Perrigo Company PLC (PRGO) 2012 Q3 法說會逐字稿

Good morning. My name is Beatrice and I will be your conference operator today. At this time I like to welcome everyone to the Perrigo fiscal 2012 third-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. I would now like to turn the call over to your host, Mr. Joe Papa, President and Chief Executive Officer. Please go ahead, sir.

Thank you. This is Art Shannon. Thank you very much. Welcome to Perrigo's third-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 at perrigo.com. Also on our website is a slide presentation for this call.

Before we proceed with the call I would like to remind everyone that the safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the safe harbor created thereby. Please see the cautionary note regarding forward-looking statements on page one 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 third-quarter fiscal 2012 earnings conference call. Also 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, next Judy will go through the details of the quarter, and then I will provide some additional comments on our key success drivers, including new product launches, plus an overview of our expectations for the remainder of fiscal year 2012. Finally, this will be followed by an opportunity for question and answer.

Now let's just discuss the quarter. As you can see on slide four, we had a great quarter with strong year-over-year growth on an adjusted consolidated basis. The net sales strength was driven by strong execution across our generic prescription business, especially the integration of Paddock Laboratories, and new product sales of $64 million with the majority of those sales coming from our consumer healthcare business in fiscal year 2012 Q3.

This top line net sales performance translated into expansion of both our adjusted gross margin and adjusted operating margin. In fact, adjusted operating margin expanded 250 basis points to a record 22.1% due to continuing operating leverage, even though we made a significantly higher incremental investment in research and development which was up 19% versus last year.

I want to congratulate the entire Perrigo team for executing a 13% increase in net sales year over year, while more than doubling that on the bottom line with an increase of 32% on an adjusted basis. Furthermore, quarter over quarter adjusted operating margin for each of our four largest business segments all increased. In this quarter our store brand private-label businesses of consumer healthcare and our nutritional segment together combined to generate approximately 73% of this quarter's sales so great performance.

Turning to slide five, you can see the business segment breakdown. Judy will talk you through the detail but I want to touch just on a few items here.

First, our consumer healthcare unit had all time record fiscal third-quarter sales. Global consumer healthcare sales grew 6% in the quarter while OTC US sales rose 8% despite the historically mild cough/cold/flu season which hurt sales by approximately $25 million. The growth was driven by $34 million in new product sales led by the highly successful fexofenadine product, the storebrand version of Allegra, and our launch of minoxidil foam, the storebrand version of Rogaine Foam.

Adjusted operating income was up versus last year despite competitive pressures in this gastrointestinal category and promotional new product spending in advance of our expected launches in the second half of the fiscal year. We anticipated both the GI pricing pressure and the marketing costs in our plan.

As a side note, the gastrointestinal pricing has appeared to stabilize over the past 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 and third quarter last year a competitor had a recall in the infant formula category, which gave us plus $8 million in additional sales in the third quarter last year. When you remove these additional sales, year over year the infant nutritional business actually grew approximately 12% despite a very weak market.

Also, sales in the vitamin and mineral supplements were down over 15% in the quarter which impacted our results. I will discuss the VMS segment further after Judy comments.

Adjusted margins in the total nutritional segment improved over 460 basis points versus quarter two fiscal year 2012, as long-term supply agreements we implemented last quarter mitigated the impact of rising material costs.

The Rx business had another very strong quarter. Rx net sales increased 84% and adjusted operating income grew 130% as a result of three factors. Number one, the successful Paddock integration; number two, the gains of market share from both Paddock and our legacy Rx business; and number three, organic net sales growth of 11% from a favorable pricing environment in our Rx business.

The RX team continues to execute very effectively in the legacy business and the Paddock integration.

Looking at slide six, the overall OTC consumer market was relatively flat versus last year with national brands down 2.2% but storebrands gained 6.8% on new product launches, national brand recalls, and just increased market share based on IRI 52-week data ending April 8, 2012. This trend has also accelerated in the most recent quarter with storebrands growing 7.6% based on the latest quarterly data ending April 2012.

I want to highlight a couple of areas in this data. First, the cough/cold/flu season is down versus last year. However, the category, which includes allergy, is up 2.1%, primarily due to a very early and very strong allergy season.

National brands are down slightly, but store brands have gained 8.9%. While the allergy season is going very well, there wasn't much of an impact in our third quarter as this quarter was mostly a channel fill. We are optimistic for rest of the season, although we are certainly sympathetic to all of you allergy sufferers.

Primarily as a result of the historically mild cough/cold/flu season and the lighter sales of the VMS business, we are adjusting our consolidated revenue guidance for fiscal year 2012 back to our original August 2011 guidance of 15% to 18% growth year over year. We still feel confident raising our adjusted diluted earnings guidance to $4.90 to $5 per diluted share, up from the previous guidance range of $4.70 to $4.80 per diluted share, based on stronger operating margin expectations and a one-time tax benefit of approximately [28%] realized this quarter.

So now let me turn this call over to Judy who will provide more detail.

Thanks, Joe. Good morning, everyone. As you just heard, we had another very solid quarter. On a consolidated basis our team continues to perform well with record third-quarter revenue and earnings.

I will provide updated consolidated and segment earnings guidance for the remainder of the year in a few minutes, but first I will give a brief review of our fiscal 2012 third-quarter results. As always, I would like to remind you that my comments today are focused exclusively on adjusted results from continuing operations. You can view 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.

Now let's walk through the financial results for each business segment. On slide seven you can see net sales in the consumer healthcare business grew 6% year over year, driven by new product sales of $34 million, primarily in the cough/cold and dermatological categories; a $5 million increase in sales of existing products in the smoking cessation category; and net sales attributable to the acquisition of CanAm Care of approximately $8 million. These increases were partially offset by a decline of approximately $25 million in sales of existing products, primarily due to the historically mild cough, cold, and flu season that Joe just mentioned.

As we have discussed throughout the quarter, the incident of cough, cold, and flu was down 9% year over year according to IMS FAN data, which helps to explain the absence of typical reorders of product by our customers in this quarter.

The decline in adjusted gross margin was due to several factors. First, as expected, we observed year over year relative pricing pressures on a key product in the gastrointestinal category, although increased volume buffered the impact on the top-line sales.

Secondly, the dynamics of the relatively slower cough, cold, and flu season played out in several ways within the CAC adjusted gross margin. Although efficiencies in production processes are improved from this time last year, production volumes in Michigan were down double-digit percentages across the board year over year. As a result, we experienced under-absorption of fixed production costs relative to this lower volume output.

In addition, as cough, cold, and flu products' sell-through was lower this quarter inventory balances have grown and, therefore, the inventory carrying costs have risen, negatively impacting adjusted gross margin. However, we are pleased to report that service levels are much higher than at this point last year.

The adjusted operating margin decreased by a lesser amount than the adjusted gross margin as we were able to control operating expenditures well in the quarter without sacrificing product investment. DSG&A expense increased on a dollar basis with both the inclusion of CanAm Care expenses, as well as with the continuation of necessary marketing and promotional investments this quarter to prepare for the fiscal fourth-quarter launches of numerous new OTC products. Even with these investments, as a percent of net sales adjusted DSG&A spend declined 20 basis points year over year.

On slide eight you can see that net sales within the nutritional segment declined 5% year over year due primarily to two factors. One, the absence of $8 million of additional sales in the third quarter of last year as a result of a competitor's product recall that Joe mentioned earlier. Removing this effect, we are pleased that notwithstanding a continued 2% decline in US birthrates the infant nutrition categories grew by approximately 12% year over year.

Two, net sales in the VMS category declined year over year, due both to unattractive pricing and our continued SKU rationalization program. These factors together caused lower VMS production volume output and pressured the category's adjusted gross margin.

Adjusted gross margin in this segment decreased 390 basis points to 29.2% due to many of the same factors that affected the segment last quarter -- increased costs of raw materials for infant formulas, such as lactos, non-fat dairy milk, and whey protein; weaker product mix between higher-margin infant formula and relatively lower margin toddler foods; and an under absorption of fixed costs during the quarter as we continue to run production of infant formula at both our Vermont and Ohio facilities.

Despite these year-over-year challenges though, I am pleased to note that steps outlined last quarter to increase both gross and operating margins have made a substantial impact this quarter as the adjusted gross margin increased 390 basis points and the adjusted operating margin increased 460 basis points sequentially from the second fiscal quarter. These steps included negotiating long-term agreements with key suppliers of our most expensive raw materials to reduce our costs and continuing to implement pricing initiatives.

On slide nine you can see that our Rx business continues along the strong growth trajectory we have seen over the last several quarters. Net sales growth was driven by the Paddock Labs acquisition, favorable new pricing, and new product sales. Our newly combined Rx team has made great strides gaining market share and net sales, bringing our broader combined portfolio of products to our customers, a real example of how an acquisition can deliver on the promise of one plus one equals three.

Adjusted gross margin for the quarter was strong compared to last year due to the favorable pricing on new and selected products and production cost leverage in the business. I am pleased to note that our organic Rx businesses' adjusted gross margin expanded by approximately the same amount as the combined segment. DSG&A leverage was once again evident this quarter as the adjusted operating margin increased 200 basis points over the adjusted gross margin and 990 basis points year over year.

Next, looking at the API segment on slide 10, the net sales decline was due to expected unevenness of revenues in the overall business and was not attributable to any one particular product. Adjusted gross and operating margins increased 480 basis points and 210 basis points year over year, respectively, due to favorable product mix and improved cost leveraging in our manufacturing operations.

This quarter the effective tax rate was favorably impacted by the conclusions of several tax audits and various statute expirations. As a result, the adjusted effective tax rate this quarter was 17.2%. These tax audit conclusions translated into a $0.20 diluted earnings per share tax benefit, or an approximately 12 percentage point improvement to the adjusted effective tax rate for the fiscal third quarter.

Now some quick highlights on our balance sheet. Excluding cash and cash equivalents, working capital from continuing operations was $607 million at the end of the quarter, up from $471 million at this time last year, due primarily to the additional working capital from the Paddock and CanAm Care requisitions and higher inventory as a result of the mild cough, cold, and flu season this year compared to supply constraints in those categories experienced last year.

Cash flow from operations for the third quarter was $91 million.

As of March 31, 2012, total current and long-term debt on the face of the balance sheet was $1.49 billion, essentially flat sequentially from last quarter. Excluding cash and cash equivalents, our net debt to total capital at the end of our third quarter fiscal 2012 was 34.7%.

Now I would like to discuss our updated earnings outlook for fiscal 2012. Looking at slide 11 you will see that we are making three changes to our detailed consolidated guidance. As Joe already highlighted, we are now estimating consolidated year-over-year revenue growth in a range of 15% to 18%, but are raising our adjusted diluted EPS guidance range by $0.20. Let me explain.

As I noted a few moments ago, in the fiscal third quarter we realized a $0.20 EPS benefit related to the closing of various tax audits. With this benefit we are adjusting our expectations for the worldwide effective tax rate to be between 25% and 27%. However, although we have adjusted our top-line net sales expectations slightly down, we still feel confident in raising the adjusted bottom-line guidance by this full $0.20 to be between $4.90 and $5 per diluted share due to the team's ability to translate new product launches and operational efficiencies into operating income dollars.

Looking to our segments on slide 12, we continue to anticipate strong demand for our products in consumer healthcare segment; however, we are making slight adjustments to revenue and adjusted margins. These adjustments are due to a few factors.

First, this quarter we experienced a historically mild cough, cold, and flu season which impacted sales. Second, our international consumer healthcare sales and contract manufacturing operations have not performed in line with our internal expectations.

Third, we have not seen any indication that the sponsor holder of desloratadine will be launching an OTC version of the product and, thus, we now do not expect to launch a storebrand version of Clarinex. Fourth, we are adjusting our probability weights on new products, including fexofenadine D12 and dextromethorphan. And as a reminder, both of these are partnered products and not 100% Perrigo controlled.

Incorporating these factors into our risk-adjusted model, we now expect consumer healthcare's year-over-year revenue growth to be in a range of 9% to 11% with adjusted gross margin in a range of 31% to 32% and adjusted operating margin in a range of 17% to 19%.

In our nutritional segment we have made great strides this quarter over quarter and are pleased with our growing market share in the US, despite the declining infant formula market. However, given the continued competitive environment within our VMS category, we now estimate nutritionals' revenue to be flat to down 2% year over year with adjusted gross margins of between 28% and 30% and adjusted operating margin of between 13% and 15%.

In Rx, we are now expecting top-line growth of 81% to 83% compared to fiscal 2011, driven by new products and operational excellence. We now expect Rx adjusted gross margin to be in a range of 57% to 59% and adjusted operating margin to be in a range of 46% to 48%.

In our API segment we now expect year-over-year top-line sales to grow 5% to 7% compared to fiscal 2011 due to the overall expectations of exact timing on orders of key products. However, given our focus on productivity improvement and expense management, we now expect API adjusted gross margin to be in a range of 48% to 50% and adjusted operating margin to be in a range of 28% to 30%.

Execution will continue as the focal point for the organization throughout the rest of the fiscal year. At the same time, there were external factors that affected our performance for the quarter which we were able to mitigate with strong operational performance. The next months will be busy as we march towards our many new product launches which will further solidify our foundation for continued growth into the future.

Now let me turn it back to Joe.

Thank you, Judy. As Judy just outlined for you, we had a great quarter. In fiscal 2012 we are on track to launch over 45 new products totaling more than $190 million in sales, as you can see on slide 13.

We launched the storebrand versions of Claritin-D and Rogaine Foam. We launched the generic version of Mucinex 600 milligrams in bottles to a number of customers, and we are now preparing for a full OTC distribution, including the potential to launch [NBE] blister packaging prior to the next cough/cold/flu season. We still expect to launch the generic versions of Prevacid with a date in market formation of May 19, plus Allegra D12 by fiscal year-end as well.

Year-to-date we have launched approximately $160 million in new product sales already this year. We are well positioned for a strong new product year in fiscal 2013 with great momentum as we enter into the new year.

One other note on our CAC business, a competitor had temporarily halted the production at a facility that makes OTC products. We believe this issue represents a storebrand opportunity of approximately $15 million to $25 million per quarter. We have realized some sales from this opportunity, but we believe there are additional opportunities in the future. We are focusing on a few of the products and are ramping up production to meet that demand.

Since this wasn't a product recall, we will look to replace future shipments by the competitor. We believe there will be more of an impact in fiscal 2013 and we will provide an update in the future.

Another branded competitor continues to have difficulties reentering the analgesic and cough, cold, and flu market. We continue to focus on the children's liquids product line where we have added capacity target $75 million in annual sales. The historically mild season in cough/cold/flu has dampened sales for these products, but we believe that we are well positioned to capture this opportunity in the upcoming fall season.

In the nutritional segments we are pleased to announce that we signed two new large customers for our vitamins business. These new sales will begin shipments in our fiscal 2013 timeframe, which gives me optimism for growth in this category.

The generic Rx business continues to grow. We are still awaiting final approval from the FDA for our launch of the generic version of Duac, but add this to the continued growth in our products in our Rx base business and we expect to have a terrific year for our Rx team.

In summary, we had another strong quarter on a consolidated basis. As our fiscal year winds down we are poised for a strong new product launches and strong execution. The market continues 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. Operator, let's now open up the call for any questions.

(Operator Instructions) Frank Pinkerton, SunTrust.

Thanks for taking the question. This one may be a little long, but, Joe, can you speak to the $34 million in new products in the quarter? Was there more to that than just Claritin and Rogaine?

And given that was a little bit ahead of what I was thinking those kind of products could do, what does that mean about your efficiency of launching and realization of profits from some of these products as we get to some of the larger things like Mucinex, Allegra, and Prevacid?

Okay. So, first of all, Frank, the launches in the quarter were -- more than Claritin, more than Rogaine Foam. Obviously, the fexofenadine still is a new product launch for us, so that was in there as well which was obviously a very strong product. But on balance I think what we -- I am pleasantly surprised about is the success we are having with these new products.

As I said, to date we are at $160 million, 45 products. Our plan was $190 million of new product sales for the full year. We are well on track to surpass that $190 million just based on the $64 million we did in the quarter, so we are delighted.

We had always stated that we saw our new products second-half weighted and we continue to say we think they are second half weighted, which if we step back from we think gives us tremendous momentum as we go into our fiscal year 2013. But clearly the minoxidil foam, the Claritin-D, the fexo were all important products for us.

Okay, great. Then just as a follow-up, you made a comment about utilization of manufacturing assets on the consumer health side. And maybe this is a broader question, but can you just explain how a light or a mild cough/cold season doesn't translate over into maybe some pre-manufacturing or other things for the Novartis and Johnson & Johnson recalls?

I know not all lines are converted 1-to-1, but was there an ability to maybe pre-manufacture for some of these opportunities in the future? And how certain are we in capturing some of these opportunities? Thank you.

I will start, Mike, and then Judy may want to add some follow-up. But as I think about it is there opportunity for us to move some of the manufacturing capacity we have from the weak cough/cold/flu season to pick up some of the opportunities for any of our competitors that run into problems certainly on the branded side? And the answer is, yes, and we are doing that.

Certainly on a product like Excedrin Migraine we have seen incremental demand for that product and we continue to ramp up for that demand. The only thing that I was trying to say with the difference on the recalls -- I am sorry, the Novartis situation, we think that that is a $15 million to $25 million opportunity. But they did not have a recall and, therefore, it wasn't withdrawn from the shelves. It was simply no further product going to the retailer, therefore, we are really replacing as those future shipments materialize, if you understand my point.

It's different than a recall issue. So we are seeing that really materialize now in our fourth quarter of our fiscal year. That is the primary (technical difficulty) the previous situation where actually one of the branded competitors had actual recalls in the marketplace which means that there is an empty shelf that you have to fill immediately.

On the other part, probably best Judy talk more about the entire desorption of what we are trying to accomplish with our business.

So it's based on relatively. As I said, year over year volumes to the plant are just down dramatically. You remember where we were at this point last year with tremendous pull as a competitor was pulling things off the shelf and we were meeting normal demand and compensating for that additional space on the shelves. So the production process was extremely, extremely high last year.

This year, while the procedures within the plant are actually more efficient than they were last year on a per unit basis, the lack of volume or the relatively lower volume year over year just causes a drag on overall fixed cost absorption. So it's not anything that isn't completely reversible when volumes are at a normal pace, but again it's back to the relative volume dynamics in the plant year over year.

Okay. And the $25 million cough/cold/flu that we just didn't ship this year versus what we would have shipped in a normal season. In fact, if we looked at the US business -- maybe just one other point. I mentioned the US OTC business was up 8%. If we had shipped that incremental $25 million of cough/cold/flu sales the US OTC business would have been up somewhere in the 15% range. So it gives you some sense of how we try to manage through a challenging cough/cold/flu season.

Okay, great. Thanks for the color, guys.

Sure.

Gregg Gilbert, Bank of America.

I will ask one three-part question up front. First, on Rx, what drove the $20 million or so sequential decline from the December quarter? Was there a buy-in in retrospect?

Second, Judy, can you talk about to the tax rate longer term in light of the comments you made today about the rest of this fiscal year? And third for Joe, is there a risk that Nexium may not go OTC or if it does that there would be three years of exclusivity on that one? Thank you.

I will start with the Rx business. I think the Rx business, obviously, continues to be very strong, Greg, in terms of total. We looked at the growth rate still very strong. In fact, as we look at it now we are actually increasing our growth rate 81% to 83% for the full year, so that was one part of it.

Do we in a quarter some products that, just for example imiquimod having some additional competition? Yes, that clearly is part of it, but on balance we are still seeing very strong growth in our Rx segment so we feel very positive about that. I am going to take the next question and I will give it back to you, Judy, for the middle question.

Do I think that Nexium will go OTC? I believe the answer is yes. Can I be 100% confident? No. As you know, we do not control that decision. That decision in the US is controlled by the innovator company. But I look at the success they have had with the Prilosec product and look at that and suggest that that gives them a great opportunity for AstraZeneca to do something with the Nexium brand.

Also, number two, I look at how much direct-to-consumer promotion they put behind the brand. They are clearly establishing Nexium as a very important brand for consumers, so I think for those two reasons I do expect to see Nexium go over the counter.

On the question of the exclusivity, I do believe they will get exclusivity. I do believe they will get a three-year exclusivity because their current indications are for ulcer and I am not sure what the other one -- I think it's (inaudible) or something like that. But I do believe they will get a three-year exclusivity for the frequent treatment of heartburn, but obviously that will be up to the FDA.

Judy, do you want to take that middle question?

Sure. Effective tax rate; great question given the volatility we have seen in the tax rate over the course of this particular fiscal year. I am proud to say that as of right now we are audited by the major taxing authorities in our major jurisdictions through fiscal year 2008; have a few tax audits underway. But the main driver, of course, in this quarter was the fact that we resolved a few tax audits and had a few additional statutes expire.

So we actually go through a process of evaluating the effective tax rate for a current year, and as we look forward, by looking mainly at jurisdictional mix as well as the process that we have to go through under US GAAP to put together tax reserves in expectation of eventual tax audit resolution. So that process is reviewed in great detail by our team, by our auditors of what is an appropriate tax reserve to put in place by jurisdiction and for specific line items.

As you saw this year, we have had two quarters where there have been positive adjustments -- in the first fiscal quarter as well as in this fiscal quarter -- and we are very pleased to be able to announce those results. At the same time the key question is so what is the core rate going forward. As I noted in my prepared remarks, if you take away that one-time adjustment or that tax benefit this quarter, you are back to a core rate of approximately 29%.

To think about next fiscal year and maybe a little bit beyond that if you assume that the business stays essentially -- mix stays essentially as it is today, you are exactly back to where we were in our original, beginning of the year, pretax audit tax rate guidance, which if you remember was 29% to 31%. And that is exactly where I would be modeling next year. In fact, that is where we are going to be modeling next year as a starting point as we think about FY 2013.

So core rates 29% to 31%. And this year we had the benefit of releasing those tax reserves in accordance with US GAAP at the completion of these tax audits.

Thanks a lot. Good answer, thank you.

Louise Chen, Auriga.

Thanks for taking my questions. First question I had was what gives you confidence that the weakness that we have seen in CHC relative to expectations this year is due more toward the timing of your launches and not deteriorating fundamentals or slowing growth in the OTC category?

And then the second question I had was on the margins, looks like you continue to expand your margins quite a bit. And can you talk about where that could go to over the longer term? And then the last question is just the breakout in sales between -- in CHC between cough/cold and allergy, as allergy becomes a larger part of your overall business? Thank you.

Okay. So a lot of good questions there. Let me try to take them all in sequence. First of all, our confidence in the business from the consumer healthcare I think is driven by two factors; the first one being that if you -- there was clearly a weak cough/cold/flu season. We have absolutely recognized that, and it has been historically a weak or mild cough/cold/flu season. So that wasn't really a surprise.

That amount of dollars that we determined is somewhere around (technical difficulty) of sales that we would have realized were it to be a normal cough/cold/flu season. In the US numbers we believe that the US numbers grew 8%. However, if I added back a normal cough/cold/flu season, the US would be running at somewhere around a 15% growth rate. I think that is an important driver for how things are going relative to the business.

The other point I would focus your attention on to this question, Louise, in terms of confidence is if you look at our page 6 in the handout, you can see from the all category update two things. Number one, if you look at the total OTC market where we are playing, although the market is flat, up 0.6%, you see the store brand continuing to gain market share up at 6.8%. So a majority of the growth in the category is being driven by store brand, and we continue to gain share in the overall OTC market and we expect that to continue based on everything we are seeing with our patients. So that part is clearly one other important reason for our confidence.

The final point I would mention that gives us reason for being confident is that as I mentioned in my comments, we also looked not only at the growth of the 52-week data but we also looked at the latest quarterly data, and the latest quarterly data was up even more than the 6%. So those reasons is why we felt the opportunity was bigger than just -- actually, store brands were up 6.8%. If you looked at the quarterly data it was up 7.6%, so it is an accelerating quarterly number there.

On the questions of margin, as we look at margins we have been very pleased with the results we have seen. We talked about a 22% operating margin. The team has just done an absolute fabulous job, 22.1%, in growing our operating margin. Up 250 basis points versus last year, up 70 basis points just versus the last quarter, quarter two, so it has been a great operating margin story in terms of leverage and we are continuing to look to that.

Obviously, as we look at any quarter though we don't want to -- we are also thinking about next year, so we want to make sure we are balancing all of our levers as we push and pull levers. So we felt that we had a great quarter at $1.41 and that is really the way we looked at it.

The final question you had was --?

On CHC sales, the breakout between costs (multiple speakers).

We don't give out that specific breakdown, Louise. Obviously, though, in the allergy season we feel very good about what we have relative to the launch of the fexofenadine, the loratadine, the Claritin-D or loratadine D12, so all those being -- obviously, the cetirizine. So all of those are clearly driving our total [stall] of what we have got in our business in terms of allergy. But we really just don't break out the individual allergy versus cough/cold/flu.

Thank you.

Jami Rubin, Goldman Sachs.

Thank you for taking my questions; just a few, Joe and Judy.

First question is, Joe, you were very helpful in quantifying the $25 million hit from the weak cold and flu season. Can you also quantify the upside from J&J not being on the market? Novartis you did address, but they certainly weren't shipping in what we thought was a strong and early allergy season.

Secondly, if you can provide some color around what we can expect for Delsym. My understanding is that you got tentative approval in April 2011 followed by summary of judgment in December, and we just were surprised that we haven't yet seen final approval. And what you think the hold up is.

Then, finally, Joe, what is the next milestone in the FDA's considering a new Rx to OTC paradigm? And where are we with PDUFA legislation? Thanks.

Okay, you got great questions, Jami. Let me try and make sure I get them all.

Certainly the quantification of the weak cough/cold/flu season somewhere around $25 million is our best number as you stated. J&J, as we said, last year we were at the run rate of about $50 million of the analgesic liquids. At this point we built up our capacity to go to the $75 million or an additional 50% improvement in our capacity. I will say, though, that we did not get anywhere close to that $75 million because of the weak cough/cold/flu season.

So it is -- in fact, I would guess the total cough/cold, I don't have the exact number in front of me but it's probably stable to down versus last year in terms of our analgesic liquids total for the J&J side. So it's really once again a big impact of what is going on with the weak cough/cold/flu season.

Novartis, I think I mentioned sufficiently. It's a $15 million to $25 million but we have just not seen it yet. Really because it's not a recall, it's just a -- they stopped shipping. What we are doing is gearing up our manufacturing to get ready for that.

The final part of your question was Delsym, at least on this section. All the data you stated was correct. There was a tentative approval; this is a partnered product in that I do not control this, this is my partner controlling it.

While I don't want to speculate exactly on the issue, I will say that we believe the issue and the situation now is really dealing with one of the DFM suppliers of the raw material inspection that was required. We expect to get that approval any day, but that is one of the things that we just don't control that one directly as this is a partnered (multiple speakers).

So it's not a manufacturing challenge or a batch challenge?

I don't believe it's a manufacturing, I think it's a DMF inspection from the FDA that was just -- is lagging. It's an overseas inspection that needs to happen, and that really is what the issue is for that one.

The last comment was FDA and the Rx to OTC paradigm switch. That is a tough call. We have had meetings with Fred Upton, who is the chair of the committee that oversees the PDUFA legislation.

I don't know exactly what is going to happen with that. I would say, though, that as we look at this I do think it's going to take a couple of years for the FDA to sort this out in terms of what is happening.

I think the good news, the good news is that the FDA recognizes that there is opportunities here to make more products available over-the-counter. The good news is that some of these categories, like migraine products, like statins, are very large, sizable products -- allergy products -- and if some of those products move from prescription to OTC we obviously think that would be good for consumers. They would make greater availability of product available or greater accessibility of product, so I think that would be good.

Obviously I think the other part that is driving the commissioner of the FDA is the desire to lower healthcare costs, and I think that is the other part of the paradigm. So I can't say exactly what is going to happen. I would think it's at least a couple years off. But if it does happen obviously we think that is great news for consumers in terms of availability and access, but obviously good news for Perrigo.

Joe, can I just ask a quick follow-up? And I am sorry because I know there are a lot of other people on the phone.

But you had said with J&J and Novartis you didn't see a benefit this quarter because of the still weak allergy season, but you had really only focused on the liquid analgesics. What about the benefit from everything else, from J&J not getting their act together and getting back on the market?

First of all, J&J has some products back in a market. Where they had the problem in the recent quarter was they relaunched the liquid analgesic product starting at the end of the fourth-quarter calendar 2011. They start relaunching it and then they had to recall that out of the market. That is the real area where we have focused on our upside.

The rest of the product that J&J has had really did not make a significant contribution to our number, simply because we are not really focused on some of those lower margin opportunities. They tend to be the older products and, therefore, they haven't been material in our opportunity upside as we looked at the business.

Just one quick clarification. On Novartis we did see some incremental demand for products like Excedrin Migraine, the storebrand version of that. That hasn't been (inaudible) because it wasn't a recall; we are really just filling the new orders for the retailers. It hasn't been something that we had to fill an entire pipeline.

The real opportunity for Novartis, we think, will be in our fourth quarter and our fiscal 2013 as those products are just emptying off the shelves. That is where we will refill the demand at that point.

Got it. Thank you.

David Risinger, Morgan Stanley.

Thanks very much. I have a couple of questions. First, Judy, could you please just talk a little bit more about other income this quarter and what we should expect for the fourth quarter?

Sure. On the other income, other expense line there was an item as we have completed the exit of our German facility. If you remember, we had an API facility that had been functioning there for years and we closed it down, sold the assets approximately year-and-a-half ago. The remaining component of that was finally selling the service rights that we had at that facility.

Hence, you see a one-time, a good guy of approximately $5 million on the other income line as we sold those rights, which were a previous income stream on that same line but just smaller. So on a go-forward basis, if you were to remove the one-time $5 million good guy there, that would be a more reasonable run rate below the line before earnings, before tax. Back to just basically the interest expense that you see booked.

Okay. Then changing gears to the prescription segment. Glenmark got imiquimod approved and Medicis is obviously promoting the new Zyclara pump. Can you just talk about whether that will impact your business in any noticeable way?

I do think that there will be some contribution or some loss of some market share for the imiquimod product on the new competitors. Some pricing, but obviously we still feel that we have got very strong growth in our Rx business and why we have been able to increase our revenue guidance for the Rx from the, call it, the 70% range to the over 80% range. So we still feel very strong about the growth, it's just really -- we are going to see a product have some challenges but we are going to see clearly launches of new products.

The other thing, though, that is probably more important than that is that on some of the older products what we are really seeing is a favorable pricing environment in our Rx business. We have been able to look at pricing on some of the products where we are first, but also where we are last with our products. And that has really been probably the more important aspect rather than any individual product.

Zyclara is making inroads into the imiquimod products sales though is why I don't want to believe that one; they are gaining some share there.

Okay. Then just sort of bigger picture, obviously consumer was weaker than expected; generics was above. Could you talk about how that is going to transition over the course of the next year? Meaning could you provide a framework for how much you think the consumer business can accelerate and start to grow as a percentage of the business?

Sure. I don't want to talk about our fiscal year 2013. We will really talk more about that, specifics on that, for our August meeting. That is when we talk about the upcoming year.

But just in general comments what do we think is going to happen? I think the key drivers in our consumer healthcare business are still the same.

Number one, it's still the movement from national brands to store brands. That is the clear, big driver in terms of the absolute movement in unit volume. And you are seeing that from the IRI data that we presented and, importantly, even seeing it accelerate in the quarterly data which we have seen as well.

Number two for us in the consumer healthcare business is really going to be all about the launch of these new products. As we said, for the total business we have got over $190 million of product launches, 45 new products. What we clearly are seeing though is that the majority of the big products are second-half weighted products.

Now that we have launched the Rogaine Foam, the Claritin-D, the Mucinex, as we get ready for Prevacid, which is a May 19 event, those will be important drivers for the growth of our next year, as well as putting in the fexofenadine D (technical difficulty) product. So that is really what we expect to be the bigger driver for our business, which we have always talked about our consumer healthcare business absent -- just looking at it from an organic point of view, we have always talked about it being in the 5% to 10% high single-digit rate.

As I think about that, we put these new products in and you get some bolus from the new products, but that has got to be high single digits to low double digits for the consumer healthcare.

The Rx team they have continued to perform. They have just done, I think, a fabulous job with the integration of the Paddock. What I talked about, and I just want to make sure the subtlety is clear, not only did they do well with the integration effort but they are actually gaining market share with what they have done with the paddock product.

So we got the Paddock product but they also gained incremental customers with those products, as well as gaining share with our own business as we become more important to the retailers. I think Judy said it very well in the presentation. The Rx business clearly is under the synergy of one plus one equals three is really what we have seen in our Rx business.

So I do expect continued strong growth in that business. I don't know we will be able to talk about 80% growth next year, but we certainly expect strong growth, certainly organically, above the double-digits rate for the Rx business. But I probably don't want to make many more comments beyond that.

Great, that is helpful. One final question. Could you just talk in a little bit more detail and may be quantify the J&J liquid versus tablet benefit, since you mentioned that you are not really focused on the lower margin tablet opportunity?

Yes, I don't know I can say much more to it. I think the real upside that we experienced over the last several years because of the J&J issue was on the pediatric suspensions. We have stated that previously last year we did about $50 million, but we were constrained by our ability to supply product.

We did ramp up this year to go up to about $75 million of product. We have the additional capacity to do that for the suspensions. And this is very special technology, so that is why it took us better part of the year to do it.

We have that capacity. Unfortunately, the very weak or mild cough/cold/flu season has resulted in less demand than even last year. So we are there, we are ready with capacity; we just have to wait and see if next year's season is sufficient to be able to come back into this with the full $75 million opportunity.

The tablets for us really were almost meaningless. They didn't really drive -- we didn't go after them, they weren't that big of an items for us. Remember many of these products are Tylenol tablets that have been around for, I don't know the exact year, but 50 years. As a result, they are not -- they are monograph products without significant margin opportunities.

Therefore, as you know, we focus on return on invested capital. There weren't big opportunities for us. Did we pick up some? Yes, but it wasn't a major opportunity for us.

All right. Thanks so much.

Randall Stanicky, Canaccord Genuity.

Great, thanks, guys. I will just keep it to one two-part question. You are coming up on the anniversary of your last sizable acquisition, so can you just, Joe and Judy, maybe talk about deal appetite and then the attractiveness of pet care as a tangential opportunity? Thanks.

Okay. So good question. And you are absolutely correct; our last deal we did -- large, major deal was Paddock that closed in July. But we did the small deal, CanAm, that was in the $40 million range. So the last big deal was, for M&A, was Paddock.

Relative to what we think about M&A, clearly we still believe there are opportunities to leverage our strategy and drive operating margins for our business with M&A. I would say the good news is that we don't feel we need to do M&A. We think we have got good organic growth rate.

However, if we can find M&A activities that hit our strategy, which would be continuing to grow our storebrand private-label business as well as add critical mass in Rx, or going after geographic expansion, if they can hit those strategic advances, and they also passed our return on invested capital hurdle, we are going to keep looking at them. I do think there is more out there.

You happened to pick one specific category that we believe makes sense, pet care. Think of the items for dogs and cats; companion animals is what we are thinking about there, but we are also interested in a number of other ones.

We also think continuing to look at diabetes, looking at the growth of what is happening in diabetes. Really it is -- obesity and diabetes is really becoming an epidemic, and that is something we are going to continue to look at. Diabetes and also the effects of obesity on what it could mean for the storebrand private-label.

We also really strongly believe in what we are looking at for adult nutrition. Think of things like Special K diet, thing of [Muscle Milk], (technical difficulty) Ensure, Ensure Plus. Those kind of storebrand opportunities we think make a lot of sense as well.

We also think wound care is an important item. This really spins off of that diabetic comments as well. But those I think would be most of the areas.

Judy, do you want to touch on that as well?

I was just going to add to that that the funnel of opportunities that we are looking at is fairly robust right now. The amount of flexibility we have in our balance sheet -- fortunately, with the performance we have seen and with the strength of the balance sheet we have a lot of depth to do a variety of activities but patience is a virtue in this process. As we have talked about before in our other transactions, you have to have a lot of shots on goal and a lot of patience in this process.

So, as you know, we focus on ROIC, so to Joe's point a lot of things we are looking at. But if there is an expectation that there is a deal announced every X months, you might be disappointed. We go through the process and are diligent in that.

Judy, are these deals in the size, perhaps, of PBM Holdings type of a deal? Are you seeing private opportunities of that magnitude out there?

There are opportunities of that magnitude, yes.

Okay. Thanks, guys.

Yes, I would agree.

David Buck, Buckingham Research.

Thanks. I will try to keep it to a couple of quick questions.

First on consumer health, Joe, can you give a little bit more detail in terms of what the dollar value was in GI and whether that was just omeprazole or whether it was other products? Just some type of magnitude there.

Secondly, on consumer health, to make the 9% revenue growth it looks like you need to do about 18% growth in the June quarter, which is obviously a big step up from 6%. So can you talk about maybe a little bit more of your confidence in getting there?

Then if we look at the Rx business, unfortunately you had a death of an executive in the past quarter. Can you talk about what the plans are for replacement and the management team there? Then Duac, what are the gating factors in terms of launching? Thanks.

Okay. I will try to get everyone of those, David, but I [might leave any out]. On the first comment, though, it's really consumer healthcare, what is happening with omeprazole. Really it is omeprazole that was impacting the GI category for us, but there is nothing unexpected there.

We had anticipated giving up some share, and indeed we talked about that going back now for about -- it's about six months ago that it happened. Then we also talked about it would have -- it would contribute to gross margin and that has happened.

That is behind us. What I would say positively about GI though is the volume continues to expand and we are growing the product, notwithstanding the pricing hit that we took going back, I guess that was about six months ago. Over the last six months the GI category has been very stable.

The good news, we think, is that we are seeing is more and more patients transferring from the older therapy of antacid tablets, H2 antagonists, moving over to proton pumps. And that is only going to accelerate, we believe, with the lansoprazole, or Prevacid, launch on May 19.

So in general we think our GI category is very robust. We await the outcome or the launch of the lansoprazole, Prevacid product on or about May 19 is obviously the next important milestone.

Your numbers are correct, David, on the CHC side in terms of growth. We are expecting significant growth. And once again, what is the drivers? The drivers are these new products we have talked about.

Continuing to see the good, strong growth for Rogaine Foam, Claritin-D, the Mucinex, but then also adding to that the Prevacid, the fexofenadine, and potentially Delsym, although that is a little uncertain because it's outside of our control. It's a partnered product. So it's going to be the new product that is going to drive the growth in that in terms of the second-half effect.

I also do think that we will pick up some international sales. We didn't talk as much about international, but international was a little bit of a lagger this quarter. We will expect to see some additional growth internationally for our business, and also in what we call our contract segment of our consumer healthcare business.

On the next question you asked, we did experience a very unfortunate passing of our dear friend, Rafi Lebel. He was not directly responsible for the Rx business, though, just to correct one comment. He was responsible for our API business, as well as many of our activities in Israel, which include some of the Rx R&D that occurs in Israel.

The only thing I would say about our dear friend Rafi who has passed away is he just built a great team, and really the team is just doing an outstanding job of stepping up in Rafi's absence or Rafi's dying during the quarter.

Final comment; Duac, I can't say. This is just hung up at the FDA. It's a first product approval for the category. We expect it any day, but to be clear it is hung up.

There was an inspection of a raw material supplier that had to occur with this product as well. I know that has occurred and then there has been a re-inspection of that raw material supplier, so I do expect to see this product approved in the near future, David. But you know, I don't want to make a comment to say that it's going to occur this month or next month. I do expect it though.

If you ask me, the expectation is that we will see it in the current fiscal year. However, I have to put the caution that it's in FDA's hands right now. But the important point part is a first approval for this category, so we do think we will get the expedited look and review by the FDA. We are ready when it happens.

Okay, thank you.

Ami Fadia, UBS.

Most of my questions have been answered; I will stick with two questions. Firstly, for consumer healthcare do you think it's reasonable to expect the operating margins to trend towards 20%, something which you have talked about before, once we have some of these new products launched? That is one.

The second one, for the nutritionals business how should we think about growth going forward? Should we think about it as tied directly just to the birth rates or do you still anticipate that there could be some share gains that could sort of accelerate the growth rate? Thanks.

Good questions. On the consumer healthcare, the operating margin, do I think in the longer term it will trend up? The answer is yes. Do I think what we have looked at is --clearly at this point this is not -- we have talked about a forecast between 17% to 19% for our future. I do think there is an opportunity to get to the 20% range, but it's not going to be this year. It will be at some point into the future as we launch our new products.

To me the real message on the adjusted operating margin for consumer healthcare is really the story about the new products, because that is really where -- when we launch those new products we don't drive expenses from the SG&A side. It really is an opportunity to leverage the P&L, and that is -- when we launch these new products when we expect to see the higher operating margin for consumer healthcare.

Remember, though, in the first couple quarters that we launch there is some incremental display expense, other expenses as we get out there with the new products. But after that that is when we really see the returns from the consumer healthcare new products.

On the question of nutritionals, it's two functions. Number one, it's the birth rate; that clearly is part of it. The other part of it, though, in terms of growth for us beyond the birthrate is what we do to gain storebrand share here in the United States and then, number two, what we do outside of the United States. It is both those factors that we think will help us to drive our business.

If we took away the one time effect of what happened with one of our branded -- the branded recall of infant formula last year, we are seeing very good growth. I think the number was 12%, if I am not mistaken. So we feel very good about the infant formula business. I certainly would say just based on what it appears (technical difficulty) for the Pfizer infant formula business, you see it's a very valuable business and we are delighted to have that business, our infant formula version of that business.

Thank you.

Chris Schott, JPMorgan.

Great, thanks. Just two quick ones. First on the Novartis opportunity, how sustainable do you see that if in fact we see Novartis back in the market, let's say, in calendar 2013 and there is not this prolonged period of national brand absence? I think you mentioned that $15 million to $20 million opportunity. Is that something you can hold over time or just how do you think about that?

Second is on nutritional gross margins, this 28% to 30% range. How should we think about that evolving over time and the number of initiatives you have in place here? But as [we think out to like maybe] 2013, 2014 is that a number you think you can significantly improve from here or should we think about maybe incremental improvements from this new gross margin target? Thanks.

First on Novartis, I think you would have to go with the Novartis guidance they gave relative to when they will be back in the market. We are going to take Novartis a quarter at a time is really the way we always take it with any company that we see has run into problems from an FDA issue, because I can't give you better guidance than they give you.

Right now we have heard that they will be -- it will take them longer than the midyear calendar 2012 to get back in the market. So we do expect it to be slightly longer than where they were at the first announcement of this issue.

On the question, though, we do think there is about a $15 million to $25 million per quarter issue out there in the marketplace for storebrands, our opportunity. We are not going to get all of it, but we do think we will get a certain share of it, especially on some of the flu products and also the products that are the Excedrin Migraine type products. Those are the ones we will pick up.

We will pick up some other liquid type products, etc., just simply because we are in there, but they are not the higher margin opportunities for us.

So do I think we can be somewhere in the $10 million to $15 million range once this market stabilized? I do think that that is the kind of opportunity we are talking about in terms of Perrigo achieving somewhere in that $10-plus-million range of opportunities on a quarterly basis.

But I want to be really cautious on the duration; I don't want to overstate the duration. Really it's one -- I can't say how long it will be. It's up to Novartis to determine when they will get back in.

I think they have got two problems. One of them is a relatively quick fix; the other one is a longer fix. And it just depends on how the FDA views that item that has the longer fix in terms of duration.

On the question of nutritional gross margin, we clearly are taking steps to improve nutritional gross margin. As you can see, we have taken some steps. The operating margin improved dramatically as a result of some of the things we have done here quarter versus quarter last -- second quarter versus third quarter. So those are the steps that we are going to take.

Do I believe that one of the things we did was lower the cost of one of our more expensive raw materials? Did we get that done? Yes. Will we look at pricing going into the future for our product? The answer to that we told you previously is, yes, we will get better pricing out in the marketplace.

That is occurring now as we speak. Not though -- it hasn't shown up in the last quarter that we are reporting. It's showing up now in our fiscal fourth quarter. So those things are going to help to drive the operating margin.

The other part, though, of operating margin will be back to the comments Judy made about capacity utilization. As we drive demand for our two facilities, both the one in Vermont and our one in Ohio, that utilization of our facility will drive the rest of our operating margin.

The final comment I would offer on nutrition is VMS. VMS is a rocky road here relative to what is happening with our vitamin and mineral supplement. We believe that when the FDA truly enforces some of the requirements for products made in the US as they look at some of the overseas manufacturers, we think that could help us.

But the bigger opportunity is going to help us in the near term right now from a gross margin point of view is what we are doing with new business, with new customers right here in the United States. So I think that is going to be the shorter-term improvement that we expect to see in our nutritional gross margin.

Empirically, Chris, is there opportunity to get gross margins back up? Yes, and we are working on actions to get them to where they were in previous quarters.

Operator, we probably have time for maybe one more question.

John Andersen, William Blair.

I guess I will make it a two-parter. Just taking omeprazole out of the equation, I know focusing on maintaining price in OTC has been important to you over the past several years. So, again, taking omeprazole out, have you been able to maintain your pricing on your other product lines and is that your expectation going forward? Then, second, just at update on tamazolomide in the US? Thank you.

Sure, good question. If you remove omeprazole from the consumer healthcare business, the pricing environment in our consumer healthcare business is essentially flat. I will say we planned for that. All of our plans were that we would face some challenges with omeprazole, and indeed those did come to fruition. But take that out of the equation, our pricing is flat.

The good news is that while our pricing is flat we are continuing to drive efficiencies in our raw material supplies. And that is where we think we can continue to drive that and help us to get continued improvements in our operating margins, as well as just the important I talked about before is launching these new products.

I am sorry, the second part of that was? Tama US is very straightforward; we will launch that August 2013. That product will be launched in August 2013. We have a partner with that, but nothing will happen until -- that will be our fiscal year 2014, just as a reminder to everybody. So that product launch.

I will say, though, you didn't ask about the ex-US but ex-US continues to do well. There is always going to be some ups and downs with an API supplier in terms of how you recognize the value, but there is not a lot of competition out with tamazolomide so we do think it's a good foreshadowing of opportunities here in the United States.

Thank you, everyone, for your interest in Perrigo today. Operator, that will conclude our call. Have a great day, everyone.

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