the overall OTC consumer market was flat versus last year, with national brands down nearly 3%, but with store brands gaining 13% on the strength of new product launches and increased market share. Most of the individual store brand categories were up as well. The overall gastrointestinal category was up more than 2% over the past year. National brands were down 4% while store brands gained 24%. The surge in H1N1 activity which really began accelerating in early October is not yet reflected in this data.

During the analyst day in New York City in September our team outlined some of the positive tailwinds that give us optimism about our future. These tailwinds included retailers focus on driving store brand market share. As you can see from the statistics I just showed you, that trend continues. In each category, store brands are gaining share versus the national brands as consumers realize the value of the store brand proposition. On the analyst day you also heard all indicators point to a strong start to the cough/cold/flu season. The Company received some early orders in the category during the first quarter but we will see the true impact of the season in our second fiscal quarter. This flu season is historic not only in that it started so early but it also has been declared a national emergency and schools are being shut down around the country. The team is working very hard to meet this unprecedented demand. We have added new operational employees and set production records in many of our facilities that make cough/cold products as we continue to ramp up our operations. I have been very pleased with the team's proactive response to this national situation.

Earlier today we also announced that we have signed a definitive agreement to sell our Israeli consumer products business for approximately $54 million to the Amelia group, a private equity firm in Israel. Perrigo will continue to distribute and support services for the US private label cosmetic business for twelve months after the close of transaction. The team did an excellent job finding the right buyer who has previous experience in the Israeli consumer market.

I am sure you will have other questions about our updated fiscal 2010 guidance, and our market share gains but I will get into detail in that shortly. Let me turn the call over to Judy.

Thank you, Joe. Good morning, everyone. As you just heard we had a very strong first quarter with results exceeding even our own expectations. We're especially proud of our team for their continued focus on execution in such a dynamic economic environment. This focus was instrumental to our success and will continue to be as we look forward to the remainder of fiscal 2010. During the next few minutes I would like to provide you a brief view of the first quarter results and following that discussion I will review where we stand today and our revised expectations for fiscal 2010.

Onto the first quarter results. I would like to remind you that, like last quarter, these numbers are based on continuing operations only and do not include the results of the Israeli consumer products business which were moved into a single line item, discontinued operations, on the face of the condensed, consolidated, statements of income for all periods present.

This was an extremely strong quarter year-over-year. As you can see on slide number four consolidated net sales from continuing operations increased 16% to $528 million while consolidated GAAP gross profit grew 21%. Through execution across all businesses, and leveraging operating expenses, we were able to grow consolidated GAAP operating income by 47%, more than double our top line growth.

On slide five, you will see that we have excluded two small items from our analysis of the adjusted operating basis financials for the first quarter of fiscal 2009 and 2010. You may view the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in the appendix to the slide presentation and our press release.

Now I will take you through the rest of the financial analysis based on adjusted results from continuing operations. As you can see on slide six, consolidated net sales growth from continuing operations was 16% or $72 million driven by a combination of strong sales volumes of existing products and the inclusion of sales from the acquisitions of JB Labs, Unico and Diba in the Consumer Healthcare segment, along with strong volume and product mix in the Rx pharmaceutical segment. This growth was partially offset by $14 million of unfavorable foreign currency impact and by the loss of a customer contract in the other operating segment. Adjusted consolidated gross profit from continuing operations was up 21% from a year ago driven by improved volume and product mix in Rx, continued operational improvements in API, new product sales and material cost improvements. We benefited company-wide from our focus on execution and driving improved efficiencies in most of our manufacturing locations.

Adjusted gross margin increased 120 basis points from this time last year to 31.1%. We were able to translate this 16% top line expansion into a 45% improvement in adjusted consolidated operating income versus last year. And as you can see on the bottom of slide six adjusted operating margin of 16.4% was a 330 basis points increase from last year. Adjusted consolidated income from continuing operations was $61 million, up 57% from last year. Adjusted earnings per share from continuing operations were $0.66, up from $0.41 last year.

Now on to the business segments. As you can see on slide seven, Consumer Healthcare's first quarter net sales increased 19% to $437 million. Approximately 14 percentage points came from both new and existing product sales growth, and another 10% came inorganically from the acquisitions of JB Labs, Unico and Diba. These increases were partially offset by approximately 3% from unfavorable changes in foreign currency exchange rates and another 1% from divesting and exiting certain products. Gross profit was up $17 million from last year. As you can see, though, total gross margins decreased 90 basis points from last year due to lower gross margins associated with the expansion of our contract manufacturing sales base and a negative currency impact from international businesses. These pressures were partially offset by improved material costs and new product sales and the continued strength of gross margins in our core domestic OTC business. Consumer Healthcare's adjusted operating margin was flat to last year at 16.3%. We were able to maintain this historically high margin through operating expense leverage on increased sales.

On slide eight you can see that the Rx business delivered strong year-over-year sales. Operational excellence and customer service has significantly benefited sales in a dynamic marketplace. The Rx team did a terrific job maintaining the sales volume seen in the fourth quarter of fiscal 2009. First quarter net sales in Rx were $47 million, up 42% compared to last year. This increase was driven by strong growth in our new over-the-counter Rx business and strong base business performance. This quarter also included milestone revenue related to the final FDA approval for Triamcinolone which was received by Teva on July 31st of this year. Gross profit in Rx was up $11 million or 104% from last year, and gross margin increased 1,440 basis points from last year. This tremendous improvement was again the result of the strong sales volume and product mix I just mentioned, as well as continuing manufacturing efficiency improvements and the accelerating contribution from ORx.

In all, Rx operating income increased 700% over last year due to the combination of strong leverage, manufacturing efficiencies, and favorable changes in foreign currency exchange rates. Operating margin improved 2,490 basis points to a very strong 30.3%. The Rx team continues to do an outstanding job driving increased sales, improving sales mix and maintaining focus on operational efficiencies.

Next, looking at the API segment on slide nine, execution has been a critical component to this quarter's API results. Sales declined year-over-year by 12% yet the team was able to expand gross margins 850 basis points through major improvements in plant efficiencies, new product contributions, and improved base product mix. The combination of lower operating expenses and improvements to the gross margin drove the operating margin increase of 1,120 basis points you see at the bottom of slide nine. On slide 10 you will also see that although the sales in our Israel pharmaceutical and diagnostic business declined year-over-year, the team has driven adjusted operating margin improvements in the quarter.

Now, some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $343 million at the end of the quarter versus $361 million at this time last year. Looking to slide 11, you can see that our working capital turns have increased 17% over the last three year period. Inventory turns, day sales outstanding, and days payable have all improved, and the team continues to keep focused on these metrics as we move into a very busy operational period for Perrigo. Cash provided by operations was a strong $38 million in the first quarter compared with $1 million last year. This is a record for a fiscal first quarter. Typically our first quarter cash flows are relatively low due to seasonal inventory preparations. However, we're seeing increased sell through in many of our products helping drive cash flows during the quarter.

At the end of the first quarter cash and current investment securities were $257 million down from $316 million at the end of fiscal 2009. The decrease was due primarily to a $50 million payment on our revolver and another $25 million in share repurchases. This decrease was partially offset by our strong operating cash flow during the quarter. Our total current and long-term debt on the face of the balance sheet was $843 million but included a $400 million back to back loan which is completely offset by the $400 million restricted cash deposit in noncurrent assets. As of September 26th net of the back to back loan our external debt was $443 million or 31.3% of total capital. Excluding cash, cash equivalents, and current investment securities, our net external debt to total capital was 13.1%.

This quarter we also paid $5 million in dividends or $0.055 per share. Last Thursday our board raised the quarterly dividend to $0.0625. As I noted among ago, in the first fiscal quarter we used $25 million to repurchase 839,000 shares of Perrigo stock per our 10b5-1 plan.

Now I would like to briefly update you on our outlook for the remainder of fiscal 2010. As a starting point, we can look to slide 12 to see where we are versus the fiscal 2010 guidance provided in August. In the first quarter we have out performed these annual guidelines. As we look at the rest of the year, certain external factors will naturally continue to play a role in our performance. For example, the cough/cold/flu season began to accelerate dramatically near the end of September which we expect will benefit our second fiscal quarter. Also, as of today, our Omeprazole store brand franchise is still alone in the marketplace, so we have built additional momentum for this product into our second fiscal quarter forecast.

As Joe noted, there are a number of other tailwinds that are benefiting us right now. As we said on analyst day our team has kept their focus on many continuous improvement initiatives that we set for ourselves this year. We remained focused on improving our operating expense cost structure while also squeezing efficiencies out of supply chain and manufacturing processes. We're continuing to reassess all of our products weeding out the underperformers and challenging pricing assumptions in others. Finally, we're working to execute our new product pipeline looking for ways to continually expand and diversify the portfolio.

On slide 13 you can see our revised expectations. Starting with the Consumer Healthcare segment we're now estimating year-over-year revenue growth of between 8% and 10%. This reflects the potential benefit to the Consumer Healthcare segment from strong cough/cold/flu in the second fiscal quarter, the absence of competition in the first half of the fiscal year in Omeprazole and continued strong sales in smoking cessation. Like our August guidance, our new forecast does factor in competition in the gastrointestinal and smoking cessation categories in the second half of the fiscal year. We now expect Consumer Healthcare's operating margins to expand between 125 and 175 basis points from adjusted fiscal 2009 14.6%.

In a period when quality issues have hindered some of the competition our Rx team has been able to reliably service customers with quality products. They are driving sales in a dynamic marketplace in both their base business and our expanding ORX business. So we're now targeting Rx revenue growth in the mid-teens and 300 to 500 basis points of adjusted operating margin improvement over fiscal 2009 driven by sales volume, cost management, operational improvements and product mix. Tying together these new expectations and our position today, we are now expecting consolidated revenue growth of 7% to 10%. We expect adjusted consolidated gross margins to be stronger than fiscal 2009 improving 125 to 175 basis points from fiscal 2009's adjusted 29.9%. Given the strong revenue growth and product mix, we now expect adjusted consolidated operating margin to be between 14% and 16% of net sales as compared to 13.3% during fiscal 2009.

In addition, for those of you who like to add some precision to your models between operating and net income, it is worth noting that our forecast for the interest and other line approximates $24 million for the full fiscal year as we have paid down debt and our variable interest rates are lower than last year. With the assumptions I just reviewed, we now expect full year fiscal 2010 adjusted earnings per share from continuing operations to be between $2.35 and $2.45 which is an increase of 26% to 31% from adjusted fiscal 2009 earnings per share from continuing operations of $1.87. This also assumes an effective worldwide tax rate from continuing operations of approximately 27%. Finally, looking at operating cash flow, we now expect the performance of our businesses during fiscal 2010 to translate into cash flow from operations of between $240 million and $280 million.

We are very proud of the team's accomplishments during the first quarter. At the same time we are all fully aware of the fact that the bar is now raised on expectations for the rest of the year. We are more focused than ever on keeping operations flowing smoothly across all areas of the business during this very productive time.

Now let me turn it back to Joe.

Thanks, Judy. Judy has provided you with the details from the quarter and I would like to talk about our increased earnings guidance and how we came to that expected range. We have a great start to the year. Record first quarter earnings along with a strong start to the second quarter gives me confidence that we will meet our revised forecast so let me tell you what our assumptions are for that forecast first. We are currently expecting competition for Omeprazole by the end of the calendar year 2009. Second, we are forecasting a strong second fiscal quarter cough/cold season, then have these product sales of cough/cold/flu products return to more normalized levels in the second half of the fiscal year. We will update you in our second quarter earnings call as we gain more visibility to the duration of the season. The forecast also assumes that the Company continues to operate and execute well.

Considering those factors, we now expect to grow adjusted earnings per share from continuing operations 26% to 31% over last year's adjusted earnings. The Company's organic growth will continue, with plans to bring more than 35 new products to the market this fiscal year adding more than $120 million in new product sales. In fact, nearly a third of the new products for this year have already been launched this quarter but late in the first quarter. We launched the generic form of MiraLAX in October. Brand sales for this product are approximately $200 million annually and growing 20% per year. Pending FDA approval and resolution of our legal issues, we expect to be in a position to bring the store brand version of Mucinex to the market in the next three to six months. Brand sales for this product are approximately $180 million annually. The store brand version of Monistat 1 is expected to come to the market during this fiscal year. That product currently has approximately $80 million in annual branded sales.

These are just some of the new products coming to the market this year. The Rx and API business segments have strong new products coming to market this fiscal year as well with branded sales of over $80 million. While I have stated many times that there aren't any Omeprazole sized individual products coming to the market this year, however, there are numerous quality products that will drive our growth. On September 13th we acquired the ANDA for clindamycin phosphate 1% and benzoyl peroxide gel from KV for approximately $16 million in cash. This product is the equivalent to GSK's Duac Gel. Annual sales for the brand were approximately $165 million. Just last month GSK dismissed its patent litigation with prejudice allowing us to come to the market once we receive FDA approval which we expect could occur in our fiscal 2011.

On October 13th we announced the filing of the ANDA for OTC Minoxodil topical aerosol foam 5%, a generic foam of men's Rogaine foam which has estimated sales at retail of approximately $52 million annually. This represents the sixth foam product filing with the FDA by Perrigo.

Our operations have to be able to meet the demand caused by the current success. We are nearing completion of an addition to our tableting facilities here in Michigan that we expect to be online by the end of the calendar year. This expansion is proving to be very timely. Our current tablet run rate would mean that Perrigo could produce 48 billion tablets this year. That means that every second of every day 1,500 tablets are consumed by our patients. We are continuing to meet the record demand in our OTC business while adding these new products.

In summary, we have made the investments in quality and it continues to be our focus. Customer service is good, even with the increased demand. New products continue to drive our growth as we bring 35 plus new products to the market this fiscal year. As I stated earlier, we have already launched nearly a third of those products for the year already. We believe our balance sheet is strong and positions Perrigo to stay the course for any market conditions while generating strong cash flow. Our OTC business is a clear leader in the category. Our Rx business is beating our expectations and is positioned to continue to capture opportunities to the ORX business. Our results are strong. We are optimistic and excited about our future as we continue to focus on execution. In this challenging environment we're working together with retailers to meet the demand from consumers for cough/cold products. Perrigo is the right company in the right place at the right time to meet the world's growing need of quality, affordable healthcare.

Now let's take your questions. Operator, can you open up the line for questions?

(Operator Instructions) Your first question is from the line of David Buck with Buckingham Research.

Thanks. A couple of quick questions. First on Consumer Health, can you talk maybe a little bit more specifically about what cough/cold was in the quarter? You mentioned just late orders, surprised there wasn't a little bit more impact there. And for Judy, at the analyst meeting recently you gave the fiscal 2011 through 2013 revenue growth in the 5% to 8%. Can you walk about for fiscal 2011 whether or not you think you can be in line with that target after the strong year this year? And that's it for now. Thanks.

Thank you, David. I will start with the first one. The cough/cold influence in the quarter was actually less than perhaps many people would have guessed. Our cough/cold sales are up approximately -- we don't normally break it out but I can give you an approximation -- we were up approximately 11% versus last year which actually if you do the comparison with the CHC it actually slightly trailed the overall CHC growth of the 19%, so it wasn't a big influence. We did see some early orders. The majority of the influence that we saw on cough/cold really started right around the end of that September timeframe as we saw the dramatic increase in the incidence of flu around the country. Judy, do you want to talk about the second part?

Obviously we're only one quarter into fiscal 2010. We're not standing here today saying that we're going to start revising our out year guidance. We went to analyst day knowing, to some extent, that we were off to a good start to the year. We are not planning on revising that 2011, 2013 framework we provided on analyst day noting that's supposed to be a three-year compound average over that period of time. Certainly going into next year we know that we have new products on tap also for next year. We have talked about the growth that we're expecting in our Rx and API group. And obviously as this year unfolds and we see the mix of products we'll be able to talk more about how we expect Consumer Healthcare to continue to evolve as we look into these out years. So we are remaining with the guidance framework that we provided on analyst day September 29th.

If I could sneak in one more question, can you talk a little bit, Joe, about what you're hearing from the retailers in terms of inventories they plan on carrying the second half of the year? You mentioned you're expecting cough/cold to get back to more normal levels, but what are you hearing about maybe preorder for that seasonal flu and inventories there? And also nutritionals, can you give us an update there?

Sure. Let me start with the seasonal flu question, then nutrition. First question, on the seasonal flu candidly it is very difficult to forecast seasonal flu. We are seeing unprecedented incidence of flu at this time. We look at maps of the country, and pretty much the entire country has been impacted by the seasonal flu at this time. The difficulty that we do not know is, number one, we are clearly seeing increased need for seasonal flu product at this time. The demand is very strong, and as I said, predominantly showing up in our October numbers in terms of what we have experienced.

Number two, it is hard for us to calibrate exactly how long the season will go. There is no question the peak is much earlier than expected. In a normal flu year you see peaks fail somewhere in the January/February timeframe. We have seeing a clear peak in the October timeframe as more and more people are talking about the flu and experiencing the flu, and demand has gone up dramatically. The reason we have brought the flu levels down to a more season the second half of the year is simply to be somewhat conservative relative to the incidence because it is so high at this time, and normal flu dynamics tell you once you get to a peak sometimes you will flatten out for the remaining part of the year.

So that's how we are treating flu at this time. Early season, high incidence starting in the October timeframe, and unclear as to whether or not it will peak, though, during this current quarter or will have additional peak in the second half of our year or the beginning of the calendar year 2010. But we're, at this point, modeling it just with the peak in the October, November, December timeframe.

Second part of the question was nutrition. Nutrition did experience good growth although it is still lagging on its gross margin and we're continuing to take the steps to grow that business. The business has grown well. We need to continue to work on the gross margin opportunity for that business and that's something, a part of our ongoing operational efficiencies.

Okay. Thank you.

Your next question is from the line of Greg Gilbert with Bank of America, Merrill Lynch.

Good morning. First for Judy, on selling and admin, those expenses as a percent of sales have come down nicely. Are you doing anything differently there or are we simply at the point where the absolute spend has peaked going forward?

Great question. Thanks, Greg. SG&A this quarter in particular was a bit low. We are still expecting the run rate for the full year to approximate 12.7% which was the rate of last year for distribution, selling, general and admin, so I don't expect that percentage to change. There was some fluctuations in timing of specific activities in this first quarter, so I would not use the spend this quarter and approximate that out for the rest of the year.

Just to clarify, Judy, on tax rate guidance are you expecting 27% for the full year which implies something higher than that for the remaining quarters individually?

That's exactly right. We have gone from a 28% approximation in August guiding it down slightly to 27% for the full year. And the anomaly this quarter, just to be clear, the reason we came out to 22.7% for this quarter, is GAAP requires us to record discrete items when they happen in the quarter, and we had a $4.6 million benefit in this quarter that all went straight through to the tax rate due to the fact that the Israeli government changed the statutory tax rate in the quarter. So we were able to take a one time benefit and that also rolls into the full fiscal year going from 28% to 27%. So the remaining quarters will probably pick up a bit higher with mix but the good guy this time was a one-time benefit for us.

And two product questions for you. On MiraLAX, do you have a shared goal you will share and what's the relative gross margin on that product compared to the rest of the business? And on Mucinex and the follow-up products that will come out in the coming years what do you expect from URL Mutual when you launch your store brand versions? I understand they have an authorized generic or authorized store brand deal although I am not sure what their capabilities are so can you just paint us a picture how competitive you expect the Mucinex lines to be going forward?

You asked me a couple of different questions there, Greg. Let me make sure I get all of them. First of all, on the growth of the store brand version of the PEG or the MiraLAX generic product we do expect that store brands will reach approximately 40% of the MiraLAX share, so in other words store brand share will reach approximately 40%. That will take, we believe, 12 to 18 months, very consistent with previous expectations that we had previously given for a product like Cetirizine and Omeprazole. So 40% store brand share is the first part of the question. Of the business that Perrigo has within the store brands, we expect that Perrigo's store brand share of MiraLAX or PEG will be over 80%, so Perrigo will have over 80% of the store brand share that is gained for this product. On the second question I think you asked about Mucinex.

I am sorry, Joe, the relative gross margin on PEG versus the rest of your consumer business?

It is higher than my average gross margin, so as with most of my new products, Greg, gross margin for new products that we launch recently has been higher than the average gross margin of Perrigo which reflects products that are some of the products in our total portfolio go back 10, 15 years. The newer products, as certainly the case with PEG, will be higher gross margin than my average.

Next question I think was on Mucinex and our expectations for URL Mutual I think is the second part of the question.

Yes.

We do expect that there is a potential for URL Mutual to launch a store brand of the Mucinex product. However, having said that, I think most of the retailers respect the fact that Perrigo will put together a program that's not just manufacturing and having product available but will be a full turnkey program when we get to the market for this product which means that we'll put together not only the product and the tablets in the bottle but we'll put together a full marketing program that helps to reinforce that this product is comparable to the Mucinex product once we get FDA approval and get to the market based on our legal issues. So I do think we'll do well with the product, very similar to products like the MiraLAX product or like the Cetirizine or like the Omeprazole, we'll get that kind of a market share and our share of store brand we will be a significant player of the store brand market for the product.

Thank you. I will get back in line now.

Your next question comes from the line of Randall Stanicky with Goldman Sachs.

Thank you for the question. Joe, just a clarification. I thought you said at your analyst meeting that cough/cold/flu is tracking 16% as you were leaving the month. Is that correct?

The actual cough/cold/flu was ahead at the analyst day 16% versus the previous year. That is correct. However, that was the incidence of the cough/cold/flu. What I shared with you on our 11% growth, if that's what is causing the confusion, that's an internal number reflecting our sales in the quarter was the 11%. The actual cough/cold increase versus last year for our sales. The 16% was the incidence of the cough/cold/flu during versus the previous year.

Okay. Got it. So just a conceptual question. Obviously very strong quarter and strong outlook, so the main question is what's really changed from the analyst day September 29th and why not take numbers up at that point. The source of my question I am just trying to understand how much conservatism there might still be in the numbers from here?

Sure. During the analyst meeting that we did at the end of September, I believe you would say we were very positive on the tailwinds that we had supporting the products, supporting the business, and we just have as a company don't go out with numbers until we finish our quarter, have a chance to do the analysis, and make sure that we are consistent with where we think the growth is from a forecasted point of view for the year, not just simply from any individual quarter. We have a very rigorous analysis because it reflects new products, it reflects all of the assumptions that go into putting probability weighting on getting new products to the market, et cetera, et cetera. So we are not ready at that point to give you specifics, until we finish that and as I said we finished that over the last several weeks. Now, do we think we have positive tailwinds? Absolutely. To me one of the big questions will be when do we see the competition for Omeprazole? Right now we're expecting it by the end of the current calendar year, so by the end of December 2009 is our expectations for competition on Omeprazole. If you have a different assumption on there, you get the different numbers of course but that's really how we're trying to reflect it based on the expectations of the team at this time. As to whether there is conservatism in this, I think it really will reflect on some of those key assumptions.

Fair enough And obviously a lot of strength came from the consumer business and as I look at it, sounds like the increased Omeprazole assumption, perhaps some cough/cold/flu drove a lot of the 200 basis point full year growth assumption that you have built into your new guidance. So if we take that back of the envelope $30 million to $35 million in graded revenue, is that the appropriate way to think about the benefit from those two products?

I don't agree with the first part of your assumption, Randall, in the sense that do I think Omeprazole is important, yes. Do I believe that the cough/cold/flu, at least as we're seeing it in the current quarter, is going to strengthen our revenue growth, yes. But I just want to be clear. What we are seeing that's got to be an important part of this is the move to store brand. The continued movement to store brand as a result of the challenging economy we see. And of course the retailers move to greater utilization of store brand I think is the other important what I would call macro trend that is really affecting our business and allowing us to continue to show strong growth.

And of course the only other point I want to make relative to your comments is the new products. When we put our new products forecast together we put it with a probability weighting. When I actually now can have the MiraLAX PEG product realized, that helps me, new products helps me because the probability factor comes out of the equation, if you understand my comment. Prior to the October 6th time period when we launched, it had a probability weighting. We expected it, but it is not at 100% probability. Now the product is out there, and the probability weighting gets much stronger, of course.

Right. I think we're on the same page. My question is just revolving around the fact that perhaps should we be thinking about further upside than 200 basis points of growth in the consumer business because it sounds like you have a lot of things going in the right direction across several products.

We do. I just don't know, as I said, we really feel the forecast we have here with the assumptions we have here is a reasonable number. Judy, I don't know if there is anything else you want to add to that question.

Again, we're at quarter one, and we're looking at now where we stand with one quarter behind us and the mix of products, as Joe added, with the probability weighting one quarter's worth of probability weighting being able to come off this. So whether you believe that our assumptions on the timing of cough/cold/flu and/or competition in Omeprazole are overly conservative, that will remain to be seen. We'll continue to guide to the rest of the year as assumptions on those critical two items will change.

Fair enough. Good quarter, guys.

Your next question comes from the line of Scott Hirsch with Credit Suisse.

Hi, there. First question I have for you is that almost 75% of the new products in the Consumer Health came from the acquisitions of JB Labs, Diba, and Unico. And I don't think you guys have given us any clear gross margin assumptions out of those acquired products, but can you maybe give us some color on it or at least maybe in aggregate how it represents according to the rest of the business?

I will start and then, Judy, you can make a comment. First comment is that some of the acquisitions that we have acquired that have been both on the contract manufacturing side such as JB but also on some of the pediatric electrolyte business such as the Unico business we acquired, those gross margins, in general at this point are slightly below, or approximate, our current Consumer Healthcare gross margin, somewhere in that range, so they won't drive gross margin out of those areas. So they will not drive gross margin out of those areas. They will be slightly down to flat with our overall gross margin, is the first part of the question.

The second part of the question, or part of the comment, was that that was the major driver of new products, and that is not correct. So I am not sure if we said something that caused some confusion on that, but the new products have been mostly in the area of existing over-the-counter and nutritional products that we have launched as well as some of the API type opportunities.

Okay. I understand you said $36 million of incremental sales from acquisition of JB, Unico and Diba and $49 million of new products, so I was using those two numbers.

You were combining them, so, yes, we were referencing the inorganic sales coming from the acquisitions and expansion in our the preexisting or organic growth side. I understand.

On Omeprazole, have you seen any inventory impact to date? And just curiosity, what are you assuming in terms of which customers go? Do they come in with one customer? Do they come in with three small and customers? What are your assumptions in that regard?

Sure. First of all, the question of Omeprazole, there hasn't been any major build in inventory, if that was the question. I would say our inventory position in terms of day sales on hand is relatively comparable with last year, maybe down slightly in terms of day sales on hand at our customers, but no major changes within our customer versus a year ago, first comment.

On the second comment on Omeprazole, our expectation is that the product from our competitor will come to the market, as I said, by the end of the current year. Our expectation, though, is that they will be at incremental add to the customer. In other words our product will be in the customer, it is a very strong brand of Omeprazole, store brand Omeprazole. This will, because it is a different product, it is a capsule, and most customers, our expectation it will be an incremental add for the customer. So they will have our product on the shelf, but they will also add the capsule product from our competitor.

Not replacing you in whatever customer?

At this time we have no basis for understanding anyone that would replace us. It would really be more of an incremental add is the expectation at this time.

Okay. Just very lastly, what are the lead products in the ORX category you mentioned, the over-the-counter Rx, what's really leading the way for you?

We don't go into individual products in that area because of competitive purposes, but I think it is fair to say is if you look at the products that have switched from prescription to over-the-counter over the last five years, those will be the leading categories where we play in that space. For competitive reasons we don't to want talk about any specific products in the category, but products that have switched from prescription to over-the-counter status in the last five years really will be the major drivers.

Okay. Thank you.

Your next question comes from the line of Derek Leckow with Barrington Research.

Good morning. Question on your research and development spending, it's relatively flat here in the quarter, down about 50 basis points as a ratio. I wondered if you can give us some updates on your research and development spending plans as far as is it going to be held at a lower level going forward or should we expect that to, with timing, bounce back? Is there something going on there?

No. It will bounce back, Derek. It really is just a normal quarterly variation. We expect it to be approximately 4%. It is very consistent with where we have been in the past, just you always get a little bit of oscillation depending on what clinical work gets accomplished during the quarter but 4% is still our assumption.

It is a longer term target as well, right?

Yeah.

Yes, and as I commented on in earlier calls, just to remind everyone, we include our paragraph 4 litigation costs in the R&D line, so between the lumpiness that can happen with clinical trial timing, as well as the lumpiness that might happen with paragraph 4 defense costs, quarter to quarter there can be some variability, but it is still 4% for the year according to our forecast.

And of course the external R&D when you buy products, that winds up in a different area as well, right?

Let me be clear. When we buy a product, if we do the continuing R&D work, it would stay in our normal R&D budget. I think if you're talking more about the specific dollars,, for example, in our acquisition of Duac, that would be outside, if that's what your question is.

That is my question. It has to do with other products you might be adding here. You have, obviously, the ability to go out and buy these products now and my understanding is there is probably more available. I wonder if we'll see more of that type of arrangement going forward?

I think that's a good comment. That's a fair comment. We at Perrigo believe the opportunity to do these bolt on acquisitions, whether it be an individual product or a business that is an adjacent product category, represent a good opportunity for us to go forward and use our strength of our balance sheet to go out and pick up these opportunities.

As a final question on your international expansion can you provide an update on that project?

Sure. Just as a reminder, when we talked about two other areas of growth, one was the adjacent product category. The second one is the international opportunity as we look to expand internationally. We have dedicated resources to that, have put together a team of people that are out looking for opportunities either through acquisition and/or joint venture where we would bring the product portfolio Perrigo has today in the US, in England, in Mexico, in Canada and take that product portfolio and bring it to other geographical areas with the opportunity. We have resources dedicated. They're looking for what's the best way to do this, is it through an acquisition or is it through some kind of joint venture opportunity. And we're looking at Europe as well as Latin America, South America, and to some degree, some Asia opportunities for that to come to fruition.

So as far as your guidance is concerned, there is really no assumption for anything from that project at this point in time?

No assumption, and any acquisition is not in the assumption at this time.

Thank you.

Your next question comes from the line of Louise Chen with Collins Stewart.

Hi. Just a few questions. First question is with respect to your fiscal 2010 guidance. Just curious if you're maintaining the prescription growth rate of 5% to 7% and then the API business being flat for fiscal 2010?

I commented earlier that we were now expecting the generic Rx business to grow top line in the mid-teens.

Second thing is your analyst day you talked about how you expect the Rx and API business to be increasingly larger growth drivers going forward over the next three years. Can you elaborate more on what's going to be driving that?

That question is a very good question. It really refers back to our expectations for new products. We have made some very sizable investments in the new products side of the equation for the Rx team. Rx R&D is somewhere closer to the 10% of sales. We made some big investments over the last three years I have been with Perrigo in the Rx side, and really what we're just going to see is that come to fruition.

On the API side it is a little different question there. That business is just how it happens is more of a lumpier business. We have had a couple of years of what I would call lesser performance and now we'll just see better return to the norms for that business. That's going to help drive the increased growth in the future for the API business. One of the products that we had talked about is Triamcinolone product opportunity certainly in Europe as one example of the opportunity to bring new products to the market on the API side. But by far it is a lumpier business, it has more variation in the quarterly results and we expect the API business to improve just on the new product side.

Last question is just on this distribution of support services agreement related to the sale of your Israeli consumer business. Is there a financial impact of that or how meaningful is the financial impact of that?

What we agreed with the buyer's party, in order to have a very smooth transition and to have a seamless handing of the baton for our US customers, would be that we would provide distribution support services for a fee over that period of time. But in terms of the materiality of the numbers, or contribution to the bottom line EPS, it would be next to invisible, perhaps $0.01, but not something that would really move the needle.

Thank you.

The next question comes from the line of David Wysinger with Morgan Stanley.

Thanks very much. You obviously have some tremendous growth drivers ahead, but you mentioned a couple of areas where you're expecting competition. I am not sure what type of disclosure you provide, but is there any way that you can quantify the run rate of Omeprazole and smoking cessation for your company and the degree and the impact of competition that you expect, just so that we can understand what level of competition to expect and how to think about the progression of the numbers?

Okay. Good question. On the growth drivers clearly I will start with the new products. It is the move to the store brand as being certainly part of the growth drivers and it's new products, the incremental new products. Having said that, there are a couple there that we have made expectations on Omeprazole, for example. We have said Omeprazole is a $200-plus million product, and our expectation is that we will see the appearance of one additional player in the marketplace for Omeprazole, and our expectation right now is at the end of this current calendar year. We have not given a specific number as to what percent share and/or what will be the pricing impact because we just don't have that information. We make assumptions on it but you can use that from basically any other two player market that is where it occurs.

The one thing, though, that has to be mentioned on Omeprazole that is an important part of this question is that the total market for store brand Omeprazole continues to grow. It is not as if it has hit, like in generic Rx you hit a very high peak of 85%, 90%, generic erosion within the first couple of weeks and you stay there and then you come down as you face additional competition. In this particular case, we are now, store brand Omeprazole is in the 40%-plus share, but it is continuing to grow. So at the same time that we will get a new competitor, we'll still see increased utilization of store brand Omeprazole, and that's part of the total expansion of the pie. So that is part of what we're looking at in terms of Omeprazole.

Nicotine, there is one other player in the marketplace. That player received an approval on the nicotine coated gum. I believe it was early calendar year 2009, and they have share. They in fact have a couple of different customers they have share with, and that pretty much is a relatively stable market. There is going to be some gains and losses with any individual customer but we don't see big changes in the nicotine business from where we are today.

And how big is that business for you?

We don't give out those individual category numbers for competitive purposes.

Thank you.

Your next question comes from the line of Linda Bolton-Weiser with Caris.

Hi. How are you? I know you probably don't want to talk too much about pricing assumptions for Omeprazole, but can you think of another example in the Perrigo portfolio products where you had some exclusivity on a high margin product like this for a long period of time and then another single competitor came into the market, and what the price discount was that made its way into the market? Is it 5%, 10%, 20%? Also, I am sure you have measures that you're working on to try to maintain the growth margin of Omeprazole even if the price comes down. Would that be true or do you think there will be some growth margin degradation?

It is a great question. Relative to Omeprazole, once again, I really can't comment on any individual product. It obviously would depend on who the competitor is and what their current situation is. However, I think as a general rule if you ask me what's a general rule, I think something like 10% to 20% pricing decrease is a possibility in any general rule when a new competitor shows up into a marketplace. That something like that is a possibility, 10% to 20% pricing reduction. But I will tell you on a gross margin one of the things that we have done I think very effectively is I think as you know we have an API business. That API business has run the cost of goods analyses if we were to make the Omeprazole active ingredient ourselves. That gives us a very good what I would call credible threat to understand. If we can understand what the cost of the API is, it helps us to negotiated better for a good strong cost of goods, and improvement in cost of goods, relative to the active ingredient, which usually active ingredient runs something like 40% to 50% of the total cost of the business, the product.

So your agreement with your partner on that product allows to you perhaps take it inhouse at some point?

No, I want to be clear. It is where is the API source for the active ingredient, where is that sourced from. The ability to get the best cost of goods for the active ingredient portion of that product, it is important to know what the actual run rate would be and then to utilize that as you negotiate to get the best cost of goods, a fair cost of goods for your product. By having the ability to do it ourselves gives us a good understanding how much we should or should not receive for the cost of goods of the product.

Okay. And then can I just ask on the proceeds from the sale of the Israeli business, do you take a tax hit, is that money abroad? In other words, can you only use it going forward for an acquisition that's international or can you use it for a US acquisition?

We have not finalized the cash flow on all of this yet. We're just a announcing it this morning. Suffice it to say there is going to be tax planning that goes into the process of closing the transaction. And while we may be able to repatriate some of that cash there is also a list of opportunities we're looking at making investments internationally as well. So I'm not going to commit one way or the other if the cash is going to stay there, stay internationally or come back, but we believe there would be opportunity also in our international operations as we're doing a lot of growth as you know with the transition to India and investments we're making in upgrading our facility in Israel as well.

Okay. Thank you very much.

Operator, I think we have time for one more question.

Certainly. Your final question comes from the line of John Andersen with William Blair.

I was wondering, Joe, if you could comment, you obviously expect competition in Omeprazole now by the end of the current calendar year. Is that based on any new market intelligence or is visibility better now on that than it was, say, three months ago?

It is really based on just the fact that our competitor received an approval for this product in June of 2009. Our expectation was, candidly, they would be in the market by this time. However, since they are not, we just wanted to move it out essentially one quarter. We really do not have any other intelligence that tells us they're coming to the market other than just that we felt it was prudent not to expect them not to come to the market so we said we would move it out one quarter to the end of December 2009.

Thanks. Just one more quick one. I was wondering if you could comment broadly on what you're seeing in the channel both from your major retail customers that might explain the continued share gains for store brands relative to brands. And then what are you seeing from your branded competitors? Is there more price promotion going on, price rollbacks, that you are either seeing or may expect to see going forward?

Good question. On the channel side, all of the retailers that we've had a chance to interact with are really talking about the importance of the store brand private label offering. They see it as being an important way, especially in the current economic situation we find ourselves in, to move additional business to store brand because of the fact that people are looking for a better value equation. Because our products are FDA approved to be identical to the brand in the sense that they get the same efficacy, the store brand offering has become very important to consumers as they look for better value. We're just seeing more and more of that in the marketplace.

On the question of the brand side, what we're seeing there is predominantly additional couponing and additional promotional activities. We haven't seen anyone lower their base price. It has just been additional couponing type efforts to try to look at what we are doing in the store brand category. So strong, strong growth in the use of store brands as the consumers seek the better value of store brands.

Thank you congratulations.

Everyone, I just would say thank you very much for your attention to our numbers and your participation in today's call. We are very excited about what it means for Perrigo going into the future. And I once again would like to thank the 6,000 plus people at Perrigo who are working very hard to deliver these results and focus on quality affordable healthcare products. Thank you, everyone. Have a good day.

Thank you. This concludes today's conference call. You may now disconnect.