Perrigo Company PLC (PRGO) 2015 Q2 法說會逐字稿

Good morning, my name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo Company plc second-quarter calendar year 2015 results conference call.

(Operator Instructions)

I will now hand today's call over to Mr. Art Shannon. Please go ahead, Sir.

Thank you very much, Kayla. Welcome to Perrigo's second calendar quarter earnings call. A copy of the earnings release that we issued this morning is available on our website at Perrigo.com. Also on our website is the slide presentation for this call. As you know, Perrigo believes in being transparent and open to our investors. Following today's conference call, we will be actively reaching out to investors over the next few weeks.

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

Thank you, Art, and welcome, everyone to Perrigo's second quarter 2015 earnings conference call. Also joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. For our agenda today, first, I will make a few comments on the quarter. Next, Judy will go through the details of the second quarter results. Then, I will give you an overview of our recent success in both store brand and prescription product approvals. And finally, reiterate our position on Mylan's unsolicited offer to acquire Perrigo. Finally, you will have an opportunity for question and answers.

Before we get into the agenda, however, I'd like to start by thanking Perrigo employees for their diligent focus which has led to adjusted net income growth of 37%. Even with all the noise you have been following over the past few months, our nearly 13,000 Perrigo employees have announced three M&A transactions, delivered on our Omega integration plan, achieved great operational efficiencies and productivity improvement, executed on new product launches and delivered on our Base Plus Plus Plus strategy. It's great work by the team.

Let's discuss the quarter. On slide 4, you can see, despite some challenges, this is a very strong quarter. Our quarterly performance is highlighted by second quarter record net sales of more than $1.5 billion. We also achieved record adjusted gross margin, record adjusted net income and record operating cash flow. Our Consumer Healthcare segment grew adjusted operating income an impressive 18% compared to last year. In fact, our consumer facing revenues now represent 75% of the total Perrigo Company revenues.

Moving onto slide 5, you can see consolidated Perrigo grew the top line by 34%. This is driven primarily by the addition of the Branded Consumer Healthcare, or BCH, segment sales and the record second quarter sales in the Rx business. New products contributed $149 million comprising $116 million in legacy Perrigo sales and $33 million in our Omega business. You'll also see that we continued to invest in our future this quarter. We invested over $44 million in R&D to continue to support our strongest new product pipeline ever.

I'd like to highlight that even with strong R&D investments in our legacy Perrigo business, supply chain and manufacturing efficiencies and favorable product mix allowed us to achieve record second quarter organic adjusted operating income which improved 11% over last year.

Judy will give you more details, but let me highlight a few items from the business segments. Our Consumer facing business segments, both Consumer Healthcare and our Branded Consumer Healthcare segments, had combined net sales of $1.15 billion this quarter with adjusted gross margins of nearly 42%. Their combined adjusted margins were nearly -- operating margins were nearly 21%.

New products for the Consumer facing businesses were $110 million in the quarter. In the quarter, we were able to realize positive gross profit margin improvement from new products net of discontinued products. The globalization and scale of our Consumer facing business platform provides exciting new opportunities for Perrigo as evidenced by the three recently announced acquisitions in our Consumer business.

First, we announced the acquisition of the Mexico Patheon softgel business which closed in May. Perrigo has long desired to be a prime manufacturer of softgel products and this acquisition gives us our entry point. Second, we announced the acquisition of brand assets from GSK. This portfolio generated over $110 million in annual sales last year and with the return of the nicotine lozenges, we expect to grow those sales.

Also, we announced the acquisition of Germany's leading dietary supplement brand, Yokebe, which is marketed as a meal replacement product and is currently the second largest dietary brand by market share in Germany. We expect to close both the GSK and the Yokebe transactions in the third quarter.

With the record adjusted operating income in our Consumer Healthcare business, the strong performance of our recently acquired Pan-European Omega business and these recently announced transactions which bolt on very nicely to our existing infrastructure, I'm excited about the future prospects and our mega trends in this truly global Consumer business platform.

As you can see on slide 6, new products will drive our future growth. Excluding the impact of Omega, we expect $1 billion in new product launches over the next three years representing more than $3.6 billion in national brand sales highlighted by the launches of Nasacort, Flonase, the Mucinex family plus many more. Also, just in the last week, we received three ANDA approvals.

First, we just received FDA final approval for testosterone topical gel 1.62%. Second, we received FDA final approval for ibuprofen sodium tablet ANDA, the national brand equivalent to Advil fast release. And finally, received FDA approval for omeprazole magnesium tablet, the equivalent to Prilosec OTC. This is the first and only truly equivalent generic product to the national brand. Thank you to our R&D team for the excellent work.

Our Rx segment once again achieved record results, growing sales 10% with a record adjusted gross margin of 65%. New product sales in the quarter were driven by the generic versions of clobetasol spray and our AB-rated Androgel 1%, both of which are powerful launches in our Rx business. Adjusted operating margins were strong in this segment even as we invested $20 million in research and development and continued making investments in our branded Rx sales team. Congratulations to the Rx team for another strong quarter.

In Specialty Sciences, we have been very pleased with the market performance of Tysabri. It is a great asset that is generating terrific cash flow, particularly with the current 18% royalty that it now provides.

As you can see on slide 7, over the last 52 weeks, US store brands continue to gain share in smoking cessation. When you take out the impact of new national brand product launches and the effect of national brands return to the market, store brand market share continues to grow. Given the mega trends that I have talked about for many years, including an aging population, increased use of medication as individuals get older and rising healthcare costs, Perrigo is well-positioned to meet the future needs for the global healthcare community. Now, let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone and welcome to our first earnings conference call with the addition of our newly formed Branded Consumer Healthcare segment -- or BCH, as I'll refer to it -- established after the March 30, 2015, closing of the Omega Pharma acquisition.

It has been an extremely busy quarter on multiple fronts. We continue to execute on the integration of Omega and broaden our customer and patient reach, further the process of shifting our fiscal year end from June to December to ameliorate your financial analyses going forward, updated the market on our strategies to achieve organic three-year compound annual growth rate of 5% to 10%, announced three acquisitions since closing Omega, received two unsolicited offers from Mylan to acquire Perrigo, and continue to actively pursue new corporate development opportunities. All while achieving record results in the quarter. Never a dull moment at Perrigo and seemingly never enough pages in our passports.

Before we dive into the quarter, I'd like to first remind you of our continued focus on providing highly transparent financial and operational results. With the addition of our new Pan-European BCH segment and our focus on continued geographic expansion, we will now provide you with constant currency revenue information to enable easier analysis of the underlying performance of our business outside the US.

Consolidated results from our durable base business portfolio bolstered by the newly acquired Branded Consumer Healthcare segment, delivered 37% growth in adjusted net income. Consolidated adjusted gross margin expanded 460 basis points to 49.1% with positive contributions from BCH, supply chain efficiencies and overall positive product mix.

As Joe talks about frequently, the moat around Perrigo's margins via our supply chain prowess, was clearly evident this quarter as year-over-year organic adjusted gross margin expanded over 300 basis points driven by focused global sourcing and continued manufacturing efficiencies throughout our operations.

Now I'd like to turn to our business segments starting with a review of our results in Consumer Healthcare on slide 8. As a reminder the CHC segment now includes the legacy nutritionals as well as our PDI business which had previously been reported in other.

Sales within CHC, were driven by positive contributions from our smoking cessation franchise even after the return to market of a national brand competitor, inclusion of sales from store brand 600-milligram Mucinex ER in the quarter versus last year and overall higher sales within the cough cold category due to a relatively longer cough cold season in the US versus last year. Within the infant nutrition category, net sales of infant formula continued to perform well led by increasing consumer appetite for organic formula reflected in higher contract manufacturing sales in that category.

Offsetting these positive dynamics were, one, relatively lower sales within the animal health category led by the absence of contract manufacturing sales to a national brand, as previously discussed last quarter. Two, a relative decrease in OTC promotions this year by certain retailers of a major product in the GI category. Three, continued price pressures from international competitors within the VMS category. And four, $12 million in foreign currency headwinds. In fact, the impact of the animal health, VMS and FX items I just mentioned, were a 450 basis points year-over-year topline headwind to this segment's growth.

Adjusted gross margin expanded to its highest level in the last six years due to greater production efficiencies, greater seasonal volumes and favorable commodity pricing. At the same time, we continued our spending discipline in SG&A and as a result, adjusted operating margins increased 390 basis points year-over-year which led to the impressive 18% growth in adjusted operating income compared to last year that Joe just mentioned.

On slide 9, you can see that net sales within Branded Consumer Healthcare were $401 million for the quarter, an all time record quarter for Omega Pharma. This impressive result was driven by an 11% increase in sales of the top 20 brands on a constant currency basis versus last year and the launch of a number of exciting new products including XLS Max Strength, a line extension to the brand XLS Medical for weight loss, new versions and flavors of Bronchostop, an herbal cough medicine, and strong distribution sales in the quarter.

Turning to slide 10, you can see that our Rx team continues to deliver, posting 10% net sales growth to a record $278 million in the quarter. New product launches and contribution from our women's health branded category led to record adjusted gross profit for the segment. We continue to invest in high margin potential R&D projects highlighted by an approximate 38% increase in year-over-year R&D investments to a level of 7.2% of Rx net sales.

Turning to slide 11, Specialty Sciences net sales were $84 million comprised of Tysabri royalties at 18% for the entire quarter versus only two months at that 18% level a year ago. Year-over-year growth was limited by two dynamics. One, foreign exchange negatively impacted net sales by approximately $7 million. And two, second calendar quarter 2014 net sales included approximately $10 million in net sales from Biogen's agreement with the Italian Medicines Agency.

Before I turn to the forecast, a quick comment on the balance sheet. As of June 27, 2015, total cash on the face of the balance sheet was $786 million and current and long-term debt was $5.3 billion. Net cash flow from operations on a trailing 12 month basis was a record $1.2 billion.

Moving into the updated calendar 2015 guidance on slide 12. First, I'd like to start with noting that we are confirming our calendar year consolidated net sales and adjusted earnings per share guidance we provided you on April 21. To help you further refine your models, I'd like to provide you with some added color on the segments for calendar 2015.

Due to previously discussed seasonality in Consumer Healthcare, specifically in the animal health and cough cold categories, we expect the adjusted operating margin realized in this segment's past quarter to be the highest for the year. As is our historical trend in this segment, volumes in the second half of the calendar year are anticipated to be relatively lower over the next two quarters. Thus producing relatively lower adjusted operating margin in the second half of the calendar year in line with past seasonal performance. Additionally, we anticipate R&D spend to increase approximately 30% in the second half of the calendar year related to project timing.

We continue to expect Branded Consumer Healthcare to contribute approximately 20% of total Perrigo consolidated net sales for the full year with strong net sales over the remainder of calendar 2015. Note that though our forecast in this new business anticipates that the June quarter just ended will be the highest revenue quarter in the calendar year due to new product launches such as XLS Max Strength and strong distribution sales we just realized in that particular period. Note also, that the current BCH forecast now does include $25 million in net sales associated with recently announced acquisitions which we expect will close in the September quarter.

Given the continued positive momentum in the Rx based business coupled with strong recent product launches, we remain excited about this segment's growth prospects. Please note that for the remainder of the calendar year, adjusted gross margins in Rx are also expected to be slightly softer than this past quarter due to product mix and limited new product launches for the remainder of the calendar year.

Turning to slide 13, while the adjusted annual effective tax rate is still expected to be approximately 17% for the full calendar year of 2015, we anticipate both the third and fourth calendar quarter rates to increase to approximately 18.5% due to the inclusion of estimated earnings before tax from Omega Pharma. This jump in the rate is a function of the accounting rules surrounding annualizing effective tax rates.

Please realize that for accounting purposes, the six-month stub period for second half of calendar 2015, is the first time Omega results will be included for a full US GAAP reporting cycle. The first half of calendar 2015 was still technically part of our FY15 reporting year which included Omega for only one quarter. This estimated 18.5% adjusted tax rate is in line with the expectations from our November 6 Omega acquisition announcement call.

So, summing all this information up at the consolidated level, we expect third calendar quarter 2015 adjusted net income to grow between 30% and 35% over the comparable 2014 period. For your calculations of earnings per share, please continue to model diluted shares outstanding of approximately 147 million shares in the quarter.

As I stated a few moments ago, these are certainly very exciting times at Perrigo, both in terms of reaching new customers around the globe and executing our BP3 strategy. Yet again, we've delivered remarkable year-over-year adjusted net income performance, 37% this quarter, coming off 41% growth in the March quarter, with expected growth next quarter again, north of 30%. At the same time, record cash flows will continue to provide meaningful returns to shareholders and as well as they create the dry powder to enable meaningful M&A and the multiplier effect these transactions can achieve. Now, I'd like to turn the call back to Joe.

Thank you, Judy. Before we open it up to Q&A, I just want to provide a few thoughts. First, I want to repeat the exciting news that we received three ANDA approvals within the last week. That is great news, and to my recollection, is a record for Perrigo. And importantly, it gives us increased confidence in our ability to execute on the Base Plus Plus strategy.

Second, our manufacturing and supply chain teams have done a great job finding operational efficiencies with our continuous improvement program and you are really seeing it in the bottom line results of our Company.

Third, I want to take a moment to speak about the unsolicited offer by Mylan to offer 2.3 shares plus $75 in cash per share of Perrigo which I know is on a lot of the shareholders' minds. As we've been saying since April, we strongly believe that Mylan's offer substantially undervalues Perrigo, is not in the best interest of Perrigo shareholders and both remain true today. We do not believe this is the best interest of Perrigo shareholders.

Our Board's rejection of Mylan's offer was unanimous and specifically that it had nothing to do with Teva. It has always been a strength of our standalone Perrigo business. You have seen this reflected time and time again as we return value to our shareholders by executing on our Base Plus Plus Plus strategy. Our acquisition strategy continues to provide a multiplier effect to our already strong organic growth as we have shown with our acquisitions of leading European brands over the past few months. The market movements following Teva's announcement last week only reinforced our conviction about the Mylan offer.

Also, Perrigo has a strong history of responsible corporate governance policies. We believe deeply in our responsibility to shareholders. For example in 2014, Perrigo received the best compliance and ethics program for a large cap companies and our General Counsel, Todd Kingma, won the Governance Professional of the Year. Great achievement for Todd and the entire Perrigo Company.

But there is a lot of noise in the market and I want to try to distill it down into really three comments on the unsolicited Mylan offer to acquire Perrigo.

Specifically, combining with Mylan, number one, would dilute the strength of our durable consumer business. It would risk the value that we continue to create for shareholders. Number two, we believe it would result in a significant P/E multiple contraction as we take our Perrigo durable business and combine it with the Mylan business. Number three, I make no statement about the timing of EpiPen generic, however, clearly it would expose Perrigo if we merged the two companies together to a product concentration risk of EpiPen. I'll let you all decide when and if a generic will show up of EpiPen.

I make no predictions on how Mylan shareholders will vote on August 28, but I also want to remind everyone, including the Mylan shareholders, that if they proceed with a tender offer for Perrigo, this will not be the easy path to completion as some are painting it to be. The bar for success in the tender offer process is a very high 80% of all outstanding Perrigo shares. We've been on the road talking to our shareholders and we are pleased to hear your confidence in Perrigo's management team and our standalone strategy.

Each of you will need to make your own decision, but based on the current offer, if we ever get to a tender share process, I intend to vote no to the Mylan unsolicited offer to acquire Perrigo.

In closing, we continue to believe that Mylan's offer substantially undervalues our business and we are confident that by executing on our Base Plus Plus Plus strategy, we can deliver far superior growth to what is represented by the Mylan offer. I will now open up the call for any questions. Operator, any questions?

(Operator Instructions)

Our first question comes from Louise Chen.

Hi, thanks for taking my question. One question that we often get is how much growth is left for Perrigo over the longer-term, especially in light of some of the news events that have happened recently? Are you just at the beginning, middle or end of the Company's growth and how committed are you as a management team to see this through? Thanks.

Louise, thanks for your question. I think the commentary that I will offer is that we see the growth opportunities as being very substantial for the Perrigo Company. Number one, relative to where we sit as a Company, we really think there's three mega trends that continue to drive the business, each of them contributing to the growth.

The first is just what I would call the demographics and the intensity of usage of pharmaceuticals we expect to go up as we just see growth in the population and more importantly, growth in the over 65 population that uses 2.7 times more pharmaceuticals.

Number two, we expect the continued movement from national brand to store brand. That's the trend that we continue to see even despite some of the new launches that have occurred. We continue to expect to see more products shift -- more consumers shift from national brands to store brands.

And number three, it's a movement of new products that are today prescription, moving over the counter. We expect that will continue to also contribute to our growth. So, we still think there is a significant growth opportunity.

On top of that though, what I think the second part of your question, is that we see tremendous opportunities now that we've aligned and acquired the Omega organization and what that means for us on the Branded Consumer business. And importantly, the same things that have helped Perrigo grow in the past where we've bolted on incremental assets, we think we can do the same thing. We think the GSK asset, the Yokebe asset, are just the beginning of things that we can bolt on as we look to continue to grow that Omega asset. We are really excited about the future and I think that's just an overview of how excited we feel about where we can go with this business.

Our next question comes from Randall Stanicky.

I have a two-part question. Joe, you have spent a lot of time highlighting your exposure to what I'll characterize as a much more stable consumer and consumer facing business. What's your appetite to add more generic exposure outside of a Mylan transaction and how do you think about formulation technology to your geography and then possible sides? And I have one quick follow-up.

On the question of what we've done, you are absolutely right. We've built our business. We've done some additional acquisitions, most notably the Omega acquisition. Now that we are sitting at approximately 75% of our revenues are very strong revenues in our Consumer Facing business. We think that gives us a very durable platform for the future.

But as I've said in the past, I cannot say it more strongly. But our Rx business is a very unique business. It is a business model with these incredible margins. Most recent Rx margins, the most recent gross margin was 64.8 with a 49.5% operating margin. That is a very unique Rx business.

If I can find additional assets that fit into that and that means that there is some degree of difficulty in producing them. For us, it's always been extended topicals, things absorbed topically, dermatology, respiratory, nasal, ophthalmic, et cetera, I'm going to continue to look for those types of assets. I do think there are some out there and we will continue to look for them. I don't want to limit us only to consumer. I do think there are some Rx assets that will make sense to us as a Company notwithstanding the, as you said, the Mylan situation for us. Did you have a second part on the formulation comment?

Part B of my one question would be, you called out on slide 7, the smoking cessation and the store brand growth over national. And I just wanted to get a sense, has GSK come back? Have you seen that impact and are you growing through that return? How much of what I think is about a $250 million base for you, how much of that do you think you can hold onto if GSK does return?

GSK is back in the marketplace to be clear and we are continuing to grow through the situation. As I said in the part of the call, it is a very good business, very large business for us but one that we think has tremendous upside for us in the future. Especially now as we have acquired the GSK branded assets, not US assets, but ex-US assets, most notably in Europe. We think that gives us another opportunity to grow the product.

One of the unique items about Perrigo it that now Perrigo with Omega could do something that Omega couldn't do by itself, Perrigo couldn't do by itself. We could buy those GSK assets that were available in Europe. Not only do we see it growing here in the United States as evidenced by the IRI data, but also we see the opportunity to grow our smoking cessation category in Europe and around the world. We're really excited about it. We think we will continue to grow that business very consistent to what we have seen historically.

Your next question comes from Sumant Kulkarni from Bank of America Merrill Lynch.

I'm going to ask my one question plus plus plus. (Laughter). How much more leverage is there in your system on distribution selling and administrative expense and where do see the opportunities for cost reduction if there are any at Perrigo right now?

I will start. Judy, you may want to add to what I say. I guess I will say we think there is plus plus plus opportunities, Sumant. Specifically, where do I sign? First of all, on the leverage we're seeing, is that there is no doubt that as we do additional M&A, we think there's chances to just get more items on the truck as we ship our truck from Perrigo to our large retailers. And that's both here in the United States but also now as we're doing those acquisitions, bolt-on acquisitions in Europe. We clearly think there is a chance to leverage additional margin or leverage the P&L.

Second comment I would say, is that I don't want to miss the chance to say it one more time, the supply chain team from Perrigo and our entire operational and manufacturing group have just done an outstanding job of running our facilities very efficiently and finding continuous improvement projects to lower our cost of goods sold. That has given us tremendous leverage in our P&L especially in the margin structure, as I talked about. Our Consumer Healthcare operating margin this quarter at 21.4% is certainly an all-time record and I think really reflects the fact of the team just working very well to take cost out of the system and allow us to leverage what we've done historically and just do more of it. Judy, anything you want to add?

The only thing I would elaborate upon is as you are all witnessing dynamic changes in healthcare and life sciences, you are seeing different delivery processes and systems coming about and our customers and retailers partnering with others to reach patients more efficiently and effectively and broaden the reach of healthcare. Our supply chain team and distribution folks are already reaching all of those players, So as that dynamism continues, we're able to continue to leverage our relationships and our physical distribution network to serve these newly formed entities as well. That dynamism continues to be served with the assets that we have and the competencies that this team has built.

One last comment I will make before you go to your second part, Sumant, is that often people ask me about the question about well the retailers are putting more pressure to get better pricing in the marketplace. And that is true. But please make sure that everyone realizes that we are doing exactly that same thing with our API suppliers. We are putting pressure on them to get better pricing for our raw materials and I think that is part of what you are seeing here. Our ability to take advantage of what we have always affectionately referred to as a moat and how we look at our business and how we can continue to seek out additional pricing improvements for our cost of goods sold. It's clearly we think an important part of what brought some of this success and certainly on the legacy business, record operating profits. Did you have a second part?

Just on how much cost could come out of the system but I think you touched upon that.

Okay.

Our next question comes from David Maris from BMO Capital Markets.

Good morning, Joe. We agree with you the offer significantly undervalues Perrigo. One of the things that Allergan did when they had an unsolicited offer is that they drew a very bright line between the two different business management styles and business models. Something that you've done a little bit so far, but today, you mentioned a little bit about how Perrigo has best in class compliance. After the earnings (technical difficulty) going out on the road to talk a little bit about this unsolicited offer, is it your intention to do maybe a stronger job in explaining the differences? Do you see a difference in the corporate cultures?

And separately, if the Mylan (technical difficulty) in their favor, do you intend to then reach out to other interested parties and are there other interested parties? Thank you.

So you have asked a lot, David. I'm going to try to get through all of them. First of all, thank you for your commentary on supporting our position that this offer by Mylan substantially undervalues the Perrigo Company.

On the question of management style, there is no doubt there are differences in the management style of the two companies. I really don't want to go into any of the positives and negatives on this. There will be a time and place for that should that get to that point.

I think what we've tried to focus on predominantly right now though is that we are very proud of what we have accomplished. We are very proud of winning the corporate governance large cap Company of the Year. That is something that Todd and the entire team worked very hard at accomplishing. We are very proud of things like that. We're very proud of our corporate culture and what we have accomplished as a team. The Perrigo team has been together for the most part, this entire team, we've been together for going on nine years now. So it is a team that knows each other very well, knows how to get things done and importantly, delivers on the bottom line.

Yes, we have challenges like any other team but we've done a great job working together as a team and achieving great results both for making quality affordable healthcare more affordable for people all over the world. We are excited as we think about the future. There is even more we think we can do to make this a reality especially knowing that we think we are in a winning spot in healthcare. We think we've got a durable position over the long-term. If at some point there is a -- the Mylan team wins their shareholder vote, we can talk more about it at that time. Right now, I think we want to stay focused on continuing to drive our Base Plus Plus Plus strategy for the future.

Thank you, very much.

Your next question comes from Marc Goodman from UBS.

Good morning. First in Consumer, the discontinued sales were unusually high. Can you just give us a little more color on that? Second, Omega. Just remind us first of any seasonality in that business? And second, you mentioned distribution, how much are distribution sales relative to regular consumer direct product sales? Maybe I didn't understand it. And third, in the generics business, just remind us of where we are in this price increase dynamic and how sustainable you feel like those increases are? Thanks.

I will probably take the first question on the Consumer Healthcare and the third question. Judy, let me do them both and then you can talk about Omega and the distribution and then the Omega seasonality question.

On Consumer Healthcare, yes, there are discontinued products. That's a normal part of what we do in Perrigo. Let me try to describe it because it is a good question you're asking. As always, we continue to refresh our portfolio to stay even with the national brand equivalent approach to our business. That means there are changes that occur in the portfolio.

An easy example is in our pet healthcare business. This year, you know we launched our fipronil plus. That is obviously a new product, a very exciting new product, for us and we have done well with it. Having said that though, we had a fipronil with novaluron as part of our business as a result of launching the fipronil plus, we decided that it was appropriate to discontinue the fipronil novaluron. When we do that though, we find ourselves promoting products or having a national brand equivalent product, which is always good. In that particular case, it is a national brand equivalent product that has a better margin. That is part of what is driving our bottom line for this business as we shift from one product to the next generation of products, we discontinue the older generation. It is a natural part of what we do in our Company. That's probably the first part of it.

I'm going to go to your third part on generics and pricing and then I'll go back to Judy for the second one. On the generics and the pricing environment, our team has done a great job at looking at pricing, looking at both making money when we are first with our products, which as an example, the AndroGel 1%. And certainly, as I mentioned today, we'll do the same thing with the AndroGel 1.62% when we launch that. So we get good pricing there. Finally, we get good pricing when we're the last ones with the product or one of the last few with products.

Across that portfolio we think there are still opportunities to do pricing. We will continue to look at it. We think there's something that we'll be talking about in the future for pricing. But I think it really supports the strength of that operating profit line of 49.5% of what we achieved with our Rx business in the quarter. And importantly, the gross profit line of 64.8%. For those reasons, we think we have got a strong Rx business and we look to still find some additional pricing opportunities for the future. Judy, you want to talk about the Omega portion of the question?

Sure. Just backing up, the question was on distribution. The Omega business has historically had the leading distribution of generics and some branded products out of Belgium, from their historical presence there. On a pro forma go-forward basis, that would represent about 15% of their revenues. If you think about in the previous calls we talked about a run rate, a full-year annualized run rate of Omega of about a $1.6 billion revenue run rate. About 20% was distribution and on a go-forward, it would be about 15% go-forward.

And we talk about seasonality. The June quarter was a very strong quarter, as I mentioned in the prepared remarks. They had an important launch in the June quarter and the distribution sales were also heavily seasonal. Why? First of all, you have your cough cold allergy season coming off just like in the United States. You have the focus also in the summer of having products available for stocking, because as you know the behavior in Europe, July and August very very heavily vacation oriented and many of the distribution systems move differently. So you have a little bit more focused seasonality in the June quarter. It's not unusual for that quarter to be their strongest one in Europe.

So we'll be talking about that on a go-forward basis as well just like we do for our primarily US Consumer Healthcare business. But suffice it to say, the rest of the run rate for the remainder of the year slightly lower new product launch combined with what we expect to be a good solid second half of the year.

Your next question comes from Gregg Gilbert from Deutsche Bank.

Thank you, guys. I will stick to a two-parter. First on CHC. What can you do organically to improve revenue growth trends for CHC? And inorganically, do you see acquisitions of size potentially out there for CHC in the US? The second part of the question Joe, was touched on earlier but not addressed head-on. Under what circumstances would the Board officially explore all strategic options for the Company or should we assume that is already underway? And I'm curious how that plays into your prediction that there would be a quote difficult path to completion between that 50% and the 80%? Thanks.

On the question of organic growth for CHC, Gregg, there's always going to be some amount of growth relative to just the demographics and population. There's some growth could be from national brands switching to store brand. But the biggest part of the growth and the biggest exciting part of the growth is when we launch those new products.

When we have a chance to, which we hope in the very near future, certainly over the next 12 to 24 months, launch the equivalent of Flonase, launch the equivalent of Nexium, of Mucinex D, a Mucinex family, loratadine softgel, just to name a few. Those are the big ones that we think will help propel our growth and it's why we said with confidence that we expect to launch over $1 billion of new products in the next three years when you put these types of products into the marketplace. We think there is a significant return for our shareholders.

On the question of inorganic consumer healthcare growth, yes, we do believe there are some additional bolt-ons. They're in categories that we have talked about in the past; adult nutrition, opthalmics, pet care, diabetes, are the areas where we think we can still support some additional bolt-ons with our business. And as Judy said, we are generating records amount of cash. We think we can use that cash to do some additional bolt-ons and just make our business more valuable to the large retailers.

On the third part of your question, strategic options, we do believe we have strategic options. Right now, we are focused on running our standalone business. We think that's the most important thing to do as a Company and as you can see, we are doing it quite well with what we've shown just a 34% revenue growth, a 48% gross margin growth and a 35% operating income growth, 25% EPS growth. We think that's an important part of our success in the standalone and we're going to continue to focus on that.

If in fact, we get to a point where we think there is a -- if Mylan does win their shareholder vote and there is an initiation of a tender process, at that point, we'd make some strategic decisions as a Board as to what's the right thing to do for the Company. I do know there are other companies have expressed some conversations to me but I don't want to go too far too fast. I think we're going to continue to stay focused on what we are doing as a Company on a standalone basis.

Your next question comes from Linda Bolton Weiser from B. Riley.

Thank you. You gave quite a bit of color on the Omega and the good sales there and the new products and the seasonality. But I was curious about in terms of the new products, do you have a window into like how does 2016 look relative to new product sales? Would it be higher or lower than what we are seeing in 2015?

And secondly, Joe, if you could just give a little more explanation on the omeprazole magnesium approval? To consumers, it is known as Prilosec OTC and it's kind of transparent to them, I think, what it's actually made of. Is that going to be a cannibalistic product or are you actually going to get more shelf space by putting another product on the shelf? Can you just explain that a little? Thanks.

Sure. Let me just start with -- I'll start with some comments on our new product portfolio and Judy, if you want to add anything to that, please feel free to do that.

First of all, one of the best things I can say right now, Linda, and what we have said out in the marketplace is that we expect $1 billion of new products over the next three years. The majority of those products will be on our Consumer side, as we have said that, realizing that approximately 75% of our revenue is on the Consumer side. Admittedly that is looking at both Omega and Perrigo together but the majority of it will be on the consumer side.

The only final comment I would say is while we have not given individual year by year commentary, we do expect the new product flow to be approximately one-third, one-third and one-third. Now, it may move from year-to-year just simply as FDA approvals come in but it's approximately one-third, one-third and one-third is the way I would characterize it. Obviously, a little bit more in the outer years but approximation one-third, one-third and one-third.

On the question of omeprazole magnesium, we think it's important. It will be the very first omeprazole magnesium tablet product in the marketplace. As to how we launch that product and what we do with the product, I think we are going to continue to weigh our options on that. But to be clear, it is the very first tablet formulation that is omeprazole magnesium equivalent to Prilosec OTC. Our product continues to perform very well. So, I don't want to over promise for this product, but it is an optional alternative for us to think about as we think about the future marketplace for our equivalent to Prilosec. Judy, anything else you wanted to comment on the new products?

Just wanted to make sure, a little color there Linda. As Joe said, we said $1 billion in new products. Think one-third, one-third, one-third, greater than $300 million next year but that is without Omega. At this stage, we're still in the process of scrubbing and making sure that as we define the plan for new products that we're hitting the same definition.

But suffice it to say, that the team has quite a long list of new products opportunities both organically as well as their plans for putting in product that is currently in the US Consumer portfolio and plugging that into their format. Which, as we've talked about, is a key driver of long-term future revenue growth within the Omega platform. We haven't called that number out yet. As we get better clarity we will. But suffice it to say that will be accretive to the $1 billion we talked about.

Your next question comes from Elliot Wilbur from Raymond James.

Thanks, good morning. You've touched on this subject matter a couple of times, so maybe we can explore it in a little bit more detail because I do think it is an important trend break and certainly will entertain questions about durability. Specifically, the gross margin performance in the Consumer Healthcare segment. Obviously, a record level and well above recent performance trends and certainly, Perrigo of non-believers over the years have pointed to absence of margin expansion even with growth. And this quarter obviously stands out as a dramatic exception to that trend.

Thinking about a couple of the push pull factors here, specifically the discontinued products. I would assume that those were relatively low margin. And also the continued shrinkage of the contract manufacturing business, those had positive impacts on margin trends but you're also talking about operating efficiencies as well. Maybe just a little bit more granularity there so that we could perhaps understand the durability of the performance this quarter going forward?

Okay, Elliot, you actually know our business very well. I congratulate you. You've touched on it.

I'm for sale, Joe, at the right price. (Laughter).

Getting back to the question. The gross profit, absolutely, you've hit on it. Product mix was important. We sold more of the higher margin and less of the lower margin items. That obviously has an impact on revenue as you appropriately point out. We think that's important that we continue to stay equivalent to the national brands. So we follow those national brands very closely. As we get better products in the marketplace, we discontinue some products that are just not as valuable.

Number two for us on this question of mix is, as the brands switch from a standard tablet to a fast dissolve, we want to be there. We want to be there with -- for example, we just got the Advil quick dissolve, or fast release product approved. That's another example of a brand going after a new formulation. We are following quickly. We'll have that product and to our knowledge, we are the only one with that product approval. That will be another example of an upside opportunity for us relative to margin. Those are the things that we do on the margin side. Yes, we discontinue products but importantly, we try to launch new products that are national brand equivalent that have better margin structure.

On the other point of it clearly though, is the operating efficiency of the team both from just the continuous improvement projects. We have hundreds of continuous improvement projects that we've run through the team. We've tried very hard to make that a part of our DNA at the Company and indeed, I think we have had success doing that and we'll continue to look to try to get operating leverage in our P&L.

The final point, you didn't mention, I do want to make a point of it though is that, very much as our customers have come to us for pricing discounts and rebates et cetera, we've done the same thing with our supply chain. We've said to our raw material suppliers listen, we can get some incremental business by working with large customer X. If we do that and can do some things, can we get some additional discounts on our cost of goods? And indeed, we have had success doing that and we think that's going to be an important part of our future to your question on what we are thinking about in our future. Judy, anything I left out?

It was a tremendous margin quarter. There is no doubt. As I commented on earlier, we are still looking at having a very strong margin quarter for the consumer business, as Joe pointed out. This quarter was particularly good with the volumes and the amazing manufacturing efficiencies that we saw. It really translated into a bump in those margins and we expect them to be strong through the year. But as I commented margin-wise, it would be the strongest quarter for the calendar year. But looking still overall a strong performance in gross profit for the year.

On an operating margin basis again, operating margin as well, second quarter strongest, it just was timing of R&D spend. But the SG&A cost savings and efficiencies that the team saw in this quarter, we expect to continue throughout the rest of the calendar year as well. Good lean operating efficiency of the overall team, both on a sales and marketing side and on manufacturing have continued to contribute to the ability of the team even with some dynamism on the topline that you saw to be able to execute well on the bottom line.

Our next question comes from Jason Gerberry from Leerink Partners.

Thanks for taking my question. Just curious on Omega, I think you provided the growth of the top 20 brands year-on-year. I'm just curious if you would be willing to provide the year-on-year growth relative to the prior-year quarter? And Joe, just curious with Pfizer terminating the Lipitor OTC switch program, just curious your updated thoughts on whether there is life for the statins in the OTC channel? Thanks.

We haven't given out specific numbers on Omega for its growth but it is double digits, I think, is probably the way I would rephrase the question.

On a constant currency basis the top 20 were 11% year-over-year. For the whole portfolio directionally mid-teens would've been the year-over-year growth. You got some noise in there with foreign currency et cetera, but approximately 14% or 15%.

And the second part of the question was on statins and Pfizer's decision on Lipitor. As I've always said, I never thought it was a 100% chance of probability. I did say 60/40. It appears though that the results of the Pfizer clinical trials did not result in patients going on to see their healthcare providers. I think in that situation, it's probably unlikely that statins will come to the marketplace. I can't rule out somebody else will try it with a new refreshment and view on it. But I think based on this last attempt by Pfizer, I think it's probably unlikely that we will see statins in the near future come to the marketplace for OTC.

Our next question comes from Annabel Samimy from Stifel.

Thanks for taking my question. I wanted to touch on CHC a bit more. You kind of answered this. It was supposed to be a big animal health quarter as you were selling into the channel for the season. It seems like there was actually some declines and you had mentioned that you had switched over product. But as you look at animal health, is there as big -- is it as big an upside opportunity as you expected and to what extent do you need to supplement consumer health in general with inorganic growth? And are you placing more priority on Omega right now and growing the European consumer side as opposed to the US consumer side?

Just a separate question on guidance clarification, it does or does not include the GSK products and the German nutritionals? Thanks.

I think I got about a five part question in there. I'll try to get them all. On the question of animal health, animal health performed reasonable but it did have a problem. The problem was that it was Merial. Merial's influence on two parts of it. One part of it was clearly the introduction of that second store brand equivalent product which we believe, continue to believe, is a breach of our agreement. We will find out and play that out in the court system at some point in the future. The second part of the animal health story is they also had some contract manufacturing business. That is part of what we saw.

The base business though in terms of what we do every day, store brand selling, our fipronil plus product, continues to perform well but we do have some things we have to offset.

On the question of the switchovers, we expect to see more products continue to go over the counter or be available for us in terms of flea and tick products and the team is doing a good job to get the equivalent of those products into the marketplace and they're continuing to refresh that pipeline of R&D efforts on the pet care side.

On the question of the additional bolt-ons for the US business, we clearly think there was more opportunity there.

Are you prioritizing Omega over the bolt-ons in the US I guess?

The good news is I don't think we need to prioritize. We have to clearly prioritize. Let's just say that. We have to prioritize but I think we have the resources now to do both. I think with what we can do in both, in the European platform and the US platform we have the capabilities based on cash flow. Judy, why don't you comment on that part?

On the Omega modeling question and the guidance, as I said, the second quarter, the June quarter is the largest quarter for the year. A slower September quarter with the summer months and summer holidays, people being away from home. But combined with the expectation that we would expect to be closing on our two recently announced acquisitions in that September quarter. Which then means that we have said we have put approximately $25 million of sales associated with the combination of those two transactions in the fourth quarter of the year. So there is in fact an amount of $25 million included in the guidance and in our forecast for those two acquisitions in Omega.

Your next question comes from David Risinger from Morgan Stanley.

Hi, this is actually Emil on for Dave. Just a quick question. You mentioned priorities in consumer, can you discuss the prioritization in terms of inorganic versus organic? Do you guys still feel that you need to do something inorganically in the near-term especially against the [stack out] of $1 billion over the next three years organically? Thank you.

I think probably the best way I could answer that question is based on our history. We have always sought to have a balance of both the organic and inorganic in our growth and I think we will continue to look at that. We think doing both is really the best answer for any company out there. So we will seek to do the inorganic, to be clear, looking at those bolt-on transactions. We think they are valuable and very accretive to our shareholders. So we'll continue to look at those.

The important comment about what we do every day here at Perrigo is try to find a quality product, make it more affordable and use our research and development efforts to come out with the new product flow. My commentary on new product floor is really critical. As I said, to my recollection, this is an all-time record of having in one week, three ANDA approvals from the FDA. But look at what they are. They are products that, AndroGel 1.62%, first to file. Advil Fast Release, to our knowledge, also first to file and certainly we'll be out there first approval for sure.

Omeprazole magnesium, yes, we launched an omeprazole based product into the marketplace going back now almost seven years ago, but we are not content to just sit there and we want to continue to go after the national brand equivalent. We have those opportunities. We are going to continue to take them to make sure we make a quality product, make it more affordable for society both here in the United States and around the world. And that is what we think is really exciting and motivating to us as a company.

Our next question comes from Jami Rubin from Goldman Sachs.

Judy, I have a question for you and then a follow-up for you, Joe. When you talked about the second half of the year with each of the businesses, you threw a little bit of cold water in terms of expecting higher expenses, lower margins, et cetera, but second quarter was sort of a peak. Are you blessing the lower end of the $7.50 to $8 guidance range and what does make up -- what are the key variables to that $0.50 difference?

Joe, a follow-up and maybe this is not a fair question but I think we are all trying to get at this. In the absence of a white knight investor for Perrigo, how do you drive upside to your share price as a standalone company just based on consensus estimates? The stock trades at a 24 multiple now on this year's earnings, a 22 multiple on next year's which is comparable to Seldane. Clearly, while you have done a great job with deal activity and topline growth. If you strip out Omega, there was no topline growth this quarter. So how do you think about driving upside from a multiple as high as it is in the absence of consolidation where Perrigo is involved? Thanks.

I will take your first part first. I never like to throw cold water on anything. That is such a downer.

Well, this is your opportunity to clarify that. Thank you.

All right, all sunshine. I just wanted to make sure that everyone had a line of sight in helping you be able to model. As you know, we don't go out and give detailed quarterly guidance. We try to give you an idea on how to shape the arc of the year. Also, we have this new vernacular as we are switching over and going into calendar year mode.

If you were too lay out, as I'm sure you have in your model, the overall margin dynamics for our component businesses, you see this seasonality really reflected more in consumer facing businesses just because of consumer facing behavior and we are certainly seeing this in Omega as well. The June quarter is historically the highest quarter. There is just a lot of volume movement through the plants as we both are both selling through as well as preparing for fall launches.

You see slower, typically, slower sales in the September quarter because of the vacation season which is even exacerbated and seen more in our new European business. And it's just important also, we have a lot of activities going on usually in ramping up with new lines and new production in the end of the December quarter typically. There are many normal recurring behaviors that go on in the second six months of any calendar year.

And it was also very important, I had to call out just because of the inclusion now of Omega in our pool of earnings before tax, that if your model had had 17% effective tax rate for every quarter, our model has 18.5% in the back half of the calendar year because of this dynamic, as I said before, about the requirement in doing the accounting. Very boring accounting discussion here of how one must book effective tax rate. You have to take the blended rate forecasted for the reporting period, and as you know, because we are in this stub year transition, the US GAAP quote full year reporting is this six-month stub period ending December. So that stub period accounting will be more in an 18.5% range.

That's why, just to give you color on how to think about the shape of the full 12 months and the seasonality therein, that is why I wanted to -- it sounded like cold water but just making sure you had a crisp way of viewing so that you weren't overstating or getting ahead of just the shape of the year and confirming the guidance that we provided already.

On the second part of your question Jami, the issue for me really goes back to how do we continue as a standalone company, how do we continue to be successful? And I think really the best way to say it is it's that Base Plus Plus Plus approach. Looking at what we are talking about there, clearly new products. Just getting three new approvals this week, I think just is a great illustrative example of why we are excited about it, why we think if I could add $1 billion of new products over the next three years into our portfolio, we think that's going to be an important part of driving both top line and our bottom line. Because as you know that our new products tend to be more profitable.

Number two, I know that clearly we always look at quarter versus a year ago, but if you think about what we have done sequentially, our Consumer Healthcare business is up $61 million or approximately 9% sequentially if you go from quarter 1 to quarter 2. I know that that's not always the way you look at it but I do think it's -- sequential is another important part of the consideration as to the terms of the direction of what we are trying to accomplish.

Number three for me, this is the first quarter that we've had a chance to talk about Omega. Omega we think is tremendously important to our future and what we're looking to try to accomplish as we take those businesses and we get the revenue synergies and the cost of goods sold synergies in Omega, we think that's going to be an important part of it. And obviously, as Judy talked about, the business has done quite well in the quarter and we expect to see great things from Omega.

Final comment I offer and it really reflects on also what Judy was talking about for our cash generation. We are generating a significant amount of cash. We intend to put that cash back to work in M&A. Expect to see more of the bolt-on transactions that we think are going to be very accretive to our shareholders and we believe that's going to help us tremendously. Not just the GSK asset, the Yokebe asset but the other assets that we think are out there and will fit very good with both our European business as well as our US business. That's the excitement we see. That's why we are very passionate about our standalone business and what we think are great prospects for the future.

Operator, thank you very much and everyone, thank you very much for your interest today. We appreciate it. We will have a chance to follow-up over the next days and weeks ahead. If there's any questions please get in touch with Art Shannon or Brad Joseph who will be happy to try to answer anything further. Have a great day, everyone.

This is the end of today's call. You may now disconnect.