Perrigo Company PLC (PRGO) 2014 Q1 法說會逐字稿

Good morning, my name is Melinda and I will be your conference operator today. At this time I would like to welcome everyone to Perrigo's fiscal 2014 first quarter earnings results conference call. Thank you, Mr. Art Shannon, VP of Investor Relations you may begin your conference.

Thank you very much, Melinda. Welcome to Perrigo's first quarter 2014 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the release is available on our website. Also on our website is the slide presentation for this call.

Before we proceed with the call I would like to remind everyone that during the process of this call management will make certain forward looking statements. Please refer to the important information for investors and shareholders and Safe Harbor language regarding these statements in our press release issued this morning and on slides two, three, and four in the accompanying investor presentation. Under Irish takeover rules we are under increased scrutiny between now and the close.

And for those of you accustomed to our regular and open communication and disclosure, this will be a change so please bear with us during this period. We will open up the call are to questions and I would like to remind everyone limit to one question each. Following management's review of the presentation we will open up the call for questions and I would like to remind everyone please limit to one question each. I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art. Welcome, everyone, to Perrigo's first quarter fiscal 2014 conference call. Joining me is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. I have to start today's call by saying congratulations to Art Shannon and all of the other Red Sox fans out there on the World Series victory.

Go Sox.

I know some of you may have questions regarding our definitive agreement to acquire Elan. As you know, under Irish takeover rules, we are limited in our ability to discuss forward looking information.

On the expectation that the transaction will close by the end of calendar 2013 we expect the transaction to be at least $0.10 cents accretive to fiscal year 2014 stand alone Perrigo adjusted earnings per share. In our fiscal 2015 we expect the transaction to be between $0.70 cents and $0.80 accretive to stand alone Perrigo adjusted earnings per share. I would be happy to take any additional questions of the Elan transaction during the Q&A.

Today we will spend a majority of the time focused on stand alone Perrigo first quarter earnings. In the next few minutes I will provide a few comments on the quarter. Next Judy will go through the details of the results from the fiscal first quarter then I will provide an overview on each business area plus expectations for the rest of the fiscal year. Following this I will provide you an opportunity for Q&A.

First let's discuss the fiscal first quarter. On slide seven you can see that this was another great quarter for Perrigo demonstrating the strength of our platform. Our quarterly performance is highlighted by all time record net sales of $933 million, record added gross profit, record operating margins, and record first quarter adjusted diluted EPS.

Moving on to slide eight, you can see the data for our first quarter by business segment. Consolidated Perrigo grew the top line 21% with double-digit growth in every business unit. What you can't see here is that the consolidated organic revenue growth was 13%. The strong performance is driven by great execution across all business segments.

Moving to our individual business segments Consumer Health Care grew 20% to over $538 million in sales. More than half of this growth was led by base business growth and the $17 million of new products, and of course sales from the animal health acquisitions. The strength of our core business continued to impress in what is traditionally a very light first quarter.

Our nutritional segments grew 25%. That's the second straight quarter of double-digit growth. We believe consumer acceptance of this new SmarTub container continues to gain traction.

Our Rx segment once again achieved record results growing sales by 25% and aded operating income growth of 34%. As you can see on slide nine, store brand continues to gain market share versus the national brand across most categories especially diabetes and infant formula.

Looking at infant formula this category was up 2.7% with national brands up slightly, but store brands grew 7.7%

On slide 10 you can see the strength in store brand market share growth in the infant formula category. in the past quarter store brands gained 45 basis points, in the last quarter. With that let me turn it over to Judy.

Thanks, Joe. Good morning, everyone. Happy Halloween. I am very pleased to be able to share with you some more financial color on the terrific start to our fiscal 2014 this morning.

I will move directly into the business segment starting on slide 11. Consumer Health Care's fiscal first quarter net sales increased a very healthy 20% year-over-year due to a combination of an increase in sales of existing products of $40 million primarily in the analgesic and cough/cold categories, new product sales of $17 million primarily in the cough/cold and smoking cessation category, and $42 million attributable to the acquisitions of Sergeant and Velcera. Specifically sales in the cough/cold category which include the recently launched store brand version of Mucinex 600 milligram extended released tablets were up an impressive 22% year-over-year.

Additionally despite the return to market of a major national manufacturer, sales within our analgesics category were up almost 16% year-over-year due to strong end consumer demand. The combined sales increase of $99 million was partially offset by a year-over-year decline of $7 million in sales of existing products mainly in the contract category, and $3 million in discontinued products. The 90 basis point increase in aded gross margin was driven by acquisitions, new products, product mix , stable pricing and strong volumes across the broad CHC portfolio.

We invested more in consumer health care R&D projects versus the first quarter last year and DSG&A spend was a slightly higher percentage of net sales after the inclusion of Sergeants and Velcera expenses versus this time last year. As a result of these investments and the absence of a $3 million indemnification settlement payment the Company received in the first quarter of fiscal 2013 aded operating margin decreased slightly year-over-year.

On slide 12 you can see that net sales within the Nutritional segment increased 25% year-over-year as existing product sales rose $21 million and new product sales were $5 million. In the spirit of full transparency I would like to remind you that our first quarter of 2013 was negatively impacted by an incremental $10 million of retail shipments at the end of June 2012 in advance of our planned July 1, 2012 shutdown of our Vermont plant. Even if you were to include the additional sales from the plant shift, the Nutritionals category still grew a very impressive 14% year-over-yeardriven by strong consumer acceptance of our new SmarTubs in the U.S. and growth of retail sales in Canada.

The aded gross margin in the Nutritional segment decreased 170 basis points due to a larger contribution of sales from the lower margin VMS and toddler foods categories. The aded operating margin expanded due to DSG&A leverage on increased volume. Now turning to slide 13, you can see that the Rx team's streak continues as this business had yet another phenomenal quarter. Net sales growth of 25% was due primarily to net sales of $23 million from the Rosemont and Fera acquisitions.

New product sales of approximately $15 million and robust gains in our organic Rx business. In fact net sales excluding the contribution from the acquisitions grew an impressive 11% year-over-year. In Rx the team was able to once again dramatically expand margins as the overall strength of the base business continued to be evident this quarter. Aded operating margin grew less than the aded gross margin as we invested more this quarter in R&D versus last year.

Next on slide 14 you will see that API's first quarter net sales increased by $7 million driven by new product sales of $17 million primarily from the recent U.S. launch of the generic version of Temodar, offset by the anticipated decrease in existing product sales of $11 million due to expected increased competition on select products. As noted previously we plan only a limited new product launches beyond Temozolomide as we shift our investments more to projects which will allow further vertical integration in our portfolio and expect natural competitive dynamics to impact the rest of the existing portfolio.

Over the long-term you should continue to expect third party API revenues to begin to decrease while at the same time inter company sales to consumer health care and Rx will be ramping up. ramping up.

Now some quick highlights on the balance sheet. Excluding cash and cash equivalents, working capital was $807 million at the end of the quarter, up from $639 million at this time last year. The increase in working capital is primarily driven from working capital needs associated with seasonal sales, acquisitions and timing of certain accounts payable payments. As of September 28th, 2013 total current and long-term debt on the face of the balance sheet was $2 billion, essentially flat sequentially from last quarter.

Excluding cash and cash equivalents our net debt to total capital at the end of our first quarter fiscal 2014 was 32.1%. Net cash flow from operations for the first quarter was $99 million up $54 million from the first quarter fiscal 2013. We spent $40 million this quarter on capital expenditures focused on continuing expansion in our Holland and Allegan, Michigan facilities to keep up with increased customer demand and to prepare for expected Rx to OTC switch products as well as our expansion in Israel related to future generic launches and increased volumes for consumer health care products we manufacture there.

On slides 15 and 16 you will see we are not making any changes to Perrigo's stand alone guidance for fiscal 2014. Once again the team performed extremely well, but we have no time to rest on our laurels. We are deep into a jam packed fiscal 2014. The normal cough/cold/flu season is kicking off, multiple launches are awaiting green lights, construction projects are getting the full advantage of a terrific Indian summer and the conclusion of several integration processes for our new businesses is at hand.

A dedicated team is working hard to prepare fully for the close of our proposed acquisition of Elan by the end of the calendar year readying our teams for the opportunities ahead. Our commitment to our core values and our humble roots will remain all while we continue our mission of providing ever more quality health care products to an ever increasing number of patients worldwide with an ever more substantive balance sheet and investment grade profile. Now I would like to turn the call back to Joe.

Thank you, Judy. Now I would like to provide some additional thoughts on the business and going forward. First, the same three mega trends continue to drive our business. It is the movement of consumers and retailers from national brand to store brand product. Second, it is a continued switching of prescription products to over the counter status and third the continued introduction of new product launches.

As demonstrated on slide 9 the market continues to move to store brand. In fact, store brands today represent 35% of the OTC market. In addition our xOTC switches are expected to continue with $10 billion of branded Rx sales likely to switch in the next five years with over $5 billion of that expected in the next three years. Emphasize some very significant and attractive growth opportunities.

We have all seen new categories making the switch like overactive bladder and nasal steroids with Nasacort OTC receiving FDA approval. Further our Company is poised to leverage new store brand offerings from our animal health business, upgraded better-than-national brand packaging for our infant formula and continued very strong Rx growth. In regards to our third mega trend, new products, the pipeline for our fiscal 2014 looks very robust. We anticipate launching over 75 new products across all segments and contributing more than $190 million in revenue for the coming fiscal year.

Within any given quarter a year there are a number of factors that affect our consumer health care business and I would like to discuss a couple of these with you right now. Within the liquid cough/cold space a major branded manufacturer recently limited their shipments of nighttime and daytime cough/cold liquid products. Though it is too early to specifically assess any impact to us at this time we will keep you posted on any further developments.

As Judy mentioned, the launch of store brand Mucinex 600 milligrams ER is off to a great start. We continue to work with one of our vendors to maintain a sufficient supply of raw material for this product. However, recent API batches received did not meet our rigorous, high quality internal specifications. The team is working very diligently right now to resolve this supply disruption as quickly as possible.

To be clear, we are still shipping store brand Mucinex, but we will experience a gap in our ability to manufacture Guaifenesin until this is resolved. Turning to slide 18, you can see that our Nutritional business has numerous growth drivers in the coming year. A key highlight here is the introduction of the upgraded national brand-style packaging the SmarTub. As of July 2013 , the Company has successfully transitioned 100% of its core items at U.S. retail customers to the new plastic container.

Moving on to the growth opportunities in our Rx segment, on slide 19 you can see that we continue to be very well positioned. Over the past few months we have launched four new products with combined branded sales of nearly $360 million. We have a robust pipeline of 28 ANDAs pending FDA approval, representing approximately $4.2billion in branded sales. This includes seven confirmed first to file ANDAs.

Additionally on slide 20 we have a healthy leadership position across multiple technologies. We have the only FDA approved generic topical foams. In our API business segment we are very excited about the U.S. launch of generic Temodar which is a meaningful product to our portfolio with a first to file exclusivity. As you can see from the results this quarter, the launch is going very well.

In summary on slide 21 Perrigo is poised for continued strong growth with a great start to our fiscal year 2014. Stand alone Perrigo is expected to grow aded earnings per share by 13% to 18% this coming year over last year's record performance. The business remains strong and we look forward to closing the acquisition of Elan by the end of the calendar year. Once the companies combine we will have a more enhanced platform for longer term growth as we continue to execute on our mission of making quality health care more affordable to consumers. Operator, let's now open up the call for any questions.

(Operator Instructions). Your first question comes from Annabelle Samimy with Stifel.

Congratulations on a great quarter. I have several, but we can start with the guidance. You have had some spectacular growth in each of your segments and the guidance hasn't changed. Is some of that growth catch up from last year especially I guess in Nutritionals or is there is something you are expecting later in the year that is going to drag that down?

Well, first of all, thank you very much for the kind comments on the quarter. We are very excited. There was great execution by the 9,000 plus Perrigo employees around the world. Relative to our guidance comment, for us right now the big important factor for us is to get the Elan transaction closed which as we stated we expect by the end of the calendar year. I think after that is closed we expect to have more to say about after the Elan close, but right now as we look it is early in the year and we are excited about what the future holds, but we want to focus on getting Elan closed at this time. That was really the commentary on the guidance.

I would echo the same thoughts as Joe did. We always said the second half of the year has the effect of new products continuing throughout the year and frankly to Joe's point given all of the things going right now we felt it was prudent at this time to remain with the current guidance as it stands.

Can you tell us on some of your recent acquisitions such as Rosemont, Fera, or any of the pet care products, are those tracking in line with your expectations and particularly for pet care are you now at a point with the regional approvals where you feel better about the growth rate going forward?

I would say in general that we believe all of the acquisitions in general are tracking close to our expectations. Some ahead, some behind, but if you look at across the businesses , we feel very good about what they mean. We think the pet care business -- we still believe it is a $2 million business. We believe it will grow at a high single digit growth rate. Until we introduce the store brand offering of our flea and tick products, once we introduce store brand flea and tick we think it has a chance to go into a double-digit growth rate.

I will say and I said publicly we did have a little softer animal health business, and it was predominantly because of a lesser flea and tick season as a result of the weather. It wasn't as strong of a flea and tick season as perhaps the previous year, but that is all a normal seasonal variation that occurs within the business. The rest of the Rosemont in the Fera -- the acquisition of opthalmics, they are both contributing significantly to our business. There is going to be ups and downs, but we are very pleased with the total performance of our M&A projects.

If I can ask one more on Nasacort, we all saw the approval for Sanofi of the OTC version. We don't know if they have exclusivity or not, but how quickly could you launch that product if they indeed don't have exclusivity?

It is a great question and I have to say right at the onset right now it is not entirely clear on the exclusivity position right now. However, having said that I will say that I have looked at the Nasacort approval letter, it was published on the FDA website. At this time in the approval letter there is no statement on exclusivity for the three-year exclusivity. No three-year market exclusivity.

Can't say exactly if that will be the final disposition of this question, but at this point, we did not see it in the FDA approval letter. As you know we received an approval for the Nasacort product with our partner and launched that product approximately two years ago in June. We've been out in the marketplace. We have previously fought the patent litigation on that product, got the product approved, got it in the marketplace approximately two years ago so we have the product available. It simply would be required for us to get a supplement approved to switch our product to OTC status depending on whether there is a three year exclusivity we would be able to move very quickly or after that three year exclusivity, but at this time we don't see any specific mention of a market exclusivity in the approval letter for the Nasacort OTC.

Okay, thanks a lot.

Your next question comes from Elliott Wilbur with Needham & Company.

Elliott? Elliott?

Elliott, your line is open.

Operator, maybe go back to Elliott at some future point. Is there another question?

Your next question comes from David Risinger with Morgan Stanley.

Yes. Good morning. I don't know if you can comment but Royalty Pharma issued a press release that they are holding a debt [raising] call this afternoon. Is that something you can comment on?

Hi, David. This is probably not something we can make a specific comment on what Royalty Pharma's plans are at this time. All I can say about the Elan transaction is that we continue to make progress on it and we -- I think you know there is a vote for the Perrigo shareholders and the Elan shareholders scheduled for November 18th, and at that point we look forward to going forward. But having -- assuming a positive vote.

But really there is nothing we can say specific to what Royalty Pharma's plans are at this time. The only other comment I mentioned is what we said in the call. Our expectation is this will close at the end of the current calendar year.

Great, thank you.

Thank you.

Your next question comes from Tim Chiang with CRT Capital.

Thanks. Good quarter, Joe.

Thank you.

I wanted to get your thoughts on the overall story for Perrigo. Heading into next year and assuming the Elan deal closes, could you talk a little bit about what your priorities will be? Do you think more acquisitions are certainly something you are thinking about? And how do you roll that into your existing business?

Sure I will start and then Judy please fill in. First and foremost I would comment that I believe the basic mega drivers, the mega trends that drive Perrigo's business will continue to be the same. Those mega trends are the movement of the national brand products to store brand. Consumers continue to move national brand to store brand. The second mega trend is this movement of Rx to OTC, switching to OTC. We continue to see that happening and we expect that to continue to happen specifically with products like Oxytrol and the Nasacort OTC, and additional products like the Nexium products and other products we previously talked about.

The third part for us is going to be continue to focusing on new products. We have over $190 million planned for this year. We continue to want to launch these new products. We think they will be the mega driver for us to continue to be successful , to grow the top line but also grow the operating margin for the business as demonstrated in this current quarter.

I would simply say that historically our business has been -- we have been able to grow on a compound annual growth rate. Approximately half of the growth has come from organic and the other half has come from acquisitions. We continue to believe that will be an important part of our business going forward. I will say, and as Judy has said publicly and as I have said publicly that until we get -- once we close the Elan transaction we will increase our debt at that time and then we will seek to bring that leverage down to a more normal level. Judy you may want to comment on that.

Absolutely. After the close of course we will talk more about long-term utilization of cash and to Joe's point commit -- our commitment to that investment grade profile and delevering quickly after close in the next 12, 18, 24 months is going to be an imperative for us to look in the field and opportunities to Joe's point to expand into adjacent categories, new geographies, et cetera. Same themes on a larger basis and we will be able to elaborate in more detail with some real data behind it in the coming calendar year.

Joe and Judy, one follow-up, it looks like your margins did quite well across the board. Is this all driven by new products or is there some seasonality with your business right here?

I think there are a couple different areas. I will start with as a general comment the operating margin in the business has continued (inaudible) to go up and it is really because we continue to bring out new products as well as some of the acquisitions we have been able to do that essentially put more products on the trucks as we send those trucks to our large retail customers. A little bit from the new products both organically as well as those we've acquired through acquisitions through things like the pet care and the infant formula business have been big drivers of (inaudible). Judy, anything you want to add?

High level of execution across the business units I think to a T. We saw increased productivity across our manufacturing sites. We were humming along from a productivity perspective, pricing initiatives were well received this quarter and so you really get into the dynamic of a combination of all of those fronts. When I made my prepared remarks I said in most of the businesses it was a combination of a lot of positive factors. Really we have seen the margin expansion by doing what we say we will always do which is go after critical operating execution as well as obviously bringing new products to market.

Very good. Thanks.

Thank you.

Your next question comes from Elliott Wilbur with Needham & Company.

Thanks, can you hear me all right?

Yes, we can hear you this time, Elliott.

Hi, Elliott.

Hi, a question for Joe I suppose and going back to your earlier commentary around Nasacort. I understand it is very early in the game and we are in a bit of unchartered territory here, but curious your thoughts on the market potential for a product like that. Talking to folks, it seemslike the expectation is well this could be a couple hundred million dollar brand and then obviously at some point the high value target opportunity for Perrigo. If you look at the performance of generic Fluticasone in the market over the past five years or so, ever since that product went generic, it would suggest there is potentially a massive market out there for a value brand in the OTC nasal steroid market. I'm wondering if you guys have had a chance to do a deep dive at this point on what you think the overall market opportunity may be. Thanks.

Great question, Elliott, and it has been very much a topic of discussion within Perrigo. First of all I would say that you are seeing a couple things, number one you are seeing the real benefit of us being both a generic Rx company as well as an OTC company. We brought out this product as a generic prescription product, Nasacort, before it went OTC, had the product in our portfolio and can now switch the product as this product becomes available. And I think that is one of the great synergies we have in the Perrigo story. If you think about it we started that product going back 6, 7, 8 years ago and in fact had it in the market place a couple years before the product even went OTC. That would be my first comment.

The second comment I would offer though is we really think it gives us a chance to look at the entire class of products. One of the things you rightly point out is that this is important for Nasacort, absolutely correct and the product going OTC. We looked at the nasal allergy opportunity and while Nasacort is a $300 million type product the category is over $2.5 billion of branded sales. We think what importantly here has happened is the nasal steroid Nasacort has been approved for OTC status. It may open up the entire category for other nasal steroid products to move from prescription to OTC. We think that is an important characteristic.

The second reason why we are very excited about Nasacort opportunities. It is really important for Nasacort, but importantly it opens up the rest of the category. The final thing I would say is we have done a comprehensive review of what happens to products when they move from prescription to OTC. It was mostly led by our knowledge of what happened with the non-sedating antihistimines. As we looked at the non-sedating antihistimines and followed that category even for products like Cetirizine we know that once the Cetirizine molecule went from prescription to OTC the demand for the Cetirizine molecule rose dramatically by a factor of more than two to three times what the usage was as a prescription. Those are the characteristics we are following and the ones that we are excited about this Nasacort opportunity.

Operator, next question?

Your next question comes from Jaime Rubin with Goldman Sachs.

Thank you. Judy a follow-up on the operating margins within the Consumer Health Care business. You provided a good explanation, but I wanted to follow up follow-up. The margins came in a little bit below a year ago and I am actually surprised given the significant revenue beat as the revenue beat came from your in-line products not the animal health products where it sounds to me like including the acquisitions actually put a little pressure on the margin.

If you can talk about that, what the pushes and pulls were and why considering the significant revenue the operating margins weren't better. And I see you are reiterating your operating margin guidance for the full year aw 18% to 22%, clearly that suggests a back end loaded contribution from operating margins, if you could talk to that as well. And to confirm are you still expecting a stronger back half year given the strong performance we saw in the first quarter? Thanks very much.

Wow, that was --

I'm sorry about that.

Okay, I will try and be (inaudible, background noise) about it. So let's start with Consumer Health Care margins. You saw that gross margins did in fact expand quarter over quarter. We saw some slight contraction sequentially so the growth quarter over quarter , Q1 last year to Q1 this year driven by base business expansions and acquisitions primarily. So you have the other -- the bucket of other initiatives I commented on. On a sequential basis we did see a slight decrease because of the fact frankly as happens timing on seasonality with animal health and animal health being a more of a brand-type margin structure you saw the impact in gross margins because of that. That was the explanation of the quarter over quarter.

Dropping then down to operating margins you are also spot on there was a 30-basis point decline year over year on Q1 operating margin and that was entirely the effect of the fact we chose to make a 20% increase all time record spend in R&D in the Consumer Health Care segment. Without that increase we actually would have seen operating margin expansion, but we had good projects on deck and didn't see the need to hold off on those for the cosmetic of that particular quarter's operating margin. We do expect operating margin -- our forecast has operating margin expanding over the course of the year. And as my earlier comment for the entire Company when we talked about the full year there is a back half weight that comes with again the pile up of new products compounding over the course of the year. That is still part of our planning as we look at the full year.

So looking at the strong margin performance we feel very good about where we came out for this quarter across our businesses and we maintain the guidance overall on our margins for each of the business segments. So I know your model is sophisticated enough to be able to work that through and know that our operating margin this quarter was specifically impacted by the timing in R&D.

And your next question comes from Greg Gilbert With Bank of America Merrill Lynch.

Thank you. With the Sox winning and Perrigo going Irish could Art be any happier?

Probably not.

Hard to contain him, Greg.

Have I a two-parter for Joe and Judy. For Joe, hopefully you can comment on this as someone looking at Tysabri as someone that doesn't own it yet, but can you comment on your confidence in the growth of the royalty stream as it relates to your previous guidance comments in light of growth head winds on the product? And for Judy, does the new improved tax structure you will hopefully secure change your long-term view on what appropriate leverage should be for Perrigo? Your leverage targets near term are very clear. I am asking about a couple years out and what the appropriate leverage might be in light of the new structure? Thanks.

Well I will start first, Greg, and relative to Tysabri, I think I can really reiterate what we said in the past. We are very excited about the Tysabri asset. We think it occupies a very important space in MS and as a result of that being in the highly efficacious space we think that is an important place to be in order to help meet some of the unmet medical needs for MS patients. Beyond that, of course, the other part of what is important about that Tysabri asset is that it is an escalating royalty.

The royalty will move from that 12% to the 18% and for any sales above $2 billion go to 25%. So I think it is the combination of being an important product for an important category MS where there continues to be a very significant unmet medical need and that makes us excited to be with this product. Other comments I would say is we do feel very good that we are working with we think the experts in MS and working with BioGen as our partner and we think it is the important part of why we are excited about Tysabri. Judy, I will turn to you.

Greg on your question regarding the combination or the way to view the world in the future in leverage ratios in combination and in concert with the tax rate, I guess I look at it very holistically thinking conceptually going forward in that of course with a relatively lower tax rate, one is in a position to generate more optimal EBITDA and cash flows and therefore you are in a position to think about what we want to do in investing in the future differently. Very importantly the overarching theme here without getting into specific metrics is we are committed to an investment grade profile.

If we continue to grow at the pace that we have outlined in our S4 with our forward looking financial information and forecasts which exclude future acquisitions, and we continue to delever to the rates that we have committed to in this process, we can prove to the important debt markets that we are committed to this newly minted investment grade profile and that we perhaps deserve to have a slightly higher leverage profile and maintain the investment grade status. But I would be getting way out over my skis if I said start naming specific numbers today. It is critically important we prove our ability to delever quickly and ramp back up and we think if we can perform in line with our forecast we will certainly generate very attractive cash flows that will be satisfactory for the equity markets and our reinvestment strategy and debt markets for being a very high grade performing debt.

Thank you.

And your next question comes from David Buck with Buckingham Research.

Yes, thanks. For Joe, a couple of quick questions on the OTC switches. And then one for Judy on the IRS interaction that you may have had ahead of the deal. For allergic rhinitis versus hay fever is it clear whether or not there is a different indication between the OTC indication and the prescription indication or is it a matter of more layman's language in terms of labeling for Nasacort?

And secondly what is the status for Oxytrol for women? Is that clear cut that that gets the three year exclusivity? And then for Judy can you remind us what restrictions you would expect to have once you become a PLC in terms of divestitures and moving more flexibly after you become an Irish domicile PLC with use of cash, et cetera. Thanks.

So David I think really what I can really refer to you is with the specific letter for the supplement approval for Nasacort OTC, the letter talks about the new drug application provides for over the counter use of Nasacort Allergy 24-hour for the temporary relief of symptoms of hay fever and other respiratory allergies, nasal congestion, runny nose, sneezing, and itchy nose in adults and children ages two years and older. That gives you a pretty broad platform for Sanofi in Chatham to bring it into the market place relative to exactly where they will promote and focus on it. I have to leave that up to them to make the judgment as to what they are specifically going to go after, but I think the statement for their approval is a very broad statement in the approval letter.

Let me clarify. The question I guess is, is that broader indication, is that explicitly different to the FDA in terms of what would determine exclusivity, or is it more using in layman's language?

I think it is comparable to what the current prescription product is approved for, to be clear. Very comparable to the prescription product if that is what are you asking me.

And that would imply that it may not have the exclusivity.

I don't have enough -- I think -- David, I understand your summation of the comment, but I think it is very early for me to make that comment, but I do think that from an historical precedent, your summary is correct.

And then a follow-up so Oxytrol and any limitations on the tax rate?

So on the Oxytrol question, Oxytrol got a different question. Oxytrol has some patents and intellectual property around the product that is different. I think that's probably going to be the more significant question on Oxytrol is some of the transdermal patents specific to Oxytrol. I think they can be worked around and my expectation is that they will have a three-year exclusivity, but beyond that it is really going to be a question of us working very diligently to go after that product and design around that three-year -- or work through the three-year exclusivity, but more importantly design around the intellectual property that is known to us for Oxytrol. (inaudible) the IRS question as well.

I am not quite sure what the IRS question was. If you could clarify.

Sure. So the expectation is that you will have a reduced tax rate in the neighborhood of I believe about 19%. Can you make significant divestitures freely once you close the transaction and once you become a PLC? In other words if you want to change the ownership of certain assets what restrictions do you have is the bottom line question.

So once we close and complete the transaction we will be an Irish company, and at that point we are allowed to manage the business in a way that we see appropriate. We could look at any assets that are in our management and like always, like we do today consider the best uses of those assets. There are no legal restrictions placed on us as to how to manage the business, look at the portfolio and review ROIC as we do today. I'm not sure if that's where you are thinking of going, but there are no rules that would prohibit our ability to manage the business.

Sure so the question mark on Tysabri if you decide it is not part of the future there should be no restriction in terms of divestiture if you thought that was the right determination.

There are no legal handcuffs placed on us.

Understood, thanks.

Your next question comes from Louise Chen with Guggenheim

Thank you for taking my question. My first question is on Sergeants and Velcera, using that platform to sell generic animal health drugs, wondering your updated thoughts are on that opportunity? And then also on your lower tax platform which you close [along] at 12.5% tax rate that you can ledge with new products, how far out is that in terms of you getting new products approved for that platform or putting new products through that and you being able to leverage that tax rate, and then last question was on -- and this may be getting further ahead, but on the adjacent store brand acquisitions or developing business development on that front, what are you thinking there in timing after close of Elan, when would you resume looking at those opportunities? Thanks.

I will take your question and third part and Judy you can talk about the Irish portion and the products and timing for that. In the first question about Sergeants and Velcera, we are very excited. We continue to be very excited about the opportunity with the generic flea and tick products, launching a store brand version. As a reminder we launched a store brand version to limited number of customers, mostly regional chains this year. We are still, working toward the more -- the larger national customers launch for we believe for next flea and tick season so next April-May type of time frame. That's an exciting part.

We have not gone -- we have a limited number of products offerings for what I would call more the generic animal health products beyond the flea and tick. We continue to look at this as a platform to look at further enhancement of animal health as an important part of Perrigo for the future. Probably don't want to make any more specific comments about the individual products.

On the last question, or specifically where we are going in M&A, the point for us on M&A is that we continue to be very interested in going after adjacent categories. Those adjacent categories as we have said previously will continue to be the areas of opthalmic both for the OTC and generic prescription opportunities, adult nutrition, diabetes, and pet care as all important areas for us that we are interested in, and also as we said previously we believe that we have a great model for -- here in the United States where 80% of our sales are. We think there is opportunity to expand this model globally and that is something we would clearly look to do for the future, but as I have said and Judy said previously in the near term we have got to look for any major opportunity.

We have to first delever our P&L in the debt levels before we go there. Judy, do you want to make additional comments on the products ?

Sure, the question was about how fast could we begin to launch products within the domicile of Ireland. That is a question that is similar to any question you would ask about our overall pipeline development process because we will start products from concept inception all the way through development and eventual approval. It is a several year process. We can start that right away, but it is not something that can happen in three months because we are not moving IP, we are developing IP. We will be doing and owning the development process from our new location and hence it will take several years to bring products through development through approval to eventual launch.

Thanks.

Your next question comes from Chris Scott from JPMorgan.

Great, congrats on the quarter and thanks for the questions. Just two of them. First, infant nutritional, can you tell us about how you're thinking about price on this franchise moving forward? I believe this is still an area that is priced at more of a discount to the national brands than your typical store brand of offerings. With the successful share trends is price a lever can we start thinking about over time here?

Second one is following up on the tax issue. Assuming a product mix that is similar to what you will have post the Elan transaction, roughly speaking how low do you think we can think about the tax rate getting if we look out say five or seven years? Is something in the low teens a possibility as you roll out these new products? I know it takes time, but as we think about longer term how low can this rate go? Thanks very much.

First of all, Chris, thanks for your comments on the quarter. I will take the first point on infant nutrition and Judy you take the tax questions. On the infant nutrition side of the business relative to price you know that we are at a significant discount to the national brand. We are at approximately a 50% discount to the national brands. There is some opportunity on pricing there.

The other point I would make though that is as important is that when we switch to the plastic container one of the comments we made is that the plastic container is more expensive and from a cost of goods point of view, than the previous metal composite can, so as a result we did expect some cost increase as well as the point that it was less -- the plastic container was a new process for us and there would be some learning curve. I am delighted to say we have gotten through the learning curve and the team is doing a good job there with the plastic container at this point. We do think though there is some pricing that we need to go after as a result of the problems that the plastic container is a more expensive cost to goods sold. That is something we have done some work with in the market place and we hope to have more to say about that in the future in terms of how that is progressing, but it really is. You are looking at the incremental cost of the plastic container to be a national brand equivalent that we are going after. Judy do you want to take the second part of the question on the tax?

I love to talk about the taxes, You know that. On the question of how low can it go? First of all, you know that I am fairly prudent when it comes to such things. Committing to a long term tax rate at this stage with a million variables would be ill advised. What I can say is if you imagine a world where our mix of business doesn't change at all.

We all know if you look at the S4 and the type of projections we put forward you see growth there. But if the jurisdictional mix didn't change at all we go from a rate around 30% to the high teens with this transaction. If nothing else changed when the Tysabri rate changes from 1% to something more like 12.5% in 2020 you would see a lock step change for that stream of income on that date, but suffice it to say to the earlier question , Louise's question about bringing new products to market we plan to put new products in Ireland and begin the development process there so there will be in a few years a stream that is coming from Ireland at a rate that is in the low teens. You should assume that at some point in the future after we have completed our delevering process we are doing more M&A and we have committed to not only adjacentcies in the U.S., but also doing international expansion. And you will get the benefit of doing M&A from Ireland with again the lower rate.

You have to assume we will be continuing to launch products and selling them around the world from some of our foreign jurisdictions as well. So it is hard to commit to a specific number because there are a lot of variables , but we do have things at hand that would allow us to take advantage of having this new corporate structure, continuing to launch new products, continuing to do M&A and all from an advantage base.

Thank you.

Operator, we probably have time for one more question if there are any more questions.

Your last question comes from Jason Gerberry with Leerink Swann

Thanks for taking the question and congrats on the quarter. On the new product launch guidance, can you confirm -- my understanding is it is largely Rx driven and do you see any risk to regulatory delays? I know companies engineer [to base] are citing delays to regulatory approval as the agency overhauls its [end of] review process as it implements the user fee. And second question, does Perrigo have a broader interest in dry powder inhaler and the MDI space beyond Albuterol given that the pathways -- the regulatory pathways seem more clear cut, but capital barriers are still high. It seems like in Perrigo's sweet spot for development. Curious if you can comment there. Thanks

Let me talk -- the first part of your question was specifically in terms of our new products as we stated publicly. We think we will launch over 75 new products. That's more than one per week and over $190 million of product sales. We feel that that is going to really be across our entire portfolio. The Rx team will have a good year to be clear.

But we do expect also some nice products in the rest of our portfolio. Certainly as notable by Temozolomide and what we are doing with our Consumer Health care Business and also some of the things we are doing in our vitamin and mineral supplements. We see it as being a diversified portfolio of new products. in terms of where we have done. I think Judy said the numbers for the first quarter were very, very strong for us. On the question of this regulatory risk, I will say that we have experienced some delays in our approvals for some of our products. The Rx products, the four products we have approved this year is great, great start to the fiscal year. I have also said publicly that some of those products we wouldn't expect to see last year.

So I think we did experience some delays last year . As a result of that we really have tried to look at our probability waiting on our portfolio to try to anticipate some delays in the process that normally happen. I don't think that right now it is -- we have seen major changes in what's happening. We really expect to see some continued new product approvals during the year.

On the final portion of your question on the metered dose inhalers, to be clear, we're delighted to have a first-to-file on the pro [ear] product, we think it's a great opportunity for us. And we're very excited to go forward with that particular product. We like our spot. There is litigation, to be clear, on that product, but we like our position on that litigation. In terms of other metered dose inhalers, I'd say that concept that we've put forth in terms of having a program to look at whether it be other metered dose inhalers or other products in the category fit very well with our concept of extended topicals, and by that I meant dermatology, respiratory, nasal, opthalmic products that are very high interest to us in our product selection process. So yes, the answer is clear. That is true.

I will say the one area that you mentioned that I'm a little bit reserved on is the dry powder inhalers. I think the characteristics and the requirements for that area are significant and I think that's a little bit more of a challenge than the metered dose inhalers. Not to pick words but I do think metered dose inhalers and dry powders are a little bit different animals so to speak, in this world of trying to get products to the marketplace. But in balance we're very excited about our Rx portfolio, but it's really, it's all of our new products.

Great, thanks.

All right. Operator, I think that concludes our call for today. I'd like to say thank you to everyone once again for your interest in Perrigo, and look forward to talking to you after the close of the Elan transaction, which as I mentioned, we expect it to be at the end of the calendar year. Thank you very much, everyone, have a great day.

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