Perrigo Company PLC (PRGO) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time I would like to welcome everyone to Perrigo's FY14 second-quarter earnings results conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Art Shannon, Vice President of Investor Relations. Please go ahead, sir.

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

Before we proceed with call, I'd 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.

Following Management's review of the presentation will open the call for questions. I'd like to now turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art. Welcome, everyone, to Perrigo's second-quarter FY14 earnings conference call. Also joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer.

Now, let's go through the agenda for today's call. I will provide a few brief comments on the quarter including details on our continuing sales growth and strength in store brand market share. Next, Judy will go through the details of the results from this fiscal-second quarter and walk through our new guidance for consolidated Perrigo. Then, I will provide an update on each business unit plus an overview of our expectations for the rest of the fiscal year. Following this I will provide you an opportunity for Q&A.

First, on December 18 we closed the Elan transaction. I'd like to congratulate the entire team for executing on the closing a few weeks ahead of schedule. It was a tremendous amount of work and it was done seamlessly.

Additionally, many talented professionals from Elan organization have accepted offers to join Perrigo. We are excited to welcome them to the Perrigo team. We are very pleased that we were able to retain such great talent, to have them join us at Perrigo.

Now, let's discuss our recently concluded fiscal-second quarter. On slide 5, you can see that this was once again another great quarter for Perrigo, demonstrating the strength of our diversified platform.

Our quarterly performance is highlighted by three important achievements. Number one, all-time, record net sales of $979 million, up 11%. Number two, continued adjusted growth profit and operating margin expansion. Finally, number three, record adjusted quarterly diluted EPS.

Moving onto slide 6, you can see consolidated Perrigo grew the top line 11% driven by the out performance in the Rx and Nutritionals business. Despite a relatively slow start to the cough, cold, flu season, consolidated organic revenue growth was 7% with new products contributing $53 million. These strong sales results correlated with impressive results and operating income.

We also had record adjusted growth in operating margins for the business. These results allowed us to make strategic investments in our digital media, which accounted for some of the strategic increase in corporate SG&A expense. I look forward to sharing you more of these exciting initiatives at our upcoming Analyst Day on February 28.

Now let's move on to the business units. Consumer Healthcare was relatively flat this quarter as last year's second quarter was an all-time record high on the strength of an unusually early spike in the cough/cold, flu seasons. Sales for the quarter were $536 million with $17 million of new products.

Our Nutritional sales segment grew 15%. That's the third straight quarter of double-digit growth. Consumer acceptance of the new SmarTub containers continues to gain traction. Our Rx segment, once again, achieved record results growing sales, 52%, with an adjusted operating margin of 50%.

As you can see on slide 7, store brand continues to gain market share versus national brands across most categories. Looking at infant formula, the category was up 1.9% with national brands up 2.9%, but store brands grew 9%.

Let's talk about the analgesics and cough, cold, allergy, sinus categories. In analgesics, the category has grown 2.3%, while national brands have out grown store brands. The relatively strong national brand performance in the category was due to the expected return to the market of a brands competitor that's been absent from the market the last several years.

On slide 8 you can see the strength in store brand market share growth in infant formula category. Just over the past year store brands gained 60 basis points. You can see these market share results and gains in what I've just shared with you.

Now, let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. Welcome to our first earnings conference call as Perrigo Company plc. As you just heard, the team recorded its best financial quarter in history with record revenue, adjusted earnings and margins.

We delivered solid consolidated operating results while managing through a highly dynamic consumer environment. At the same time, much effort was invested to promptly close the acquisition of Elan before the end of the calendar year, a goal that we were pleased to execute against.

Now, let review the fiscal second-quarter results by business segment. Beginning on slide 9, the change in net sales in Consumer Healthcare was due primarily to an increase in sales volume of existing products of $19 million, primarily in the smoking cessation and gastrointestinal categories; along with new product sales of $17 million, primarily in cough/cold and smoking cessation categories; and $5 million of incremental sales attributable to the Velcera acquisition. These increases were offset by a decline of $46 million in sales of existing products, primarily in the contract manufacturing and analgesics categories.

I'm sure you'd all like to understand why we saw year over year declines in CHD, so let me walk you through the key drivers. First, sales within our contract manufacturing business were down over 40% year over year. The biggest contributor of this decrease was a certain contract customer to whom we supplied significant product in the past year as they resumed production at one of their own facilities, reducing the need for product source for Perrigo.

While we continue to supply a sizable amount of product to this customer, the volume of sales compared to last year is down significantly. Such is the nature of the contract manufacturing business. Were we to exclude this decline in contract sales, Consumer Healthcare net sales would have increased approximately 4% year over year.

Second, as we've stated the cough, cold, flu season in the second fiscal quarter started later in the United States versus last year. This, combined with lower incidence of cough, cold and flu, yielded a very difficult year over year sales comparison. In fact, as of today, in all of the data we've reviewed and according to IMS FAN data, the incidence of cough, cold and flu is down double digits year over year versus last year's season.

Third, the expected return of product to market by specific national brand competitor impacted year over year sales particularly in the analgesics category.

After all of that, I'm happy to note that within the nicotine replacement category, sales of our store brand nicotine lozenges, notably the recent launched mini lozenges, are performing extremely well with sales up by more than 40% year over year. Adjusted Consumer Healthcare gross margin expanded 50 basis points, attributable to product mix as well as the Velcera acquisition. The adjusted operating margin was impacted by our decision to accelerate investments in new product R&D.

On slide 10 you can see that net sales within the Nutritional segment increased 15% year over year, as existing product sales rose $15 million and new product sales were $4 million. As Joe noted, consumer acceptance of the plastic tub within infant formula category continued to increase, as store brand market penetration is now about 12%.

Our customers have attributed this increased a few factors. First, the side-by-side presentation of our product next to the national brands on the shelf. Second, consumer appreciation of the superior design and functionality of the powder scope compared to the national brand. Third, increased shelf space versus this time last year. Fourth, more effective digital promotions targeting young families.

The adjusted gross margin in Nutritional segment increased 270 basis points, driven by greater absorption levels in our manufacturing facilities and improved efficiencies over last year. The adjusted operating margin expanded due to DSG&A leverage on increased volumes.

As you can see on slide 11, the Rx team continues to outperform expectations on all metrics. Net sales within our Rx segment increased 52% to $247 million due to incremental net sales of $26 million from the Rosemont and Fera acquisitions, new product sales of $24 million, and product mix. Adjusted growth and operating margin increased due to acquisitions, favorable product mix versus last year, and higher margins on new product sales.

Next on slide 12, net sales in the API segment declined to $30 million due to a decrease in existing product sales of $17 million as a result of increased competition, partially offset by $7 million in new product sales. Gross and operating margins were impacted by the decrease in sales of existing products I just referred to, partially offset by lower selling, general and administrative expenses.

Turning to slide 13, I'd like to walk you through how our new Specialty Sciences segment will be reported. Specialty Sciences includes the revenue we receive from Biogen Idec's sales of Tysabri, currently at 12% of their total global product sales, and which you may remember, will increase to 18% on May 1, 2014.

The revenues we record drop fully to the adjusted gross profit. As previously disclosed, we expect to incur operating costs in the segment consisting of R&D for the D5 Phase 2 clinical program and SG&A for Irish space costs, including facilities, legal and finance, among others in the future.

Now, let's discuss our consolidated, adjusted, effective tax rate for this quarter, which was approximately 14%. As we have discussed in previous calls, we are required to analyze our effective tax rate in accordance with GAAP accounting rules. This GAAP accounting requirement causes benefits of the positive jurisdictional mix of earnings from Elan and the new corporate structure to be recognized in the quarter it is implemented.

Since we closed Elan during the second quarter, we realized the benefit of the Elan jurisdictional mix and the new corporate structure on an annualized basis in this period. This impact significantly reduced our effective tax rate for the quarter.

Some quick highlights on our balance sheet. Excluding cash and current investments, working capital was $718 million at the end of the quarter compared to $707 million at June 29, 2013. As of December 28, 2013, total current and long-term debt on the face of the balance sheet was $3.3 billion, up $1.3 billion sequentially from last quarter due to the recently completed acquisition of Elan.

Net debt, that is gross debt less cash, cash equivalents and current securities, was $2.7 billion, which equals a net debt-to-total capital at end of our second quarter of 24.1%. Year-to-date net cash flow from operations was $220 million even with the inclusion of an estimated $103 million of transaction and acquisition cost cash flows related to Elan.

I'd like to discuss our updated earnings outlook for FY14. Looking toward segments on slide 14, we continue to anticipate healthy demand for our products in our Consumer Healthcare segment. However, we are making adjustments to revenue and adjusted margins to reflect some recent developments.

First, our current February 6 expectation of our ability to have our Guaifenesin 600 milligrams ER available for the rest of this cough/cold season has been further risk adjusted. Joe will discuss this in more detail momentarily.

Second, as noted earlier, the cough/cold season began later and, despite some initial indications of an uptick in early January, has not yet surpassed the incident rates of either last year or the rolling five-year averages of what we would normally see at this point in the season. As such, our outlook for the remainder of the cough, cold, flu season is down versus our original plan.

Third, our contract manufacturing business is now anticipated to be lower than our projections from the beginning of the fiscal year, for the reasons I noted earlier. Lastly, we are lowering our probability weights on the launches of the broader Guaifenesin family of products based on current information from our partner.

Given the momentum in Nutritionals segment, with the continued growth of store brand infant formula and increasing manufacturing efficiencies, we are raising guidance for this segment's net sales and adjusted gross margins. Revenue in the Rx segment is now projected to grow 26% to 30% year over year, with a more favorable margin structure as new product launches, a deep pipeline, and favorable market dynamics enable continue out performance for this segment. Within the API segment we are adjusting our revenue growth to reflect the increasingly competitive market dynamics of the products in our portfolio.

Looking at slide 15, you will see the changes to our detailed consolidated guidance include the acquisition of Elan and the overall dynamics within our portfolio businesses. We are now estimating consolidated year over year revenue growth to be in a range of 15% to 18% with adjusted growth in operating margin expansion. As previously discussed, due to the jurisdictional mix changes related to Elan and our new corporate structure, we expect the effective tax rate to be approximately 22% for this fiscal year.

Also as a reminder, we continue to expect our total shares outstanding to be approximately 134 million shares on a go-forward basis, which equates to a full-year FY14 weighted-average shares outstanding of approximately 116 million shares. All of this leads to a $0.10 increase in our adjusted diluted EPS guidance range for FY14. The increase in operating cash flow guidance includes an estimated $180 million to $190 million of operating cash outflows related to Elan.

The diversification of the Perrigo business model was evident this quarter as the team demonstrated its flexibility to deliver double-digit top-line growth. With the closing of the Elan acquisition behind us, we remain focused on solid execution as a basis for continued growth both organically and as we further cultivate our business development pipeline.

Let me turn it back to Joe.

Thank you, Judy. Now, I'd like to provide some thoughts on our Business going forward. The same three mega trends continue to drive our Business.

First, the movement of consumers purchasing and retailers promoting store brand products versus the national brands. Second, the continued movement of prescription products switching to over-the-counter status. Third, the continued importance of new product launches.

In fact, store brands represent 35% of the OTC market in dollars and obviously more in volume. In addition, Rx to OTC switches are expected to continue with more than $10 billion in branded Rx sales likely to switch in the next five years. We've all seen new categories making the switch such as overactive bladder and the nasal inhalers like Nasacort OTC.

The pipeline for 2014 looks robust, as you can see on slide number 16. Highlighted by the launch of our store brand version of children's Delsym and the expected launch of Claritin 24HR Liqui-Gel and Advil Congestion Relief, with these two products nearly $60 million in combined branded sales.

Year to date, we launched an impressive $107 million in new products. As we stated in August, we anticipate launching over 75 new products across all segments, contributing more than $190 million in revenue in this current fiscal year.

The launch of store brand Mucinex 600 mg ER contributed very nicely to the quarter; however, as we have previously stated, we continue to work with one of our vendors to obtain raw materials for the product that meet our specific, rigorous, high-quality internal specifications. The team is working diligently to resolve this supply disruption as quickly as possible, but we acknowledge that this will have an impact on our ability to supply customers.

We have adjusted our guidance for Consumer Healthcare to reflect this. Also, based on recent comments from our partner in terms of their current expectations for the remaining family of Mucinex-like products, we have decreased the FY14 probability of launch. In our Animal Health business, we have began shipping our store brand version of FRONTLINE to limited customers and expect additional customers to order in time for the flea and tick season this spring.

Turning to slide 17, you can see that what we expect in our Nutritionals business has been driven by numerous growth drivers in the coming year, most specifically the upgraded national brand style packaging, the SmarTub.

Moving onto the growth opportunities in our Rx segment on slide 18, you can see that we continue to be very well positioned. Over the past few months we have launched five new products with combined brand sales of more than $450 million.

In January, we received final approval for the generic equivalent to Vanos Cream 0.1%. We were awarded 180 days of generic drug exclusivity and began shipping the product in the middle of January. We have a robust pipeline of 28 ANDAs pending FDA approval, representing approximate $4.2 billion in branded sales, which includes seven confirmed first-to-file ANDAs including the generic versions of Androgel 1.62%.

Additionally, on slide 19, we have a healthy leadership position across multiple technologies including the only FDA approved generic topical foams. Additionally, we have a full year of contributions from our 2013 acquisitions of Rosemont Oral Liquids and Fera's Ophthalmic Products. In summary, on slide 20, Perrigo is poised for continued strong growth with great start to the new year.

Finally, couple of the questions that have come up during recent meetings in San Francisco, I wanted to comment on relative to Tysabri. One of the questions is, how and when we might consider monetizing the asset?

First, let me say that we love this asset. It is growing royalty stream on a drug with best-in-class efficacy that generates cash. That said, there has been a lot of interest in this asset and we like the optionality that this asset brings to us. Ultimately, we will do what is best for our shareholders and for Perrigo.

On January 29, I also want to let you know that we priced an underwritten, public offering of shares of Prothena, which was one of the lonzi investments. This has generated approximately $79 million for Perrigo. We are monetizing this asset as part of our strategy to focus on the core strength of Perrigo.

The next most popular question has becoming forward to us was, when we'll be doing our next deal and how big will it be? First, we stated our desire to de-lever the balance sheet to approximately 2 times debt-to-adjusted EBITDA in the next 18 months.

We believe we can do that and still do the adjacent category, both on our geographic transactions that we've done in the past in the near term. Our business development pipeline is robust, and the team considers, on those type of deals, as opportunities will arise in the sub $200 million range.

Finally, I'd like to thank the entire Perrigo team for the impressive first-half results. It takes a great team, doing great things, to achieve these results. Perrigo is very well positioned for further growth as we head into the second half of our FY14 with a more enhanced platform as we continue to execute on our mission of making quality healthcare more affordable for consumers.

Operator, let's now open up the call for any questions.

(Operator Instructions)

Gregg Gilbert, Bank of America.

Joe, you proactively answered part of my first question. I was going to ask how would you, maybe I will say, further characterize the level of interest in Tysabri you've seen from outside parties? When might you make some decisions based on that interest? Then, I will have a follow up.

First of all, Gregg, I think as I stated on the call, we love the asset we think it's a great asset for us. It is got a number of important characteristics in terms of, obviously, being very unique in the MS category, being a highly effective product. We've got a great partner with Biogen. It's got an escalating royalty. The tax rate on is approximate 1%.

We think it has a long life. Having said all that, there has been interest in this asset from some other individual companies out there, in terms of this royalty, this very significant royalty. I think what I'd probably say right now is that we are evaluating those discussions. And will continue to have some discussions to really understand the relative pros and cons of this. As I've stated publicly, I think there's a couple different ways one can look at a royalty and monetization of a royalty.

You can do a vertical slice. You can do a horizontal slice. You can do a time-based slice. I think we're looking at all the different options and considering those, but in the long term we certainly like the asset. I probably won't say much more about any specific timing on that question.

Then on the deals, the comment you made about deals and being focused on bolt-ons in the $200 million or less range. Are you saying that those are the only types of deals you're likely to do in the next 18 months? Or just that you can do those deals and still honor the deleveraging target without having to make some bigger decision? Focused on what you would do and would not do?

Yes, it is more of the latter of what you said, Gregg. I think we feel that we can still do transactions very similar to what we've done in the past. Those are really the adjacent categories where we bolt-on a transaction there, or we do some type of smaller geographic expansion opportunity where it is a sub-$200 million level.

Those are the things that we can, because we are generating significant cash. Having said that, it is a bigger transaction, the plus-$1 billion type transactions, where we have stated that our first priority will be to delever our debt leverage. So, look for smaller ones. There are some out there, but not the larger transactions at this time.

If I could sneak one last tax one in for Judy? I have to, in terms of the quarterly fluctuation in the tax rate, Judy, going forward? Other than that annual affect issue you described, how much do expect your tax rate to bounce around by quarter? Then, at a higher level, what have you learned since closing that has made you feel either more optimistic or less so about tax savings longer term for Perrigo? Thanks.

That's a very multi-part, multi-part question, thank you. The annualization, I think I commented in the prepared remarks that you get the impact of having to catch up. GAAP requires us to book analyzed tax rates, so once we were in a position to close in the quarter that forced us to have to make this, what appears to be a funny adjustment, to the Q2 tax rate.

But, that gets our year-to-date tax rate in line then with what we expect for the full year, i.e. that 21% to 22%-ish percent effective tax rate on an adjusted basis for the full fiscal year. How much it will bounce around in the context of the remainder of the year on a quarter-to-quarter basis? We've given you a pretty tight range. The only thing would be if there was some very unusual swing jurisdictionally within the core business from Q3 to Q4, for example. I don't expect that much volatility when we are starting to get such an advantageous benefit in the overall rate with our new structure.

That being said, post close is there something new or revelatory about the ongoing, go-forward view of what the effective tax rate will and can look like? Of course, in the future years we will have the effect of a full 12 months of this structure and the contribution from Tysabri on a go-forward basis. That will continue to keep us in that high-teens zone that we talked about previously, as we started to project what we thought the tax rate would look like in the future. There has not been anything specific that would make us deviate from that other than obviously looking at the ongoing jurisdictional mix of our underlying business -- timing on new products, timing of contribution from Rx, et cetera. So, no changes that I'd really comment on at this stage to deviate from the types of tax rate we talked about in the past.

Can we just limit to one question per color, thanks, please.

Randall Stanicky, RBC Capital Markets.

Just on Tysabri, Joe, any change to the way you're thinking about the accretion for FY15 beyond? Then Joe, specifically as you are thinking about slicing, or potentially slicing Tysabri, how are you thinking about managing the P&L sensitivity from that perspective? Thanks.

Sure, let me start with Tysabri. I don't want to give us a suggestion that I know there's a specific way to slice Tysabri. I'm not making any representations that we are going to do that. As I said, we really love this asset.

Having said that part of the commentary, I really think I refer you back to what we put forth in the S-4 projections out there for Tysabri. That's really how we are looking at this asset. As Judy stated, with relative to tax, the operational and tax synergies that we look at for the Elan transaction still exist as we've previously stated, so see no real changes there in terms of how we are looking at.

Obviously though, one of the comments that I made was relative to some of the other assets that we acquired as a result of the Elan transaction, most notably Prothena. We have now extracted ourselves from the Prothena asset to really focus on the things that we believe at Perrigo are core to our strategy, which is as we've stated before quality, affordable healthcare. There are some things that their JV or other activities that we will extract ourselves from, but importantly I'd say that the numbers that we put forth previously are continued to what we are striving for from an operational and tax synergy point of view.

David Risinger, Morgan Stanley.

I just wanted to dive into the Elan contribution and just better understand that. We calculated that the Elan contribution, for about two weeks in December, was $0.03 per share after tax. I just wanted to confirm that that's correct?

Then also, just wanted to understand why for the next six months there would just be a $0.07 per share after-tax benefit? If you could just help us better understand that, and walk us through that Judy, that would be great. Thank you.

Thank you all for patiently letting me walk through this, because this is one of those as messy as it gets from an ins and outs perspective on the P&L. Rolling it forward this quarter, hopefully we roll it forward and then on an ongoing we'll all be level set with the same assumptions. You are operationally, directionally accurate when you do the math on what the Specialty Sciences segment contributed to earnings before tax. But, step back for a minute and think about the other ins and outs that come through the P&L this quarter and as we forecast the full-year guidance to think about what's going on.

First of all, obviously, you have share issuance. If you start to think about what that impact is, it will be approximately 116 million shares, weighted average shares outstanding, for the full year. Or an incremental 20.658 million shares that come through this quarter, so that has obviously, right off the bat, a negative impact north of $1 of EPS just flowing through on the sheer calculation of incremental shares outstanding.

You do get the incremental income that comes from, to your point, the 10 days in Q2 of the Elan operating contribution, a Specialty Sciences contribution that will go on through the rest of the year. That does pop through. You can look at the estimated modeling that came through in the S-4. We are not specifically quoting that number, but that is a healthy contribution for the full, remaining six months of the year.

You have an incremental negative interest expense. Now, that technically is only a few cents negative, because we were able to get new financing on an ongoing basis. The outstanding debt number is larger, but the type of financing that we were able to raise, it raises total interest expense for the year about $8 million. You get a negative impact of several cents on the interest expense line. Lastly, you get the positive contribution of the ongoing new tax structure, so as you're looking at revising and updating your models to look at the full year, obviously we have been guiding to a tax rate give or take 31% and now we are telling you 21%, 22% that has a good guide.

Net-net, fully loaded here, you come back around to the contribution of the acquisition of Elan. We had told you expect approximately $0.10 accretion for FY14. Our number is slightly north of that, offset by the fact that we did comment that the basket of our portfolio for the, I will call it legacy, the outstanding business pre-close of Elan, is slightly negative. There's some good guys.

We talked about Rx and Nutritionals being guided up, Consumer Healthcare and API being guided slightly down. The net-net of all of that ends up coming back to the $0.10 accretion number for our overall EPS guidance range. Hence, when I talk $0.10, you are trying to go from $0.03, add $0.07 in the back half of year, and the curiosity of why it's only that $0.07, but it is all the ups and the downs related to shares, interest, tax.

Got it, thanks very much.

Is that helpful?

Yes, thank you.

Jamie Ruben, Goldman Sachs.

Judy, you beat this quarter by $0.27, but only raised the full year by $0.10. I'm assuming the $0.16 shortfall in the back half of year is explained by Consumer and API even though you also raised Nutritionals and Rx? Just trying to understand where the real shortfalls are, because at the same time you are raising guidance for two very important divisions.

Also, Joe, if you could give us an update on your thoughts on Nasacort AQ? It would appear that you are not including that in your numbers, and I would suspect that would have a material impact later this spring for your Consumer Healthcare business? Thanks.

Let me start with just some comments, and I'll talk -- when I get to Nasacort then I'll turn it back to Judy on that, so just for continuity here. Let me start, first of all, on the general question, as Judy stated it, a lot of moving pieces as we go forward. As you stated, we did beat the quarter relative to the numbers on the adjusted earnings per share.

Having said that, we did feel it would be appropriate, with all the moving pieces in and out, to just try to continue to digest all of the activities and just try to come forth with a number that we felt was something that we could accomplish and be confident in that number. Having said all that, is there some pieces that are going up? Yes. Are there some pieces that we've been more conservative about? Yes, that is also true.

It's really a reflection of trying to look and manage and understand how each of those pieces will impact the future for us as a Company. The only thing I wanted to say, which I think is just critically important is that, number one, we're still see very strong revenue growth up 11% across the total business this quarter. We've got record operating margins at 24.3%. Importantly, I think what really is the major part of this answer is that we have a diversified platform of business units that's allowing us to generate consistent long-term growth despite, as Judy said before, that weak cough, cold, flu season, the return of a branded competitor. I think it is those pieces that allow us to still have the confidence to raise the numbers.

Going back to the Nasacort, what I would say about Nasacort at this time. First of all, we are excited by the approval of Nasacort OTC and what that means for the entire category of nasal inhalers and other products that could potentially switch at some future time, period, for the nasal inhalers. Number two, I would say it is great to see that Nasacort OTC product get out into the market this week. It appears Sanofi has the spending behind this product. Having said that, we are working with our partner Teva and there still is a number of things we need to do to work through the issues with Teva to get our product into the marketplace. I'm probably going to stop at that point, because we still have a number of things that have to happen between ourselves and Teva.

Is it in your guidance Joe? Is Nasacort in your guidance this year? A risk adjusted?

We have reduced the probability weighting significantly on this product at this time. I probably don't want to say much more than that at this time.

Thanks.

Next question is from the line of --

Wait, Operator, excuse me. I think there's some additional parts to that.

I was just going to comment, Jamie, to your point on back half of the year. As we looked at the landscape of the second half of the year, I walked through the big factors that led us to take the CHC number down, which is never something we take lightly. We commented on those moving parts. To Joe's point, dramatically changing some of those probability weights. He just commented on one product in particular, but I commented on the Guaifenesin entire family of products, in-house and partners.

We talked about what appears to be a seat cough, cold, flu season that where the retailers are doing a good job of managing their inventories very efficiently for their own balance sheets, and very low incidence gave us pause to think about, to your point, where's the $0.27, and being a conservative as we think about that second half of the year with all of the moving parts and a lot of variables. Hence the number where we are right now, knowing that there are several things that can still happen but wanted to get to a place where rolling you forward to the second half of year and giving you visibility on the why's we changed those numbers.

Thank you.

Operator, next question.

Jason Gerberry, Leerink Partners.

A quick question on Mucinex family and the regulatory issues there. Could you comment at all whether those are major or minor deficiencies? If you can't answer that question, my backup is on infant Nutritionals. Looks like you are grinding up your market share in an upward direction. How should we'd be thinking about the container conversion opportunity? Is this going to be driven more by category growth, or do you expect more meaningful share capture going forward? Thanks.

I will try to hit the highlights on the Mucinex question. Then, I will get to the answer on the rest of it. As I stated on the call, we have a partner for the Mucinex family of products. We've had conversations with that partner. Based on the comments from our partner, we felt that the right thing to do was to reduce the probability of our launch in FY14.

We always -- every new product we have, we look at it. We put probability weighting on that. Depending on our progress for how things move, because things go better than expected sometimes and sometimes they go worst than unexpected, we just adjust probability weighting. In this particular category, as I stated on the call, we felt the right thing to do was to reduce the probability weighting based on what we've heard from our partner on this particular products. It's actually a family of products.

On the second part of your question, on the infant formula, the gains in the infant formula, the market share that we talked about, the 60 basis points improvement, really are a reflection, we believe, of the SmarTub plastic container that we've launched into the marketplace. We believe that any time that Perrigo has launched a product that made that product look more like the national brand, we do well. This particular product, the infant formula plastic container, looks very similar to the national brand.

When we make our product look similar to national brand, it invites comparison. When we invite comparison, consumers are more likely to select the store brand, private-label product. That's what we are seeing the gains in the formula -- infant formula market share gains. We do expect to see infant formula continue to gain market share. That was some of the reasons that we felt comfortable in raising our guidance from the previously stated 8% to 12% to the current guidance for this call to 10% to 14% revenue growth based on the strength of what we see in the private-label business.

Only other comment I would make there is that we also see, as illustrated in our handout materials, some other categories that are going to help us to grow, or other products in the category that are going to help us to grow within the Nutritional business.

Louise Chen, Guggenheim Securities.

I just had a question on two growth opportunities that you have, which is one, being the Rx to OTC switch. Any updated thoughts LIPITOR, Nexium, and additional OAB products that might switch over-the-counter? Secondly, on Animal Health, where are you with the Rx products and making generic versions of those? Thanks.

I think going back to the first part of the question, the Rx to OTC, as I stated on the call, we are very excited about the switch of the different categories or new categories starting with the Oxytrol, as an example. Oxytrol went over-the-counter, which is we think it is great news. Oxytrol by itself is not a large product from a prescription point of view, but importantly it has, being the first in a category of overactive bladder, it may open up opportunities for additional overactive bladder products to move from prescription to OTC. Obviously, we are going to continue to monitor those very closely.

As I mentioned, just previously, on the nasal inhalers. The Nasacort move is an exciting move, that's now actually in the marketplace this week. I think, though, it opens up other opportunities for nasal inhalers beyond just the Nasacort product. I think you know that our portfolio in the Rx side has already always been looking at those kind of opportunities with the believe that someday they may switch from prescription-only status to OTC. We think we are well positioned in the category for other products that may switch into the category of nasal inhalers.

On the question of Nexium, we think Nexium is a spring 2014 possible event. It may get pushed off slightly, but we think somewhere in that spring 2014 timeframe is when we would see the national brand switch. As I said, it could be six months later, but it's somewhere in the 2014 timeframe based on at least our current information. As to other products like LIPITOR, I think you may have seen in the news that Pfizer made some comments about their pursuit of a oral statin over-the-counter opportunity.

We are just continuing to monitor that. I think it is still -- it's not a 100% probability. I think it's, as I've said publicly, I think it's more like a 60/40 probability, but I probably don't want to say much more on it. Obviously, we wish Pfizer well on their pursuit of that particular product. It's really important for us, really, always just to be in the position of being a fast follower for any opportunity that does go over-the-counter.

On the Animal Health in the generic side, I'm probably going to just really say in Animal Health our primary focus at this time is looking at animal health products that are over-the-counter or available without a prescription. That really is our focus with starting with the flea and tick products. We do believe that there is a great opportunity in the Animal Health for companion animals as we've stated previously. We're going to continue to follow that track and see what other adjacent category bolt-ons would help us with Animal Health.

Operator, our next question?

Marc Goodman, UBS.

In the consumer business, you went through in nice detail just why it was weak. I was curious on the brand coming back, J&J coming back with their analgesics. Obviously, this has something that we've been watching now for quite a few quarters. I was curious why all of a sudden is that an impact now? Or has it been an impact before and it just wasn't as much? I was curious how much of that is the reason versus the cough/cold versus the contract manufacturing?

If you could just maybe give us percentages of the weakness in consumer was mostly this but partly that? Then, no one's asked about API, but API seems to be a little bit weaker than before you even launched Temodar, which has obviously been a great product, especially last quarter. I was curious what is going on in the base business of API that seems to be pushing that to be a little weaker than where we were before Temodar? Thanks.

Let me start with the first part of the question in what we are seeing with Consumer Healthcare. The expectation of the return of one of the large branded companies was something we fully expected, and that's really not something that has been a surprise. We all felt that. I think I would say the return of that product category has gone well for the brand. But we still believe that, as we've stated publicly, we would still retain a portion of that business that we have picked up while the brand has been absent from the market.

That really has not changed our impact or how we've looked at our Consumer Healthcare business. The real changes, as Judy mentioned, was the weak cough, cold, flu season being down double digit. It is the Mucinex supply disruption that continues on the single entity Guaifenesin 600 mg product, and then as well us lowering our probability weighting on launching the remaining family members for the business. And of course, as Judy mentioned, on the contract business.

Going back to the question of the API business, here's what I would say on API. API, the temozolomide product launch is going well. The generic is picking up a significant share of that business, but we also want to be cautious about the day 181 when, potentially, other competitors could come into this business. We don't want to get to far over our skis, as they say, relative to what's happening there.

The other part of the business, beyond temozolomide, we have seen some weakness in that business. As we said a year ago we had a wonderful opportunity to monetize and receive some value for a product that was somewhat -- or getting 180 day exclusivity on the product was somewhat unexpected, so that was a positive last year. That's gone away. That's why you are seeing some lumpiness in the API business.

The only other comment I would say is I would remind everyone, the API business for us is strategic for a couple reasons. Number one, it is a chance to launch some products like a temozolomide that are unique into the marketplace. The other important reason is, as we've stated publicly, we intend to use this for vertical integration as well as to have a credible threat that if we cannot get lower, raw material prices from our suppliers, we can choose to make our own raw materials.

I think that's partially why you see us seeing some very significant operating margin improvements in our business and getting to a record operating margin of 24.3% for the quarter. I think it goes back to some of the values that the API business has added to us. Yes, lumpy business, no doubt about it, but still driving some significant synergistic value for us as a Company.

Operator, our next question?

Annabel Samimy, Stifel.

This is Josh Riegelhaupt in for Annabel. To the extent that flu and the cough/cold segment has surprised to the down side, how much room do you guys think you have on the upside come the other seasonal products for flea and tick? Then also, can you comment a bit on your operating margins? Since they seem to have expanded, particularly in Nutritionals, how much more room you have to continue that trend? Thanks.

One of the things I always say on how we look at both the cough, cold, flu season and the flea and tick, which candidly is a relative -- we've only got one year of flea and tick under our belt, so to speak. I would say we always try to look at what we think would be an average season. The tough part of the cough, cold, flu season this year is -- last year was a really tough comp to compare with, in that it was a very early and very significant season. That's really caused some of the decrease that Judy mentioned relative to our cough, cold, flu comp versus a year ago.

On the question of flea and tick, really, we always have to try to put in a average year on things like flea and tick, on things like allergy season, on things like cough, cold, flu, because you just can't ever really know exactly what's going to happen. We look at the humidity levels and things that help drive something like a flea and tick season, but from a forecast point of view, because we have things that can go up and could go down, we always have to just put it on a probability weighting for all our products. I would just say that we will continue to look at average seasons, for both allergy and flea and tick, where there's this unknown variables until we get to the seasons.

On the question of the operating margins on Nutritional side. We do like that business and what the team has done. They've worked around the clock to make sure that we continue to improve our operational efficiency as we went from a previously composite metal can to the new plastic container. It is been just great work by the team. I think we are just getting better and better on the efficiency that comes out of the business.

I probably don't want to say anything further on the operating margin. We kept the Nutritional operating margin at that 12% to 16%, which was consistent with where we've been all year. I probably would just leave it at that relative to where we expect to go. I do think that the opportunity is there with our infant formula business to continue to drive the top line based on gaining share. Then, continuing to look at what we'll do with the operating margin as if we get more efficient in the manufacturing process required for the plastic container.

Operator, next question.

Chris Schott, JPMorgan.

Coming back to business development. I know your priority is to delever in the near term, but when we look at those larger transactions, the $1 billion-plus type of deals, in broad strokes can you just talk about priorities and focus there? Are those different from some of the adjacent category opportunities you've highlighted in the past?

The second question, and sorry to come to back to this tax issue, but I keep getting questions here. If we've been previously modeling Perrigo with a 30% or so tax rate the first half of year and something more in the range of 17% the second half of the year, once Elan closed, with this accounting you're laying out today, should I be basically raising my second-half tax rates into that 21%, 22% range? Which might help explain some of this big quarterly beat and more modest guidance bump that we are getting with the annual numbers? Thanks very much.

Want me to grab the tax one first?

I'll do business development, then you do tax. On the business development side, there's really no significant changes to what we've said. We think we can do the smaller bolt-on transactions now. Those would be the adjacent categories, or the geographic opportunities. Then, looking at the larger transactions opportunities would be in terms of what targets we are after, it is really all the things we've said before.

It's what can we do in adult nutrition? What can we do in diabetes? What can we do in opthalmics? What can we do in pet care as a larger type of transactions from an adjacent category point of view are the ones that we are very interested in.

So no specific major change with that. I would obviously have to add to what I just said that there are larger transaction geographically as well that we think would help our business and help bring our concept of quality, affordable healthcare in a more global configuration. Same basic categories of looking at what we are trying to accomplish with adult nutritions, opthalmics, diabetes and pet care type products is what we are looking at as well as geographic expansion.

Judy, why don't you take the second part of question, was really this question on tax.

I love to talk about tax. Good. As we talked about the way to think about the tax rate for the full year and all of our lead up discussions since the announcement on July 29, it was always around and expected the first 12 months after the deal of being approximately 17%, high teens. Now we get into the reality of our fiscal year and the closing of the transaction, which we had started to estimate, assume December 31 for ease of modeling. One-half of the year is at one rate, second-half of the year is at the other rate, and we said, you start to blend those out. We'll let you know, but it should be in the low 20%s, blended for the year.

Here we are today. This is just again, the uniqueness of the requirements under US GAAP. Because we closed in the month of December, we have to book in the quarter a blend for the full year. So you get caught up now in Q2, so that very low 14% rate in Q2 reflects this catching up. As you are building your model for the period of January through June, you should now book an effective tax rate of approximately 21%, 22% because you've gotten caught up now.

You are caught up. So the blend for the full year and how you should book the second half of the year should be 21%, 22%, as we've guided in the document that you see on the WebEx. That's the rate that you should have in a second half of the year model. That's what we will have in our second half of the year model, because we did the catch-up in fiscal-second quarter.

Just also, as you are doing your model, I'm going to come back to shares for a second, same concept. Think of it this way. On the face of the income statement, you have shares today outstanding on December 28 -- 98.7 million weighted average shares first half. Second half, 134 million shares will be outstanding in the second half of the year. We make the comment on WebEx that the blend for the full year, weighted average shares for the 12 month, is 116 million shares. But again, smaller amount in the first half. 134 million in the second half. Make sure that as you're laying out your models that you reflect actual shares outstanding in those two quarters remaining will be north of 134 million.

Thank you, Judy. Operator, next question.

Linda Weiser, B. Riley.

Just a question on the Nutritionals segment and the increase in your guidance. You start to get up against your harder comps in the next quarter, in the fiscal-third quarter. You don't have the declines in the prior year. I'm wondering if we are going to see growth drop down much lower into the single digits? Then, how that goes along with your increase in the guidance there?

Then secondly, Prestige Brands this morning reported in the branded OTC space -- and they are having some similar issues as you with J&J's return and inventory reductions by retailers as well. They said there was a 4 percentage point gap for them, year to date, in their fiscal year through three quarters, between sell in and sell through. Can you comment on the magnitude for you of the difference between your shipments and the consumption, and what that says about the level of retail inventory now? Thanks.

Let me get to the first part of your question on the Nutritional guidance. I would say we certainly are aware of some of the changes in the numbers from last year and what that means from our comp, relative to where the Nutritionals business is, it being up 14.6% in the second quarter. What we are suggesting, our guidance for the full year being that 10% to 40% range, so by definition that would mean that we know, we expect that the percentage gains off of second half of last year are going to be less. We acknowledge that comment, Linda, relative to what's happening.

I always step back from any individual quarter and say what's happening with the mega trends? I continue to believe that more and more consumers are moving from national brand product to the store brand private label. That's evidenced by what we are seeing in terms of the gain in the basis points in terms of market share gains for our infant formula. I think that's what's the most exciting part of what we are seeing out in the marketplace is more and more consumers using the store brand private-label product versus national brand. Albeit, still only at 12%-plus, but still growth for the future there.

On the second part of the question, we did make mention in the call about what's happening with the specific inventory positions. We do look at that. We look at it a little differently than what you talked about the other company doing. What we look at is days sales on hand, so we understand what's happening out there.

There has been some slight reductions. This is just really a normal pattern as we at the end of customers' fiscal year changes. There is some reductions going on. We don't see anything as a continuing trend there, but it is something we keep a close eye on relative to where that's going to go in our expectation. There is no doubt that the supply chain efficiency that has occurred between Perrigo and some of our large retailers has gotten more efficient all the time. It is good for the retailer. It is good for Perrigo, albeit there is some in quarter results.

On balance we think that's a good thing to happen as we get more efficient with our large customers. I probably wouldn't say more of that, in terms of that specific gap. Our primary method of tracking this is what we would refer to as days sales on hand. We are looking at that. We're continuing to monitor it. There's really, I don't think, any real surprises there.

Operator, next question.

Elliot Wilbur, Needham & Company.

Just real quickly for Judy. I know it is not as exciting a topic as taxes, but maybe if you could just walk us through the current components of the debt side of the capital structure? What we should be thinking about on an annualized basis going forward in terms of interest expense?

Just for you, Joe, very strong sequential performance obviously in Rx generics. That's certainly an organic growth number. Can't really think of specific items that would have accounted for that. Maybe you could talk a little bit about that in more detail? Maybe it's just the difference between approval timing and actual launches. Just a little bit more color there would be helpful? Thanks.

Judy, why don't you take the debt portion first?

Sure. Your 10-Q is going to be coming out in the next hour or so, and as always there will be the extremely detailed footnote that will walk you through the components of that down to the basis point for interest rates if it's high level. We now have outstanding a $1 billion of term loans, and so those are at very attractive interest rates tied to LIBOR. We then have senior notes. As you know, the remainder of the capital structure is made up of public debt, so we have notes that are due in 2016 that are 1.3%, and that's $0.5 billion of 1.3% notes.

We have another $600 million of 2.3% notes, $797 million of 4% notes, and just shy of $400 million in 5.3% notes. Round numbers, you are looking at interest expense annually, on an annualized basis, give or take $95 million. While we have more debt outstanding on the balance sheet than we did pre transaction, given the success of our public debt offering net-net, the weighted average cost of debt is lower. The interest rate expense on a dollar basis is only slightly above where it had been in previous years.

Hopefully that's helpful. If you didn't catch it all just wait for your Q to come out. It's about page 21, when you get your Q up.

The second part of your question was the strong performance of our Perrigo generic Rx business. I would agree that any time a team can generate a 50% plus increase in revenue and approximately almost a 50% operating margin for that business, that's a good result. I think it really comes from a couple of factors. It is very similar to what I said in the past. It is being first with new products.

We've got a unique set of assets where we are going after the products that I referred to as extended topicals, products are absorbed topically both dermatology, respiratory, nasal, ophthalmic type products. Those are things that we are focusing on. We've had the ability to be out there first. I remind you that that 50%-plus growth occurred in a timeframe when, even before we've launched the Vanos product that did not actually launch until January. New product has clearly been an important driver.

The second part of what we've done is to make sure that we continue with our products to be the last company to exit the market with the products as well. First in with new products and the last one still making the products. We've got a very wide range of generic dermatology products. We're the last player there still making them, or the second-to-last player still there. The reality is that also generates some significant opportunity for those particular products in our categories.

So, get there first and stay there for a long time, is really the simple structure that we have in our Rx product portfolio. I clearly have to add before I concluded this comment, just great execution by the generic Rx team, from every facet of product selection, the selling efforts, the marketing efforts, all the things that go into making a great business unit. Our Rx team has continued to perform incredibly well, and I'm very proud of the results they've accomplished.

Operator, I have probably time for maybe two questions and then we'll have to stop.

David Buck, Buckingham Research.

First, on the Nasacort OTC opportunity for generics, can you talk about what the swing might be from, I believe you have that still as an Rx product. So is this something that's actually incremental, or is just basically switching from the Rx channel with some pipelines help potentially? I know you talked about the difficulties in getting it to the channel, but it seems like there may be a loss in the March quarter of sales there.

Secondly, for Judy, the contract manufacturing issue in analgesics. You called out about a $46 million revenue hit, which was most of the shortfall in Consumer Health versus our model. Why didn't we know about the contract manufacturing issue last quarter? I believe it may be J&J who actually took it back in house. The cough/cold issue comps, I think we knew about, analgesic competition, but the contract manufacturing, I'm surprised we didn't hear commentary about that last quarter? Thanks.

Let me start on Nasacort and then Judy can address the contract manufacturing question that David asked. I think I've said some of the things I'm going to be able to say on Nasacort. It's great that the product is approved. It's great the product launched. It appears Sanofi is spending behind it. We have the product with the partner. Our partner is Teva, as we stated publicly. We still need to work on a number of issues with our partner. Over time, though, I do expect the product to be consolidated into the OTC channel because once the product switches from prescription to OTC, often it gets consolidated into the OTC channel.

There are still some questions about the exact timing on that issue relative to the actual label and things that we've previously discussed. There is a number of issues that we are still working our way through on this Nasacort question. Probably, I'm going to stop, David, with that as my comments there. Importantly, it really opens up a category of nasal inhalers that we think are real exciting for things like Flonase, Astepro, and Nasonex, things like that that could mean things for the future. Judy?

Good question. Our contract, we call it -- I'm using air quotes. Our contract business is actually, think about it as a channel. We always talk in our disclosures in detail about sales by product category. You will see it broken down in the 10-K by product category. Included in that is contracts. It is a channel like selling to retailer A, B and C. We have customers for whom we do contract manufacturing of the full basket of certain product categories.

That being said, we are also involved in confidential relationships with them and are not at liberty to get into individual sales to individual customers in that contract channel, for confidentiality reasons, just like we don't give you sales by specific store retailers, either, brick-and-mortar store retailers. What does this mean? Why did we not give you an indication of the movement in that channel? Because, frankly, those sales are very dependent also on the needs of those customers on a quarter-by-quarter basis. We stand ready to be flexible and provide them product on and as-needed basis as we do for retail customers. It is not always a -- we can't go through VMI inventory like we can for our retailers and see what's on the shelf in different stores.

We take those orders and process them quickly to service our contract customers, and we ourselves don't always have a clear line of sight on a quarter-by-quarter basis on what the demands are going to be. If those contract customers are seeing their own dynamics from a competitive landscape change on a quarter-by-quarter basis, their orders back to us will change as well. We try to always make sure we tell you what's going on in contract, even though it is a channel. We comment every quarter in the MD&A on those pieces.

I would add to that, David, is that obviously our contract customers are also experiencing a weak cough, cold, flu season as well. Building on what Judy just said.

Operator this is going to be our last question.

Tim Chiang, CRT

Joe, I didn't want to finish the call with a Tysabri question, but I guess I might as well. Assuming you keep Tysabri, your tax rate is going to stay in this high-teens rate. In the case that you divested Tysabri, would that had have any impact on your going-forward cash tax rate?

The answer is yes. Going back to the commentary, we like Tysabri, as I stated. But if Tysabri is at a 1% tax rate, so all things being considered, if you take an asset that has a 1% tax rate out of the mix that -- effectively the weighted average tax rate would go up. There's no question about that. I don't want to get ahead of ourselves there on that particular question. If anything comes about there, we'll obviously have a lot more to say about it.

For right now, we really like the Tysabri asset for all the reasons I said publicly. It's a good asset and a great category of MS. We've got a great partner with Biogen. It is got an escalating royalty and we do think it has a very long life as a product category. For those reasons, I will probably stop there. The answer is that if we sold part of that or monetized part of that, it would have an effect on our tax rate.

Joe, I just had one follow up, maybe it is for Nancy. The D5 R&D spend, I know you guys included in your guidance. Is that more front-end loaded to the back half of your FY14 than FY15?

The D5 spend, as we have currently laid it out in our expectations, would be for the full calendar year 2014, so it would be through the calendar year. Obviously, that means both in our FY14 through June 30, and then obviously the six months going into the start of our FY15. It would be for a full calendar year 2014 as it currently is envisioned.

Let me conclude with that and just make a general comment. First of all, thank you very much in your interest in Perrigo. It really was a great quarter. Great execution across the Business. If you think about, we sometimes forget that we're still making over 45 billion tablets doses per year. We're closing the Elan transaction. It takes a great team of people to get the great results that we did achieve during the quarter. I'd just like to say thank you to the entire team for all the great results that occurred.

Thank you very much for your interest in Perrigo. Have a great day everyone.

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