Perrigo Company PLC (PRGO) 2010 Q3 法說會逐字稿

Good morning, my name is Dawn, and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo fiscal year 2010 third 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.

Mr. Art Shannon, Vice President Investor Relations, you may begin your conference.

Thank you, very much Dawn. Welcome to Perrigo's third quarter 2010 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 Perrigo.com. Also on our website is the slide presentation for this call.

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 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 27th, 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 third quarter fiscal 2010 earnings conference call. Also joining me today is Judy Brown, Executive Vice President and Chief Financial Officer. For today's agenda, I will provide a brief perspective on the quarter. Next Judy will walk through the detailed financials, and our assumptions supporting the increase in our fiscal 2010 guidance to $2.75 to $2.80, adjusted diluted earnings per share from continuing operations.

Finally, 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 question and answers. Now let's discuss the quarter. We had a tremendous result across all business units in the quarter. We continue to execute on our plan. We had record third quarter fiscal sales of $538 million, beating our expectations, plus record adjusted earnings per share of $0.76 from continuing operations, which was up 52% from last year on 6% sales growth.

On top of that, consolidated adjusted operating margin from continuing operations was a record 18.2%, driven by strong performance from each of our three business units. Additionally, we generated $57 million in cash from operations during the quarter. Our consumer healthcare unit had record third quarter fiscal sales of $436 million. This was driven by an increased store-brand market share gains, and strong sales in our analgesics category, due to quality issues at a national brand.

On slide three, you can see that store brands gained nearly 10 share points in acetaminophen sales during the quarter. Adjusted operating margin was 18.1% in this segment for the third quarter, up 310 basis points versus last year's adjusted operating margin. During the quarter, the new product launch of our store-brand version of MiraLAX performed very well. On slide four, you can see that in the five-player store-brand opportunity, Perrigo has the majority of customers, and in just five months, our store brand penetration has reached 29%. Brand sales for this product are approximately $220 million annually, and are growing at about 20% per year.

Looking at slide five, the overall OTC consumer marketed was up 1% versus last year, while national brands were down 2.8%, and storebrands gained 11.9%, on the strength of new product launches,and a shift in retailer and consumer preference to store brand in each major category. Store brand is driving the sales growth in the category.

Our RX business unit also had an incredibly strong quarter, we grew RX net sales 22% while operating margin improved a very strong 1,400 basis points to 33.1%, which is an all-time quarterly record operating margin for the segment. Our new over-the-counter prescription business, we call ORX continues to grow, we believe Perrigo is uniquely positioned to capture this sustainable opportunity. Our API segment has turned the corner from a couple of difficult years, to rebound with new product sales and improved plant efficiencies, improving gross margin to over 40%.

I am sure there will be plenty of questions about our updated guidance, but first I will turn the call over to Judy Brown.

Thanks, Joe. Good morning, everyone. As you heard from Joe, continued execution paved the way for another quarter of strong results. During the next few minutes, I will provide you a brief review of the fiscal third quarter results, and then review the revised expectations for fiscal 2010. I would like to remind you that my comments in the third quarter are based on continuing operations only, and do not include the results of our Israel 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 presented. Also on March 1st, 2010, we announced that we had completed the sale of the Israel consumer products business.

We had strong growth year-over-year this quarter. As you see on slide six, consolidated net sales from continuing operations increased 6% to a third quarter record of $538 million, while consolidated GAAP gross profit grew 24%. This gross profit dollar and margin expansion enabled us to grow consolidated GAAP operating income 21%, with an operating margin of 16.2%. On slide seven, you will see that we have excluded five items from our analysis of the adjusted operating basis financials for the third quarter of fiscal 2010, and one item from fiscal third quarter 2009. The fiscal 2010 third quarter adjustments are primarily related to acquisition costs from the Orion and PBM acquisitions, and restructuring charges from the sale of our German API facility. The restructuring in Germany is part of our overall API transformation strategy to make us more competitive globally. You may view the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in the Appendix to this slide presentation, as well as our press release.

Now I will take you through the rest of the financial analysis based on adjusted results from continuing operations. As you see on slide eight, we had solid revenue growth year-over-year during the quarter which was driven by strength in all of our segments. New product sales of approximately $28 million was the largest driver of the increase in net sales. We had tremendous growth in adjusted consolidated gross profit from continuing operations of 24% over last year,4 times the revenue growth rate. This gross profit growth was driven primarily by sales of higher margin new products in Consumer Healthcare, non-product revenue, and favorable movements in pricing in RX, and continuing operating improvements in API. We have continued our efforts to expand margins, and this quarter we drove a nearly 500 basis point increase in adjusted consolidated gross margin over last year.

While it's a great accomplishment, we remain focused on executing against the operational programs that have enabled us to reach these levels, in order to maintain and even improve on this profitability. Although operating expenses were up in dollar terms on increased legal costs related to successful litigation, we were able to improve our expense leverage, and reach an all-time high adjusted consolidated operating margin of 18.2%. Our performance this quarter translated into a 52% increase in adjusted diluted earnings per share from continuing operations of $0.76, up from $0.50 last year.

Now on to the business segments, as you can see on slide nine, Consumer Healthcare's third quarter net sales increased 4%. The growth was largely driven by new product sales primarily in the gastrointestinal, nutrition, and analgesic categories. Additionally the analgesic category benefited overall this quarter for some issues at a branded manufacturer. Increases in existing product categories were offset by a decrease in the smoking cessation category, brought on by the expected presence of competition, as well as a year-over-year decline in our contract manufacturing business. Adjusted gross profit growth was driven by a combination of improved plant efficiencies, favorable product mix, and new product sales.

As we have mentioned before, we actively look to remove lower-performing products from our portfolio. This does in fact place pressure on our top line growth, but overall it drives more value to the bottom line. These combined factors, including pricing and operating improvements in our nutrition category, increased adjusted gross margin to a very strong 31.7%. Improved gross margin leverage was the main driver of the 310 basis point increase in adjusted operating margin. Increased variable incentive compensation expenses and increased legal costs related to successful litigation, partially offset the gross margin improvement. We expect these costs to normalize going forward.

On slide 10, you can see that the RX business continues to perform very well. Net sales growth was driven primarily by an increase in non-product revenue related to Triamcinolone Nasal Spray, new product sales, and positive movements in pricing. Please note that there were no sales of Clindamycin Phosphate foam, the generic equivalent to Evoclin, included in these third quarter sales that you see on slide 10.

Gross profit for the quarter rose substantially compared to last year. The major drives were non-product revenue, product mix, improvements in pricing and operating efficiencies. The combination of all of these factors lead to a nearly 1,500 basis point increase in gross margin. Operating income for the third quarter more than doubled compared to last year. Despite an increase in R&D spending, we were still able to translate this strong net sales and gross profit performance, into the 33.1% operating margin you see on slide 10.

Next looking at the API segment on slide 11, the story in API continues to be about transformation and execution. The net sales increase was due largely to the introduction of new products and to Dossier sales. While the pipeline looks strong, the team has stayed diligent on driving strong margin improvements through improved operating efficiency, which translates into profitability today, as well as positioning us for the future. We again saw triple-digit basis point improvement this quarter as compared to last year.

Now some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $377 million at the end of the quarter, nearly flat to $375 million at this time last year, despite the top-line net sales growth. Looking to slide 12, you can see that our working capital turns and Days Sales Outstanding continue to improvement. We also saw improvements in inventory turns for the quarter. We had strong cash flow from operations for the third quarter of $57 million, bringing our year-to-date total to $216 million, up over 100% from fiscal 2009's $102 million. At the end of the third quarter, cash and current investment securities were $315 million, up from $198 million at the end of the third quarter of fiscal 2009.

Our total current and long-term debt on the face of the balance sheet were $825 million, but included a $400 million back-to-back loan, which is completely offset by the $400 million restricted cash deposit and non-current assets. As of March 27th, 2010, net of the back-to-back loan, our external debt was $425 million, or 28.8% of total capital. Excluding cash and cash equivalents and current investment securities, our net external debt to total capital was down to just 7.4%. Just a reminder, as part of our acquisition of PBM Holdings, we expect to incur additional debt at the time of closing, which is anticipated to occur within the next three business days. This quarter we also paid approximately $6 million in dividends, or $0.0625 per share.

Now I would like to briefly update you on our outlook for the remainder of fiscal 2010. As a starting point on slide 13, you can see where we are versus our last fiscal 2010 guidance provided in February. During the third quarter, we were able to mitigate the identified pressures in our business, capitalize on tailwinds, and execute on many opportunities, resulting in performance that outpaced even our own guidance expectations. Looking at slide 14, you can see our updated consolidated full-year expectations. We are now estimating consolidated revenue growth of 12 to 13%, including approximately $50 million of contribution from PBM. We are now expecting full-year adjusted consolidated gross margin to approximate 33% of net sales, as it is year-to-date, and adjusted consolidated operating margin to be between 16 and 17% of net sales.

As a percentage of net sales, we continue to expect adjusted operating expenses excluding R&D, to approximate 13% or flat compared to last year. Additionally there is no change to our R&D spending expectation, which remains targeted at 4% of net sales. Note that these updated expectations include two months of contribution from the acquisition of PBM Holdings. With the assumptions I just reviewed, we are now expecting full-year fiscal 2010 adjusted diluted earnings per share from continuing operations to be between $2.75 and $2.80, which is an increase of 47% to 50% from fiscal 2009 adjusted diluted earnings per share from continuing operations of $1.87. This assumes an effective worldwide tax rate from continuing operations of approximately 28%.

Finally, looking at cash flow, we expect deal-related expenses to be approximately $8 million negative to fourth quarter cash flow. But even taking these and other deal-related uses of cash into consideration, given our strong year-to-date performance, we continue to expect cash flow from operations to be between $270 million and $300 million for the full year. This has been another strong quarter for us, and an exciting year. The team is already well into planning for fiscal 2011, and focused and ready for the integration of PBM, new product launches, and continued execution.

Now let me turn it back to Joe.

Thanks, Judy. Now that Judy has provided the details from the quarter, I would like to review several of the important accomplishments during the third quarter, as well as our increased earnings guidance, and how we expect to continue this growth. First, it was a very busy quarter for us. Let me start with the acquisition of the infant formula manufacturing business, on March 23rd we signed an agreement to acquire PBM Holdings for $808 million. PBM is the largest store-brand manufacturer of infant formula in the world. We expect to add approximately $300 million in sales, and be at least 10% accretive to GAAP EPS during the first full fiscal year, and ROIC accretive in year two. We expect to grow the store brand penetration in this adjacent category, as we integrate PBM and utilize our marketing and distribution expertise.

In March, we acquired Orion Laboratories for $49 million in cash. Orion is the leading supplier of over the counter store brand pharmaceutical products in Australia and New Zealand. In addition, Orion manufactures and distributes pharmaceutical products supplied to hospitals in Australia. The acquisition is expected to add more than $30 million in sales annually, and be accretive in earnings during the first full year. Orion expands our global presence and complements our existing business. Australia currently has a very low store brand penetration, and presents a great opportunity for future growth.

In February, we received final approval from the US Food and Drug Administration, to manufacture and market Ciclopirox shampoo 1%, a generic version of Loprox shampoo. We began shipping the product immediately. Loprox's estimated annual brand sales for the last 12 months were $26 million. On March 15th, we launched into a new adjacent OTC category, ophthalmics. We began shipping a generic version of Zaditor, Zaditor had estimated annual brand sales during the last 12 months of $15 million.

On March 31st we launched a generic version of Evoclin, this new product is part of our highly successful partnership with Cobrek Pharmaceuticals. Two years ago we partnered with Cobrek for several topical foam products. This past month, our first major launch with them of Clindamycin Phosphate foam was a very significant success. We look forward to launching more new products as a result of this partnership. We also announced with Cobrek that we settled all Hatch-Waxman litigation relating to betamethasone valerate foam, brought by Stiefel, a GSK company. We are taking a royalty-bearing license under all relevant patents.

Under the terms of the settlement, Perrigo can launch a generic version of Luxiq foam on January 15th, 2013, or earlier under certain circumstances. Luxiq foam had sales of approximately $38 million for the 12 months ended February 2010. On April 13th, we entered into an agreement with Graceway Pharmaceuticals to settle all patent litigation regarding our ANDA filing for generic imiquimod. As part of the agreement, we were named Graceway's authorized generic distribute for the Aldara product through February 24th, 2011, and under certain circumstances will be able to launch our generic product after that date. We began shipping product earlier this week. Aldara had sales of approximately $370 million for the 12 months ending February 2010.

Finally we won a favorable jury verdict against Rexall Sundown in an unfair competition lawsuit. The jury unanimously found the statement on Perrigo's store brand packaging inviting consumers to compare the products to Rexall Sundown's Osteo Bi-Flex is not false and misleading, and does not violate Section 43 of the Lanham Act. This verdict is an important victory for store brands, US retailers, and consumers. The jury verdict confirms the statements on our wholesalers and retailers packaging, inviting consumers to compare store brand products to the comparable higher-priced national-brand products are fair and legal. This kind of informational statement helps consumers to identify store-brand products they want, and helps them save as they choose the affordable high-quality store-brand option.

In summary, we continue to execute on our plan, we continue to focus on our five pillars of quality, customer service, new products, low cost structure, and our people. 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 we believe it is well-positioned to continue to capture opportunities in the RX business. Our API business has turned the corner, and is poised for a strong year in fiscal 2011.

Before we move to questions, I would like to publicly thank all of the 7,500-plus Perrigo employees around the world for outstanding contributions to the quarter, and really, what they have done has been truly outstanding. Now let's take your questions. Operator, I would like to open up the line for questions.

(Operator instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Louise Chen.

Hi. Several questions here on the quarter. First question I had was with respect to your guidance. The gross margin, are you updating that at all? The 32 to 33% for the full year for fiscal 2010?

So the guidance that we are now providing and we are approximating 33% for the full year, yes.

And then -- (Overlapping speakers). Thank you. Sorry. And the other thing was obviously you had a great margins this quarter, better than they expected on the Street, and just wondering how sustainable that margin improvement will be going into fiscal 2011? If you see additional margin improvement on top of what you have seen this quarter?

Louise, it is Joe Papa. The margin that we saw in the quarter was very significant. It reflected a couple of things, number one, the importance of some of the new products we launched. Number two, product mix, and obviously the real strength that we see in the generic RX business and the API business, so that was an important driver for us, and our expectations just based on the new products are, that we will continue to have very strong gross margin.

The only thing I will add is that Aldara is an authorized generic, and as a result, as you can imagine, that will have a lower contribution to the gross margin structure. Offset, of course, by PBM, which we do believe will have a higher gross margin. So it will be a little bit of a move between segments, but on balance we do think it will be continuing in this way.

And just last question on PBM, just wondering on when you may giving an update on additional new product opportunities, and then also when we would see better packaging and increased distribution for PBM's products once the acquisition is closed?

PBM, the team, we are delighted with the progress they have made on the new product filings and activities there. So there are some activities that are well underway. We think the team has been outstanding as we have come to learn more about the business since our announcement of the acquisition. Paul Manning and his team have just truly done an outstanding job on it. We will continue to look to continue to move the progress forward from what Paul has done, and the team has done, but I don't want to go into any more specifics on when the next new product will come out.

We are taking a look at packaging. We think there are packaging opportunities to help the consumers more easily identify our products to be the store-brand equivalents to the national brand. And that is something that we will work very closely with Paul Manning and his team on, in terms of trying to continuously improve the packaging design, the labeling design, to help the consumers to compare to the national brands. So those activities are in the works, but probably we hold off to make any specific comments, until we have specific news we would like to share. Also one point I don't want to leave out is geographically, we continue to believe there are a number of geographic expansion opportunities with store brands, and once again, Paul Manning's team is taking the lead here, but we are trying to work it as well with our teams, that we have in countries like Mexico, Australia, and around the world.

Okay. Thank you.

Your next question comes from the line of David Buck.

Yes, thanks for taking the question. Just a couple of questions on what is in the guidance. Just can you talk about Aldara's contributor to profits, and generic Mucinex, how they are accounted for in the updated guidance? And then for PBM, you talked about the accretion for fiscal 2011 in GAAP terms, and previously you said it wouldn't be accretive at all in this fiscal year? Is that still the case? Or did you see an opportunity to take the accretion up sooner? Thanks.

I will take the PBM question first. So we expect that the two months of PBM, I said in my formal comments that we expect the PBM transaction to close within the next three business days, which would imply then that we have the months of May and June in our fiscal year. So on an operating basis, on the adjusted earnings from continuing operations guidance that we provided there are a few pennies of contribution there from PBM excluding charges related to deal costs, et cetera, and then obviously we made the comments on GAAP accretion that go into 2011. We're not commenting on 2011 yet, but we do expect that some of the increase in guidance raise is coming from PBM.

Okay.

That being said again, close expected in the next few days, and we will be commenting in more detail on the full contribution of PBM going forward when we do our August full-year earnings call for the 2011 fiscal year.

Just to repeat Judy, we are saying that the PBM first year GAAP accretion is $0.10 of earnings from a GAAP accretion point of view. We have not changed that one, David.

Right.

Obviously it will depend on the exact closing time as Judy outlined. But $0.10 in the first year, $0.10 in the first year is what we have said, and we will continue to say.

On the question of the guidance relative to Aldara and generic Mucinex, let me go through them individually. On Aldara, our previous assumptions were that we would have an August 2010 launch. That was previously what we assumed after a 180-day exclusivity. As a result of our agreement with Graceway, it allows us to enter the market earlier. As I mentioned we launched this week. So earlier this week we have launched the product into the marketplace, and it is performing very well.

We are picking up our share of customers, and we are excited about this opportunity for us. That obviously has an impact on our ability to enter the market with an earlier than expected launch of the product. So good news there.

On the other hand, we do not have approval at this time for generic Mucinex, as a result of not having approval, FDA approval at this time, we have removed Guaifenesin from our fourth quarter numbers to be prudent. Even though as Judy has previously noted, we are raising our guidance for the rest of the year, but we do not include the generic Mucinex at this time, based on not having FDA approval.

Great. Thanks very much.

Our next question comes from the line of Derek Leckow.

Thank you, good morning, and congratulations.

Thank you, Derek.

Thank you, Derek.

If I would start with the Guaifenesin comment. We are shifted then I guess over to 2011, and could you remind us again, the size of that market, and what you guys are planning for?I think I heard you say you are pruning your portfolio, and if I look at the CHC segment, the 4% growth it all came from new products, but you are discontinuing some existing ones, and I wonder it is because of the Guaifenesin launch next year?

Well, I will start with the facts on Guaifenesin. I am not exactly sure of the pruning of the portfolio concept, but I will start with the facts as I understand them.

Okay.

On the Guaifenesin side, it's a Guaifenesin extended release, a 600-milligram product, it is approximately a $160 million to $170 million. It is in that range in terms of an opportunity we expect into the market first. We expect to have an exclusivity for the product during the early six months of the product, but not exactly six months, here to be defined exactly how long it will be. But our expectation is we are enter the market in that first wave, the first product in the area.

On the question of the pruning of the portfolio, the only area that we have done any pruning in, is in the nutritional category. We had made a decision to exit some of the products that were, I will call them less profitable to us. In fact some of the profitability was at zero or close to zero, and we said it was not appropriate for us to continue to manufacture those products. So we have done some pruning of the portfolio, in that sense in the nutritional category. If that was the question.

Yes, that is what I was trying to get at. So it was wasn't in the cough/cold category?

No, it was not.

I was wondering how that was performing? What are you seeing in the cough/cold category right now?

Sure. Let me just back up a little bit, and I will get to your question. First comment is that our overall business is up about 10% year-to-date just as we compare, for the first nine months of fiscal year 2010 versus fiscal year 2009. So we have our growth right in line with what we had expected. However, as you know and others, and we have talked previously, the cough/cold category was up significantly during our first and second quarter, of our first/second quarter because of the H1N1, it was up in the range of 14% to 15%.

As a result, though, of the earlier flu season with H1N1, we did see some depression in cough/cold sales during the current quarter that we are in, as more and more consumers bought products earlier in the year, and if they were impacted by the seasonal flu, they had the products in their medicine cabinet. So on balance, cough/cold is up, up slightly for the full season, however the latest quarter, it was down slightly from the previous year, if that is the question that you are asking?

Yes, I am just trying to understand that better. Because that slowdown was kind of anticipated, but it sounds like pricing is holding up, and it sounds like inventory levels at retailers are coming down. So I am just wondering, relative to your excellent margin performance here. Is pricing something that could be a factor? Should we be thinking about pricing remaining stable, getting better? Presumably in the cough/cold category pricing from new products obviously helps you, but some of the older products is was what I was thinking about?

On balance, I would say our pricing for our older core product portfolio is flat to up slightly, when you take a look at the OTC and nutritional products. It is flat to up slightly. The real growth of it though, has been in the areas of the new product launches that we have had, and especially as I mentioned when you talk about the generic RX business, new products have been an important contributor to the growth in our gross margin category, from a new product/product-mix category?

And I just wanted to ask the question about competition, I mean, we have seen tremendous shifts in market share, store brands, versus national brands. Are you seeing any difference in behavior on the part of some of your national brand competitors, and are you seeing anything that we, obviously promotional activities, or pricing, or anything changed in that regard?

Yes, well, clearly, the national brands are good competitors. Expect to see continued promotions on their part. However, I think what we are seeing both from the retailers and the consumer point of view is the move to store brand. From the retail point of view, they know that store brand drives their profitability.

From the consumer point of view, they know they can get an effective product and still save some, get a quality effective product and save some value here. So those trends, I think are the same. The only thing I would say remarkably different, is at least I see more innovation on behalf of the national brand manufacturers coming out with more innovative products, and I would believe that that is really going to be the primary way in which the national brand companies tries to compete with the store brand is by coming out with new products.

Great. Let me stop there, thanks a lot, and good luck.

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

Hi, how are you doing?

Good, Linda, how are you?

Good. Just back again on the core Consumer Healthcare business, I think you mentioned that smoking cessation decline contributed a little bit there. What is that is that just more competition from Watson, or what specifically is going on there?

In the core Consumer Healthcare businesses and nicotine, there are some seasonal issues on that one, but also some additional competition from Watson, that is true. That is something that is part of it. Absolutely there is some truth to that. Absolutely.

Just a little bit of like downward pricing pressure?

There is some pricing pressure. I don't want to get overwhelmed by it. I think what is important on the pricing aspect is to remind you that our total core business that the pricing on the total amount of nicotine products is one part of it, but then if you take a look at some of the other categories, we were able to get some pricing increases. So on balance, I still feel very comfortable saying that across OTC and our vitamin nutritional segment, our pricing at this time is flat to up slightly.

Okay. Great.

And from a modeling point of view, use flat. I don't want you to get overexcited by that comment, I would just use flat pricing.

Okay. I got you, thanks. And then can you, just looking forward a little bit to FY 2011, I know you are not ready to give guidance and stuff, but can you talk about a couple, the status of a couple of the new products that could be important on the RX side, like Duac and the Xyzal tablets? Like what the status is?

Yes, well, we are not going to spend too much time on fiscal year 2011 until August. As you knowis our process of how we do it, but we feel very comfortable that in Xyzal we have a first to file. It could be a generic XR product. It may switch to over-the-counter status, based on our at least belief that the other non-sedating histamines starting with Claritin, including Zyrtec, I believe [Leggor] will switch to over the counter as well, and the facts are Xyzal would be a good candidate, on being the isomer of the Zyrtec to switch to over the counter. But we are going to be prepared for a lunch in that product whether be it a generic RX product or an over-the-counter product. On the Duac, we are not going to say too much on Duac at this point. Obviously it is a first to file. We are excited about that. We think it was a great acquisition, and we look forward to getting into that marketplace. But I think there is still a little bit of uncertainty of exactly of what the date is, or to say much more about it before August timeframe.

Okay. And then just on the guidance, I mean, if I take sort of midpoint of your range, like $2.77, that would imply, like about a $0.65 number for the fourth quarter, which is down a lot from the $0.76 in this quarter. So I am just trying to think in my head, like what would make the earnings go down sequentially, when the sales base looks like it is going to be about the same?You are going to have Aldara in there, you are going to have Evoclin in there, can you just explain a little bit?

Yes, it is a great question, Linda. As we looked at it, there are a couple of things, the first one is that we expect to see we will be able to spend some incremental dollars in the R&D category as an example. That would be one of the things that, we spent a little bit less in R&D this quarter than we would like we would have liked, but that is just a normal variation that happens quarter-to-quarter, so we are going to spend a little bit more in R&D during the next quarter as an example, and that is why we are saying the guidance. There is going to be clearly some upside in some products, the Aldara for example. The Evoclin launch, the general RX of Evoclin, those will all be some real positives in our generic RX business. So there are a number of moving pieces, but as we put together the number, we felt it was the best representation at this point in terms of where we are. Judy, I don't know if you want to add anything further?

Just on a purely mechanical front, not to forget also, we always model and give directions towards gross margins and operating margins and the pieces in there in the fourth quarter,the interest run rate will kick up. The tax run rate will kick up, because of the inclusion of PBM. When we gave you the number in EPS, we included those factors, but when you are up above in your model, putting in different line items, not to forget that again the intraspend will have to go up because of PBM, overall tax rate just in that fourth quarter, to get the averaging to still work will be up slightly.

Thanks very much.

Sure.

Thank you, Linda.

Your next question comes from the line of Sumit Kulkarni.

My question is a systems one for [Joe]. So you mentioned Allegra, and it probably going over the counter, but what hurdles would remain in place for you to launch the store brands of these products, and also to get it OTC?

Yes, so we are basing our comments on what we have heard publicly stated and what we are hearing about, from customers about Allegra, it is our belief that Sanofi will utilize their newly-acquired Chatham business, to move the Allegra from a prescription product to an over-the-counter product. We can't say it is going to happen with exact certainly, but we do hear that that is going to happen, and obviously we need to get prepared for that, in the event that Allegra does go over-the-counter.

Assuming it does go over-the-counter, we will need to have the labeling of the product, the OTC product prior to us entering into the marketplace. So we are clearly working to try to understand what the labeling changes will be. We certainly, in the case of Zyrtec, for example, we are able to follow into the marketplace very quickly. I don't expect it to be that quickly, but nonetheless we are going to enter into the marketplace as soon as we can.

How about on Zegerid OTC, when might you be in the position to launch that product?

Yes, the date on that one, I believe is 2012, I believe is the stated date. Now there are some patent issues and things that have come up for that product, but because they have gotten a new indication, my expectation is it is still going to be a 2012 type of event.

In the generic RX segment, you mentioned some non-product revenues, did they contribute differentially positively to the gross margin on that segment?

Well the answer is absolutely. It is very consistent with what we have talked about previously though, and I think, we have publicly stated that the opportunity for the Triamcinolone nasal spray was certainly an important part of that. And that is something we have talked about previously, in terms of payments, quarterly payments that we received.

Those milestone payments drop straight through to operating margin.

Okay. Now that you are getting closer to the PBM acquisition close. Are you providing any more color on the gross margins for that piece of the business?

Not yet at this time. We will obviously provide more information and filings at some point in the near future, but not yet.

Okay. Thanks.

Thank you for your questions.

Your next question comes from the line of Elliott Wilbur.

Hi, Elliott.

Good morning, this is actually Serge Belongie for Elliott. I had a couple of questions. First on your recent launch of the authorized Aldara generics, can you provide some information on the pricing of the product, and how it has changed since Fougera launched their own product? And then --

Yes -- go ahead. You want to finish?

Go ahead. I will ask the question after.

Okay. So I am not going to provide specific comments on pricing. Every customer is a different customer, and they have different requirements and different needs, but I am very pleased with our initial success in getting market share into the market. I am not aware of specific pricing that Fougera has, but I certainly feel that we are launching this product in a two-player market in a very consistent fashion with what I have seen in previous two-player markets.

Also I would comment that our expectation is this will remain a two-player market for some amount of time. We don't expect to see 20 players in this market. We expect to see one or two more at some point in the future, but our expectation is this will not be a 20-player market, just based on the topical requirements for what extended topical type products require from a clinical end point in trial.

Okay. And then secondly, can you disclose the Nasacort-related revenue that was recorded in generic business segment?

In the generic business segment this quarter we talked about non-product revenue. Within that number is $3 million for the Triamcinolone-related payments.

Okay. And what is the total of the non-product revenue?

Four.

Four. Okay. And then my last question, on the nutritionals business, can you just provide some of the more color on the current dynamics that you are seeing?

Sure. Those are the vitamin nutritionals you are referring to specifically, correct?

Yes.

The vitamin nutritional business is a good business for Perrigo. It is approximately 10% of our business ballpark in terms of the size of the business. Second comment I would make is that we did have to make some product discontinuations in the category. However, I am happy to say that as a result of that, we have improved our position. Albeit versus a year ago, to be candid we had a very, very low base of profitability, because of the some of the things that were occurring in the marketplace associated with the Olympics in China, and some of the other activities that occurred from a sourcing of the raw materials.

We have now improved our sourcing of raw materials. We have also improved our ability to manufacturer all of the nutritional products within our current facilities, and as a result of that our profitability has improved in the category from a year ago, and we are on track for our plans. I wanted to be clear though, the profitability of our new traditional business is not as high as our corporate average. It is below our corporate average, and it is on its track to get to where we expect, our expectations are right on track, but it is below our corporate average.

All right. Thank you.

Thank you.

We have a follow-up question from the line of David Buck.

Yes. Two questions. First, can you talk about what the expectations are in terms of timing for generic Temodar in the US?Obviously you have the appeals process. But can you give some sense on what your best thought is there? And then also was there any revenue in the API segment from European sales? And finally, on the call for PBM, I believe you said that PBM would be the highest gross margin business that you will have, highest gross margin segment. Can you just confirm that, and is it also the highest operating margin segment? Thanks.

A lot of good questions David. Let me start with the Temodar. It is hard for us to make any specific comments on Temodar US, in that it is still in the court system process. Obviously our hope is that it will work its way through the court system as soon as possible, but we are working very closely are our partner, Teva, on this particular issue, and I really can't make too many more comments about the court system at this point. I do expect we will hear more about it in the near future, but at this point, it is impossible for me to make any further comment on exactly how it will work its way through the court system.

Relative to the second part of your question on Temodar, or Temozolomide as we call it in the European Union, that is correct, we did ship Temozolomide in Europe. There is a small amount of shipments in it, because it happened fairly late in our quarter. Our expectation is that we will continue to grow. I think at this point we have up to five customers where we are making the Temozolomide raw material, converting that raw material into a finished tablet, and then shipping the finished product to, right now I think we have five specific customers, including Teva, Mylan, Ratiopharm, and two others that I, just escape me right at this point. But we are making good progress with that, and are very pleased with the European launch of Temozolomide, we will have more to say about it next quarter, and for next year. And then I am sorry I forgot your final question, David.

The first one was PBM--

PBM, oh, right. Thank you. PBM is a very good business, and that is why we acquired it, as we previously stated. It does have a very good gross margin structure. Relative to our overall gross margins, it is going to be one of the higher, but I think as you note in our current gross margin for our performance of our RX business, it truly has moved up quite substantially from previous areas, do I don't want you to think it is higher than our RX gross margin that we currently have reported, or just reported.

Okay. So slightly lower than that?

I don't want to say anything more about the number at this point.

Okay. Thank you.

Next question comes from the line of Jon Andersen.

Good morning.

Good morning, Jon.

Hi, Jon.

Just a couple of quick questions. Broadly can you comment on where you are in terms of your SKU rationalization efforts in CHC, and second can you give a quick update on international expansion? Thank you.

Sure. Great questions. On the SKU rationalization, that continues to be ongoing. We have gone in and looked at which products and margin structure on those products and also looking at the volume for the products, to really determine what we think is the best cost accounting for each product, in trying to determine where we should be with the product, and will the product sustain itself for the longer term. So we have done, I think an excellent job of many people would call it weeding the garden, or some type of review on our process for going forward, and trying to understand, where the product performance is, where we think the future is, what the customer value creation opportunities are, and what is important to our customers, because that really helps us to drive our performance over the long term. So we have done a lot of that from the SKU rationalization.

Most of that in the consumer healthcare rationalization has occurred in our vitamin nutritional business, where in some categories we just found that we were not as competitive as we would like, and so we made some decisions to exit some of those products, helping us to, it did depress the sales, but obviously it helped us to build our gross margin percentage profitability.

On the international side, we continue to look to move our business forward. We are very excited about this concept of quality, affordable healthcare not only in the United States, but around the world. Because all around the world we find our needs to grow our portfolio of products, similar to what Perrigo has, because people are looking for quality products, but they are also looking for ones that are affordable, and that is what we think we can provide, so we continue to make steps in that. Obviously the first step was, or one of the first steps was what we did in Mexico, what we did in England. Now what we did most recently with Orion in Australia, we continue to believe that there are opportunities in Asia, in Europe, in Latin America, and South America, and we are going to continue to look for, where can we find opportunities that fit our model, that are licensee accretive.

Thank you.

Your next question comes from the line of Gregg Gilbert.

Thanks. First to just follow up on Sumit's question on Allegra, Joe, it sounds like you don't think the multiple patents in the Orange Book really affect you in terms of a timeline for the OTC market? Do I have that right?

I don't know that I want to say that it way, Gregg. I think there will be opportunities if Allegra goes over the counter, I believe that we will be well positioned to enter into the marketplace at the first wave of product that gets there. I can't tell you exactly when that will be, because I don't know when it is going to go over the counter. However, we do believe that it will go over the counter sometime in the next 12 months or so, based on all of the intelligence we are hearing out there. I do believe that this is a product opportunity that will be I think Sanofi will spend behind it, and it will be a significant opportunity. As a result of that, we at Perrigo want to find ways to enter into the marketplace, and whether we do it ourselves, or through a partnership, we think this would be something that would be a perfect opportunity for us, just based on the success we have had with the Zyrtec product.

Okay. And then on the M&A front, the other consumer categories you are stated interest in the past are ophthalmics and diagnostics, is there any more color within those you care to provide, things you would do versus things you would not do conceptually?

Sure. So you have a very good memory, Gregg. We identified three categories. One category was infant formula. We have now moved on that.

Second category was ophthalmics. We have moved on it, albeit in a small way with our first launch of the Ketotifen product that we just launched this quarter. We do think there are incremental opportunities to launch ophthalmic products into the over-the-counter store brand space, and we will move on that as you will see in the future, probably have more of a chance to talk about it in August, but there are additional ophthalmic products that we think will be important opportunities for us to enter. To be honest we think it is a good market, because it is not as competitive as certainly just an oral tablet. So therefore we think ophthalmics will be good product category for us for the future.

Relative to home diagnostics, that one for us, where people are testing blood glucose at home, or other pregnancy tests. We are in it to a small degree, but we are just looking at that as being something that is important to our customers, and if it is important to our customers, it is important to us, therefore we are trying to see what way we can play a role in trying to improve the overall quality and the value equation of healthcare, by entering into a store brand home diagnostic opportunity. I don't want to make any specific comments about any specific opportunity obviously, but it is all about in our minds the needs of our customers, and trying to identify where they want to go, and what product offering we can bring to help them to get to their, improve their value equation.

And then lastly in the pediatric area, obviously PBM was a very nice entry there, but are there other products in your current line that could benefit that from that increased presence, or are there adjacent categories there that you could make acquisitions into? Thanks.

Sure. Let me start with our existing portfolio. We believe that the strength of the PBM business, and the strength of this business as what they have with the relationships with customers that are overseeing the baby and nutritional business, the baby nutritional business and infant formula business, will allow us to bring certain value to some of the customers that we don't have a big presence with, so they are going, PBM will bring some value, and at the same time we are going to hopefully bring some value as we take the PBM product and try to get a better position than some of the drug retailers.

So I think there will be a synergy that goes both ways on infant formula and pediatrics. Where I will say to be clear though, is that as an example, we have a pediatric electrolyte business, it is a good business, but one in which we think there are opportunities as we work to put promotion together. There are a lot of things that we think the team at PBM has done right, and we hope to follow some of those things as we go forward in the marketplace, to build an even stronger store brand presence for the quality affordable healthcare business.

Thanks.

Next question is a follow-up question from the line of Linda Bolton-Weiser.

Hi. On Procter & Gamble's conference call today, they specifically made it sound like competition in Omeprazole was getting worse. And they kind of used the plural. So do you think, I mean, I don't know if they were referring to the Dr. Reddy's product. But from your viewpoint, has the Dr. Reddy's entry put additional pricing pressure into the market at this point?

Sure. Good question, Linda. Let me just start with some facts, and then just maybe a qualitative comment. Relative to what is happening in the Omeprazole business, and let me even start even bigger, PPI business, for the proton pump inhibitor, the unit volume versus these nine months versus nine months a year ago is up 24%, so clearly you are seeing movement from the older treatments for heartburn, like calcium antacid tablets, as an example to the newer proton pump inhibitors. You have an 24% increase in proton pump inhibitor units, and that is partially the result of Omeprazole, but it is also the result of what we have seen with Prevacid and what we have seen with Zegerid as an example.

And the area that we are also looking at, we are seeing the store-brand business being up, store brand of Omeprazole being up right around that same amount from a year ago, based on what we are seeing for units. And I am seeing Prilosec OTC down slightly from the actual Prilosec OTC brand being down slightly versus a year ago, based on the first nine months of the year at least as we have seen it. So that is the factual data. Do I think though, that there are increasing competition at the brand level by what we are seeing with Prevacid and what we're seeing with Zegerid against Prilosec OTC, the answer to that is clearly yes.

But I think importantly, you are seeing the total category in units grow, which is, if you put this into the analogy of the pie, the pie is getting bigger. It is getting bigger very quickly. Up almost 24% versus a year ago, which I would ascribe to being a very rapid growth of the total pie, but you are seeing some pressure on the brand side as a result of the launch of the Zegerid and also on Prevacid, although I think Zegerid is a little early to make too much of a comment on. So that maybe from a factual basis.

Do we continue to see competition from our competitor in the store brand of Omeprazole? The answer is yes. We like our position as I stated previously. We like the fact that we have had a two-plus year head start, and we have got strong relationships, and this is a very strong, and very important product to our retailers, and we are going to continue to hold our share. I do think Dr. Reddy has gained some share, and will gain some share, but we like our position of where we are in the marketplace.

Thank you very much.

Thank you, Linda.

Your next question is a follow-up question from Louise Chen.

Hi, just one follow-up. Would you ever considering partnering with Par for a store brand Zegerid OTC product?

Good question, Louise. I think what I would say for any opportunity in the store-brand world, Perrigo is the leader in OTC store brand. If there is a product opportunity, I think it makes sense to partner to get a situation where it may not be as valuable to us as if we do it ourselves, but partnerships offer either date certainly, or they also offer ability to get to the market earlier, and what I have specified for my team, is that our goal as the leader in the over-the-counter store-brand products is to be there in the first wave of products, and in that particular case, obviously Zegerid and Par have a very unique position there, based on the recent legal findings, so we will continue to try to talk to them, or for any product for that matter, where we think it is an opportunity to enter into the marketplace to improve, to make quality affordable healthcare a reality for our customers, we are going to try to do it. I don't want to say specifically any product, but I would certainly say we want to be the market leaders. We want to be first.

Thank you.

Thank you, Louise. I think we are going to stop the questions at this point. I want to say thank you everyone for your interest in Perrigo. And I would like to thank the 7,000-plus people that work for Perrigo around the world, for just helping us deliver an outstanding quarter, and truly making quality affordable healthcare a greater reality for people all over the world. So thank you, everyone. Thank you for your interest in Perrigo.

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