Perrigo Company PLC (PRGO) 2012 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo fiscal 2012 second-quarter earnings results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Shannon, you may begin your conference.

Thank you very much. Welcome to Perrigo's second-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 press release is available on our website, perrigo.com. Also on our website is a slide presentation for this call. Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in the call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 25, 2011. 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 second-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. Next, Judy will go through the details of the quarter. Then I will provide additional comments on our plans for new product launches, plus an overview of our expectation for the remainder of fiscal-year 2012. Finally, this will be followed by an opportunity for Q&A. First, the year 2012 represents Perrigo's 125th-year anniversary as a Company. What a great achievement. I would like to thank all of our past and present employees around the world for the great work allowing us to achieve this milestone.

Now, let's discuss the quarter. It was another great quarter. As you can see on slide 5, we had strong year-over-year growth this quarter on a consolidated basis. The net sales strength was driven primarily by the acquisition of Paddock Laboratories and consolidated new product sales of $55 million in fiscal-year quarter two. This top-line net sales performance translated into expansion of both adjusted gross profit and adjusted gross margin. Adjusted operating margin expanded even further due to continuing operating expense leverage. Turning to slide 6, you can see the business segment breakdown. Judy will walk you through the details, but I wanted to touch on a few items.

First, our consumer healthcare unit has all-time record fiscal second-quarter sales. The performance was driven by $26 million in new product sales, led by the highly successful launch of fexofenadine, the store-brand version of Allegra. In fact, store-brand penetration for fexofenadine is ramping into the mid-50% range at this time, with Perrigo having the majority share of the store-brand market. That is the fastest store-brand market penetration in our history. To put that in perspective, in 2006, our new product launch goal was to gain a 30% store-brand market share penetration in the first 12 to 18 months. In this launch, the store-brand market share penetration is over 50% in the first six months. Consumers and retailers are even more quickly capturing the value of store brands.

Adjusted operating income was up versus last year, despite competitive pressures in the gastrointestinal category and promotional new-product spending. We anticipated both this GI pricing pressure and the marketing costs in our plan. As a side note, the gastrointestinal pricing has stabilized during the past four to six months. Our nutritional segment, net sales were down slightly from last year due to difficult comparables this quarter. Remember that during the fiscal second quarter last year, a competitor had a recall in the infant formula category, which gave us a $12 million in additional sales during the quarter. Margins in this segment were impacted by increasing commodity costs, as well as production variances. I will discuss initiatives we are implementing to mitigate the impact of these challenges after Judy's comments.

Our Rx business segment had a very strong quarter, as it continues to execute ahead of our expectations. Rx net sales increased 82%, and adjusted operating income grew 125% as a result of the Paddock acquisition, organic net sales growth of 11%, and a favorable pricing environment. The Rx team continues to execute very effectively across their entire product portfolio, and the Paddock integration continues to go well. Our API segment continues to perform well, driven by strong performance from the base business and highlighted by the robust sales of fluticasone.

Looking at slide 7, the overall OTC consumer market was up 1.1% versus last year with national brands down 2%, but store brand gained 8% on the strength of new product launches, national brand recalls, and increased market share. This is based on IRI 52-week data ending January 15, 2012. I want to highlight a couple of areas in this data. First, the cough-cold season is down versus last year. However, the category's up 2.7%, primarily due to the fexofenadine launch that I discussed earlier. National brands are down slightly, but store brands have gained 11.2%. When you dig through the data, you will see that store brands continue to gain share overall. But in fairness, the pace of these gains is not as strong as it has been in the past few years, when we saw up to 300 basis points of annual growth on the heels of major new product launches and the severe economic downturn.

In our guidance, we assume store-brand share growth of approximately 100 basis points a year, more in line with the longer-term historical average. Going forward, the additional positive impact of the launch of our new products in the second half of this fiscal year should help to accelerate store-brand growth by approximately 50 basis points to 100 basis points. For all these reasons, we feel confident raising the low end of our full-year adjusted earnings from continuing operations guidance to $4.70 to $4.80, up from the previous range of $4.65 to $4.80 per diluted share. So now let me turn over the call to Judy, who will provide more detail.

Thanks, Joe. Good morning, everyone. As you just heard, we delivered another strong quarter with record quarterly revenue, earnings, and cash flow, slightly ahead of our expectations. We continue to look forward to a strong second half of fiscal 2012, which I'll discuss in a few minutes. But first I'll review the fiscal second-quarter results. As always, I'd like to remind you that my comments are focused exclusively on adjusted results from continuing operations. You can view reconciliations between GAAP and non-GAAP adjusted results in the tables to our press release, as well as the appendices to this morning's presentation. Additionally, please note that the second quarter of fiscal-year 2012 includes 14 weeks of activity.

Now, let's walk through the financial results for each business segment. On slide 8, you can see net sales in the consumer healthcare business grew 10% year-over-year, driven by new product sales of $26 million, primarily fexofenadine in the diabetes-care category, along with an increase in sales of existing products of $20 million. These increases were offset by a year-over-year decline of $4 million in sales of certain products within the analgesics category due to the fact that our fiscal second-quarter 2011 experienced increased demand during the absence of a key competitor. Absent analgesics, revenue for all of the remaining categories within our consumer healthcare segment grew year-over-year in the second quarter. Net sales were also negatively impacted by approximately $2 million of unfavorable changes in foreign currency exchange rates.

The decline in adjusted gross margin was due primarily to expected year-over-year relative pricing pressures on a key product in the gastrointestinal category, though increased volume buffered the impact on sales. The adjusted operating margin decreased by a slightly larger amount than the adjusted gross margin, as we elected to continue to make the necessary marketing and promotional investments this quarter to prepare for the second-half launches of numerous new OTC products. Dollar investments year-over-year in consumer healthcare R&D continued at the same level as last year, but decreased as a percent of sales.

On slide 9, you can see that net sales within the nutritional segment declined 4% year-over-year. This was in large part due to the fact that in the second fiscal quarter last year, a competitor had a product recall that resulted in an increase in our infant formula category net sales of approximately $12 million, equal to approximately 10% of net sales in that segment for the quarter. In the second fiscal quarter this year, we are pleased that notwithstanding a 3% decline in US birth rates year-over-year, we were able to offset most of the decline related to the absence of prior-year recall with other growth. Net sales in the VMS category declined due to both increased competition and our continued SKU rationalization program. Combined, these caused lower production volume output and pressured gross margins.

Adjusted gross margin in the segment decreased 1,110 basis points to 25.3% due to several converging factors. First, we are continuing to see increased cost of raw materials for infant formula, such as lactose, nonfat dairy milk, and whey protein, as these commodities continue to see very high global demand. Second, we experienced a weaker product mix between higher-margin infant formula and the relatively lower-margin toddler foods, which grew year-over-year. And most importantly, third, to ensure continuous flow of infant formula to our retail customers, the decision was made to run production at both facilities, causing an under-absorption of fixed costs over the quarter.

We continue to monitor the situation and are taking appropriate actions as needed. While the adjusted operating margin decreased 920 basis points year-over-year, we were able to mitigate the larger adjusted gross margin impact through sound expense management. On slide 10, you can see that our Rx business continued to outperform even our own high expectations, with net sales growing 82% over the second fiscal quarter last year. As Joe noted, the Paddock Labs acquisition contributed net sales of $69 million in the quarter, and our legacy business grew 11% on new product sales of $5 million and (technical difficulties). Adjusted gross profit increased dramatically compared to last year due to the success of new product sales, market share gains, improvements in pricing, and the acquisition of Paddock. Adjusted gross margin and operating margin expanded 870 basis points and 880 basis points, respectively, as a result of the previously stated rationale.

Next, net sales in the API segment grew 6%, as you can see on slide 11. Sales of existing products increased due to increased US demand for fluticasone, partially offset by relatively lower sales of temozolomide in Europe due to changing channel dynamics from this time last year. The adjusted gross- and operating-margin expansion was due to favorable product mix, improved cost leveraging in our manufacturing operations, and continued SG&A leverage within our API segment. The effective tax rate this quarter was 30.9%, as the acquisition of Paddock Labs increased the exposure of earnings mix to higher US tax rates. Had the effective tax rate remained at the midpoint of our October 27 guidance, 28%, then adjusted earnings per diluted share from continuing operations would have been even $0.05 higher this quarter.

Now, some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $536 million at the end of the quarter, up from $448 million at this time last year, due primarily to additional working capital from the Paddock acquisition and relatively higher inventory from this time last year, due to seasonal factors and relative supply constraints experienced last year. Cash flow from operations for the second quarter was an all-time record, $166 million. As of December 31, 2011, total current and long-term debt on the face of the balance sheet was $1.5 billion. This is up sequentially from $1.2 billion as of September 24, 2011, primarily due to the funding of the $350 million of senior private placement notes during the quarter. This increase was offset by $55 million that we paid off under our accounts receivable securitization program during the quarter. Including cash and cash equivalents, our net-debt-to-total-capital at the end of our second quarter fiscal 2012 was 37.1%.

And now I'd like to update our earnings outlook for the full-year fiscal year 2012. On slide 12, you can see our consolidated Perrigo guidance information. Based on our current expectations that our full-year forecasted earning mix will be more heavily weighted toward US earnings, we anticipate the effective full-year tax rate at the high end of this disclosed range. Despite the expectation that this effective tax rate may be higher, we are raising the bottom end of the adjusted diluted EPS range to $4.70 from $4.65, tightening the range from last quarter. As you can see, the only other change from our October guidance is that capital expenditures are now anticipated to be between $110 million to $125 million for full-year fiscal 2012.

As we've noted on other calls this year, we have several manufacturing productivity and growth initiatives under way globally, including the Michigan consumer healthcare facilities enhancements, Israel Rx expansion, the Minneapolis on-boarding, India API ramp-up, nutrition productivity initiatives, as well as IT infrastructure projects. To meet our progressive product launch and productivity plans, we are advancing more quickly than originally assumed on several of these projects, and as such, expect to use more cash flow for investing activities this year than originally anticipated. As always, we are maintaining our unwavering focus on execution, innovation, as well as ROIC. These themes, while painfully consistent, we feel are the right ones and have been for over 125 years. Now let me turn it back over to Joe.

Thank you, Judy. As Judy just outlined for you, we had a great quarter, but quite a few things have happened since December 2011. In January, we announced the filing of an ANDA for the generic version of Astepro nasal spray. On January 12, we announced that Perrigo won summary judgment in the Mucinex case and that we expect to launch the product in the next 90 days. We also acquired the assets of CanAm Care to broaden our offering in the store-brand diabetes-care market. In fiscal 2012, we expect to launch over 45 new products representing more than $190 million in sales, as you can see on slide number 14. Essentially, we plan to launch the equivalent of one new product every week in fiscal 2012.

For the second half of the year, we plan to launch the generic store-brand versions of Prevacid, Mucinex, Delsym, Allegra D-12, Claritin D, Rogaine Foam, and potentially Clarinex, with combined annual branded sales of approximately $1.1 billion. One other note on our [CAC] business, a competitor has temporarily halted production at a facility that makes OTC products. We believe this issue represents a store-brand opportunity of approximately $15 million to $25 million per quarter. There are numerous competitors in these products, which are in general older products with lower overall store-brand margins. Still, this provides an opportunity for Perrigo to support our customers to meet that demand for quality affordable healthcare products. As it is early in the process, we do not yet know the extent or duration of this issue, and therefore we've added only minimal sales within our guidance to reflect new store-brand commitments. We will update you more as we get further along with this opportunity.

Also in the store-brand market, a nicotine gum, we received commitments from a large retailer who previously had not stocked the store-brand product. We are excited about this opportunity. In the nutritional segment, as Judy mentioned earlier, we have retained the capacity available for future customer demand, which impacted absorption variances this quarter. However, we have taken several steps to help mitigate the future impact of this issue. Let me highlight three items. First, we made the decision to close an oral electrolyte facility in Florida to increase manufacturing efficiencies based on return on invested capital. Second, to improve gross margins, we negotiated long-term agreements in Q2 with key suppliers of our most expensive raw materials to reduce our cost, and also, we are in the process of implementing pricing initiatives. Third, we acquired several new additional customers in Asia for future infant formula orders.

The generic Rx business continues to grow, including expected launches of the generic versions of Duac and Clobex lotion, which have combined branded sales of $210 million, as you can see on slide 15. After this, the continued growth in our Rx products and our Rx-based business, and we expect to have a terrific year ahead for our Rx team. Overall, we believe the strength of our total business and the significant future R&D targets justified a 27% increased investment in our QT R&D expense. In addition to our many organic growth initiatives, we have continued to fill our business-development pipeline with opportunities that fit our strategic imperatives of adjacent categories, new product technologies, and geographic expansion.

In summary, we had another great year, another great quarter. Looking towards the rest of the year, we are poised for strong new product launches and strong execution. The market continued to realize the value of store brands, and our Rx business continues to outperform our expectations. 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. Operator, let's now open up the call for questions.

Thank you.

(Operator Instructions)

Louise Chen, Collins Stewart.

Hi, thanks for taking my questions. One question I had was about the sales progression for fiscal third quarter through different business segments. So for example, given that consumer sales are going to be potentially lighter in the third quarter because of the weak season, can you talk more about how we should be modeling those different portions of the business?

Sure. Well, I think the first comment I'd offer is relative to the numbers, really would refer you back to what we're looking at. We don't make quarterly comments. We would refer you back to our guidance for the full year, and what we've said relative to the full-year guidance for our consumer healthcare business, or all of our businesses, for that matter. We're looking at for the consumer healthcare business that 12% to 14% improvement versus last year. At least relative to that, really, is the best comment I can make. The obvious other point I'd add to it is what's critical to us is these new product launches. When we have these numbers of products we've mentioned earlier in the year, that our year was going to be second-half loaded relative to the new product launches, especially in the consumer healthcare side. That's going to obviously input -- or certainly have some impact on what we expect to see for both the third quarter and the fourth quarter. Judy, do you want to add anything to that comment as well?

Sure, and we talked throughout the year about how to model the quarters. We've said that this year was more heavily second-half weighted, and with CAC being the biggest driver of the business, the largest sales component of our current business portfolio, the same definitely applies to CAC. And with many of the launches that we're talking about being weighted toward the fourth quarter, if you start thinking about how to model out the year, the remainder of the year, although were not going to get specific with quarter-to-quarter guidance, you can assume that the weighting is even in the second half, less heavier to the second half of the second half -- second quarter of the second half of the year.

Okay. The second question I had was on your operating margin expansion, which has been pretty impressive. Can we expect to see more of this in the coming years, and if so, what might be driving that?

Sure, well, I mean, I think, I -- first of all, thank you for the comment about the movement operating margin. I mean I think we have a very simple business model that basically, as we look to add new products to our portfolio, we can get leverage in our operating margin, because we've got one of our trucks going from Perrigo today to one of our leading customers. And if we add an additional product, new product, or an additional new adjacent category to that truck, it simply -- we simply get the leverage. We don't require additional salespeople, distribution clerks, et cetera. So it is that leverage we're seeing in the operating margin as a result of building our business and continuing to build our business with our large retail customers. We have moved the operating margin up from the single digits to -- percentages to 20%-something today, and I think what I would say to that is are we going to continue to look to strive to improve that? Yes. I would not take the model up to something similar over the next five years as what we have done in the last five, but I certainly do think we can get to the somewhere in the mid-20%s.

Okay, and just one last question is we've gotten some questions on the slowing store-brand growth and how that might affect your outlook for a long-term growth in your consumer health business. Maybe you could provide some more color there? Thanks.

Sure. First of all, I would say that the way we look at this business is that store brand continues to gain share versus national brand. We are still really very early in this process versus what you would see in a generic pharmaceutical market where 90% of the product goes generic as soon as the product gets approved. So we're very early in this process. But when you look at products like a fexofenadine that we get to a store-brand share of [wall] part 50% within the first six to nine months, it is those kind of progress that gives us the belief that the future opportunity will continue to be very strong to drive store-brand share from the low 30%s into somewhere in the 40%-plus range. That kind of movement is what we expect. We -- the model our business on only approximately 100 basis point move per year from national brand to store brand. That -- we've tried to be conservative in that regard and only use the 100 basis points per year relative to the movement. Obviously, though, any new products help us to accelerate that number, and that's certainly what we expect with some of these new products we're launching in the second half of this year.

Okay. Thanks very much.

Thank you.

Can we limit the questions to one question per caller, because we have a lot of people on the line? Thank you.

Linda Bolton-Weiser, Caris & Company

Hi, how are you? Just on the vitamin business, your comments there about SK reduction. I kind of thought the whole point of reducing SKUs is that it improves the profitability in the mix. So why would you be doing it? Or is this just unintentional share loss that's going on there? Can you address that?

Yes, I would say most of what we have done in the vitamin, nutritional, mineral supplement business has been to selectively look at where we can make money on these products and where we have a good return on an invested capital relative to that facility. In some places, that has led to us de-selecting some products, or getting out of some products, and that's something that we believe is important. On occasion, though, the market still will be competitive, and we may find ourselves in a product that we believe is important to our retailers and important to our facility and continue to stay in that facility -- with that product. But I think on balance, we are very much along the lines of what you said, Linda, continuing to look at what I would say weeding the garden to keep in the products that are the best margin opportunities. Judy, do you want to add anything to that?

Yes, Linda, just a little color. Year-to-date, the VMS business is performing better in terms of margins than we were last year. This particular quarter, with volume through the factory just being a bigger differential versus last year, there was more pressure in this quarter. But as we've talked about, weeding the garden and becoming as efficient as possible in our plan, and focusing on gross margins, we have been making progress there and are expecting for the full year to still be ahead year-over-year in terms of our profitability.

Great. Thank you.

Thank you, Linda

Ami Fadia, UBS

Hi, good morning. Well, I've got one broad question on your guidance. If you could sort of address a couple of things around what you've included in your guidance and what you've assumed regarding the following things. First of all, have you changed your assumption around the expectation for changes return to the market? And we saw a $4 million headwind this quarter year-over-year, where do you see that progressing by the fourth quarter in your guidance? I've got a couple of more, but I'll let you answer this one.

Well, let's talk about our overall guidance first. What we have not changed in our guidance is our belief that consumer healthcare is going to grow 12% to 14%. That continues to be our guidance. As it would relate to J&J and Novartis, I'm accounting to both of them, J&J is making progress in returning to their products to the portfolio. In the quarter two -- or I'm sorry, let's say it differently. October, November, December, they were reentering with liquids, and we are seeing some reentry now. Their plan was to reenter in January, February, March, with additional oral solids, and we are seeing some of that now. They are not fully back, to be clear. The expectation we have built into the plan is that they will be fully back, based on what we've heard, somewhere in the mid-year 2012, mid-year calendar 2012, and that's what we've built in our guidance, and that's what we're seeing so far. I would say there may be a little bit behind on liquids so far. I mean they're in stores, but they do not have the supply that at least they've had prior to their problems at this time.

Was there another? We've already addressed Novartis as well, I think was part of your question. On Novartis, we are seeing very small amounts at this time. We think that was a over a $200 million store-brand opportunity, I'm sorry national-brand opportunity and $75 million to $100 million store-brand opportunity on an annual basis, or somewhere between $15 million and $25 million on a quarterly basis. We have put in very minimal amount at this time, really reflecting a couple things. Number one, we still don't know the extent and duration of their issue. And number two, which is important, most of these are older products, which there are multiple players and multiple store-brand players in, and therefore we, at this time, have taken a conservative approach to putting any estimate in for the Novartis portfolio.

Two other things on -- well three other things on the guidance. How do you -- what kind of a flu season do you factor in within your guidance? And whether you have included anything from CanAm acquisition in your guidance? Also, if you've included anything from the benefit from China, the China deal on infant formula? And is this low birth rate already factored in, or is there further headwind coming?

So, there's a lot of points on guidance here.

I know.

We did highlight that there would be a flu season, our expectation there will be a flu season. However, we have seen year-to-date, or I should say season-to-date, flu sales -- cough/cold flu sales below the last year by approximately 8%, and that's what we have tried to factor into our guidance for the remaining part of the year, is that we are seeing a decreased flu season this year, especially in categories, some categories, like the fever category or the products used for fever. The second part, is CanAm in? Yes, we have CanAm in, as this was an acquisition that was completed in January. We have included CanAm into the rest of the calendar-year numbers, albeit they're not major numbers, but we did include them. China, we have done, as I mentioned, several new ventures in China to supply infant formula in China, especially our organic infant formula. We're one of the few companies to have organic infant formula approved in China, so we have done some additional work there, but it fits into what I call our overall China strategy with the Founders Group, Brilite, and then some of these other products categories.

Okay. Thanks.

Thank you.

Jami Rubin, Goldman Sachs

Thank you. Just a couple of questions. Joe, just generally speaking on revenue guidance this year, I'm actually surprised that your revenues aren't going up despite the CanAm acquisition, the Novartis recall, and J&J's reentry, which has been delayed to some extent. I mean I think J&J had talked about six months ago about being back on the market by 2012. Now they're saying mid-year 2012. So, if you could just maybe talk about what are the pulls against that, or the pushes against that, as to why revenues wouldn't actually go higher. And really more importantly, if you look at your year-to-date margins in consumer healthcare as well as nutritionals, to get to your guidance implies a significant step up in the second half, particularly nutritionals. And just with raw materials rising, I'm not sure how you hit that. And as you're launching new products in the second half, I mean is your plan to significantly pull back on that spending? If you could just talk about your confidence level in hitting those operating margin targets? Thank you.

Sure, good questions. I think the answer to almost everything you talked about is really new products. One of the things that we would comment on certainly is as we look at our range for consumer healthcare, our expectation for year-over-year growth is between 12% to 14%. A big part of the question there becomes the new products and the assumptions on the new product. As you know, we take a probability weighting on any new product, and we try to weight that probability factor as to how we are going to be successful and number of players we expect to compete with in any new product. And that, and the timing for those new products, that's all part of what we try to factor in. And I think for us, we always feel it's better to be somewhat conservative on those assumptions until we get the product approved. Obviously, once they're approved, they're out in the market, it's a whole different situation. But I think much of what we've tried to do and what the inputs and outputs for the forecast guidance really deals with new products.

The other part that is obvious that we have talked about already is that the -- this cough/cold flu season is a slow season for us to build significant incremental into where we are with our consumer healthcare business at this time, we felt would not be prudent -- as prudent decisions for us and would not reflect in how we approach a conservative approach, especially when -- Yes, is J&J behind a little bit in the shipment of their products? Yes, but they are improving their presence. Therefore, we felt it would be best to be conservative until we see what's going to happen in the marketplace. And the same comment, and I think I mentioned Novartis already, so I probably won't say more about that. But really, it's just looking at -- until I get a better understanding of the extent and the duration of the Novartis issue, it's hard for me to put a lot more into that. I just think it's better to take a quarter of the time.

And then on margins, Joe?

Margins, yes, sorry, same comment on margins. It's new products, new products, new products. It really -- the new product differential is what really drives the margins in our consumer healthcare business --

And what about nutritionals?

Nutritionals, it's going to be some of the steps that I outlined on what we are going to do with number one, we closed a facility in Florida. Number two we got significant reductions in our cost of goods for one of our expensive raw materials. And of course we opted to do something on pricing. And then number three, it's the incremental instant formula sales in China that are going to help drive our nutrition margins. It's those three things that I had mentioned there on the call.

Thank you.

Thank you.

Gregg Gilbert, BofA

Well, Art, it's one question. Well, sort of, one two-part question. On Rx, Judy, could you walk us through how you're viewing the market-share gains there? Are there a few or several, and how temporary versus permanent do you see those? Because it seems to me the big story this quarter was the size of revenue and how high margins were, and I'm sure folks want to understand how sustainable that is. Secondly, Art -- I'm sorry, Joe, are you able to pursue the Androgel 1.62 formulation under the terms of your agreement? Thanks.

So, Gregg, on the Rx margin front, we've seen strong positioning in our legacy business, as well as the incremental add that comes from the Paddock acquisition. In the legacy business, the team has seen stability in the pricing work, the pricing improvements that they've been able to achieve over the last several quarters. And as I've said, they've been pretty stable. So are we able to predict exactly how long that stability will exist and how dynamic the pricing environment will be 12 months out with any certainty? No. But given the competitive landscape of those particular products, and what is happening for our team right now, we're feeling good, obviously, for the remainder of the year and being able to confirm guidance.

Yes, maybe the only thing I'd add to what Judy stated, because I think it's absolutely clear, was that the other part of what our team has done very well in the Rx business is you make money in the generic prescription business when you're first to the market, which our team has done that. But they also make money when you're last in the market, and the team has done that. As some of the other competitors in some of these products have discontinued some products, it's given us a chance to reassess where we were versus the national brand. And I think it's that ability to be first and last that is truly what has differentiated the team activities in the Rx business and helped us to get the numbers we did. On the latter part, Greg, I really can't comment on exactly where we would go with any formulation of Androgel. I will simply say that if it is a topical product, it is something that Perrigo will look very seriously at, because really we like that space. It's harder to get into these products, as you know, in terms of the expense and the commitments it takes up front, but our team is absolutely looking at all topical products as really the place we want to play. So, any topical product, we're going to look at.

David Steinberg, Deutsche Bank

Okay, thanks. Yes, I just wanted to pick up on Gregg's question about your generic business. It looked like an outstanding quarter, $30 million above most estimates. And I was just wondering as this is your first full quarter after the acquisition of Paddock, is the $177 million a good basis for moving forward for the year? Do you see sequential growth in this business in Q3 and Q4, or were there any one-time exclusive launches or one-time gains in your prescription -- in your Rx business?

Well, we did have some launches during the quarter, to be clear, absolutely, yes. What I would say to that, though, is that the best comment I can make relative to the go-forward is the full-year guidance that we initially issued. Earlier in the year, in August, we talked about a Rx revenue growth at 55% to 57%, and then we adjusted that to 69% to 71% in October, and we're staying with that 69% to 71% here today. So I'd say from a guidance point of view that is the kind of growth, the 69% to 71%, that we are expecting, and we continue to expect in terms of the total business. I will once again though say that the team has executed extraordinary well. A large part of what we -- the unknown, though, in the Rx business is always new products. We have two new products that we expect during the year, the ones I mentioned being Duac and Clobex. That really is the commentary about could we do better? Certainly, if new products all come in, but we think you always have to put a weighted average conservative approach adding new product opportunity.

Elliot Wilbur, Needham & Company

Thanks. Good morning. Joe, maybe just real quickly if you could provide a little bit more color on the fexo launch and some of the differentiating factors, why you saw such a significant uptake in a relatively short period of time? Obviously, that's just more than an incremental step in the right direction. That's a large step in the right direction. And perhaps does this kind of a new standard benchmark for store-brand OTC of launch uptake?

Yes, well let me just back up a little bit on your question, Elliot. First of all, I'll say Sanofi did a great job in launching the Allegra brand. That brand is on pace to be over $500 million, at least from our numbers, so they did a great job. And we simply followed it with obviously being fast to market and having a good store-brand promotional program. The team and the consumer healthcare group just continues to get better in terms of execution on store-brand programs to drive the education for the consumer, the education for the pharmacist, the display, the ability to show that this product, fexofenadine, is a store brand of Allegra. All the activities promote everything from the color of the graphics. All of that is being very well implemented into making sure the consumer understands that we can offer the same quality of Allegra with a more affordable option with store-brand fexofenadine. And for us to be at over 50% I think certainly is a target that I'm going to certainly hold the team accountable to as we look to future launches, yes. We will, though, probably a little bit more conservative in terms of what we actually guide to, but certainly that is a target that we now know is achievable, and certainly one that we will seek to try to duplicate for future launches.

Randall Stanicky, Canaccord Genuity

Thanks, guys. Just again on your consumer business and a follow-up to Elliot's question. The $26 million in new sales revenue, that was largely fexofenadine. Joe, should we be thinking of that as a good run rate, or should we be thinking as we go forward that number could be $30 million or $35 million? And then I have a follow-up.

Yes, I think that it's a good number for the quarter. Obviously, that particular product's going to have some seasonal variations with allergy seasons, so there is going to be some seasonal variation, I guess I want to point to, first comment. Second comment on that is that it is not our expectation that we will see a significant number of new entries here. We could, but we do not expect significant number of new entries into the category, so that would argue towards more of a stable number of players in the business right now. And obviously, the third comment, which is probably the most important one for Perrigo, is the launch of the Allegra D-12 is a significant opportunity for us that we expect to launch sometime in the next several months. So that to me would be -- or certainly before the end of the current fiscal year. That would be the biggest upside to Allegra as a total product category, would be the launch of the D-12 formulation.

David Buck, Buckingham Research

Yes, thanks, just a couple of quick ones. For the nutritionals business, can you talk a little bit about what the current size of the China sales are now? I believe it's pretty small. Just wanted to get a sense of whether you expect it to stay small during the fiscal year or into fiscal 2013? Also, you talked about generic Mucinex launching in the fourth quarter. Can you talk about what plans you might have for Mucinex D, either alone or in partnership? And then just finally, can you give an update on where the API cost-savings program stands in terms of moving manufacturing to India and getting product in there? Thanks.

Okay, all good questions, David. First, China, our -- we have stated publicly that we sell in China single millions of dollars of sales, but obviously we think the potential is significantly more than that. I would say relative to the numbers that we're still in that single millions heading to double digits, or tens of millions, but in terms of a ballpark number, it's still high-single-million dollars of sales for China. But with a very important growth rate that we see relative to these new ventures that we have entered in, as well as adding some new customers this year. On the second part of the question, I think with Mucinex, it is our expectation, as I stated, we'll launch it in the next 90 days. We're looking forward to launching the single entity of the guaifenesin. Everything is on track for the validation for that. It is currently all that we're talking about launching right now is the single-entity guaifenesin product. I really have no other comments I can offer on the Mucinex D or DM. And I'm sorry, I left out the last one. What was the last one?

And then the last one is just API, cost-savings update, and manufacturing update?

Yes, well in general, we are always striving across our growth vertically integrated API, as well as the utilizing the vertically integrated capability to get reductions in our API resource from outside of Perrigo. We use our vertically integrated API as what I would call a credible threat to continue to negotiate down our cost of API. Our team has been very good in doing that, and they are continuing to make progress on that. India, we have made good progress in the building-out of the facility. We have our first DMF product at this time. We've got to get it approved, of course, but that's good progress in terms of our ability to get a DMF put together, and certainly look forward to that very soon. I don't want you, though, to build into that model suggesting that's going to be a major change right away. That's going to take a couple of years as we bring out really more APIs for the new product launches that we expect for Perrigo consumer healthcare products. So it-s really more of a two- or three-year horizon relative to impacting the cost of our API, or the input cost of our API. What we are doing, though, in the meantime is using the ability of this team to help us understand where API costs should be to go out and negotiate down our current -- with our current suppliers of raw materials.

Jon Andersen, William Blair

Quick question. I just had a question on the competitive pressure that you cited in gastrointestinal and whether that has stabilized somewhat from the first fiscal quarter, and whether you're seeing any movement in competitive pressure to other product lines in CHC? Thanks.

Yes, so, as we stated, as we acknowledged in our first quarter, that we did have some competitive pricing issues in our GI category, and that is something that we did experience. We expected it, because of really the issue on the expectation there is something that we knew we had a significant share and that we were going to -- there would be some pricing pressure there, and indeed we expected it, and we did exceed that. But over the last four to six months, that has been very stable. There have been no new competitive questions, issues there, and that is our -- what we are seeing right now. And it has not extended to other -- I think the question was did it extend to other product categories. Really, it was isolated to a specific product in the GI category.

Chris Schott, JPMorgan

Thanks very much. Just had two quick questions on the consumer business. First, the release today talks about a $20 million increase in sales from existing products. Is that a reasonable proxy for growth we should anticipate in the next few quarters before we consider, obviously, these new launches that you've discussed? And the second was on your consumer growth targets. I think you've grown about 7% year-to-date. Is that growth in line with your plans as we think about the overall targets for this year, or has the year become a bit more back-end loaded than was originally anticipated between weak flu season, the Novartis opportunity, diabetes, et cetera? Thank you.

On the question of the existing products, and one of the hardest things to do at Perrigo is talk about existing products versus new products, because one of the challenges we always face is we may have a grape-flavor cetirizine, but then we're going to add the cherry flavor as a new product. So technically is a new product, is a new flavor, but does it cannibalize some of the grape flavor? The answer is absolutely yes. So it's a very hard distinction between new products and existing products. Having said that, I'd continue to say that we expect that 12% to 14% growth rate in the consumer healthcare. Yes, we -- I agree with the sentiments somewhere along that 7% range year-to-date.

The difference, though, that I would say is critically important to us, and we said it from the very beginning, is new products, new products, new products. It is the launch of those new products which are unfortunately all grouped into the February, March, April, May, June time frame that is influencing our numbers to date, but once we get these products launched, I believe it will do two things. Obviously, it will obviously drive the revenue growth and also drive the operating and gross margin, operating margin. And importantly, it will also drive what you see externally in the IRI data as we get opportunities to launch new products in categories we did not have then before. So I think it's really all three things that it does, and that's really going to drive the future performance and success of our business.

Frank Pinkerton, SunTrust

Joe, could you make some comments around the diabetes acquisitions and businesses? When I think of those ultimately, can they be as large in aggregate from a product standpoint as maybe your cough/cold or your gastroenterology businesses that are about 13% to 15% of sales? Do they have that growth potential? And if so, do you have everything you need, or are there more acquisitions or more needs to fill out your diabetes product portfolio? Thanks.

Frank, thank you for -- it's a great question, because it really speaks to the future and what we're really excited about for diabetes. You know, some people would view what we've bought business, $40 million of revenue, so that's good. But what's really much more important to me is we created a platform. The platform we created for diabetes which, unfortunately, I think we all know is growing by double-digit numbers in terms of the number of patients with diabetes continues to just grow significantly. And so the products they consume are also the demand they have for products are growing very quickly. We look at this as a platform. So, for example, now we have the broadest store-brand offering in -- for any company in diabetes. And we have obviously the blood-glucose monitors, the meters and strips, but we also now have the glucose tablets, glucose gel. We have the lancets. We have the syringes, the needles, the pen needles. We have a broad category.

So this, though, I believe this is a future platform for us as a Company. So I believe as an example, we can now add to that, as just simply an example, a sugar-free nicotine lozenge that patients don't have today, and that's something we can be unique and get out there and really bring it in as something that is a value-add to our customers. Another very easy example to understand is the sugar-free cough syrups, and putting it all into a what I would call a display, a point of purchase, for our retailers in the entire category of diabetes. That to me is a really exciting platform opportunity that this begins to shape for the future. Yes, it's a $40 million acquisition, but more importantly, gives us the entire platform for the diabetic patient, which, who unfortunately, continues to grow very quickly and is utilizing a lot of pharmaceuticals, and we want to make sure that we've got the best, quality, affordable healthcare offering available. So it is a platform that I think is really exciting for the future.

Gregg Gilbert, BofA

Thanks. Judy, you mentioned the 14-week issue. How should we think about that? Is that 7% or 8% more sales than would normally occur?

So, the 14th- week issue occurs because of the fact that we are on an SAP calendar. And so, every six to seven years -- this is only the second time in our history that this has happened, because we've only been on SAP since 1999 -- but every six, seven years, this will occur and it will going forward occur in the second fiscal quarter. And it occurs, if you will, the week between Christmas and New Year's. So, if you're trying to come up with a model of what's the impact, suffice it to say you can take a simple average of the quarter. 14 -- divide the quarter by 14 weeks to come up with an assumption of approximate sales, but knowing that it is, if you will, a holiday week.

Okay, and then Joe on adult nutrition, how do you expand your business there? Is that a combination of organic and acquisition? Thanks.

Yes, I think, Greg, the easy answer to the question is yes. We talked about it. One of the things that PBM, and we acquired PBM a couple years ago now, gave us is the capability to do some of the formulations for the adult nutrition, and that capability is something that we have today. However, there may be some opportunities there on the acquisition side as well. So, we've got capabilities for the formulation side of adult nutrition. We believe it's a very large category, one that the PBM team at Perrigo is very much focused on. The question is what else can we do to grow it? There are so many different opportunities. There's Ensure. There's Ensure Plus. There's Ensure Muscle. There's Special K diet drinks. There's Muscle Milk. There's so many adult nutrition drinks that we are very excited about going into that, because there really is not a lot of good store-brand opportunity or offerings today. So, a lot of opportunity, and ones where we've got some capabilities there as a result of PBM that we will seek to bring into the category.

Jami Rubin, Goldman Sachs

Jami?

Hello, can you hear me? Sorry about that, technical difficulty. Just to follow up, just curious to know what your expectations are for the competitive dynamics for Prevacid OTC. And I guess my question really is triggered by the Dr. Reddy's conference call. It was either yesterday or the day before, when they talked about a citizens' petition that you issued and their view that that would actually hurt you, although it's actually kind of confusing to me. So if you could just please remind us all what this citizens' petition is about, if you expect to be the only store-brand Prevacid OTC on the market, and if Dr. Reddy's were to launch, would do expect that they will be as aggressive on price as they have been with omeprazole? Thanks.

Sure, so, first of all competitive dynamics on Prevacid is our expectation that we will have competitors in the marketplace. It will not be a Perrigo-only product launch, first comment. Relative to the citizens' petition, we actually believe that what we're saying to the FDA is that if there is a product already available in a category, like Prevacid OTC, that people need to conduct the clinical bio study versus the OTC product, not versus the Rx product, it is our belief that some people have attempted to get approval based on the Rx product and not the OTC product. That is the simplicity of our difference of opinion. I -- Dr. Reddy can make whatever comment they want. I -- we think that we are just simply stating that we are on the right side of this argument that if there is an OTC product, that is the reference listed product that one needs to do the bio study versus their product, not versus the Rx product. That is the simplicity of our belief.

On the question of what could happen, we competed against a number of players. I go back to cetirizine. We've launched head-to-head with players. I go back to omeprazole. We had a head start, but then we launched against the players in each of those cases, well into the product life cycle. Perrigo is the market leader with a majority share. We don't have 100% share, nor do I want 100% share, but we are the majority leader in the marketplace. And so I feel very good about the upcoming launch, and we look forward to the opportunity to bring out a quality, affordable healthcare version of lansoprazole.

And there are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Well, first of all, thank you very much everyone for your interest in Perrigo. And I once again to say thank you to all of the current and past employees of Perrigo as we enter our 125th-year anniversary. It's an exciting time to be a Perrigo. We clearly believe we are the right Company at the right place at the right time. Thank you very much for your interest in Perrigo. Have a great day.

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