Perrigo Company PLC (PRGO) 2013 Q2 法說會逐字稿

Good morning. My name is Dawn and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo's fiscal 2013 second-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session. (Operator Instructions) We ask that you ask only one question per person at a time. Thank you. Mr. Art Shannon, Vice President of Investor Relations, Corporate Communications, you may begin your conference, sir.

Thank you very much, Dawn. Welcome to Perrigo's second quarter 2013 earnings conference call. I hope you all had a chance to view 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'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 this call are forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 30, 2012.

I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome, everyone, to Perrigo's second quarter fiscal 2013 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 discuss the acquisition we announced earlier this morning. Then I will provide a brief perspective on the quarter and the continued strength in our store brand market share growth. Next, Judy will go through the details of the quarter and our fiscal 2013 earnings guidance.

Then, I will provide an update on the transition to plastic containers in our infant formula business and our plans for new product launches, plus an overview of our expectations for the rest of the year. Finally, this will be followed by an opportunity for Q&A.

First, earlier today we announced the acquisition of Velcera for $160 million in an all-cash transaction, as you can see on slide number 3. This acquisition follows our move into pet gear with the Sergeant's acquisition last October.

Velcera is best known for pet armor. It is a Fipronil-based flea and tick treatment, comparable to Frontline Top Spot. The complete Frontline franchise has annual branded sales of $1 billion.

In calendar 2012, Velcera had annual sales of approximately $60 million. Velcera is expected to add a great new product pipeline and be $0.11 accretive to adjusted earnings in its first full year, and ROIC accretive in our fiscal 2015.

This transaction combines an existing store brand player with our manufacturing capabilities, enabling us to deliver the strongest flea and tick market offering. These are expensive products that can truly benefit from the addition of a quality, affordable store brand. Now let's discuss the quarter.

On slide 5, you can see we had all-time record quarterly net sales of $883 million, with record adjusted net income up 14% from last year on a 5% net sales growth. We had all-time high second-quarter adjusted gross and operating margins. Consolidated adjusted operating margin was 22%, driven by strong operational performance.

Our operations in the consumer healthcare business are producing higher volumes and are operating more efficiently than at any time in our history. The Lean Six Sigma process changes that we began to embed a few years ago are now really paying dividends for us. The Perrigo quality and supply chain teams are doing great work.

Along with record earnings and earnings per share, cash flow from operations was a fiscal second-quarter record, $185 million.

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 of the items.

First, our consumer healthcare segment has an all-time record second-quarter sales, up 14% versus last year. If we normalize the days versus last year, CHC growth would have been 23%. The performance was driven by continued execution of our CHC strategies, operational excellence, store brand market share growth in innovative new products, international growth and continued expansion in adjacent categories.

Sales in our nutrition segment were down from last year as we spent the majority of the quarter ramping up a retailer by retailer launch of the plastic containers in the infant formula business. This launch is underway and retailers have begun to heavily promote store brand infant formula.

Both gross and operating margins in this segment improved as a result of the increased pricing and improved product mix. Judy will discuss our guidance for this segment shortly.

With record adjusted second-quarter gross and operating margins, our RX business had a good quarter. Although net sales decreased 8% compared to a record second quarter last year, and adjusted operating income was down 6% as a result of increased competition on certain base products, on a normalized basis, considering the extra week last year, net sales were relatively flat to last year. The RX business has our best pipeline in Perrigo's history.

Looking at slide 7, the megatrend shift from national brand to store brand continues. The overall OTC consumer market was up more than 2% versus last year. National brands were down almost 2%, but store brand gained 9.7% on the strength of new product launches, national brand recalls increased store brand acceptance. In nearly every category store brands drove the growth.

The diabetes category experienced tremendous store brand growth of more than 14%. In the gastrointestinal market, the category was flat, while store brands grew 12.2%. Store brands continue to drive growth in the marketplace. Now let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. As you just heard, we delivered another high-quality quarter with record second-quarter revenue, adjusted earnings, and cash flow. We are already busy working on what should be a strong second half of fiscal 2013, which I'll discuss in a few minutes.

But, first, let me review the fiscal second quarter results by business segment. As you may recall from this time last year, the second quarter of fiscal 2012 included 14 weeks of activity versus the 13 weeks in the second quarter of fiscal 2013, which we are reviewing today.

So, on slide 8, you can see net sales in consumer healthcare grew 14% year over year, driven by an increase in sales of existing products of $38 million in the contract, analgesics, and smoking cessation category; $34 million attributable to the Sergeant's and CanAm acquisitions; and new product sales of $12 million, primarily in the cough, cold, dermatologic, and gastrointestinal categories.

Specifically, sales within the analgesics category or up more than 8% year-over-year, led by sales in children and infants liquid analgesic products in a period where a specific branded competitor has not yet fully returned to the market.

Additionally, sales of our OTC products outside the US increased 9%, as the team continues its concerted efforts to grow store brand market share internationally. These increases were partially offset by a year-over-year decline of $13 million in sales of various existing allergy and gastrointestinal products, and approximately $5 million of discontinued products.

The increase in adjusted gross margin was due primarily to product mix and increased production efficiencies.

Our operating expenses remained flat as a percent of net sales as R&D spend was down slightly due to project timing, while the DSG&A expenses increased with the expansion into our new animal health and diabetes care categories.

On slide 9, you can see that net sales within the nutritional segment declined 5% year-over-year. The 14th week impact previously discussed accounted for even more than this amount, but was offset by $3 million in new product sales.

Birth rates in the US are still down 2% year-over-year and national brands continue to coupon as part of their marketing strategy to gain market share in infant formula.

We began shipping the news SmarTub plastic container in mid-December. As of today, February 1, we've launched a customer to represent a little more than 60% of our US volume. Feedback on the plastic containers has been favorable and, notably, Wal-Mart and Sam's Club have featured this new packaging directly next to the national brand in a number of nationwide circulars.

Adjusted gross margin in the nutritional segment increased 280 basis points to 27.2%. As price increases, which we initiated following the continued rise in raw material prices, were fully visible this quarter. And product mix was favorable as a greater percentage of sales were from infant formula versus relatively lower margin toddler foods.

The adjusted operating margin increased 320 basis point due to lower employee-related expenses as a result of our back office consolidation activities, along with the absence of operating expenses related to the Company's Florida location, which was closed in the fourth quarter of fiscal 2012.

On slide 10, net sales in our RX business decreased 8% as existing product sales were lowered year-over-year by $11 million, due to the expected increased competition on certain products. These decreases were partially offset by new product sales of $9 million.

Most of the decline in second-quarter net sales was attributable to the extra week of operations.

Adjusted growth in operating margin increased due to favorable product mix versus last year, as well as higher margins on new product sales.

Next, on slide 11, net sales in the API segment decreased 4% due to a decrease in existing product sales of approximately $5 million as a result of increased competition, partially offset by $4 million related to the continued strong performance of a customer's products. Growth in operating margins were positively impacted by the product launch I just referred to, along with favorable mix of existing product sales within our API segment.

Now some quick highlights on our balance sheet. Excluding cash and current investments, working capital was $680 million at the end of the quarter, up from $536 million at this time last year, reflecting primarily the impact of our acquisition of Sergeant's Pet Care and CanAm Care, organic growth and timing of tax related liabilities compared to the previous year.

As of December 29, 2012, total current and long-term debt on the face of the balance sheet was $1.4 billion, flat sequentially from last quarter. Excluding cash and cash equivalents, our net debt to total capital at the end of our second quarter fiscal 2013 was 30.2%.

Cash (technical difficulty) flow from operations of $185 million was a second-quarter record, due to strong earnings and the positive impact to improvements in the Company's working capital during the quarter. Year to date, net cash flow from operations was $230 million, $10 million more than last year, based on strong earnings growth, offset by timing of certain tax payments as compared to the prior year.

Now I'd like to discuss our earnings outlook for the full year fiscal 2013. On slide 12 you will see that we are updating guidance for the nutritional segment, based upon lower than expected results during the first half of the year. As we've stated previously, retailers have been in the process of phasing out the older package metal cans in anticipation of the recently launched new plastic containers.

Although this process has been going a bit slower than we had initially planned, we continue to expect store brand penetration to increase as the new plastic containers gain consumer acceptance. Given the timing on this phase-out/phase-in, the highly competitive sales environment among national brands in the infant formula category, and a larger than expected revenue shortfall in the first half of the fiscal year from our original plan in VMS, we now estimate nutritionals revenue to grow between 1% and 5% year-over-year with adjusted gross margin of between 26% and 30%, and adjusted operating margin of between 10% of 14%.

On slide 13, you'll notice that we are not making any adjustments to our consolidated guidance for the fiscal year at this time. However, we are lowering our probability weights on the launches of certain new partnered products, including the broader guaifenesin family of products and fexofenadine D-12.

Due to the limited visibility we have on the launches of these partnered products, it is more difficult to precisely forecast their exact launch date. Incorporating this factor into our risk-adjusted model, we now expect fiscal 2013 consolidated new products revenue to be approximately $150 million. Please note that this number still includes our 600 milligram extended release guaifenesin version we are still currently expecting to launch within the fiscal year.

The cough/cold/flu season is off to a solid start and sales within our overall base consumer healthcare and RX businesses are strong. We assume these factors will mitigate a portion of the updated nutritionals guidance and new product revenue impacts I just spoke about. And, therefore, we now expect consolidated fiscal year 2013 revenue near the mid to lower end of the stated guidance range.

Once again, the team demonstrated its commitment to manufacturing and operating excellence this quarter as evidenced by producing the largest volumes in our 125-year history. Lean Sigma continuous improvement initiatives, implemented since 2010, helped facilitate this strong operational performance, which translated into consistent margin expansion.

While we believe there's always more to do, we remain focused on solid execution as a basis for continued growth, both internally and as we further cultivate our business development pipeline. Now let me turn it back to Joe.

Thank you, Judy. We had a solid quarter, but now I want to focus on the future. Let's start with consumer healthcare.

This year, the cough/cold/flu season has become an epidemic in some regions of the country, starting in mid-December. We are realizing strong sales in our cough/cold and analgesic categories. The key for our sales in the cough/cold/flu area is the duration of the season and, so far, it is above our expectations, but we'll have to continue to monitor the season.

Now, let me turn your attention to slide number 14. In January, we launched a store brand version of Nicorette mini lozenges, with approximately $30 million in branded sales, continuing our leadership position in the smoking cessation category. Additionally, we are preparing for the launch of the store brand version of Mucinex 600 milligrams with annual branded sales of approximately $135 million. As of today, we currently expect to launch this product in our fiscal year 2013 and, specifically, March 2013.

As previously stated before, we will issue a press release the day it launches.

In our nutritionals business, highlighted on slide 15, we are excited about the upgrade to what we believe is a better than the national brand style packaging. You have seen our other products; when we closely match the packaging to the national brand, we gain market share.

Last month, Perrigo received clearance to manufacture three Codex-compliant infant formulas for international market, which underscores high quality standard of Perrigo's opening up more international opportunities.

Turning to slide 16, first, I'd like to welcome Doug Boothe, Executive Vice President of our RX Pharmaceuticals Group to the team. Doug brings a wealth of experience and knowledge about the pharmaceutical industry from his many years working at companies such as Actavis. Welcome to the Perrigo family, Doug.

The generic RX business is well-positioned for growth. In fact, this morning we launched clobetasol emulsion foam, the generic version of Olux-E foam, with branded prescription sales of approximately $38 million. This is our second launch from the Cobrek family of products since the recent acquisition in December 2012. To date, we have launched six new foam-based products into the market. In all of these products, Perrigo's the sole generic player in the market.

As highlighted on slide 17, we are poised for strong new product launches in the second half of the year, with the recently announced launch of the generic versions of Acetadote, Olux-E and Luxiq foam, plus other undisclosed products of more than $500 million in branded sales. We expect to have a strong second-half of the year ahead for our RX team. The Perrigo team has done a great business development pipeline and continues to evaluate opportunities in new categories, technologies, and geographies.

In summary, on slide 18, Perrigo is poised for continued growth. The market continues to shift to store brand offerings. Our RX to OTC switches are expected to continue, with $10 billion in branded RX sales likely to switch in the next five years with $5 billion of that expected in the next three years.

Our nutritionals of business conversion to the new plastic tubs is being received positively. And our RX business continues to perform well.

We expect to grow adjusted earnings 9% to 13% over the last year's record performance as we continue to execute on our mission of making quality health care more affordable for our customers. Operator, let's now open up the call for any questions.

(Operator Instructions) David Risinger, Morgan Stanley.

Thanks very much, and congrats on the results.

Thank you, Dave.

I have a bunch of questions, but I don't want to take too much time. I guess I'll just start with a few things.

First of all, with respect to Mucinex, can you provide some more detailed comments on exactly where things stand, level of confidence, et cetera? Obviously, it's taken longer than expected and it's a matter of timing, but just wanted to better understand exactly what we should know about Mucinex.

And then, second, with respect to the flu benefit, could you talk about the benefit in the December quarter and what we should expect for the March quarter? Is there any way to quantify that?

And then, I guess, a final question is, with respect to competitors, could you just talk about competitor manufacturing resolutions -- what's happening at J&J; what's happening at Novartis; what's happening with Novartis' flea and tick recall, et cetera? Just so that we understand what's happening in the competitive landscape.

Okay. I'll be happy to answer your one question, Dave (laughter). Going to Mucinex, first of all, as everyone knows, we originally launched Mucinex to our customers starting in April 2012. That was to a select number of customers, limited amount of quantity.

As we were getting ready for the full scale launch to our OTC customers, we noticed a change in the characteristics of one of the excipients in our product. That forced us to go back into revalidate our product with this new excipient characteristic. We have done that.

As I sit here today, we expect to be able to launch our Mucinex 600 milligrams in March of 2013. And as I noted, the day we launch it, we will send out a press release to everybody to alert them to the fact that we have launched it.

The only other thing I will say about Mucinex is that we all launch batches that are necessary for this product launch have either been completed or in process as we speak today. So March 2013 is our best estimate at this time.

On the second question, on the flu benefit in the March quarter, I would say that, at this point, the majority of the increase in incidence of flu really happened in about mid-December. So it wasn't a major contributor to our second quarter, but certainly there was some contribution in the second quarter.

I think, really, the only thing I could say on the third quarter, fourth quarter, is really the comments that Judy said, is that we put that into our guidance. The real question, though, is that we cannot predict exactly the duration of the cough/cold/flu season at this time.

We really try to track what I call is the area under the curve of the incidence of cough/cold/flu. And, right now, as I sit here today, it's up about 20% from last year. That's a specific number as we sit here today. Don't know if that duration will continue at this rate, and that's really what we tried to put into our probability weighting for the remainder of the year, which Judy highlighted.

On the question of the competitors, and where they are, J&J continues to resolve their questions. The latest information I heard from them is that they will continue to bring products back into 2013 and expect to have the majority of their products back at the end of -- by the end of 2013. And we've attempted to factor that in to our guidance. Really, as we said, we always try to bring that one quarter at a time and not try to get ahead of ourselves on that guidance question.

The other individual company you mentioned, Novartis, Novartis has reentered the products categories in the calendar fourth quarter. They began reentering into the products in the categories. And that is our expectation is they will continue to reenter products as we speak.

Dave, I think you mentioned, also, the flea and tick category from them. That's a vet channel product. So it's not overlapping with our focus on the retail consumption of flea and tick products.

Got it. And, sorry, I jumped on late so I didn't follow the rule. My apologies.

That's okay.

Dewey Steadman, JPMorgan.

Hi, guys. Thanks for taking my question and I will limit myself to one question (multiple speakers).

Just to follow on the Mucinex franchise, what's really, for timing we understand March 2013 for the 600 milligram dose. Does the excipient issue cross over to the other potential formulations of Mucinex? And can you comment on the timing of the launches of those other formulations as well?

Sure. So the first part of your question, the Mucinex 600 milligram product in our expected March 2013 question, and the excipient does not relate to the other products. So the excipient issue that we have experienced with our 600 milligram product does not relate to the other Mucinex family of products, is the answer to that question.

Relative to the other product, as Judy stated very well, what we simply did is, because of the difficulty in seeing complete visibility of those products, we simply, at this time, decided to lower the probability of those products launching in the current fiscal year, which, as Judy mentioned, caused some of the decrease in our new products for some of the partnered products that we have identified in our new product launches.

So those other formulations, do you think that could potentially be a 2014 event?

Really don't want to make any comments specific to 2014, but, to be clear, as we delayed or we reduced the probability and then, by definition, delayed the products' probability in coming into this year, it does not suggest that they will not come to the market. It simply delays the timing.

All right. Thank you.

Jamie Rubin, Goldman Sachs.

Hi. This is Ariel Herman, in for Jamie. We just had a question on the guidance. Just maybe you guys could give us some of the swing factors here, being that we are about halfway through the year and the guidance range is still so wide. So maybe just a little bit of the swing factors and why the guidance hasn't maybe been increased with the Cobrek acquisition and the flu season being so strong.

Sure. Well, let me be clear, there is no -- as you stated very up front, there is a wide range in our EPS guidance, to be clear. So I don't know. I'd say that the actual percentage or sense of guidance does not include a Cobrek number. So there is a wide range there. We are still in that range.

However, as we've stated, and I think Judy may want to make some comments to this as well, we feel very strongly that, right now, we are continuing to monitor the cough/cold/flu season. If that duration continues, there will be upside. But we do not want to bake in the upside at this time until we actually see it, because we believe in being cautious in that sense there.

Number two, the RX business continues to perform very well. We've got a number of new product launches, as evidenced by the product Olux-E we launched today, the Luxiq product that we launched in mid-January. And then we have about a half dozen additional launches that we have planned for the rest of the year. Assuming those products go well, because we probability-weight our launches, there may be some upside, but I think we want to take them one day at a time as we go out with these products.

And, clearly, as the comment on Cobrek is, we are delighted with that. We've already got these two launches with Cobrek. And so we think it's a great opportunity for us, relative to our RX business.

And we're going to continue to monitor it. But we'd rather take one day at a time rather than -- and one quarter at a time rather than build everything into the guidance at this time. So I think those would probably be the first thing that I'd offer. Judy, do you want to make any other comments?

I would say, Ariel, just to give you the overview, our guidance range of $0.20 is about 3% of -- if you look at kind of the midpoint of the range. So it's in cent terms $0.20, but in percentage terms quite small.

When we have moved guidance in the past, and we've moved the range, it's usually with a specific finite item, an acquisition that moves us outside of the range; a tax settlement, again, that moves us out of the range. This quarter there are a lot of moving pieces, so, to Joe's comment just now.

And I think we've just stuck with our consistent philosophy of managing the moving parts, decreasing new products, offset by other things. And without any specific items that move us out of the range, we weren't going to adjust it at this moment. So just consistency in the approach.

Linda Bolton, B. Riley Caris.

Hi. So I know you don't want to get into like a big long-range projections right now, but maybe now that we have some additional things contributing to growth for FY 2014 in terms of the acquisition, can you give us some just really broad brush strokes on -- it seems to me that EPS growth rate next year, FY 2014, could be quite high, assuming basic business growth of 10% to 12%. And then accretion from the deal, and then the generic Temodar API, which was like a spurt of earnings in FY 2014. So it comes to a pretty high EPS growth rate.

So is the offset that it's not such a robust year for new products because there's nothing big? Or can you just, without giving the guidance, can you just give us a way of have to think about it for FY 2014?

Yes, Linda, you've mentioned a couple of important items for us, to be clear. The temozolomide is a big product launch for us. It's a launch for us in August 12, 2013.

It's got at least, we believe, a six-month exclusivity. As to whether it will be a longer exclusivity, I really can't comment on that right now, but certainly, at least for the first six months.

And, as you know, Temodar US sales are very significant. I think Merck reported somewhere in the $960 million global sales numbers for Temodar. So it's a big product. You're absolutely correct.

I think, though, on the question of 2014, I don't think I could really comment any further on that, other than just always we speak about what we've talked about in our long-term guidance. And that's really that we say we expect to see somewhere between 5% to 10% revenue growth for our business on any three-year term. And then the corresponding earnings per share growth would be approximately double that, or 10% to 20%.

And, really, that's all I think I can say about 2014 at this time, based on the fact that we'll have more to say about 2014 in August.

Okay. Great. Thanks a lot.

Thank you, Linda.

Ami Fadia, UBS.

Hi. Good morning. I've got one or two quick questions and then maybe it's like a three-part question. Maybe just on nutritionals, could you tell us what would be the drivers to get you to your new guidance range over the next two quarters?

And on the RX side, what should we know about any new competitors or any change in the competitive landscape there? And then, just thirdly, on the acquisition in pet care announced this morning, maybe if you could give us a sense of growth expectations, margins for the business and a little bit about the pipeline. I know it's going to be a long question.

Okay. I'll try to get to all of them and, Judy, please help. On the nutritionals side, really, the growth expectations for our nutritionals is really going to be two areas. Number one is infant formula and number two is the VMS. I'll deal with the VMS early because it's the easier one.

Really, the growth in the VMS is really related to us picking up two additional customers, one of which we've already shipped. The other one is starting to ship soon. But that's going to drive some of the growth in our nutritional business from the VMS side.

But really the important part of the growth is going to be -- and certainly the operating margin growth is going to be driven by what we can do with getting the new packaged product out to the marketplace, which we are under way right now. We've started shipping in, I think it was December. And that is happening as we speak. More product will be shipped as we go into the next weeks ahead. That's going to be the big driver.

Beyond the actual shipping of the package, more importantly, is the incremental promotion we are getting from our retailers. Those incremental promotions, we think, will help us to drive the business and help, more importantly, drive store brand share.

As I mentioned in my commentary, when we've moved our packaging to be more closely aligned with the national brand packaging, we do better. We gain additional market share as it invites the consumer to compare our product with the national brand. And that's why we are really excited about our new package design because, now, our package looks much more closer to the leading national brands -- the Similac, the Enfamil and the Nestle Gerber products. So that's really the excitement we see in the nutritionals side.

On the RX part of the business, in terms of changing in the landscape, really, there are individual companies and individual product competition that we face, but no major shifts in the change in our RX business. In fact, I would say, we are sitting today, as I mentioned, with the best pipeline opportunities we've ever had in the history of Perrigo's RX business.

We've got a great pipeline of products. We've already launched two products, both the Luxiq foam, the Olux-E foam. And then we have about a half dozen of additional products that we expect to launch in the next six months or by the end of the current fiscal year, I should probably say -- the next five months. So we feel like we are in a great position relative to the RX business.

There's clearly going to be some competition on product A or product B, but the wealth and the breadth of our portfolio of new product launches is really what's going to drive their success in our RX business. And we're excited that most of these products are products with a limited number of competitors.

Final comment was on the acquisition today. When you take our Velcera business, you add it to the Seargent's acquisition, we essentially acquired approximately $200 million of business and I think I would say our expectations for growth are in that high single digits growth rate, so relative to where we expect it to grow.

Obviously, as we launch new products with this category, that's when we will see an acceleration of growth in any given year. And we look to have more to say about that in the future in terms of our ability to launch new products, as a result of taking the Velcera team and putting it with the Sergeant's acquisition and then driving our operating and gross margin.

Only other comment I would say is, when we made the first acquisition in Sergeant's, one of the comments I made is we picked up manufacturing capabilities. As we add that to the Velcera product range, we think we will also drive the gross margin and operating margins of that business to allow us to have, certainly, better than our average corporate margins on both of those cases.

Thanks very much.

Elliot Wilbur, Needham.

Thanks. Good morning and offer my graduations to Judy and Art for their placement in the Aye-Aye All-America executive team.

Congratulations.

(laughter) Thank you.

Joe, I just congratulate you on being an all-around great guy. How's that?

Thank you for not leaving me out (laughter) . I appreciate that.

All right. So my question is with respect to the generic segment. You hit on this a couple of times, but again, just thinking about even the low end of guidance. I mean, that would basically imply that you are going to kind of be at a $190 million run rate per quarter for the second half of the year.

And, you know, obviously and, if you're going to have some contributions from some new products, I'm assuming Cobrek is more of a margin impact. But I'm just wondering now, have you gained more confidence in some pipeline assets that maybe you had heavily probability-adjusted previously? And now you maybe you've adjusted those probabilities upward? Just difficult, I guess, sort of given what we know about the pipeline to see how you are going to get to those sorts of levels. Thanks.

Sure. Well, it's a good question, Elliot, and as always, it's always good questions that you have. We really, as we look at it, or just simply looking at the pipeline opportunities we have, for example, getting the launch of the Luxiq and the Olux-E foam behind us. Having those launches January 15 and then again today, that really improves our probability-weighting on products just as they happen. So it's an important part of how we look at forecasting.

In addition to that, though, the clear other important factor that I mentioned just a minute ago is we have 6-plus product launches in our RX business over the next five months. That's really what's going to help drive our performance in the RX segment of our business.

So that is really our -- as we look at the number of product launch opportunities we have, as we look at what the new products do for driving both the gross margin and operating margin, that's really what is going to be the critical element for us for the next five months. And that's really why we have the confidence.

Many of these products are what I would call either a date certain launch or an end of an expiration period. So we have a good clue as to when they launch.

To be fair, a couple of them are not. A couple of them we have to wait for approval and then we can go. But as we balanced out the probability-weighting of those products, that's the reason why we had the confidence for the remaining half of the year for our RX business. Anything else you want to? Thank you, Elliot.

Louise Chen, Guggenheim.

Hi. Thanks for taking my question.

Hi, Louise.

So as we look at your business now, it looks like you've got several meaningful growth opportunities. You've got the animal health, international expansion, RX to OTC switch environment, improving at the FDA, you've got the infant formula and diabetes care. So just curious, of these opportunities, which one are you most excited about and why?

Well, I think I'd say, in general, Perrigo will continue to focus our business on our consumer healthcare and nutritional business. You know, we are a store brand private-label player, and as we look at what's happening there, there's a couple of big drivers. And those are the ones that you've mentioned.

I mean, we continue to see acceleration of the store brand usage and the movement from the national brand to store brand. I think that's got to be probably one of the most important drivers. And, as we see every quarter, store brand growing about 9% where national brands are flat to up slightly, that's really going to be one of the important drivers and one of the things we continue to track for our future.

The second comment is, just take the example of what happened in the past week, the fact that Oxytrol has moved from prescription to OTC. That's a big important product, not for just that individual product, but it's a brand-new category with overactive bladder. There are some big products in that category -- Detrol, Detrol LA, Ditropan are all examples of products that are in that category.

And when you move another category like overactive bladder, specifically like Oxytrol, it opens up the overactive bladder question. I'm not suggesting today all those will move. But certainly it's another potential example of what we are expecting.

Animal health brand-new, but Judy may want to make similar comments there.

Well, you never want to pick between your children, but animal health space for us is incredibly exciting because if you think about -- Joe just talked about all the opportunities of products that are going from behind the counter to over the counter. Animal health creates an entire new opportunity to save consumers money by being able to procure product in the retail space.

The retailers are excited about being able to have product available, having store brand offering available. These two acquisitions are going to create an entire new aisle of values for consumers, and I just think that's really exciting. It's basically OTC in the 1980s, as there is a whole new quality affordable health care offering. So that's pretty exciting for us, just because we're going to be at the forefront of creating a whole new space for consumers.

Annabelle Samimy, Stifel Nicolaus.

I think all of them have been answered, but I can ask you a variation on all of them. So maybe we can go to our ex-Pharma for a bit. I mean, you've talked a lot about how you are set up for the year.

This quarter, I guess, you had the one less week and you had some increased competition. How much can the new product launches that you have offset some of the competition that you've seen this quarter?

And maybe can you talk about how you are set up for the medium term? Are most of these products in new foam launches? Or are these product categories that you potentially see competition in the future?

Sure. Well, in general, I think we are looking at our RX portfolio. We clearly, as Judy said, see some significant growth opportunities with our RX business. That's why we continue to look at our guidance.

We think revenue growth can grow 15% to 19% for our RX business, and that's why we -- but most of all would say we are excited about the new product potential for the RX business.

On the question of our pipeline, as I stated before, it's the best pipeline we've ever had in the history of our Company in the RX business, so we are really excited about what that can mean for the growth aspect. Importantly, also, as you know, new products tend to drive not only the sales launch, but they also drive the operating margin and the gross margin of our business.

So for those reasons, I think that's going to offset any of the potential questions we have on any competitive challenges, and allow us to continue to demonstrate a very significant both gross margin and operating margin of the business.

As it relates to the new products, the majority of these new products fall in what we call extended topicals. By extended topicals, I remind you, we think of certainly dermatology products absorbed topically through the skin, respiratory products absorbed topically through the lungs, nasal products and absorbed topically through the nasal mucosa. Those are the things that we talk about, and that's where we continue to stay focused on our portfolio of products, and that's really what we will continue to look at for the RX business.

Obviously, you know, we've got some other examples of metered dose inhalers and other places we go with the business. Such as the -- we've got the first to file on ProAir. And I think, many of you may have seen, we got our first testosterone product approved yesterday and hopefully more to come. But we'll hopefully have more to say about that for the future

Okay. Great. Thank you.

Gregg Gilbert, Bank of America Merrill Lynch.

Good morning. I have two. First, for Judy, I think your EPS year to date is tracking a little better than cash flow from ops relative to the full-year goals. Is that just the typical rhythm of cash flow realization or are there other factors to consider in the second half? And, for Joe, is there a way for the Nexium-like store brand opportunity to form before Pfizer has its three years on the real Nexium product? Thanks.

Gregg, I'll take your cash flow question first. I think you just like to listen to me say that cash flow is never linear. It was a strong second quarter.

And the drivers in cash flow, of course, it starts with net income and based on the guidance we provided and the color we've given around confirming the consolidated projections for the full year. You can probably model fairly well that cash flow from net income.

And then the moving pieces on working capital. A lot of inventory movement around this time of year as we are in the midst of launches, and of course the cough/cold/flu season. And as we gear then into the summer, we usually have a pull-down in inventories and pull-through on the working capital side.

So usually, although it's never linear, Q2, Q4, the larger cash flow quarters, what you notice, we confirmed our full-year cash flow guidance at the moment. So not linear, but we are caught back up on where we thought we'd be year-to-date and on track for a full year.

Great. On the question of Nexium, at this time we think it would be unlikely that there would be a Nexium store brand or competitive opportunity in the OTC space before Pfizer launches theirs. But I can never say never, but I think it's unlikely. I think we'll see the Pfizer product show up in approximately 2014.

And with an expected three-year exclusivity, we know we obviously want to get ready for any situation, but with an expected three-year exclusivity, that would bring us to about 2017.

And could BenzaClin be one of your launches this year?

You know that we don't ever comment about our products, of course, unless there is litigation, Gregg. So I apologize. I can't answer that question. It really -- you also know that we know a lot about clindamycin and benzoyl peroxide, but we can't really comment about any individual product.

I figured it's a new year and maybe you turned over a new leaf, but thank you.

(laughter) Thank you, Gregg. Good try, but no.

David Steinberg, Deutsche Bank.

Yes, thanks. Two quick questions. First on tax rate, Judy, I think at the beginning of the fiscal year you discussed 29% to 31% range for the year. But there could be some conservatism given some statute expirations and audits, and I think you said it could be a $40 million benefit.

So in the first quarter, tax rate was 26%; 28.5% this quarter. Are you still guiding for 29% to 30% or should we think about a lower number?

Great question. Just go back through your comments, you made a comment about $40 million upside. I think it was closer to $15 million. We can (multiple speakers) check in the queue it will be going out this afternoon.

But, specifically, we confirmed the range for the full year. Obviously, as you know, we picked up Sergeant's into the portfolio. We'll have nine months of Sergeant's operations in there as a 98% US company at a 37%-plus tax rate. That's a drain on the overall rate.

A good guy, though, as our friends in Congress have renewed the R&D tax credit and the renewal of that will flow through the full-year rate and be a good guy. So hence, we kind of come out to a rate still in that range, maybe near the lower end of the stated range at the moment. And that's excluding any additional tax audit settlements or any kind of one-time items that may come through that are unforeseen at this moment.

But we'll obviously give color if any of those one-timers come around. But the blended rate, jurisdictional rate blend, taking into consideration the renewal of the R&D tax credit, I'd expect it to be more the lower end of the stated range.

Fair enough. And then, Joe, quick question. I think you mentioned the next five years it might be $10 billion worth of RX to OTC switches. I know recently you've been incrementally more positive on the outlook for statins to go over-the-counter. Our statements in that $10 billion or are they not?

Yes, I did mention the $10 billion the next five years. Statins are not in our numbers at this time. I do believe that statins are something like a 60%/40% probability they would happen -- 60% positive, 40% negative.

But because of the size of the satin category we do not include it in our numbers as we think about the future. It's just something that we prepare ourselves for in the event that that occurs. And we could not -- you know, a 60%/40% probability is not something we can build into the model at this time. It's too uncertain at this time, so it's not in my numbers.

Okay. Thanks.

David Buck, Buckingham Research.

Yes, thanks. Just a couple of quick questions. First, on the animal health business, Joe, you mentioned is about $200 million if you combine Sergeant's and the acquisition today of Velcera.

I guess, why wouldn't it be growing more than high single digits, given that you are expecting to actually launch some of the store brand versions of Frontline?

Secondly, for OTC switches, the Oxytrol launch later in the year, are you expecting that to have three-year exquisitely? And can you confirm that you have some type of opportunity in that category as well?

And then, just finally, for Joe, the flu season, better than expected so far; I think you mentioned 20% higher versus a year ago. When we do get a sense of whether you'll see the reorders that would push it well above what you've been modeling? I mean, at what point do we need to see the duration of the flu? Thanks.

Sure. So David, I think you tracked pretty well with my comments. At Velcera, $200 million when I put the $140 million with the $60 million, basically that is the $200 million product category for us.

We are excited about the growth opportunity as we bring out our store brand products because we, once again, we think it's going to be able to move markets from the vet-only channel into the mass market retailers such as the Wal-Mart, Target, CVS, Walgreens, et cetera. So that's all important activities for us and ones that we are very excited about.

However, one of the things -- we have not even closed yet on Velcera. We closed in October for the Sergeant's business. I think we just don't want to get ahead of ourselves in terms of the opportunity there, and if indeed there is more upside for that we'll have comments later. But, for right now, we look it as, as I mentioned, a high single digit growth rate for the category and we'll continue to track it, and if it gets better than that will be happy to share that.

On the question of Oxytrol, it is something that we've been tracking and certainly something that, once again, we're very excited to introduce a new category of overactive bladder products into this RX to OTC switch category. I do expect that Oxytrol will get an exclusivity.

They have yet to do a very large trial that would allow the FDA to understand the ability of a consumer to make -- use this product. So, therefore, I do think there will be an exclusivity period granted to this product, although I do not have a definitive answer at this time. So we do think they'll get a three-year exclusivity and I'm not going to -- I can't obviously comment about products that we have specifically in our category.

On the question of cough/cold/flu, starting in mid-December, as I mentioned, the season did take off significantly, really, in many parts of the country reaching epidemic proportions. It is about a 20% increase over a year ago. At its height it was in the mid-20% increase over a year ago, so it's something we continue to track on a weekly basis.

The biggest question for us is going to be when does the season come to a conclusion. So, for example -- and I use the word area under the curve. If you are mapping that and charting it out, think of the line being 20% above where it was last year. The question of does it stay above last year at the 20% rate for a month, which we have seen already; is it two months? Is it three-month? Or does it drop down precipitously and go below the line?

I cannot predict that, but what we do is take one quarter at a time in terms of our expectations. I can simply say that the demand for our cough/cold/flu season during the month of January has been very strong, and I'll probably have to leave it at that at this time. Can't tell you if that's going to continue into February and March. It's too early for me to make that comment.

Okay. Thank you.

Shibani Malhotra, RBC Capital.

Hi. Thanks for taking the question. Just on your long-term growth, I guess the biggest -- the number one question we get from investors is whether Perrigo has grown too fast, too quickly, and how the Company is going to be able to sustain the growth rate. So if you could just comment on that on a broad level.

But then, specifically, I think, Joe, you've talked about your -- and the OTC opportunity there as being something that you're very interested in. And there have been some recent dynamics in the market which are probably favorable to you, like the Celesio company getting a Lloyd's brand across Europe. So you could just talk about how that market place is evolving and whether you are seeing competitors trying to get in, like Watson, and how you're thinking about that? Thank you.

Sure. Well, good comments. Really, the long-term growth, starting with that part of the question first, I can simply say that the megatrends that we continue to follow support the continued long-term growth of this business. And really what I go back to is the consumer healthcare megatrends of movement from national brand to store brand continues, as evidenced by what you're seeing in the weekly data that we -- or the monthly data, quarterly data that we send out.

On the second megatrend movement from RX to OTC, that's a trend that we continue to see as evidenced by what we saw last week with Oxytrol, what you saw by the acquisition by Pfizer of the Nexium product portfolio of Nexium and extending their portfolio and bringing out an s-omeprazole, I think that megatrend continues.

Other than the commentary I already made on the foam, I was talking about a long-term organic growth rate of high 5% to 10% and double that on the bottom line, I really can't make any additional comments on that.

I will remind everybody that we will have more to say about 2014 in our August call. And then on October 1 we expect to have an analyst day where we will go through all the major drivers of the business on October 1, just to share more.

But, really, if you get to the basics of what makes Perrigo successful, we really believe it's making sure we have a quality product, make sure we have good customer service. Make sure we get out the new products, innovation, being in that first wave. Indeed, making sure we keep a low cost structure and continue to develop the people of the organization to allow us to continue to grow. Those are really the five things that I keep my hand on all the time, and I think that's the critical thing that will make us successful.

On the question of Europe, as you know, we've got more than 15 products that we have submitted or are in various stages of regulatory approval. Some of them are approved. Some are approved by country. Those are the things that we continue to look for growth in Europe.

But to be absolutely clear, for Continental Europe continental, the market in Continental Europe is more consistent with what I would call in the United States our independent pharmacist model. There is no large retailers like Walgreens, CVS, or Wal-Mart in Continental Europe. So we have to take an approach similar to what we do in the United States with independent pharmacists, where we work with large distributors like the Cardinal Health, the McKessons, the AmerisourceBergen. And that's really where we are sitting today.

There may be opportunities for other acquisitions in Europe or other partnerships in Europe. But for right now I think we're really looking at this more similar to the way we look at independent pharmacists in the United States, and how we go to market there by working with distributors. You mentioned Celesio but you didn't mention Alliance Foods. But I think those are some of the examples of opportunities for us.

Okay. Thank you.

Randall Stanicky, Canaccord Genuity

Great. Thanks, guys. (multiple speakers). On Temodar, it's obviously a big opportunity. Can you just remind us of the economics relative to your split with Teva? And any tax benefits that we should be thinking about with respect to that profit wash? And then, Joe, just at what point does Mucinex miss the cough and cold window for this year?

All right. I'll jump in on the first question. As you know, we are expecting to launch that product in August of this calendar year. That will, however, fall into fiscal 2014.

The profit-sharing arrangement that we have, we don't disclose the specific terms of it. So suffice it to say, in your modeling, it's probably easy to just go -- assume a profit split for ease of calculation. But we won't specify any more details than that.

The last piece -- well, additionally, sometimes in these types of arrangements, there is a delay in the revenue recognition because of the timing on visibility to final third-party sales. It's happened to us in the past, if you remember a few years ago, with a different launch.

I can't say yet if that is going to be the case. We'll have better visibility as we get right on top of the launch date. So -- and I'll probably be able to provide specific color to that when the first sales will be realized, will it be Q1 fiscal quarter or Q2. But the date of -- the date of certain launch is still going to happen in August.

Last point on the tax front, I would expect that this launch would have a lower than average tax rate applied to it. I'm not getting specific yet at this point, but I think it would be a benefit overall to the effective tax rate for the full fiscal year rather than a drag.

And then on the question, Randall, of the Mucinex launch, as we said, our expectation is that we'll launch that in the March 2013 timeframe. And, as I said, most of the patches are either completed at this time for the launch quantities or in process. So we feel very good about our capabilities there.

All the product has been validated or the processes have been validated for Mucinex.

Relative to the question of whether we miss the season or not, we look at Mucinex is being certainly important for cough/cold/flu season, but also obviously for the allergy season, so we certainly feel we'll be in time for that.

But, importantly, the bottom line comment is that as we looked at our revenue guidance for consumer healthcare for a 16% to 20% growth for the full year, we did that with the knowledge of [how we would probably-wise] the launch of all of our products. And certainly the Mucinex 600 milligrams was front and center in what we were looking at for that 16% to 20% growth rate for consumer healthcare.

Okay. Thanks, guys.

I think, operator, we have time for maybe one more question.

John Anderson, William Blair.

Hi, everybody. Thanks for taking my question. I'll keep it brief. I just wanted to ask about the international business. I think you mentioned early that OTC outside the US was up 9% in the quarter. Can you just talk a little bit about the dynamics there, where you're seeing strengths, in which markets, and what your expectations and efforts there are going forward?

Sure. Well, I'll just make a general comment. Judy, I don't know if you want to make any other additional comments. But, relative to our international business, they had a good quarter. They had a good quarter both in terms of foreign exchange, but also in terms of just real revenue growth.

So there was both positives on foreign exchange, but also on revenue growth. The businesses did well for us. We are certainly -- our Mexico business, our UK business did very well for us.

And, importantly, we looked at Australia as being a big driver for us for the future as really Australia is very much in the infancy of store brand growth. So as we build more capabilities in Australia, we think that's really going to pay important dividends for us for growth for the future. But, to be clear, UK and Mexico really exceeded our expectations during the quarter and helped us drive our OTC business.

Judy, anything else you want to add to that question?

Just highlighting what you said. It's store brand -- maintaining and growing store brand share. You know, the UK store brand penetration has always been quite high. It was in excess of the US for many years, but the US has been able to catch up with the penetration rates they have been historically seen in the UK. But that team is able to bring new products out so the strength is there.

Mexico still has runway. Australia still has runway and they've seem some uptick in the last few quarters.

Thank you, Judy.

Maybe, operator, if I just close quickly. First of all, thank you everyone for your interest in Perrigo. I want to say a special thanks to everyone on the Perrigo team. They just did another outstanding quarter.

It was just a great quarter of collaboration and working. A lot of hard work went into the quarter, into the M&A activity to announce is out there this morning. And everyone just did an outstanding job within the Perrigo team.

I think if you are looking at some of the important milestones for Perrigo, over the near future, clearly, in the consumer healthcare business, it will be that continued cough/cold/flu season, what is happening there, as well as our Mucinex launch. And as I've stated before, we'll make sure we get a press release out on Mucinex on the day it launches.

On the RX side, it really is going to be a continued acceleration of the new launches for us on the RX side of the business, and what's happening with those new product launches. And we'll have more to say about those as we launch those individual products.

And then, finally, really excited about what the team's efforts have been to bring the Velcera team to Perrigo and allow us to have approximately $200 million pet care business that we believe will have a high single-digit growth rate and, importantly, make a meaningful difference in the ability to provide a quality flea and tick products offering into the marketplace with affordable prices. We think it's very exciting and very core to what we do in our mission.

So thank you very much for your interest in Perrigo and have a great day, everyone. Have a good day.

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