Perrigo Company PLC (PRGO) 2012 Q1 法說會逐字稿

My name is [Demitris] and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo 2012 earnings 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). Mr. Shannon, you may begin your conference.

Thank you very much and welcome to Perrigo's first quarter 2012 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 release is available on our website at www.perrigo.com. Also on our website 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 21(e) 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 one of the Company's form 10K for the year ended June 25, 2011. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art. And welcome, everyone, to Perrigo's first quarter fiscal 2012 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice-President and Chief Financial Officer For our agenda today, I will provide a brief perspective on the quarter and the continued strength in store brand market share growth, and then I will present an update regarding the ongoing integration of Paddock Laboratories.

Next Judy will go through the details of the quarter and our increased fiscal 2012 earnings guidance. Then I will provide in depth update on the supply agreement we recently signed in China and our plans for new product launches plus an overview of our expectations for the full year. Finally, this will be followed by an opportunity for Q&A. Now, let's discuss the quarter. It was another great quarter. On slide four, you can see we had record first quarter sales of $725 million plus record adjusted income from continuing operations up 27% from last year on a 13% net sales growth. On top of that, consolidated adjusted operating margin from continuing operation was 21% driven by gross margin expansion and the acquisition of Paddock Labs.

We achieved a 21% adjusted operating margin, not withstanding a 31% increase in adjusted R&D investments since last year. Turning to slide five. You can see the business segment breakdown. Judy will walk you through the detail, but I wanted to touch on a few items. First, our Consumer Health Unit has all-time record first quarter sales. The performance was driven by $15 million in new product sales. The highly successful launch of Fexofenadine, the store brand of Allegra, helped our new product sales. In fact, store brand penetration for Fexofenadine is ramping into the mid 40% range, with Perrigo having the majority share of the store brand market. The base business continues to gain market share as well. However, a delay in shipping our new analgesic suspension product that was converted to a new and improved bottle design, slightly depressed the USCHC growth rate in Q1 by approximately 2 percentage points.

Adjusted operating margin or income was down 9% versus last year. This was driven primarily by competitive pressures in the gastrointestinal category and promotional pre seasonal and new product spending. We expected these pressures and the costs were factored into our plan. Therefore, we feel confident raising our earnings guidance for the rest of the fiscal year. Our nutritional segment was down slightly from last year due to lower sales in the vitamin business. The margins in this segment were impacted by increasing commodity costs, primarily whey protein for infant formulas. We will continue to optimize our pricing and seek cost efficiencies to offset increased costs through the rest of the year. Judy will outline for you our expected margins for the full year shortly.

Our RX business had a very strong quarter as it continues to execute ahead of our expectations. The RX net sales increased 84% and adjusted operating income grew more than 200% primarily as a result of the Paddock acquisition. Furthermore, though, organic net sales grew 28% in the quarter. Our RX team continues to execute as our competitors continue to work through their manufacturing issues. Our API segment continued to perform well driven by strong performance from the base business highlighted by robust sales of Fluticasone to new and existing customers and Temozolomide in the EU. Looking at slide six, the overall OTC consumer market was up just 1.5% versus last year with national brands down 2.4%. But store brands gained 11% on the strength of new product launches, national brand recalls and increased market share. The analgesic category was obviously impacted by a recall at a brand name competitor.

However, all of the individual store brand categories were up. Please note that this data represents the last 52 weeks of activity according to IRI. As most of you know, meeting the increasing demand for store brands has been a challenge. However, over the past year we have added processes and procedures that have raised our level of quality but have impacted our manufacturing throughput. Our team has worked very hard to ramp up and back to previous levels of production. I'm happy to report to you today that in Michigan, Perrigo has set production records over the past few months as we ramp up for the cough-cold-flu season, raising the number of tablets we produced by more than 40% versus this time last year. It was a great job by the team. I'm sure you will have plenty of questions about our updated fiscal 2012 guidance and our market share gains and we will get into that detail shortly. Let me first turn it over to Judy at this time. Judy?

Thanks, Joe. Good morning everyone. As you just heard from Joe, on a consolidated basis we had an even stronger start to the year than we had anticipated. During the next few minutes I will give a brief review of our fiscal 2012 first quarter results by segment and then review our revised expectations for the fiscal year. I would like to remind you that my comments today are based solely on adjusted results from continuing operations. You can view the reconciliations between GAAP and non-GAAP adjusted results in the table to our press release as well as the appendices to this morning's presentation. So let's move directly into the business segment. On slide seven you will note that consumer health care's first quarter net sales increased 4% year-over-year due to a combination of -- an increase in sales of existing products of $9 million, primarily in the cough, cold, and smoking cessation category. New product sales of $15 million, also primarily in the cough, cold, allergy, sinus as well as analgesics and diabetes categories.

And a $3 million change -- favorable change in foreign currency exchange rates. These combined increases were partially offset by a decline of $12 million in sales of existing products within the gastrointestinal product category driven by competitive pressures on a key product which, as Joe mentioned previously, was built into our annual planning. Excluding GI, revenue for the remaining product categories within our consumer healthcare segment grew year-over-year in the first quarter. The 90 basis point decrease to adjusted gross profit margin was driven by a combination of the market pressure I just noted in the GI category and investment activity in plant capacity, in preparation for several key product launches we expect in the second half of the fiscal year. Despite these increases, the metrics we track closely with respect to factory throughput, production volume, scrap and obsolescence all improved from this time last year.

Adjusted operating margin decreased 230 basis points year-over-year in part due to a planned increase in research and development and higher paragraph four litigation expenses. Given the strength of the total Perrigo portfolio this quarter we were able to invest incrementally year-over-year on SG&A initiatives within the segment, primarily marketing costs for social media and market research activities, as well as targeted variable compensation costs. On slide eight you can see that net sales within the nutritional segment declined 2% year-over-year mainly due to the VMS product category. Net sales in the other product categories within the segment grew slightly year-over-year and pricing remained relatively favorable. Though birth rates in the US continue to contract given the sustained economic uncertainty, store brand infant formula continued to gain market share. The adjusted gross margin in the nutritional segment decreased 330 basis points year-over-year due to increased costs of raw materials for infant formula, such as whey protein, as well as product mix in the infant food and formula category.

While consumers have been moving more to the store brand offering as evidenced by the increased market share data they have also been purchasing more of the larger volume, larger sized SKUs, slightly lower priced formula and food products versus this time last year. We have been able to address a component of the cost increases seen through pricing initiatives and will need to maintain this focus as materials pricing challenges remain. However, I would like to add that VMS contributed positively to the segment's adjusted gross margin despite experiencing a year-over-year decline in revenue as both product mix and manufacturing efficiencies have continued to improve. In addition to the adjusted gross margin decline an incremental $1 million R&D investment in infant formula clinical trials, which we chose to make this quarter, contributed to the 400 basis point decrease in the segment's adjusted operating margin.

Turning to slide nine. You can see that the RX business has started off fiscal 2012 spectacularly, outperforming our expectations. Net sales growth of 84% was due primarily to a combination of sales of $39 million from the July 26 acquisition of Paddock Labs, new product sales of $5 million, and strong gains in our organic RX business. Adjusted gross profit for the quarter was strong compared to last year, due to the same three reasons. The adjusted operating margin increase of 1,850 basis points was largely a factor of the significant increase in adjusted gross margins driven by new products, production leverage, and stability in the existing organic portfolio. Although the team had higher R&D and DSG&A expenses with the inclusion of Paddock this quarter, incremental improvements to adjusted operating margin were evident through the leverage of these costs on the higher net sales case. Needless to say, the continued integration of Paddock Labs is a high priority for the team right now.

Next on slide ten, you will see that API's first quarter net sales were up 28% compared to last year with the growth driven by a combination of solid demand for key existing products in the portfolio of $5 million, new product sales of $3 million, and favorable changes in foreign currency exchange rates of $2 million. Specifically, sales of Fluticasone and European Temozolomide were major drivers of the 80 basis point expansion in adjusted gross margin. These two products and continued expense control collectively helped to drive a 280 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 $560 million at the end of the quarter, up from $387 million at this time last year. $60 million, or approximately one third of this increase, is directly related to the acquisition of Paddock Labs within the quarter. The remaining increase is due to the growth in the organic business and production constraints experienced at this time last year. As of September 24, 2011, total current and long-term debt on the face of the balance sheet was $1.2 billion. This is up sequentially from $893 million at the end of fiscal 2011, primarily due to the July 26 addition of a $250 million term loan to fund the Paddock acquisition.

Excluding cash and cash equivalents, our net debt to total capital at the end of our first quarter fiscal 2012, was 41.2%. Net cash flow from operations for the first quarter was $54 million, up from first quarter 2011 due to changes in deferred tax balances related to taxes paid in foreign jurisdictions. Now, I would like to discuss our updated earnings outlook for the full year 2012. As a reminder, our earnings outlook is based on adjusted financials from continuing operations which excludes deal related amortizations as well as certain acquisition related charges. First, on slide 11, you will see that we are updating guidance in the nutritionals and RX pharmaceutical segments while our expectations for full year deliverables on the other two segments remain unchanged from August.

For nutritionals, we now predict revenue to grow 3% to 5% over fiscal 2011, and anticipate fiscal 2012 adjusted gross margin between 31% and 33% with adjusted operating margin between 15% and 17%. Please note that this new revenue assumption excludes any incremental revenue from our recently announced partnership with Founder Pharma. While we do expect to begin shipping product in this fiscal year it is still too early to provide you a meaningful estimate of either first year volumes or timing. So as is our custom, we will give you more color and as needed update our numbers to reflect the Founder transaction once we have more specific details to share. So the changes in this nutritional guidance I just noted here are due to a lower revenue contribution from BMS, higher cost of raw materials, and product mix.

For RX, we now anticipate top line growth between 69% and 71% compared to fiscal 2011, driven by Paddock Labs and an expectation that the strong performance of the organic RX business will continue beyond the first quarter. We are now anticipating RX adjusted gross margin to be in the range of 55% to 57% and adjusted operating margins to be in the range of 41% to 43%. Summing everything up, back at the consolidated level on slide 12 we now expect year-over-year revenue growth to be in the range of 17% to 20%. This increase will be driven by Paddock and our growth in the base business.

We continue to estimate adjusted consolidated gross margin of between 35% and 38% and an adjusted consolidated operating margin range of between 20% and 22%. Moreover as we realize an $0.08 adjusted earnings per share tax benefit in the first quarter due to the resolution of various tax audits and statute expiries we now expect a worldwide effective tax range from continuing operations of between 27% and 29%. This is down from our August estimation due to the first quarter tax benefits and some changes in the income mix by the business units I just mentioned.

In total, this brings to us an estimate of adjusted diluted earnings per share from continuing operations of between $4.65 and $4.80. With respect to cash flow from operations we now expect fiscal 2012 cash flow from operations to be between $500 million and $530 million, up from a previous range of $470 million to $500 million on the increased income estimates. We also now expect that capital expenditures will range between $90 and $110 million as we have multiple projects underway in Vermont, Israel, India and Michigan as well as integration activities in Minnesota and Virginia. This quarter, more than most previous quarters, highlights the power of our diversified growth strategy and the ability to sustain and grow earnings on a consolidated basis. We tenaciously continue on our journey of growth, execution, and continuous improvement, and remain focused on seizing opportunities to expand the promise of quality affordable healthcare. Now, I would like to turn the call back to Joe.

Thank you, Judy. As Judy just outlined for you, we had a great quarter one. So now I want to focus on the future. This year we are planning on launching over 45 new products that we expect will translate into more than $190 million in annual Perrigo sales as you can see on slide 13. In our consumer healthcare business, essentially we plan to launch approximately four new products every month or essentially one per week in fiscal 2012. We plan to launch Lansoprazole, the generic version of Prevacid, with annual branded sales of approximately $223 million. We also expect to launch the Guaifenesin ER, the generic version of Mucinex, with annual brand sales of approximately $150 million. The generic RX business is growing as we integrate Paddock Laboratories into the Perrigo family.

We are poised for a strong new product year highlighted on slide 14 by the generic versions of Duac, Xyzal, Cenestin and Clobex lotion, which have combined brand sales of more than $480 million. Add to this the continued growth in our ORX products in our RX based business which continues to grow as competitors work through manufacturing issues and we expect to have a terrific year ahead for our RX team. In our nutritional business we are excited about the launch of the store brand version of Align, a digestive supplement which has annual branded sales of approximately $85 million. And importantly we're also on track to launch the store brand version of Gerber Gentle with branded sales of over $50 million. Finally our global expansion continues. Slide 15 highlights a supply agreement we announced last week with the Founder Pharma company. Perrigo will supply Founder Pharma premium branded infant formula manufactured in our US facilities for sale and distribution under the Founder Pharma brand. Under the non exclusive agreement we will manufacture and package the product in our US facility, then sell it to Founder Pharma.

They will take delivery in the US and will be responsible for shipping, marketing, sales and distribution of the premium brand infant formula. Perrigo (inaudible) realizing sales margins at or above our corporate average. We expect to begin shipments in the next three to six months.

We very are excited about the deal. Founder Pharma is the type of partner we have been in search of in China. Founder Pharma is a well known conglomerate that owns medical centers, along with pharmaceutical manufacturing and API production. I look forward to giving you updates on the progress of this agreement and other potential partnerships throughout the remainder of the year. As we highlighted in depth at our investor day last month, the Perrigo team has a strong business development pipeline, and plans to expand our geographic footprint. We are looking for additional partners in China and Europe.

In summary, we had another great quarter. Looking towards the rest of the year we are increasing our full year guidance based on strong new product pipeline and efficiency gains in our production. The market continues to recognize the value of store brands and our RX business continues to beat our expectations. Perrigo is truly the right company in the right place at the right time. Operator, let's now open up the call for questions, please.

(Operator Instructions). The first question from the line of Amy [Fadiya] with UBS.

Hi, good morning. A couple of questions. First of all, on the consumer healthcare business, you indicated that 2% of the gross was missed because of a delay in shipment. But even if I factor that in I think expectations were a little bit higher than what was reported in the quarter. Could you give us a sense of how you see the progression of the consumer healthcare business over the course of the year and how much of it is organic growth of the base business versus new launches that are expected for the year?

Sure. First of all, let me just maybe just repeat a little bit about what I was saying on the 2% growth rate. We had a conversion to a new and improved analgesic suspension. That new improved bottle design is better for patients we believe and better for our customers. We launched that during the quarter and there was just some delays as we got our product out the door but certainly wanted to make sure that that product will get out there in time for the cough, cold, flu season and that is, indeed, what we have accomplished. That is just quickly on that part, make sure I was clear on that question. Relative to the original -- the rest of the question on the CAC progression. First I would say as I remind you, we never guide on a quarterly basis, we guide for the full year and relative to that full year guidance for consumer healthcare we are continuing to expect a 12% to 14% revenue growth for consumer healthcare consistent with what we had said in August, consistent with what we had talked about at our September investor's day. So there is no change in our guidance and our expectation. As you rightly pointed out, a large part of what we expect with consumer healthcare is the 45 new products representing $190 million, many of those though are slated for the second half of the year including the Mucinex products, the Lansoprazole products, the Clarinex products. So there's a number of products that we expect all geared towards that second half of the year. I think that was the specific part to your question. Anything else that was -- that I missed?

No, that pretty much covered it. Maybe I have two other questions. One on the nutritionals business. Could you -- has your outlook for the PDM business growth in the US changed in the last couple of months, as you have seen the business perform, or do you still think that it can grow at sort of high single digits? And then my understanding was that you think that it can grow at 7% to 8% on an ongoing basis. And then also maybe some comment on the gross margin side, and my third question was just on whether the tax rate is sustainable into next year.

Okay, I will take the nutrition and then Judy, you may want to comment on the tax rate question. First on the PBM business we are still very optimistic about the PBM business. As we stated in the business review that Judy had we are lowering this year's growth prospects slightly down to 3% to 5% for this quarter. I mean, our comments this quarter. Let me talk about that a couple of reasons. And give you a couple more points around that. Number one, we are still seeing very significant store brand growth in the category. So the move to store brand continues, as I outlined, I didn't specifically talk about the data point but infant formula is up 9.8%. Store brand is up 9.8%. So we are clearly gaining share. The total business for infant formula for the category is down 2.1%. So the move to -- from national brand to store brand in infant formula continues at this time and that is obviously a very important reason we feel very optimistic about the growth.

However, to be clear there is a decline in the US business in terms of birth rate. We believe part of the decline in the US birth rate is associated with the recent economic troubles and the economy and the recession at least based on previous recessions that we have seen before so we believe that is currently what happened with the growth rate of birth. However, at some point we do expect that to recover. I obviously can't make specific projections on US birth rate but we do expect it will go back to previous levels. The real other comment though on nutrition has to be the international side. We believe the activities and the steps we are taking at international will supplement the move to store brand that we see in the US and that will really bring around the full opportunity set that we see in the infant formula. Judy, why don't you comment about the tax rate question?

Sure. As I commented on just a few minutes ago the effective tax rate in the quarter and then our expectations for the full year were sizeably impacted by the settlement of several tax audits and some statute expiries that all happened in this quarter and that then changes the rate for the full year. If you take out that $0.08 impact in Q1, actually our rate would still substantively be in the original range I just quoted. That 29% to 31%. But I believe your question was more forward looking and how to think about modeling in the future. I would start with a point of approximately 30% like the original range I gave in August but given the expansion opportunities we have going forward in our international business as Joe was commenting with the Founder Pharma business coming online, we look at the mix of new products and the sustainability of our RX business going forward and the international components of that, R&D and manufacturing that we have in Israel, I do believe that there are opportunities to sustain a rate below 30%. But again, the core rate, the core mix today is still up in that high 20% range.

Thanks. I will get back in the queue.

Operator, next question.

The next question from the line of Elliott Wilbur with Needham & Company.

Good morning. First just with respect to the -- some of the change in financial metrics in terms of the outlook for the RX business, Joe, maybe you could just rank order for us some of the drivers there. Obviously pretty significant increase in terms of the top line outlook.

Sure. Well, first and foremost the generic RX team has just done a fabulous job in picking up additional business. Launching some new products, and then also clearly integrating Paddock into the business, and importantly gaining some of the ORX, certainly, of the Fexofenadine opportunity. So I think it's been three or four activities. Importantly I will say one other comment about pricing. We have found some opportunities for pricing across the business. The best way to model Perrigo, though, is that pricing is flat to up slightly for the total book of business but there are some areas where pricing is up more and obviously some areas where we have had to be competitive and reduce pricing but for the total book of business we have been able to keep pricing flat to up slightly which I think is an important part of why we have been able to increase our adjusted operating margin by essentially 200 basis points.

Okay thanks. And I guess just one follow up question, kind of with respect to some of the commentary on the OTC GI space. I guess when we think of the RX generic market obviously when there is pricing pressure one sort of hopes to gain share and certainly that doesn't necessarily appear to be the case in the OTC market. So I'm just kind of wondering sort of what has changed relatively recently here in terms of pricing other than bringing down your dollars it doesn't really seem like that is a strategy that is working for the other player in the market.

Let me just back up a little bit on the gastrointestinal category. I remind you that that category is a category where we had done very well in that category. We have had significant store brand share growth in the category over time. As you know, we have had some competitors come into that space and it was always anticipated very much as we have looked at our plans for this year are that we would lose some share and there would be some pricing there but it was all part of our anticipated plan and our expectation is that we would be able to offset some of that pricing there with other opportunities in our total book of business and indeed, that is exactly what has happened this quarter and our expectation for the full year is very similar that we would be able to it continue to have a pricing environment that would be flat to up slightly across the total book of business for Perrigo. Recognizing that in some areas we would take some pricing concessions to be competitive.

All right. Thanks. Those are my only questions.

Thank you, Elliott.

The next question comes from the line of Collin Stewart. I'm sorry. You next question comes from the line of [Lewis Ian].

Hi, how are you. So I had a few questions. First question is just on the infant nutrition commodities cost. Basically what is the cause of that and how long do you expect that to last and is it in your guidance for this year -- incorporated into sort of like risk adjustment for guidance. And then secondly, how sustainable is your growth margin that we saw this quarter for the remainder of the year and then last question is just any thoughts on your uses of cash for fiscal 2012?

Sure, good questions. First off, on the infant formula, yes, it is the increase in the whey proteins. We do expect to see continued commodity pressure there. As to whether or not it will escalate it is hard for us to exactly predict it but we have put into our forecast the full year effect of this. As Judy noted, we have not completely captured all of the potential upside in the nutritionals sales for different business development activity such as the Founder Pharma group, so that would be a potential upside to our sales if we are to able to bring about these incremental opportunities outside of what just we have done in this time period. The second part I think of the question was the gross margin question for the consolidated business, and as we talked about, we still believe that 35% to 38% gross margin for our fiscal 2012 guidance is correct and that is really where we would continue to keep our guidance. Importantly, though, from an operating margin we have made some significant advances in operating margin and that is consistent with also what we had expected, despite the fact that we increased dramatically the R&D investment during the quarter. Judy, anything you could add to Louise's question?

And then the last question was uses of cash.

Okay. Thank you for clearing that. The use of the cash really Louise, it's very similar to what we have done in the past. We obviously increased the dividend. That was just yesterday that we announced that, that minor use of cash. The other parts of what we would do is obviously the business development side, we will continue to look at opportunity for businesses development, and as we noted in Judy's comments, CapEx is a slight increase from where we talked about. Certainly the range is a slight increase in CapEx that we would continue to make the investment because the demand for the store brand consumer healthcare products continues to be very significant. As I mentioned we have gotten approximately a 40% increase over last year on the output of our Michigan facility, really trying to keep up with the continued demand for store brand consumer healthcare products.

Thank you.

The next question comes from the line of Randall Stanicky with Canaccord.

(inaudible) the questions. Just a couple. First, we are getting a lot of questions still around J and J. I guess, Joe, can you just help clarify, is that still run rating the gains that you have had there in the same range around $12 million and then how sticky or volatile do you think that will be going forward? And then I have one follow-up.

On the J and J situation, Randall, we have projected that that was a $100 million opportunity. That $100 million opportunity is an annual opportunity for store brand. Of that we previously stated that we could accomplish approximately or achieve approximately $50 million in the past based on our capacity. However, with the incremental capacity we are bringing online that we believe we can go up to approximately $75 million of annual store brand sales for that product, or that brings it up from I guess $12.5 million to some where around $18 million to $19 million a quarter for our capacity based on the new equipment that we brought in, into the Perrigo facility. I will quickly point out that that product is one of the products that was subject to a conversion to a new and improved bottle design and that new and improved bottle design conversion depressed our sales during the quarter as we were bringing online the new bottle design that we expect though, we will be able to ship incremental significant amounts in quarters two, three, four, the analgesic product.

Got you. Okay. That's helpful. And then the other question, can you help us, just whether you quantify it or from giving us color around how well Allegra has done for you from a store brand OTC perspective? And then I guess, Joe, a bigger picture question. Do you think or do you have a sense that there are other products at Pharma that may be being looked at that could also kind of go the same route. Former GX products that could go OTC and create I guess additional opportunities for you down the road?

Sure. Couple of comments. First of all, Fexofenadine's, or Allegra's, launch has gone very well. The product is on pace to surpass Zyrtec. Which would mean it would be over a $500 million product for Sanofi, so Sanofi and Chattem has done an outstanding job of launching the Allegra product. Within the store brand space, we find store brand shares somewhere around the mid 40%s in terms of share of the total market. Fexofenadine store brand has approximately 40%, or store brand has approximately 40% of the total [molecule that] sales that are out there. We at Perrigo have the majority share of that product so we are very pleased with that and obviously we continue to look forward to the launch of the Fexofenadine D12 which is a product that we expect to launch in the next three to six months.

So a lot of good activity there, and ones that we are very excited about in terms of launching it. On the second part of your question in terms of other products going from prescription to OTC, we continue to believe that over the next five years it will be over $10 billion of products that can move from prescription to OTC. They represent the rest of the proton pump inhibitors, so the Nexium, the Protonix, the Aciphex products all represent we think great opportunities to move from prescription to OTC and we know a number of them are under development as an OTC products so we are going to continue to try to be a fast follower in the category. Obviously the Clarinex products, or the next non (inaudible) antihistamine is certainly also an opportunity that we expect that product to go generic in June of 2012, so at the end of our current fiscal year. We obviously believe would be also a good RX to OTC switch. Beyond that there is a number of other categories that could potentially switch, the largest of which is the statin drugs. It is a little bit less clear there but certainly there is a possibility there of those products not immediately, but say three to four to five years out, and then also some of the products that are for the treatment of overactive bladder we think are also important candidates and some of the non oral products for pain relief we think could also be important products that could move from prescription to OTC.

Okay. Great. Thanks, guys.

The next question comes from the line of David Buck with Buckingham Research.

Yes, thanks for taking the question. Just a couple of quick ones. First on the overall revenue line looks like you were about $27 million light of our estimate and $22 million below consensus. If I take the 2% delay that is about $13 million, can you talk about in nutritionals and consumer health were there any sort of one-time type hits or not? And then for the nutritionals business can you give the number for the infant nutrition this quarter? And then just so I understand what is in the guidance going forward for the rest of the year, can you talk about what the assumption is for J and J coming back in, and what the assumption is on the Founder Pharma. It sounds like it is about being left out. But is that potentially a meaningful upside and you just don't know the number or you just don't think that the sales will be meaningful? Thanks.

David, you asked about five or six. I was trying to get all of them.

I can remind you.

If I missed any of them, let me know. First of all, the first comment I have to make is we obviously don't guide on a quarterly basis. We guide on an annual basis and relative to our full year guidance in terms of the Company, as Judy talked about, the revenue growth, we actually increased revenue growth for consolidated Perrigo from 15% to 18% up to 17% to 20% so that is clearly an increase on that guidance. Having said that, though, as we talked about the individual business segments really the consumer healthcare revenue growth is the -- consistent with where we were last August, or in August, a couple months ago now. The only one we decreased was the nutritional slightly and we raised the RX. So on the page that Judy outlined, just a the reminder that we don't guide quarterly, however, we have increased RX, slightly decreased the nutritionals and consumer healthcare really no change there in terms of our guidance. On the next comment, though, I want to make clear one comment you made relative to the consumer healthcare, the store brand analgesic product. I think your $13 million number is a little high. Because that was specific to the US OTC business.

Okay.

So that's a little bit high in terms of your comment there, to be clear. On the question of Founder Pharma, we at this point believe it is a very good opportunity, significant opportunity. However, in terms of how it is going to get up and running and the pace in which it gets up and running, it is not entirely clear to us at this time. So we do expect we will be shipping products in the next three to six months. The question of exactly the magnitude is really the reason why, as Judy stated, we kind of said let's put that to the side right now. That could be a potential upside but we really want to see those orders and understand the slope with which the uptake will occur before we get too much into that number at this time.

I guess I would just add a little color on to that. Don't read anything insidious into it. It's just our -- as you know, our mantra is we provide information when we feel like we have a clear line of sight and as soon as we have that we will give you color into it.

Absolutely. Thank you, Judy.

Okay, and just a follow up, then, I guess on the McNeil shortage. Remind us what the assumption was, when they come back and it looks like they have come back on some products and what do you expect the impact to be on your own sort of share that you had taken? How much give back is there. Thanks.

Sure. Thank you, I forgot that one. J and J, we expect to re-enter with the liquids in this current quarter, our quarter two and we expect that the J and J oral products will begin re-entering in quarter three, which is the January through March quarter for us. With the anticipation of that they will be fully back in by the end of that quarter three for us or the March time frame is our current expectation. Relative to the retention of the business for us, once again, I remind you that we have stated up front when people move from national brand to store brand we retain approximately 90% -- 91% of those patients. However, in the case of when they move, or they are forced to move, we retain approximately half in the case of a question of analgesic recall such as this. We expect to retain roughly half of the business that has come to us from the J and J recall.

Great. And just one final. That was the number for infant nutrition in the quarter?

We don't give out individual numbers, David, a you know, in any category like that. But it was -- we clearly think there is an upside for it for the next quarter. (inaudible - technical difficulties) the cough, cold, flu season and get through the conversion that was just a natural part of our plan.

Okay. Thanks.

The next question comes from the line of Sumant Kulkarni with Bank of America Merrill Lynch.

Good morning. Thanks for taking my questions. Sumant for Gregg. First question is on the consumer health business. So now, you have seen the same competitor in the GI space and in the fexo space and you said that the competition has been as expected but do you think they could be taking a more strategic viewpoint on the overall over-the-counter space? Becoming bigger?

Sure. Thanks Sumant. My -- our view is right now that all the things that have played out in the consumer healthcare space have been as expected. I think that -- I remind you on omeprazole we still have over an 80% market share of the omeprazole -- of overall omeprazole store brand sales. So everything we think has played out as we expected. Do I think that they have a strategic goal in OTC? That is hard for me to really comment on their goals. I expect that they will come after products that are moving from prescription to OTC but I don't see them coming after any other categories other than if they have had a ANDA for a product that was a prescription and coming into OTC, I don't see them in the other categories at this time.

And again on the Michigan facility you mentioned that it has been at record production levels recently. So do you think your CapEx spend outlook encompasses the expansion of the facility or do you think you would need a step change at some point just to capitalize on all of the opportunities that are out there?

I think as Judy said we are going to slightly increase the opportunity for our CapEx so we will be spending some incremental capital relative to the store brand opportunities but also some of the opportunities we see in infant formula and also in the API business and also in the RX business. So it's looking at the total book of business. But I don't see it being a step function different, I see it more as just some incremental spend. Judy, do you want to make any more comments?

And we talked about a little at analyst day. What we have been always strategically striving for with respect to expansion of our footprint has been how do we utilize the real estate, the physical plant that we have. And as you know, we have the ability to expand on our campuses globally to be able to enhance the production volumes, expand our packaging abilities, et cetera. So between our campuses in the US and in Israel specifically, built into that $90 million to $110 million range for this year are our intentions to be able to continue to expand. So we don't necessarily need to have a completely separate facility in order to be able to be able to continue our expansion of capacity for the Company.

And on the infant formula business, you mentioned earlier that the US birth rates have been declining. So should we think about the US growth for that as lower than the double digits that were previously cited?

I think what we have previously talked about in terms of growth rate was, as Judy outlined, we expected the growth rate for the total nutritional business to be 3% to 5%. It's going to be composed of a couple of things. Gaining incremental store brand share as per our previous comments, but also recognizing that the total category is going to be down approximately 2%. So it recognizes both gains in store brand shares but also the overall decline in the birth rate in the United States.

And my last question is on the API business. You called out fluticasone of the products that you shipped out. Was that for a [state] formulation or other types of formulations?

I don't think I'm going specifically go into that comment. It was certainly a good opportunity for us. Both with new and existing customers but I don't really probably want to make much more comment beyond that. The other part of it of course that was the temozolomide in the European Union. Both of those products had a very important foundation for us.

Thanks.

Thank you. (Operator Instructions). Your next question comes from the line of Frank Pinkerton with SunTrust.

Thanks for taking the question. Can you speak to your infant formula division? You made a comment with whey prices up that you were going about taking price increase. Since you did the acquisition there has kind of been a theory out there that overall store branded infant formula is priced at too large of a spread discount versus the branded products. Is this an opportunity to narrow that spread and actually get closer to what some others think should be the appropriate price in infant formula for store brands.

Sure. Thank you, Frank. We do believe that the spread, at approximately 50% difference between the national brand and store brand in the formula product, is a very significant spread. It is more than the usual spread that we have of about 30% in most of the OTC products. We still believe there is some opportunity for pricing. We have taken some pricing to be clear but we will always continue to reassess the pricing environment. And as I said before, I think what is important for us at Perrigo, as we look at the total portfolio we have, if we can keep the pricing environment flat to up slightly across the total book of business that allows us to have a very strong foundation so that when we launch these new products we are well positioned. So I guess the summation of the comment is, yes, we will continue to look at pricing. We obviously believe there is some -- and that we are one of only four manufacturers of infant formula in the United States, there that there is some opportunities. It's really going to be looking at what do we do with our cost component and where we go with the pricing in total across the total Perrigo book of business as we try to evaluate where to go with the business.

Can you also make a comment on the OTC to RX switch? That was a business you talked a lot about maybe a year, year and a half ago. I know some of those products are seasonal but just how does that switch go and does something like an Allegra coming over the counter give you another line potentially to feed back in there or since Allegra was generic to begin with is that not an opportunity for the behind the counter generic side?

So, yes, there is a -- with the Allegra product, and there is seasonality with the Allegra product, that is absolutely true. There is an ORX opportunity with Allegra. I will say one other comment that our supply of fexofenadine is improving from our manufacturer Teva. That is improving. It's not quite as much as we would like, but that continues to improve, and as that improves it gives us more additional upside opportunity, not just in ORX, but across the CHC book of business as well.

Okay, great, thank you.

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

Thanks for taking the questions. Absent the delay that you talked about in the analgesic suspension products were CHC sales kind of in line with your expectations in the first quarter and as you think about kind of the ramp to 12% to 14% sales growth for the year in that business, should we expect that ramp or that acceleration in Q2 or is it more heavily back half weighted given the sequence of new products?

Sure. The question of the in line, yes, we had expected it. Is there a little bit of incremental market share and pricing questions that Judy had talked about. Yes, there was a little bit of that we saw in the quarter, specifically to one category of products, yes. But beyond that, really, the discussion we had about our total book of business was that we were going to be -- we don't guide on a quarterly basis but we did expect incremental sales across our Company in the second half of the year and we continue to feel that the second half of the year will be stronger than the first half of the year for us as a Company. A reminder that the Mucinex products, the guaifenesin products, the additional products that we launch with minoxidil foam and also the lansoprazole product all are second half, and the clarinex are all second half opportunities. So a number of our larger new product opportunities are second half.

Okay. That's helpful, thanks. And then on the nutritionals business and kind of the adjustment to the sales outlook for the year. Just so I understand it sounds like that is being driven more by the VMS side of the business, not infant formula. Is that accurate? And then can you give a little more color on VMS today and where that stands in terms of -- I know you've been going through some SKU rationalizations, but how much of where you are in terms of SKU rationalization and the maybe even kind of the competitive environment there?

Sure. The growth in that business or part of what's happened there is a vitamins and mineral supplements activity as we stated. The major part of it was purposeful in the sense that we had weeded the garden or certainly looked at some SKUs and moving them out of our portfolio because they were underperforming and that has been an important part of what we have continued to try to do as we look at it.

I would say that that total business of vitamin and mineral supplements still is at a cross roads. We believe that potentially that could be a better business for us, but a large part of it is going to depend on how much of that is manufactured here in the United States versus how much of it is coming in from outside the United States in terms of where that business goes. So I think that we are going to continue to monitor it and look at it based on the return on invested capital as we have done in the past.

Last question just on China and infant formula. It sounds like this relationship with Founders is a good one and one you were looking for but it also is non exclusive, I think you mentioned, and you are still looking for additional partners. I guess what is the Founders relationship going to cover and maybe what gap still exists and what would you be looking to fill over time?

Good question. You picked it up absolutely, correct. It is non exclusive in that we think Founders is a very important customer and very important opportunity. However, we still believe that there are some additional things we can do in terms of either A, contract manufacturing for additional companies, in terms of companies that are in the market in China with a low or mid tier brand and is looking for a premium brand. That is one of the things we can -- think we can supply to some of the customers outside of the Founders' group. The second thing I would comment on is that we still have our Bright Beginnings product in China and if we can find additional ways to improve our distribution of that Bright Beginnings product we think that would be the other significant China opportunity that we are looking to explore and expect to have more comments on that in the future.

All right. Thanks everybody.

Thank you.

The final question is a follow-up from the line of Amy Fadiya with UBS.

Just along the lines of the China question. Could you give us some color around what is going on with respect to the partnership and right now, in the sense that what is Founder Pharma's next step right now, are they negotiating with the retailers there or is that done and you are at a point where you are waiting for new orders to come in? And then just separately, having done this deal, what is your next set of priorities in terms of this development. Thanks.

Sure, good question. We are doing a lot of the work right now with Founders to work on labels and other activities that we have to ensure that we get product to the market. As I said, in the next three to six months. So there is a lot of work that is going on there. Founders, as you know, or as I mentioned, has some great relationships in China and they are looking to talk to some of those retailers, hospitals, to leverage those relationships, so I probably don't want to make more comments on exactly their activities at this time. We at Perrigo are certainly getting ready for their anticipated needs in terms of building supplies as well as working on the labeling requirements. On the comment of where else we go. As I mentioned there is two opportunities. Looking for additional contract manufacturing in China for other customers who are currently approved products but also trying to get additional distribution of our Bright Beginnings product which we have talked about in the past where we know we need incremental distribution for Bright Beginnings in order to significantly ramp up the sales of that product to move it from single millions of dollars to tens of millions of dollars. So those are the two areas that we are continuing to focus on for the China infant formula opportunity.

And anything beyond China that would you would identify as a prioritized opportunity for this development?

Sure. There are other opportunities we are seeking in South America. There are other opportunities we are seeking in Europe. There are other opportunities we are seeking in Australia. We hope to have more comments on that probably in the next three to six months. But yes, we are clearly looking beyond the US and China at this time.

Thank you.

There are no further questions.

Thank you very much. Operator, and everybody, thank you very much. We appreciate your interest in Perrigo. We look forward to talking about in the future some of the activities that we see that are exciting opportunities for Perrigo being in the right place, right time, right company. Thank you very much, everyone.

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