Perrigo Company PLC (PRGO) 2011 Q1 法說會逐字稿

Good morning, my name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo fiscal 2011 first quarter, earnings results conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Art Shannon, Vice President of Investor Relations. Sir, you may begin.

Thank you very much, Lynn. Welcome to Perrigo's first quarter, 2011 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the press release is available on our website at www.perrigo.com. Also on our website is a 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 this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forwarding looking statements on page 1 of the Company's Form 10-K for the year ended June 26, 2010. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art, and welcome everyone to Perrigo's first quarter fiscal 2011, earnings conference call. Joining me today is also Judy Brown, Executive Vice President and Chief Financial Officer. For our agenda today, I'll provide a brief perspective on the quarter, then I will give you an update regarding the progress to resolve the warning letter at our Allegan, Michigan site, next, Judy will walk through the detailed financials and our increased fiscal 2011 guidance and then I will give you an update on our new product portfolio and the tailwinds going into our second quarter. This will be followed by an opportunity for question-and-answer.

Now, let's discuss the quarter. We had a great quarter, with record first-quarter sales of $641 million plus record adjusted income from continuing operations up 22% from last year on a 21% net sales growth. On top of that, consolidated adjusted operating margin from continuing operations was 19.2% driven by gross margin expansion and the acquisition of our infant formula business PBM. Our new reportable segment, nutritionals, which includes infant formulas, vitamin and mineral supplements and oral electrolyte solutions, exceeded our expectations due to strong performance in the infant formula business. Net sales in nutritionals were $123 million with adjusted operating income of $24 million.

I am very pleased by the rapid progress the PBM nutritional team has made with the launch of a new store brand label redesign program and also larger package sizes for several of our leading retailers in quarter one fiscal '11. Our generic RX business segment had another strong quarter as it continues to execute ahead of our expectations. Generic RX net sales increased 47%, and adjusted operating income grew 20%. The strength has been from the RX base business which continues to grow, as competitors work through manufacturing issues. Our API segment continues to perform well with a 13% increase in net sales and a 141% increase in operating income. This was driven by strong European sales of Temozolomide during the quarter. Our consumer healthcare unit had another all-time record first-quarter sales, up 4% versus last year. This performance was driven by $17 million in new product sales.

Looking at slide three. The overall OTC consumer market was up just 1% versus last year with national brands down nearly 4%. But store brands gained 15% on the strength of new product launches, national brand recalls and increased market share gains. The analgesic category was obviously impacted by a recall at a competitor, however all of the individual store brand categories were up. Please note that this data represents the last 52 weeks activity. The obvious question in our OTC business is why weren't revenues even higher? The simple answer is that as we work through the remediation of the FDA warning letter at our Allegan, Michigan facility, the throughput in that facility was pressured over the summer months.

At the end of the quarter one, we had approximately $25 million to $30 million of consumer healthcare sales demand or backlog, that we could not ship during Q1. This backlog was carried into the second quarter and shipped during early Q2.

In summary, our business performance has exceeded our expectations during quarter one and we are raising our full-year guidance. I know you may have questions about our updated guidance and our market share gain, and I will get into that detail shortly. But first, let me turn the call over to Judy to provide additional details on the quarter.

Thanks, Joe. Good morning, everyone. As you just heard from Joe, on a consolidated basis, we have a strong start to the year. Even more so than we had anticipated given the challenges we knew we faced related to the remediation of our Allegan warning letter. During the next few minutes, I will give you a brief overview of our fiscal 2011, first quarter results, and then review our revised expectations for the remainder of the year. I'd like to remind you that my comments today are focused exclusively on results from continuing operations. Also, as you review the press release from this morning, You will note that the Company has realigned its financial presentation to include a new reportable segment, nutritionals.

This nutritionals segment consists of Infant formulas and foods, oral electrolyte solutions and vitamin, mineral and supplement products. I will review the results of this segment today and will also provide an update to the guidance reflecting this new segment. And now onto the results.

As Joe noted on a consolidated basis, we had a strong year over year growth this quarter. As you can see on slide four, consolidated net sales increased 21% to a quarterly record of $641 million. Consolidated GAAP gross profit also had strong growth at 31% for a 33.4% gross margin. This growth profit dollar expansion combined with operating expense leverage enabled us to grow consolidated GAAP operating income 55%.

On slide five, you'll see that we have excluded one item, deal related amortization. From our analysis of the adjusted operating basis financials for the first-quarter of fiscal 2011 and three items from the first quarter of fiscal 2010. You may view the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in the appendix of this slide presentation and to our press release.

Now I will take you to the rest of the financial analysis based on adjusted results from continuing operation. On slide six, you can see again that we had strong first quarter revenue growth year-over-year driven primarily by the acquisitions of PBM and Orion, which added nearly $83 million. And, also strong, consolidated new product sales of approximately $49 million.

We had strong growth in adjusted consolidated gross profit, up 32% over last year. This adjusted gross profit growth was also driven primarily by the acquisitions of PBM and Orion and from new product sales. Those factors also combined to help drive our adjusted gross margin up 280 basis points over last year, to a very strong 34.5%. This is despite the margin pressure related to the structure of our partnership for the authorized generic of Aldara, in which we recognize all the sales, but keep only a percentage of the profits. In addition this adjusted gross margin also include incremental costs related to our warning letter remediation activity. Our performance this quarter translated into a 23% increase in adjusted diluted earnings per share from continuing operations to $0.87, up from $0.71 last year.

Now, let's move on to the business segment. Looking to slide seven in our consumer healthcare segment, I again remind you that part of the business has been split off into the new nutritional segment which I will review in a moment. Consumer healthcare's first-quarter net sales increased 4% year-over-year. The growth in sales comes from an approximately $18 million increase in sales of existing products, primarily in the analgesic, cough/cold and feminine hygiene category, $17 million of new product sales, primarily in gastrointestinal and smoking cessation and lastly incremental sales of $7 million from the acquisition of Orion.

These increases were partially offset by a $21 million decrease in existing product sales in the smoking cessation and contract manufacturing categories. We have been experiencing increased competition in smoking cessation which was a primary pressure in that category during the quarter. We also had an additional $5 million decrease of cough/cold products in our United Kingdom business due to the relative timing of the flu season in that market versus last year. Overall, our core base business is performing well, despite the throughput pressures in manufacturing that Joe mentioned in his opening remarks. We enter the second quarter, however, with strong demand and a sizable product order backlog that we are filling.

The small increase to adjusted gross profit was driven by a combination of new product sales and the acquisition of Orion. The 50 basis point decline in adjusted gross margin was due primarily to increased investments in quality and the aforementioned pressure from competition in smoking cessation. During the quarter we also saw a positive benefit to cost of goods sold from supply chain and procurement initiatives.

On slide eight, you see that our new nutritional segment had a strong quarter that benefited the overall Company. The acquisition of PBM was the main driver of the net sales increase, which was partially offset by a year-over-year decrease in net sales of vitamins, minerals and supplement products. The year is off to a good start in infant nutrition, with net sales ahead of our expectations. Demand for our infant formula products is strong and we are very excited about the future opportunities for that product category. The adjusted gross margin improvement was driven by both the acquisition of PBM and by very strong year over year improvement in the vitamin, mineral and supplement product category. Which, if you recall, was still recovering from a challenging period of high commodity prices and capacity constraints last year. Adjusted gross and operating margins in the infant formula category were also above our expectations.

On slide nine, you can see that the RX business continues its strong performance. Net sales growth was driven by new product sales primarily Imiquimod Cream, the authorized generic of Aldara. Adjusted gross profit for the quarter was strong, compared to last year due to the success of new product sales as well as improvements in pricing. As expected, we experienced a decline year-over-year in adjusted gross margin, attributable to the sizable gross profit dollar contribution of the authorized generic partnership with Graceway Pharmaceuticals for Aldara. Adjusted operating margin was down 660 basis points, largely due to the impact on adjusted gross margin of the Aldara AG I just mentioned, but it was partially offset however by SG&A leverage from the increased product sales seen in the quarter.

Next, looking at the API segment on slide 10. First-quarter net sales were up 13% compared to last year. This growth was driven by new product sales of Temozolomide in Europe which was further benefited due to a recall at our only generic competitor there. Sales of Temozolomide in Europe were also a major driver of the 1200 basis point expansion in adjusted gross margin. Temozolomide and decreased expenses related to the restructuring in Germany, together, helped to drive an over 1500 basis point increase in adjusted operating margin this quarter.

Now, some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $387 million at the end of the quarter, up from $348 million at this time last year. The increase was primarily related to the acquisitions of PBM and Orion. Cash flow from operations for the first quarter was a negative $6 million caused in large part by the timing of our quarterly sales, payments of fiscal 2010 management variable incentive compensation and tax payment. There is no change from our original August guidance of $350 million to $380 million of operating cash flow, expected for the full-year fiscal 2011. As of September 25, 2010, total current and long-term debt on the face of the balance sheet was $905 million. This is down sequentially from $1.34 billion at the end of fiscal 2010 and is primarily the result of the close out of the $400 million back to back loans which has been in place since 2005.

Excluding cash, cash equivalents, and current investment securities, our net debt to total capital at the end of the first quarter fiscal 2011 was 41.3%. Subsequent to the end of the first quarter we took another proactive step to further strengthen our balance sheet while enhancing our long term financial flexibility. Given the very favorable lending markets for companies with our very solid credit profile we decided to do an early refinance of our $100 million term loan. We replaced the 2011 maturity loan with a $150 million term loan with a final maturity in October 2015 and used the additional $50 million to pay down the remainder of outstanding revolving debt. We also then increased our total revolver, from $250 million to $350 million to reflect the growth in total assets in our balance sheet from $1.7 billion in 2005 when we opened this revolver to $3.1 billion at the end of fiscal 2010. After this refinancing, based on the amount of variable and fixed rate debt outstanding, and current LIBOR rate environments, our weighted average cost of debt, is now below 5%.

This quarter, we also paid approximately $6 million in dividends or $0.0625 per share. I'd also like to note that last Wednesday, our Board of Directors raised the quarterly dividend 12% to $0.07 per share. Now I would like to discuss our updated earnings outlook for fiscal 2011. As a reminder, our earnings outlook will be based on adjusted financials from continuing operations which now exclude deal related amortization. I would also like to note that for your modeling convenience, we've provided quarterly and full-year financial non-GAAP reconciliations for fiscal 2010 reflecting this new methodology. Those reconciliations can be found attached to the press release and as well on our website.

First, looking to our consolidated projections on slide eleven. For fiscal 2011 we are increasing our expected adjusted diluted earnings per share from continuing operations for the year to be between $3.60 and $3.75, an increase of between 19% and 24% compared to fiscal 2010, $3.03. Looking to our segments, following the division of our consumer healthcare segment, we anticipate CHC revenue growth of 7% to 9%, driven by new product sales, increased sales in analgesic and children's suspension products related to challenges at our competitor and the acquisition of Orion. We expect this to translate into a fiscal 2011 adjusted gross margin of between 32% and 33% and an adjusted operating margin of between 18% and 19%.

In our new nutritional segment we expect sales to be nearly double that of the full-year sales for fiscal 2010 mainly due to the acquisition of PBM. We expect fiscal 2011 adjusted gross margin of between 34% and 36% and an adjusted operating margin of between 18% and 19%. In RX we now expect topline growth of over 30% compared to fiscal 2010 driven primarily by new products. We expect adjusted gross margin to be in the range of 44% to 46%, and adjusted operating margin to be in a range of 31.5% to 33%. I want to remind you again that there is some downward pressure year-over-year on adjusted growth margin, related to our partnership on the authorized generic of Aldara. However, sales of this product will provide a healthy contribution to net sales, adjusted gross profits and adjusted operating income for the year.

In our API segment we now expect a slight decline in topline sales compared to fiscal 2010. But, please note that our assumptions here do not include any sales related to the potential launch of a US generic of Temodar. However with new product sales this year, and improved productivity we expect API gross margin to be in the range of 44% to 46% and adjusted operating margin to be in a range of 22% to 24%, both improvements from last year.

Summing everything up back at the consolidated P&L level on slide 12, we now estimate consolidated net sales growth to be at the lower end of our August guidance range of 20% to 23% over fiscal 2010. This increase will be driven by acquisitions, new product sales of over $180 million and growth in our base business. We continue to estimate adjusted consolidated gross margin between 34% and 35%, which includes the incremental cost related to our resolution of the FDA warning letter. We expect R&D expense to approximate 3.5% of net sales. This then translates into an adjusted consolidated operating margin range of between 18% and 19%. Lastly, for our planning purposes, we continue to assume an effective worldwide tax rate from continuing operations of approximately 29%. In total, this brings us to an estimate of adjusted diluted earnings per share from continuing operations of between $3.60 and $3.75.

As mentioned earlier, we continue to expect cash flow from operations to be between $350 million and $380 million for the full year. Fiscal 2011 is off to a fine start financially. While the operating teams are working diligently to meet the strong demand for our products, we will likewise continue our focus on further strengthening our already strong financial foundation. And with that, let me turn it back over to Joe.

Thanks, Judy. Now that Judy has given you all the details from the quarter, I would like to talk about our increased earnings guidance and how we came to that expected range. We've had 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. Demand for our products is very high, as evidenced by the market data. And production output has returned to more normalized levels allowing us to improve our customer service. Also adding to my confidence in the increased guidance is a recall of a competitor's national brand infant formula product. Nearly all the incremental sales due to that recall began in the second quarter of our fiscal year. Additionally, another competitor in the infant formula segment, recently received a warning letter. We cannot predict any outages for this infant formula product, but we will monitor the situation closely to make sure we are prepared for all possible outcomes.

And just to reiterate, the new fiscal '11 guidance does not include any contribution from the potential US launch of Temozolomide, or the RX to OTC switch for Allegra. The Company's organic growth will continue. We expect to bring more than 50 new products to market this fiscal year, adding more than $180 million in new product sales of which 25%, or nearly 25% of these new products were already sold during the first quarter. The generic RX based business continues to grow as competitors work through their manufacturing issues. We also expect new products in the second half of our fiscal year to add to this growth of the RX business. Our API business is poised for very strong growth with the EU Temozolomide launch and the potential US launch of Temozolomide. Quality continues to be our highest priority at Perrigo, the FDA is appropriately continually raising quality standards globally to ensure the highest product safety for patients.

We are investing the necessary resources and making the incremental investments in quality to go beyond the FDA's expectations. We expect to resolve the warning letter and look forward to the FDA's reinspection of our Allegan, Michigan facility in the near future. Once this is resolved, Perrigo will be an even stronger Company than it is today. Right now we are making good progress and our dedicated teams are working overtime to improve our quality controls to meet the new standards set by the FDA.

Finally, I want to thank the team, and all of our 70,700 Perrigo employees around the world, for the tremendous effort and ultimately the excellent results we achieved this quarter. In this challenging environment, we are working together with our retailers to meet the demand from consumers for our products around the world. Perrigo is the right Company in the right place, at the right time, to meet the world's growing need for quality, affordable, healthcare products.

Now let's open the line for your questions. Operator, if you could open the lines for questions, please.

(Operator Instructions) Your first question comes from the line of Chris Schott with JPMorgan.

Good morning, this is actually Dewey Steadman for Chris. I was wondering, Judy, on the infant nutritionals or actually the nutritional segment margin, gross margins progression throughout the year, should we expect that to be progressing upwards throughout the year or second is it second half versus first half? How should we think about that?

As we think about dynamics within the new nutritional segment, one of the things obviously to keep in mind in all of this, as you can see from the published information, we have not broken out VMS separately in prior years. And, if you look back year-over-year, you'll see that VMS margins, both growth and adjusted operating margins were quite low. So, as you will see those published for prior years those get better over the course of the year last year and we're continuing to focus on making improvements on that VMS margin over the course of this year as well. In the infant nutrition category, that has now been added into the nutritional segment, those margins remained fairly stable over the course of the year. You will see progression again, in each quarter, because of the continued improvement in VMS in terms of percentage margin and the infant nutritional piece of it remains fairly stable.

How do you get to those improvements in the VMS segment? Or the VMS part of the segment?

I think there's two parts. This is Joe Papa. I think there's two parts to it. The first part is just really the performance of the infant formula business and the continued growth in the infant formula business. We have seen some very significant growth in that business and expect to see the continued growth in that especially given some of these situations out in the marketplace where infant formula competitors have run into some FDA questions and issues. We have seen strong demand from the retailers for the store brand, private label of infant formula. The second part of the question is really what we have done in the vitamin, mineral, supplements business and I think we have seen, as we mentioned a year plus ago, that we have had some challenges in that vitamin and mineral supplement business and we had done some work to reduce some of the, what we call, lower of margin products, and to take those out of the portfolio or weed the portfolio and remove those products and indeed we have done that and I think as we see the natural progression of the product category that allowed us to show better results in our vitamins, mineral, supplements as we remove some of the products. So, I think it is really those two perspectives that will help us to drive the overalls margin in the business.

Okay, great. Thanks a lot.

Your next question from Randall Stanicky with Goldman Sachs.

Thank you for the questions. I guess first one, Joe, when are you now expecting the resolution of the manufacturing to take place?

Sure. Let's back up a little bit Randall, we have had now five different meetings with the FDA to discuss the warning letter at the Allergan, Michigan facility, the latest meeting we had with the FDA was in early October. Our expectation is that we will see the FDA and do a reinspection, although I have no ability to control that, we expect to see them sometime in the next 30 to 60 days is when we expect the see FDA come back in to inspect our facility. Obviously, the FDA will make judgement as to when they come on their own, I cannot influence that, but my guess is sometime in the next 30 to 60 days.

Got it. So, you are still assuming in your current guidance that the remediation is closed out then by the year end, is that fair to say?

I would not say that, I would say, they be in to do the reinspection in the next 30 to 60 days. Depending on the outcome of the FDA inspection then obviously you have a number of different ways this could go. We clearly believe they will be in to reinspect us in the 30 to 30 days.

Okay got it. And then, Judy, did you give a number for the consultant, or remediation cost? I'm not sure if I missed that in your prepared comments.

On this quarter's prepared comments I have not. I have not updated that. We talked about it in the August earnings guidance numbers, in the total amount of incremental cost being in the mid teens, low to mid teens.

That falls in the consumer margins is that right? Just so we understand where the trajectory is.

It would be in the consumer healthcare numbers. That was a number that was built into the full year guidance that we gave in August and that would be considering combinations of consulting costs, internal headcount adds, throughput costs, other amounts related to obsolescence of product etc. all encompassed in that number.

Got it. And then my last question, did you give that J&J? I know last quarter, I think you said $12 million in incremental revenue from the J&J challenges. Did you give a comparable number this quarter for that?

No. I don't know if we gave a specific number last time. We have only stated at this point on an annualized basis, the amount of volume that would be attributable to at store brand prices of J&J issue is approximately $100 million on an annual basis. Now, we clearly have stated that we cannot ship all that. We do not have that amount of capacity, nor do we have the knowledge of how long it will take, but we have not come out with a specific number in that range range. I would say that for the quarter, you number is not that far off though, but we have not given out a specific number.

Okay, and just finally, very housekeeping, Judy, there is no change to the amortization way that you are reporting that this quarter was there? That is consistent with how it was last quarter?

That is consistent. We're just highlighting it again to remind everyone we went to a new definition of adjusted earnings, adjusted EPS which excludes the impact of deal related amortization. So, we wanted to highlight again, no change in that methodology with the way it was laid out for the annual earnings guidance in August. HIghlighting it for everyone and reminding everyone that we have now broken it out in the tables, by line item and by segment, so when you're updating your models and maybe gearing back last year's models, we have broken out by line item for you.

Okay great. That's helpful.Thank's guys.

Your next question comes from the line of Gregg Gilbert with Bank of America.

Good morning. I wanted to ask a little more about the quality issue. Joe, the timeline has shift a little bit. Can you walk us through once the FDA reinspects, what the potential outcomes and timelines are in terms of FDA back and forth and eventual closeouts? And then, once we get to that point, can you walk us through how long it will take Perrigo to get to sort of normal throughput. I recall you discussing cleaning validation and other things that would need to be ramped back up to the old levels over time after the issue is closed out. I know that is a multifaceted question, but let's start there.

Sure, just a reminder, we had a number of meetings with the FDA the latest one being that October 7th meeting. We feel very good about the progress we have made in the remediation of our Allegan, MIchigan facility, so we continue to feel everything is moving fine. The FDA, my sense, will be back to reinspect, as I've said, I can't give you a specific date, but my expectation is they will be back in the next 30 to 60 days to reinspect the Allegan, MIchigan facility. But, once again, I have no ability to say exactly that date. Once we go through the reinspection, obviously it can take a number of different courses. If we come out with a no 483 observations, that gives me pretty good confidence about what is going to happen in terms of listing it. If we come out with a significant number of 483 observations, that would put me in a different direction in terms of when we believe we can resolve this. And obviously between that is just, will be the determination of exactly what the FDA questions are or issues they have, we will seek to address them as quickly as possible. I think with the critical next milestone for us, Gregg, is that we do expect the FDA to come in to inspect the Allegan, Michigan facility as I said, in the next 30 to 60 days or by the end of the year. So, our hope and our belief is that we will have made the appropriate actions to resolve the FDA warning letter questions and issues and that is really where we are right now as we look to what is happening. The second part of the question, on the normal throughput of the operation from our facility. It is clear that we had some issues during the summer months as we were remediating our facility in Allergan, Michigan. What I can describe that as is very simple straightforward. As one of the observations the FDA had for us is, show us that the cleanings that you do on your facility are validated as an example of what we often have to do. We certainly believe everything is acceptable, however we did step back to improve the validation on our cleaning. So, instead of doing a major clean on facility, after every 12 batches, we stepped back every 6 batches, and did a major clean, validated that, and then we moved to every 9 batches and validate that and then ultimately get back to the 12 batches. Potentially even going more than 12 batches of clean between cleans. As we step back to do a clean every six batches it is something that -- and these are illustrative examples, not exact examples, but as we step back, it did reduce the output of the Michigan facility as we were making these remediation steps. I am delighted to say though that we made great progress and I believe the numbers that were in our October output were at an all-time record for the Allergan, Michigan facility relative to output. We have had to step back, but we are now back on track for getting the output out the door and importantly, the quality is also there and that is what we think is critical for us as work through this remediation effort.

Before my nutritionals question, to wrap the FDA issue up, can you summarize for us all what is factored into your fiscal years guidance as it relates to the FDA status?

The FDA status is that we have a situation where we would have the FDA back in to reinspect us and that we would have that occurred during the next 30 to 60 days and then we would have to work through whatever questions the FDA comes forward with, but we do not expect any major issues with the FDA reinspection. Obviously, I cannot speak to the exact timing of when we would receive the highlights from the FDA reinspection. That's really where we are with our current timing. We do expect to be able to continue to manufacture at our facility in Allegan, Michigan as well as the other facilities around the world. So, there's no major disruptions anticipated in the output from our facilities around the world.

Okay thanks. For nutritionals, this will be my last one, and maybe Judy can help out with this one. Can you help us with the PBM sales specifically, given that this is a changing quarter and that is an important acquisition? And also, philosophically, what drove your guys decision to combine VMS and PBM and does the VMS products line get to benefit from the ROIC of the PBM line or will it continue to measure VMS by itself as you think about future priorities? Thank's.

Two good questions. I will start with the second one first, on the ROIC front. Obviously, as we manage the portfolio of our businesses we start with an evaluation of ROIC on a segment level. So, that's the first point. Now, we can also drill down within our internal conversations around the ROIC within our specific assets or invested capital that is attributable to a product category. So, for financial reasons, multiple different categories or multiple segment work it is a little more difficult. In the VMS case, we have dedicated assets for the VMS production and so we can look at those. We have dedicated assets to oral electrolyte solutions and now dedicated assets related to the production of infant formulas and related products.

So, we internally will still go through that process and we will always look when possible at our management level at the ROIC for each of those products and continue to evaluate opportunities to either improve the ROIC at each of the product category levels. Although, we don't disclose those publicly. On the other question regarding the nutritionals sales and margins, PBM related sales are in line with our expectations. We had estimated annualized sales of $300 million for fiscal '11 and we are on track with that, starting off the year at $75 million of acquisition related sales for the quarter. And then slightly ahead of our expectations, we were starting off the year with a bang with $75 million in the quarter.

The only thing I would add to what Judy said, Gregg, is the only other comment is the majority of the upside that we have experienced as a result of a recall from one of our competitors was really experienced at the end of - the recall was on September the 23rd I believe the date was, and that recall was really experienced in our quarter two numbers, predominately in quarter two. To give us some belief that there's additionally some upside in those of infant formula opportunity for the remaining portion of our fiscal year '11.

And that contributed in part to the confidence for our new guidance expectations for the full year.

Thank's.

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

Hi, how are you?

Good morning, Linda.

Can you just remind us - I mean your gross margin was pretty far above what we had modeled for the quarter, and I was just wondering if you could remind us how the profitability of vitamins in the prior fiscal year, what the pattern was by quarter? Did it significantly improve as you progressed through the year? Was it kind of bad through the whole year? Can you give some general color on that?

Sure, I'd be happy to Linda. As I made a comment in the first question of the call, the gross margins and operating margins on a standalone VMS basis last year were challenging. But, the first quarter was by far the weakest quarter last year. As the quarterly numbers rollout and you'll be able to see last year's gross margins and operating margins of the VMS business, you will see that gross margins will jump tremendously quarter two, three and four. And then gross margins are in the teens in the remainder of the fiscal year 2010 and operating margins are positive, single-digit positive, but positive nonetheless. And as I was commenting, that is why you will also see then, an overall increase. Better sequential gross margin and operating margins continue we expected into fiscal 11. That will help contribute to improved profitability overall for the new nutritional segment into fiscal 2011.

Great. And then on the infant formula recalled by one of the branded competitors, our store checks have actually indicated that we are starting to see some replenishment in certain parts of the country. Like we saw in Texas with a phone survey and in the Pacific Northwest. How quickly do you think it will all go back on the shelves and will you really benefit that much, is there any way to quantify a little bit better?

Yes Linda, that is a good question. We agree with your comments on the infant formula recall from the competitor. We saw signs of replenishment on that product starting mid-October, let's just say it that way. Mid-October we saw some signs of replenishment of the larger two products. We have not seen the smaller products, but we expect to see the smaller products more towards the January timeframe, or end of the current calendar year, is probably the best way to say it. As we have looked at it, we said, there would be some gains during the current quarter two, which is the quarter we are in, and then also we felt that there would be some residual, but we did not put a specific number around that just because it is a relatively new category and more challenging to talk about the specific carry over. We felt at this point until we get some additional data, we would just go conservative with it, but realize there was some upside to not build a lot of it into our numbers.

Great. Can you just remind us, give a little laundry list, of a couple of positive things that could come about this fiscal year that are not in the guidance range?

Sure, the largest one, there's actually, I would say there's several. A large part of them are in the new product side. The first one is the Temozolomide situation. We did not build anything on Temozolomide for the US into our current guidance, and I think clearly that is the first one. The second one is related to Temozolomide, it is Temozolomide in Europe. We are right now the only Temozolomide supplier in Europe at this time because of the recall by a competitor in the marketplace. They had a problem with their product and therefore we got what we feel is potential upside for Temozolomide in Europe as the competitor product had to be recalled from the marketplace. The third one that is not in the guidance is the launch of the Rx to OTC Allegra or Fexofenadine. We have not built a US launch of Fexofenadine into the current numbers. Our expectation is that there will be an approval of moving Allegra from prescription to OTC status sometime in early calendar 2011, January, February, March. We will be able to launch that product if it is not currently in that we do not control the numbers is not currently in our guidance. The timing we don't control the timing, is not in our guidance, but that is certainly a possibility. The other one I would say is we have currently modeled into our numbers that J&J on the infant suspension, pediatric suspension, J&J pediatric suspensions, we have modeled in that they would return at the end of the current calendar year 2010. If J&J is delayed, it cannot ship at that time period that would potentially be an upside at this point we have only modeled into our guidance that J&J would return at the end of the calendar year 2010. Final one, is really the infant formula recalls that we have previously talked about, we expect that there would not be any significant recalls, additional recalls, but I just don't know the status given that one of the companies just received a warning letter, it was too early for us to make any judgement on that.

Great. Can I ask you about, the other consumer product companies like packaged goods companies are reporting that private label shares are starting to flatten out as the economy strengthens a little consumers are going back to national brand products. Do you think that is going to happen to you eventually or do you think you can still benefit from the problems of J&J even on the longer basis?

I would respectfully disagree with the assessment, and why would I say that? We've looked at every single category and looked at the 52 week data, or the annual data through September 26th, so the end of the quarter . The 52 week data and then wee looked at the quarterly data versus a year ago and the quarterly data which is the more recent time is even accelerated over the 52 weeks. From an analytical point of view I have a difficulty accepting that hypotheses generated by the branded companies. They may have different data and we respect that. The quarterly data is even fast growth even more significant than the 52 week data would be my first comment to your question. That is pretty much across every major category. It is clearly - we see it being very strong. Certainly in the analgesic side, it's stronger. The cough/cold side, number of places where we see greater growth in the past quarter versus a year ago. Second comment I would make, is that while I do accept that there could be some improvement in the economy and that would certainly make a difference potentially to consumers. The other part of what we are seeing out in the marketplace is the importance of the store brand to the retailers. Large retailers are putting forth significant programs and promotions to drive storebrand and we don't see any reduction in that at this

Thank you, Joe. Thank you Linda.

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

Hi, how are you? Just a few question here. First question I had was with respect to your business development for fiscal 2011. Can you provide us any color on what you are thinking with respect to expanding into adjacent categories and then also all OUS acquisition or expansion there?

Sure, Louise, I think we've talked about this over the past year, I think our comment on the MNA or business development activities are pretty much consistent with the past. What we have stated is that we feel very good about our strong organic growth that we are having and especially supplemented now with what we have with PBM and the Orion acquisition in Australia. However, we will continue to look at opportunities for adjacent categories. We had mentioned that we had three adjacent categories we are interested in the past, obviously the infant formula being the first one. Athalomex being the second one which we have now launched some Athalomex through partnerships and the third one was what we called the home diagnostic or the blood glucose type monitoring products being the three major categories on the storebrand or private label side of our interest . In addition, on the geographic expansion, we feel good that we have got what I would call a beach heading in England for expansion into Europe. We have Australia which we think can help us as we grow into the Asia market and also we have our Mexico business which can help us as we look at Latin America and South America. But in all those acquisitions we pretty much drive our acquisition strategies by a return on invested capital metric and therefore we very much want to make sure that any acquisition we do, would pass that ROIC hurdle based on the three year ROIC that we would expect from it. So, we want to be disciplined, but we will continue to look at opportunities to grow through the adjacent categories and also geographic

The second question is just on the RX opportunities for fiscal 2011, you're obviously showing a lot of growth year-over-year, so just curious, if you could highlight maybe some key products that we should be looking out for there?

Sure, well obviously, the success we've have with the Aldara product, the Imiquimod product has been very strong and as you know we have gotten approval now for making it with our own active ingredient which we think will help our margin structure as we go into the future that is certainly an important driver of the margin for the future. Second comment I would make, there's a relaunch product that we were able to relaunch into the market place the Everclen product that we relaunched in October that helps us relative to the gross margin and also the new product sales. We launched it initially and then we reached a settlement and we just relaunched it on the October 1st date. So I think those are certainly two of the larger ones. There is a number of other products at this point in the competitive market space and we can fill out more detail. I would remind you of another window that needs a cool product that we have already had previously announced will launch in June of 2011 through the partnership with Teva.

One more question, on the quarterly EPS progression, how should we think of that in light of the cough/cold season and also allergy? Is it going to be similar to what we saw in previous years, or anything different this year relative to other years?

I don't expect any major changes. Judy may want to comment on the specifics. I don't expect any major changes. The only important question obviously, or commentary that I would make, is the influence of the PBM infant formula. Specially as it relates and depending on what happens on the reduction and the ability for the competitors to shift as a result of recalls or warning letters. The only other comment I would make, just to remind you, is that, as we stated, during our first quarter, there was about $25 million to $30 million products we were not able to ship during first quarter really as a result of some of the remediation issues with the FDA at our Allegan, Michigan site. That will be something that will show up in the second quarter of our fiscal year. Judy, any more comments that you'd like to make?

Sure, as we commented on in the past, I think I made a specific reference to it on our August call when we gave guidance for the full year. We expect this year to follow a similar pattern both on the top-line and bottom-line to the shape of the arc in years past we don't give quarterly guidance but classically the first quarter is the lowest quarter, two and three are higher and then it starts to come back down in Q4 but not necessarily to the level of Q1. So, that is the general shape of the arc in any year, and we expect this year to follow a similar pattern.

Thank you very much.

Sure.

The next question comes from the line of Frank Pinkerton with Suntrust.

Great, I'll just start by Joe, can you repeat what you just said about products not being shipped from the Allegan facility due to remediation?

Yes, thank you for your question. What we thought in the first quarter as a result of our remediation effort, we were not able to make all the product that our customers demanded. Therefore, the backlog of products, of the orders that we had that were not shipped during the first quarter, was approximately $25 million to $30 million of product that customers had demand for, but we were not able to ship. Now, we have subsequently shipped that during the second - early second quarter here, but it was just a backlog that because of the remediation , some of the things we did on the cleaning validation and other things, we were just not able to ship during the first

Okay, and I just want to make sure, that was Perrigo induced and not FDA induced, correct?

That was clearly Perrigo induced, as a result of the steps that we took for their remediation of our facility. We wanted to make sure that we did certain things. So, we made some capital improvements to our facilities and other things we felt would be appropriate for us, in the future, but it was our decision.

Okay, great. Onto a couple of questions. Is there a timeline for when you would be able to launch your internal Aldara product?

We have stated that we believe we will be able to launch this product by approximately the end of the current calendar year in terms of our plan. Somewhere around that timeframe.

I have not heard you mention Mucinex. Is there any update on the Mucinex and is that in fiscal '11 guidance at this point?

Just as a reminder to everyone, Mucinex, our plans are to launch a Mucinex product or, extended release product storebrand version of the product. We still have it in our fiscal '11 guidance, that is correct, however, based on the legal and regulatory issues that we face on that product, you may recall there is an additional court case on that product. We put it in at a low probability. The way we do all our new products is we include the products that we believe could potentially, and then we put probability weighting on those products. In the case of the Guaifenesin extended release, or our Mucinex product, we put it in at a very low probability given the regulatory and legal situation.

Okay great. Judy, can you give me any dollar sign or maybe percentage on the comp that would be negative in the quarter for H1N1 occuring last year, to kind of see what the base business did maybe outside of the strong H1N1 season in the prior year?

Frank, it would be lovely to give you just a very clear black-and-white number on the quarter, but one needs to take into consideration there are many moving parts. So, when we think about the impact of H1N1 and we're discussing the whole flu season last year, we're picking up of course, cough/cold products as well as analgesic products. One must bear in mind that this particular quarter, there's a lot of noise in those numbers right now because of the lack of certain products on the shelves because of the issues faced at one of our competitors. It is very difficult for me and I would love to be able to just say here is a number and put a box around it, but it is hard to be able to see how much is uptake specifically related to the season and how much is the movement across to the storebrand alternative combined with the strong promotional activities going on at the retail shelves right now. In terms of the arc of the season, the arc of the season is similar although the volume or incident rates are lower through the first quarter in terms of flu. So, again, I cannot put a number around it but this season, I know those products for us are off to a strong start and I commented earlier in the prepared remarks, that sales of existing category, cough/cold and analgesics were off very well for the beginning of the year.

Okay great, This may be more of a theoretical question for you guys. When I think of companies in the Pharma OTC, whatever space requires an R&D investment in order to generate a pipeline, it looks like the R&D numbers for the quarter was a little lower than expected. Quite honestly with the R&D spend below 5%, is there enough investment going on to drive long-term growth at Perrigo or are we seeing more of a shift of not doing in-house R&D and longer-term it is going to be more partnerships like we have seen with some of the Teva and other relationships you have out there? Thank you.

A good question, Frank. We actually want to reassure you and everyone that the numbers of full year spend that we expend in our R&D budget for the full year is exactly as we've previously stated, there is no change. Really all you are seeing is a quarter to quarter variation, in terms of when you spend something so a seasonalization of the R&D budget. It will still be up from last year by approximately 10% plus. So clearly we still believe there is a number of project opportunities for us on both in the RX and OTC category and we will continue to spend money behind that very strong with over 10% growth in the R&D dollars from last year. In the quarter, you did see some, what we call, seasonal variation that was just something simply that something that happens and we'll certainly expect to see more dollars in the upcoming quarters that get us back to that range of where we expect it for the full year.

Thank you.

Thank you.

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

Last quarter, Joe, I think you indicated there was a bit more pricing pressure in CHC on some products. I am just wondering to what degree that's continued, has it stabilized, and how we should think about that going forward?

Sure, it's a good question. We have seen some incremental pricing pressures last quarter, and I would say that hasn't really been a major shift, it's been very similar to the last quarter and this quarter are very similar in terms of what we're seeing, some pricing pressure.Having said that, we are still finding places where there are pricing increasing opportunities as well as opportunities to lower our costly goods from our own supplier, so I think on balance, we feel very strong about what we've been able - what we could do with the pricing and the costing side of our business and therefore that was part of the things that we've thought about as we came forward with our revised guidance and revising our guidance for the year.

Okay, so is the way to think about this that pricing perhaps still net neutral overall in CHC?

I think - I say it differently. I say, some products that we're going to be able to raise some prices in some areas we're going to have to take down some prices in some areas, it may be some minor reductions in pricing. However, more importantly, where we see those we're also able to get some costing decreases so to unbalance, so we feel very good about our ability to generate gross margin dollars and as you can see from the results during the first quarter, we have been very successful in generating significant gross margin dollars. I do - as a percentage of gross margin. So, I feel very good about our ability and that's why we were able to raise our guidance for the full year.

Okay, that's helpful. And then just one other quick question on the generic Rx side or the Rx to OTC switch I should say. If Allegra does switch, and I think you've indicated that you're kind of budgeting for that, perhaps to happen in early calendar '11. Are you still confident that you'd be in a position to offer a storebrand version of Allegra, number one, and should we be thinking about any volume migration away from other products in that category?

Good question. Let me just go through our assumptions one more time. Relative, we expect Allegra to move from prescription to OTC status. The national brand will move from prescription to OTC status sometime in early calendar 2011, just think January, February, March. We have not, within the Perrigo numbers and assumptions, built in any sales for that to happen during the upcoming year. So, nothing before June 2011 on our side. However, if we are able to move it as quickly as we hope to, that would be an upside. But that I do not control the timing of that move from prescription to OTC, I did not feel appropriate to build it into our model at this time. It would simply be an upside. Do I feel comfortable that we will be there with th product? The answer is absolutely yes. I do need some time, after the product switches, to have the product label that is the new OTC label and to modify the labeling that we have to reflect that new label. But that is something, that based on Cetirizine and other products we've been able to generate pretty quickly. So, it's just a matter of working through the logistic side, we currently believe we will be out in the first wave. We have talked to all the retail customers at this time and have agreements with many of the customers on the specifics for the product launch of that product. Just we simply have to wait for the national brand.

Okay. One quick just housekeeping for Judy. Judy, does the $75 million to $90 million in CapEx for fiscal '11 still apply? And that's a step up from '10 in the mid 50's is that just largely due to the FDA remediation efforts or are there other things in there? Thank you.

Great question. I did not comment on that. It will commented on in the 10-Qs that will be filed tonight, but we are confirming the $75 million to $90 million in CapEx expected for the year. You're spot on, it is a tick up on the amount of CapEx dollar flow that has happened in years past. There are also dollars that were always planned as part of ongoing enhancements at the PBM, formerly known as PBM, facilities in both Vermont and Ohio. Those were planned at the time of the acquisition. There are ongoing CapEx spends related to our migration out of Germany. The API facility in Germany and into India and the transformation of that business footprint. That is ongoing that we've talked about in the past. And then there are also some CapEx spends planned for the Michigan facility, but the large number that you're seeing is not due primarily, again, to anything related to the remediation, but rather ongoing maintenance, some additional CapEx in Michigan, but mostly PBM and India driven in the big pickup. We, as you know, target CapEx linked annually to depreciation expense spend and try to be cash flow neutral when we think about CapEx planning. With a larger footprint and a larger base, that number is also going up, so for the future CapEx will probably not be in the 50 area, but will probably be in the $60 million plus in an ongoing basis if you think about modeling years forward.

Okay, thanks everyone.

Sure.

That concludes the companies question and answer session. I would now like to turn the floor over to Joe Papa for any closing remarks.

Well, first of all, thank you everyone for your interest in Perrigo. I thank you very much for your questions. We will be able to provide additional information on questions as they occur. Thank you so much for the numbers and I thank the 7700 people of Perrigo around the world that have contributed to an excellent performance. Thank you everyone. Have a great day.

This concludes today's conference call, you may disconnect your lines at this time.