Perrigo Company plc
Q1 2015 Earnings Call Transcript

Published: 7 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Perrigo Fiscal 2015 Second Quarter Earnings Results Call. [Operator Instructions] Mr. Shannon, please go ahead.

[Arthur Shannon:]

Thank you very much, Christa. Welcome to Perrigo’s second quarter 2015 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the release is available on our website and also on our website is the slide presentation for this call. Before we proceed with the 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, 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. Joe?

[Joseph Papa:]

Thank you, Art, and welcome everyone to Perrigo's second quarter fiscal 2015 earnings conference call. Joining us today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. Now, let's go through the agenda for today's call. First, I'll provide a brief overview on Omega and the quarter. Next, Judy will go through the details of the fiscal second quarter results and walk you through our guidance. Then I'll provide some additional details on our expectations for the rest of the fiscal year. Finally, we'll have the opportunity for questions. First, regarding Omega. Omega is a great company. Mark and his team have built an absolutely great team of individuals leading his company. We look forward to bringing together two great companies with Perrigo and Omega. We continue to expect to close the Omega transaction in late March and are excited to expand our global presence. As we continued our transformation to a more global company, we continue to focus on the five pillars I've outlined to you when I joined Perrigo 8.5 years ago. We are excited about the opportunities to leverage the strength of our new platform. Now I would discuss our recent concluded fiscal second quarter. On slide 4, you can see that this was a strong quarter, but not without its challenges. Our quarterly performance is highlighted by all-time record net sales of $1.072 billion and an adjusted gross margin of over 45% and operating margin of 29.5%, record adjusted net income and record operating cash flow. Moving on to slide 5, you can see consolidated Perrigo grew top line 9%, driven by record sales in the Rx business and the addition of the Specialty Side segment. New products contributed $54 million. Based on this top line growth, we continue to invest in our future, R&D investments were up 15% versus last year. Including these investments, we achieved record adjusted operating margins which improved by 520 basis points over last year and in fact sequentially, adjusted operating margins improved 340 basis points. The strong sales results correlate with impressive improvements in adjusting operating income. Operating margin expansion has been a focus for the company for quite a long time and we were able to achieve this goal while we continue to invest in research and development. Judy will give you details, but let me just give you a few highlights from the business segment. Consumer healthcare sales were below our expectations, but they achieved $530 million this quarter, highlighted by the growth of approximately 2% in the OTC category, which was in line with overall store brand market OTC growth. However, this growth was offset by lower than expected contract sales in the animal health category and expected lower year over year contract sales. As we announced last month, our animal health segment launched the store brand and value brand versions of Frontline Plus in December. We believe we have contractual exclusivity rights to sell this product and we have filed a breach of contract litigation against the innovator. We'll keep you updated on the status of this legal action. Finally, I’m delighted to say we relaunched guaifenesin in the quarter. Our Nutritional Sales segment fell 7%. VMS and infant foods were the major contributor to this shortfall versus our expectations. VMS sales in particular impacted by the pricing pressure from a Chinese competitor that continues to ship product to the US. Our Rx once again achieved record results, growing sales 12% with an adjusted operating margin of 46%. New product sales in the quarter were driven by the launch of the authorized generic of Protopic ointment and the launch of the generic version of our AB rated Androgel 1% gel. Operating margins were slightly below last year, based on the launch of an AG product and higher investments in the research and development. Finally in the quarter, we completed the acquisition of products for Lumara, which expands our specialty pharma offering by entering the women's health category. The acquisition also provides infrastructure to sell our product offering into this new channel with access to over 50 sales professionals. Congratulations to the Rx team for a strong quarter. Especially scientists, we’ve been very pleased with the market performance of Tysabri. It's a great asset that is generating terrific cash flow, particularly with the current 18% royalty rate it provides. As you can see on slide 6, over the last 52 weeks, store brands continued to gain share in smoking cessation, diabetes care, and infant formula. Turning to slide 7, you’ll see store brand has strengthened in the past 13 weeks. For the first time since the national brands returned to the market, we can see store brand growth in the cough/cold category and Analgesics category. When you compare national brand versus store brand like-for-like products and take out the effect of new products in national brands returned to the market, store brand market share continues to grow. Given the megatrends I have talked to you about many years with an ageing population, increased use of medication as individuals get older and the rising healthcare cost, Perrigo is well positioned to meet the needs for the global healthcare community. Now, let me turn the call over to Judy.

[Judy Brown:]

Thank you, Joe. Good morning everyone. As Joe previewed, we closed the books on a very busy and eventful second fiscal quarter, both operationally and financially, as we raised funding and prepared for the closing of the Omega acquisition. Accordingly, there are a lot of moving parts in these financials. In order to try to provide you with the cleanest and most thoughtful analysis of the operating results and underlining business performance in the quarter, our adjusted financial results discussed here and reconciled in the appendix do not include the operational benefits of Omega, as the acquisition has not yet closed, do not include transaction- related charges, and do not include the financing costs or additional equity from our November, December 2014 debt and equity raises. While our consolidated top line results for the quarter were below our own expectations, the strength of our durable business portfolio, combined with manufacturing efficiencies and cost discipline, allowed us to deliver 32% growth in adjusted net income, in line with the guidance provided to you on November 6. Consolidated adjusted gross margins were 45.2%, a 450 basis points expansion compared to the same quarter last year. Obviously, this year’s number includes the positive impacts of a full quarter’s contribution from Tysabri royalties. Importantly though, I’d like to note that we are used to exclude the $87 million gross profit contribution from Tysabri. Adjusted consolidated gross margins were still at a fiscal second quarter record of 40.4%. The continued improvement in our profitability affirms the soundness of our consolidated business model. So now, I’d like to turn to our business segments, starting with the review of our results in consumer healthcare on slide 8. As Joe mentioned, in the quarter, our OTC store brand categories grew in line with the store brand market, up 2%, led by our nicotine replacement franchise, benefiting from the continued absence of a national brand competitor and our relaunch of store brand 600 milligram Mucinex ER. In addition, we recognized $13 million in new products and sales attributable and sales attributable to OTC products from our Aspen acquisition. These positive forces however were more than offset by a decline of $13 million, primarily in contract OTC, contract animal health, as well as a small negative foreign exchange impact. So let me take a moment to explain a few of the drivers for the decline. First, net sales were impacted by the expected lapping of the year-over-year benefit related to a large customer in our contract manufacturing category, which annualized in the quarter. Second, as presented at the JP Morgan Healthcare Conference last month, while we are excited about the December 2014 launch of the store and value brand versions of Frontline Plus within our Animal Health category, we have filed a breach of contract litigation against a third party, as we believe the third party has wrongly enabled a competitor into the market, thereby negating our contractual exclusivity. While this unfortunate situation had only a slight impact on our expected revenue this quarter, it does impact our forecast update for the full year. And I'll comment on that further in a few minutes in context of the guidance update. However, with respect to analyzing the year-over-year results, I’d like to clarify that we also had a supply agreement with this third party last year that has not been renewed and therefore resulted in the majority of the $7 million decline in animal health contract sales in the quarter. Adjusted gross margin expanded, due primarily to greater sales of a mix of higher margin products versus this time last year. At the same time we continued our spending discipline and SG&A and as a result, adjusted operating margin increased year over year. On slide 9, you can see that net sales within the nutritional segment were $131 million as new product sales of $12 million primarily in contract organic infant formula, were more than offset by a decline of $12 million in the VMS and infant food categories, as well as the discontinuance of $8 million of various SKUs. Net sales within the VMS category were down 11% year-over-year, due primarily to continued pricing pressures and competitive market dynamics as national brands continued heavy promotional activity at retail. Second quarter adjusted gross margin contracted, due primarily to pricing pressure in VMS and a $3 million charge related to a specific isolated inventory loss, which the company expects to recover in the future through an insurance claim. Turning to slide 10, you can see that our Rx team continues to outperform expectations, delivering 12% net sales growth, to a record $277 million in the second fiscal quarter. As Joe stated earlier, the team generated $33 million in new products sales, driven by the launches of generic versions of Androgel 1% and Protopic. Volume increases were partially offset by $14 million of discontinued products. Adjusted gross profit margins of 60.5% were slightly below the prior year, due to product mix. However, improved 220 basis points sequentially, due primarily to pricing actions taken in the first quarter. Adjusted operating margin was impacted by the fact that we elected to increase our R&D investments in the segment, driving to a level of 7.1% of Rx net sales, reflecting the team’s optimism in our pipeline projects for the future. In addition, we continued our investments to grow our nascent specialty pharma sales force to both support the women's healthcare products we acquired from Lumara, as well as our broader spec pharma strategies for the future. Next on slide 11, you will see that API's second fiscal quarter net sales were $30 million, effectively unchanged year over year. Turning to slide 12, specialty sciences revenue were $87 million, comprised of Tysabri royalties at 18% for an entire quarter, versus 12% a year ago for the 13 days between December 18, 2013 closing of the Elan transaction and the fiscal quarter end. Before I turn to the forecast, a quick comment on the balance sheet. As of December 27, 2014, total cash on the face of the balance sheet was $3.6 billion and current and long-term debt was $4.8 billion, reflecting the additional equity and debt financing, respectively, raised in November and December for the Omega acquisition. Net cash flow from operations for the second quarter was a record $273 million, up $151 million from the second fiscal quarter of 2014. So moving into our updated fiscal 2015 guidance, I'd like to start with noting that we are tightening our November 6 consolidated adjusted earnings per share guidance around the same midpoint. The composition of this tighter range does change, however, given a variety of moving parts, which I’ll walk you through in just a moment. Before I go any further though, let me remind you once again that these guidance figures do not include any operational results, debt/equity financing or related transactional costs associated with our planned acquisition of Omega. We are currently anticipating closing that transaction toward the end of March. Following the close of the Omega deal, we plan to provide you with new updated guidance for the combined companies on a calendar 2015 basis. We anticipate sharing this new information with you in conjunction with our March quarter close earnings release in early May and we’ll have available at that time appropriate comparative historical data using these new conventions to assist you in refreshing you model. Before outlining specific segment guidance, I’d like to first highlight the impact of foreign currency on our forecast. As I’ve noted in the past, our current mix of business around the globe have been generally neutral for the bottom line. That is, we are currently fairly well naturally hedged through net income. As you’re modeling this updated forecast, I want you to note that our full year updated consolidated revenue guidance has been negatively impacted by approximately $45 million, given the extreme movement in the euro since December. However, the majority of this is offset by positive impacts within adjusted cost of goods sold and adjusted operating expenses, essentially washing out of the bottom line. Hence, ForEx is most visible at the top line and explains a portion of the segment and consolidated revenue adjustments. Please do note that once we close the Omega acquisition, however, this conversation of foreign exchange impact will certainly be an important part of the ongoing dialog. Now, moving into the updated segment guidance for fiscal 2015 on slide 13 in further detail, starting with consumer healthcare, this range change in consumer healthcare revenue guidance can basically be broken down as

[Joseph Papa:]

Thank you, Judy. Now, I’d like to provide some additional thoughts on our business going forward. Turning to slide 14, the Omega acquisition gives Perrigo the commercial infrastructure to take our products to the rest of Europe, which has been our goal for the company for quite some time. Omega’s regulatory and brand management expertise coupled with our supply chain efficiencies make for a great combination for the future. I can certainly say today I'm even more excited than I was in November 6 when we announced this transaction. We’ve been working with the Omega team on the post close integration and we've had meetings with country managers, finance team and our supply chain teams. We look forward to welcoming their 2,500 employees to the Perrigo family. Also, I’d like to congratulate the Perrigo finance and legal team for completing the debt and equity raise in anticipation of the transaction closing in such a timely manner and its well done by the teams. In summary, on slide 15, the drivers for 2015 and beyond are very straightforward. First, close the Omega deal. Second, launch our pipeline of new products. Significant new product launches announced in the second quarter give us the confidence in achieving our new product sales goals. Even if we receive no additional FDA approvals, we expect to achieve new product sales of over $235 million in the fiscal year. I’m also so pleased to announce that we now have FDA approval for store brand Nasacort OTC and importantly have reached an agreement with our partner Teva to market a store brand version of Nasacort OTC, which has branded sales of greater than $150 million in annual national brand sales, we expect to launch for the upcoming allergy season. Also, within the past week, our ANDA for scopolamine transdermal patch was approved by the FDA. This is the generic equivalent to Transderm Scope, which has brand sales of approximately $120 million. Third, leverage the positive momentum of Tysabri. Annual sales in the calendar year 2014 were above $1.9 billion mark and are closing in on $2 billion. Just as a reminder, Perrigo receives a 25% royalty on all incremental sales above $2 billion for Tysabri. Also, Biogen has stated there should be a read out this calendar year on the SPMS indication. Finally, we will continue our disciplined acquisition strategy. We have publicly stated that we will continue to execute acquisitions while we delever over the next 12 to 18 months. The team is focused on delivering strong results for the second half of the year. Our second half performance requires focused execution, and I'm confident the team will deliver. Operator, let’s now open the call for any questions.

[Operator:]

[Operator Instructions] Your first question comes from Randall Stanicky with RBC Capital.

[Randall Stanicky:]

Thanks guys for the questions. I just have one and then a follow-up. Joe, maybe just to start off with, has the traditional growth rate for consumer, that 5% to 10% level that we've talked about historically, have you seen any change in that? Should we be thinking on a multi-year basis closer to 5%? And maybe just comment on how you're thinking about that business overall from a big picture perspective?

[Joseph Papa:]

Good question. I would say that right now what we see is all the same things we talked about in the past, the megatrends are still there for our OTC business. We’re still seeing national brand products being converted to store brand products, we are seeing this consumer move to store brand. We’re still seeing a lot of Rx to OTC products to be clear and we’re still seeing how important new products are to Perrigo. But it is that last part that has slowed down this year specifically and there has been some of the issues we’ve seen with the growth rate. We are very excited that – I'm excited to tell you that today, on a like-for-like basis, store brands are still gaining share over the national brand, that’s when you take out the effect of a national brand competitor coming back to the market and a lot of the new products. On shelf, when the consumers are looking at national brand versus store brand, more frequently they are picking store brand. Having said that, though, new products are so critical to us and with the issue that we ran into in the animal health category in terms of not having the exclusivity because what we believe is a breach of contract, that hurt us. It hurt us relative to our expectation. But, we have not at this time changed our 5% to 10% compound annual growth rate for what we’re looking at for consumer, but it is something we’re going to continue to look at as we look to the future. But the major driving factor have still been national brands converting into store brands and Rx to OTC, both of which have been very – just even yesterday, we just saw Flonase going over the counter and launched by Glaxo, another great opportunity for us.

[Judy Brown:]

And to be fair, just to add a little color to your specific question on long-term CAGRs, we do provide compound annual growth rates over a rolling three-year period. So just always keep in mind that we have never given specific annual targets on a forward three or five-year basis, it’s always been a rolling three-year compound annual growth, couple that with the fact that, as I stated, when we come together with Omega and we anticipate giving consolidated combine new calendar year guidance. It would be refreshing our commentary around that as well.

[Randall Stanicky:]

Got it. And Judy, my follow-up is for you, actually, on the animal health business. If we do the math that you laid out, it looks like there was roughly a $37 million impact relative to guidance, if we go midpoint to midpoint. So I guess the question is, is that the right way to think about it? As you think about the reduction in full year growth for consumer, how does cough/cold strength factor into that, either as an offset or an opportunity to offset some of those headwinds?

[Judy Brown:]

Sure. So if you look at the total change in the growth expected, so I’ll call it, old midpoint to new midpoint and the movement there. Like we said, like I made in my formal comments, there are a couple moving parts. I think your estimation on animal health is an appropriate one. There's a couple other pieces in there as well. I mentioned a movement in contract sales within animal health also, so you pick up probably a third of the movement in that midpoint to midpoint coming from animal health. Big picture then, we have the adjustment in new products being another third, and then like I said, OTC contracts and ForEx being the remaining third. If you think about the dynamics there, also, first half to second half, about a half of that total adjustment from midpoint to midpoint has happened, so it’s the movement that has happened already through December, about two thirds of which happen in the second quarter, so just looking at where we thought we will be at this point in the year versus where we now expect to be full year, about half of that is under our belt. So you've got that done with, and the remaining adjustments come through from the reasons I just outlined, animal health, OTC contract, new product adjustments.

[Randall Stanicky:]

With cough and cold benefiting the March quarter?

[Judy Brown:]

Cough and cold would be reflected in the March quarter and our current estimation is based on what we’ve seen at retail through January are reflected in the numbers.

[Operator:]

Your next question comes from the line of Louise Chen with Guggenheim Securities.

[Louise Chen:]

I have three. First question I had was back onto the animal health, the Frontline. Just curious in terms of possible outcome this year in terms of the breach of contract, if you were to prevail on your discussion here, what could be the upside? And then secondly, on Omega, just curious how to think about the FX impact since you announced the deal? And then lastly, a question that we get quite a bit, just curious, what are some of the factors that make it challenging to forecast your quarterly EPS and how should we think about these? Thank you.

[Joseph Papa:]

I’ll start with the first one and then Judy can talk about maybe the FX with Omega and then we’ll go to the quarter EPS. First on animal health, I think Judy said it quite well, we believe that there has been a breach of contract, we think it’s very clear to us that we had an exclusive position to launch the store brand, value brand version of the fripronil plus product, not Frontline Plus store brand. Having said that, it appears that the innovator has given a right to another company to enter into this market place, which we believe is inconsistent with our contract and we will continue to pursue all of our legal options to defend our position here. The issue on this question always becomes a timing question, we think to not allow that competitor to enter the market, however whether or not we will prevail on that is still uncertain at this time. So really the resolution really can be something that is near term or could be – take longer term. Because of the concerns we felt it was best not to model an exclusive position into our current fiscal year that we're talking about right now for the next five months. So that’s what we face. Is there an upside, were we to prevail and rapidly prevail with that? The answer is absolutely yes. I don't think I'm going to put a specific number on that at this time, because it really would depend on the timing of when and how it happens relative to the season and I really don’t want to make any comments on an ongoing litigation. Judy, second question was on the FX.

[Judy Brown:]

Just one last comment to Joe's point with respect to the Frontline Plus, that is obviously a seasonal product, seasonal selling would really normally be kicking in in the March quarter anyway. So we have made adjustments to reflect where we believe will be at this moment knowing that the, I’ll call it, March through June selling cycle is classically when those products would really be moving from us out to retailers and through retailers to us. On the Omega question, I’ve already made some comments on foreign exchange, foreign exchange even impacting Perrigo which is classically a very US focused sales business. But on the Omega transaction, we have seen an impact, our original announcement, our discussions of the transaction were on November 6 and we have had our models run at that point at an exchange rate of $1.25 to the euro, obviously that has moved. We're looking at numbers that have even floated south of $1.15 in recent weeks. I’m not commenting at this stage on specific exchanges to the modeling, I think you’ve all built detailed models of assumptions in terms of revenues, costs, and then we had made a comment on accretion for the fiscal year 2015 ,that is the period ending June of 2015 to get ahead of our – get too far out over our skis right now and give you updated numbers when the exchange rate is moving multiple percentage points in a day sometimes we think would be going too far because we still don't have a lock down closing date. So we will make some comment at closing and we will certainly provide updated color on our May call with the exchange rate at that time and also knowing that, again, we’re going to give you information for the nine months ended December for Omega. So a lot of moving parts, we decided to change our fiscal year, we announced that in December. At the time we announced the deal we gave you guidance for the old fiscal year model, but we are going to update all of that with new fiscal year, new exchange rates and nine month period, suffice it to say it is a downward pressure, there is no question there. I don’t want to give specific numbers because the exchange rate could easily flip tomorrow.

[Joseph Papa:]

On the last part of your question, quarterly EPS and some of the challenges in forecasting that quarterly EPS, I think it really comes down to a couple of key factors. The first one is new products, the second one is seasonality. Let me deal with the new products first. The good news is that we forecasted over $235 million of new products to Perrigo in this current fiscal year 2015. As I sit here today, we still believe we will do over $235 million and as I said on the call, even if I don’t get any new products approved for the remainder of this year, from February 1 on, we already believe we have a run rate that will exceed that $235 million just from the products that are currently improved that we plan to launch. So we feel very good about that. Having said that, though, we did get in that new products approvals more in the Rx category, less in the consumer. So on balance, our probability weighting was absolutely spot on, but clearly there were some differences in how that occurred within our respective business segments. But for totality of it, new products were still right on the numbers that we projected over $235 million. The second issue that for us is important, and we try to minimize the seasonality, but it is, as we get more diverse in our business, as Judy was mentioning, but having said that, seasonality still impacts our quarter. If you think about the quarter through December 15 that we're reporting on, it was a very weak cough, cold, flu season, exactly like last year, very weak, not consistent with being an average season or a strong season, it was weak December 15. The season did spike, it became a stronger season or not about mid-December, and we have seen that strong season through February 1, which has been about 10% more than last year. So we have seen that occur. As to whether or not it will continue, that gets to just – I’m wanting to make sure that we don’t get too far ahead of ourselves, so we would like to make sure that we built in the strength that we've seen from December 15 through let’s call it February 1. But as to what will happen tomorrow with the season, we really don’t want to make any specific comments. But the seasonality is probably the other big swing factor for us. So new products, probability weighting on that, which certainly is important, and how it individually affects our business segments, and then the seasonality of the two major ingredients for what affects our quarterly EPS.

[Operator:]

Your next question comes from the line of Gregg Gilbert with Deutsche Bank.

[Gregg Gilbert:]

Thanks. Well, I'm glad Siggi at Teva punted that Nasacort question over to you guys. But I had two questions. First is on Omega. How's that business been performing? I'm not asking about FX here. I'm asking how it's been performing since the announcement and how focused are you all on looking longer term biz dev opportunities to leverage that footprint? And my second question, Joe, is a pricing question in the store brand environment. Obviously, the generic side of your business and many other companies has benefited from an enhanced pricing environment, if we could call it that, in the last several years. And I realize the store brand business is quite different, but you are overwhelmingly the dominant player. Why can't we see more pricing stability or growth over the next few years, given your strength in that area and given that the regulation and other aspects are there for store brands like they are for Rx? Thanks.

[Joseph Papa:]

First of all, we're delighted to say, on the Nasacort comment, that we've reached an agreement with our partner Teva, and that that product will be coming to the market for the upcoming allergy season, so that’s a good news and look forward to working with our partner Teva on the Nasacort OTC store brand launch. Relative to Omega, Gregg, we believe it’s performing very well. We've looked at the numbers for how marketing team have done even in the – by country, they shared some information there. And we are delighted to see how they've performed. More importantly, beginning integration activities with the teams from the finance point of view, from the supply chain point of view, with meetings with the country managers and our country manager meeting with their country manager, where, for example, there's an overlap in Australia have gone quite well. And we are very excited by what it means to us for the future, really to leverage the platform. And as I said in the previous call, with think there is synergy there by taking some of the Omega products and bringing those Omega products into the US, as well as taking some Perrigo products and bringing them into Omega to do some line extensions for their products, and then we think there is tens of millions of dollars of cost of goods sold synergy. So all that is going quite well and we do think that there is additional business development activity to leverage that platform, now that we have the platform in Europe and we will be looking to find additional products that we can basically bolt on to the Omega infrastructure. The final question you had was on store brand pricing, the first comment I offered is that across the total Perrigo portfolio, our goal is always to keep pricing flat to up slightly, we believe we can continue to do that and it’s been our goal I think for the past seven out of the last eight years that I’ve been with the Perrigo. We’ve always had that goal, keep pricing flat to up slightly. I’m pleased to say that we continue to believe that is attainable for us. Having said that, within any business segment there can be some ups and depending on the competitive pressures we face and what we try to do is really manage the portfolio for us in terms of take store brand pricing up in year one, but then realize that we are going to have some down comparisons on pricing Rx category. The next year we’re going to look at Rx and raise those prices, realizing that there’s going to be some challenges in nutritional or in the category of store brand. So we are really trying to manage the portfolio there, we do have some challenges, I will be clear on store brand pricing as we sit here today, but we think we can offset those with some of the things we are being in the Rx category and I think that’s really the way we are continuing to manage the portfolio there.

[Operator:]

Your next question comes from the line of David Risinger with Morgan Stanley.

[Emil Chen:]

This is actually Emil Chen filling in for David Risinger today. Just two quick questions. So besides Frontline Plus, what are some of the other key swing factors that could really help drive the consumer business in calendar 2015? And then also on Omega, to follow-up on the previous question, so the organic growth profile of about 7%. How much higher can we really drive that by promoting Perrigo's products in Europe via Omega and their infrastructure there? Thank you.

[Joseph Papa:]

So going back to your question, it really comes down to us always about new products, clearly Frontline Plus is a big one for us, but it is the other new products that we anticipate launching during the fiscal year and actually for the calendar year 2015 that really are the drivers for us. So in addition to that, clearly, is the Nasacort product that we plan to launch, we also have guaifenesin returning that we returned to the marketplace in the October timeframe, so we get that during the second half of the year. I remind you we were not there last year because of the supply issue we had with guaifenesin. So it is those products that will be the major drivers for us for the new product, the new products really is what drives our business. Your second question was about Omega, the Omega question really comes down to the daily what can we do to leverage it. And what we have said on this particular one is we believe there are specific products that Perrigo already has approved somewhere in the world that we can bring to the Omega organization and utilize those as additional line extensions to launching of their product into the market place. And we have already have been working with the Omega team to do some of those things already, even before the announcement of the deal. Those are the things that we’ve already have some familiarity with. We believe that is going to offer hundreds of millions of dollars of revenue synergies on that site. Albeit those are going to be think in years two, three or four, not next year to be clear. In addition we believe some of the Omega products that they have available today can be opportunities for us to bring back into the US, Mexico and other places where Perrigo is in and Omega does not. So those are some of the other opportunities for revenue synergies. The final one is that cost of goods sold synergy I mentioned, but we think many of the American products are currently outsourced, some of those products we can bring into the Perrigo and Omega infrastructure and potentially they will go to our cost of goods sold. Those are really the three primary areas for us for Omega synergies.

[Operator:]

Your next question comes from the line of David Steinberg with Jefferies.

[David Steinberg:]

Thanks very much. A couple questions. First, Joe, you mentioned guaifenesin coming back to the market. It's clearly one of your most profitable products, any color on how that relaunch is going? Are you pleased with it so far? And then secondly, on the subject of new products, just to go over some of the therapeutic areas, Allergies have largely gone over-the-counter and have done well in store brands, proton pump inhibitors, the same, and you have obviously Nexium coming up, and now nasal corticosteroids. But big picture, looking down the road, what are some of the other therapeutic segments that you are optimistic about that you think could go over-the-counter at some point? I know in the past you've mentioned statins. Any color on some of these therapeutic classes? Thanks.

[Joseph Papa:]

Sure. First of all, [indiscernible] we reintroduced in late October 2014, so we are back in that for several months. We are on our way to get to about 30% store brands here on that kind of direction, we are not there quite yet, but we are on our way there. I’d say though that we always believe that once we are into the marketplace with a product, we usually get to somewhere in that 40% to 45% store brand share within the first 12 to 18 months. And I absolutely believe, because there’s a lot of products, that is an extensive OTC products will get back to that same category. On the question of the additional Rx OTC products switches and what else is happening, you’re absolutely right. As I mentioned, we are delighted with the nasal allergy products that we have now got Nasacort, OTC store brand, that’s an important opportunity for us. We look forward to launching that. As I mentioned, Flonase just launched their product, just really this week, and we do expect an additional nasal sprays to be launched, we think there is opportunity for products like [indiscernible] and many of the other nasal allergy sprays to launch into the marketplace that we are going to obviously closely following. On the proton pump inhibitors, a large product of Nexium has gone over the counter, we look forward to launching our product when the exclusivity for that product expires. Beyond that particular category, we still aren’t looking at the other products for overactive bladder [indiscernible] we will potentially – that’s not a shelf for the large product, but the other overactive bladder products represent $3.3 billion of sales, products like Detrol, Detrol LA, Ditripan, Ditripan XL has opportunities for products to OTC. Should those go, Perrigo of course is going to be a fast follower in those categories. Additionally, you mentioned statins, that one we are going to get a read out probably in the next, I’m guessing, six months from the work that Pfizer has done with Lipitor. Probably, at this point I want to say – just confirm to say, it’s probably at 60% probability it will go OTC, 40% it will not. We haven’t changed the opinion on that one at this time. The other area I think is important to follow is BPH product, also the NLG big products that are topical, NLG, other categories that we expect for the future. Potentially some ophthalmic products as well form the basis of where we think other OTC switches could happen, the ophthalmic [indiscernible].

[Operator:]

Your next question comes from the line of Chris Scott with JPMorgan.

[Dana Flanders:]

Thanks. This is actually Dana Flanders on for Chris. Just two questions on the Rx business. First, can you just talk about the Androgel 1% launch, how that's progressing and what you are expecting for the rest of the year regarding AB-related competition? And then secondly, on the Rx business again, just pricing, I know you think of your overall portfolio as flat to slightly up, but it seems like there's a nice opportunity for continued pricing in the extended topical generic space. Can you just elaborate on how you are thinking about that and the sustainability there? Thanks.

[Joseph Papa:]

Sure. So first of all, on Androgel 1% AB-rated products from Perrigo Testosterone has been launched. That product, we believe, is the only – AB-rated product approved at this time. I can’t speak exactly when the next product will show up, but at this time, we’re out there with the only product. So we think that’s obviously a very favorable environment because it’s a very difficult product to show AB-rating for, to show your bioequivalent, we were able to do that through the way we designed our clinical trial, we don’t think that that’s an important advantage for us and will be a very good product for us this year. I will remind you the Androgel 1% product by itself is about $300 million product and for us that’s a AB-rated product is an important opportunity for us. On the question of pricing, you’re absolutely correct on how we view it, we view the pricing as across the portfolio, trying to keep it flat to up slightly. And every year we go and look at what, sometimes we have opportunities in the store brand side, sometimes we have opportunities in the Rx side, I will say the Rx side does have, as I sit here today, the greatest upside. I absolutely concur with the comments there. I just though, always wanted to try to manage it as one we manage our portfolio in trying to keep a look across the entire portfolio, some year this is going to be nutrition, some year this is going to be consumer, but certainly over the near-term topical, extend topical products didn’t have the greatest upside for pricing.

[Operator:]

Your next question comes from Marc Goodman with UBS.

[Marc Goodman:]

Yes, you had mentioned the Nexium launch by Pfizer, I was curious your thoughts on how Pfizer's doing out there with that product OTC and if this is going to be as big as you think it's going to be when you get to launch three years later. And then the other question is, you have some products, I know, that are prescription brand with sales people actually selling it. And I was curious how that business is going and how you think about expanding that business? Do you look to use M&A to get more into the prescription business at all? Thanks.

[Joseph Papa:]

Sure. First on Nexium, we think Pfizer has done a very good job, they have the product at $300 million run rate, which for a third launch of a proton pump inhibitor is well, has done well. I’m sure they are going to continue to take some ambitional exclusively period, I’m sure there are going to continue to try to improve the performance with the Nexium product, but basically they are about one year in and its running at somewhere around $300 million opportunity. That’s a national brand opportunity. I think it’s done reasonably well, I’m sure they’re going to continue to promote and spend behind it. I will remind you though it is the third proton pump inhibitor, behind the first one being the Omeprazole, the second one being the Prevacid product. So coming third it’s done reasonably well. On the question of Rx brand, it is an opportunity for us, the way we entered this product, we were making two of these brands for, the KV Company. When they ran into some manufacturing difficulty, they turned to us and we’re making these brands, we felt it was a way to leverage products that we were making, we already had approvals for to take them and bring them into the Perrigo portfolio as an opportunity to take our technologies, our capabilities and leverage those for going into some branded opportunities. Our process really is building our sales force in the women’s health category to go forward to be successful with these products. These products were significant products in the range of $50 million to $75 million products prior to the problems that KV had with their manufacturing, we feel very comfortable in our ability to manufacture. So it is just really going back to promote the product. But there were a natural opportunity for us to extend them, because we were already making the product. Having said that, though, what I would be very clear to say is that Perrigo was not looking to try to enter into mass market products, we are looking more at specialty items, in this case women’s health as a specialty place where we can promote, where we don’t need large sales force, we could do with a reasonable size sales force to go after some opportunities, especially when they already correlate with some of the things we do well, like manufacturing of topical products. So we are proud about that and look to do more of it for the future and especially now that you’ve got some infrastructure here in the women’s health category.

[Operator:]

Your next question comes from the line of Annabel Samimy with Stifel.

[Annabel Samimy:]

Hi. Thanks for taking my question. I have several, actually. When you mention the consumer health area, that one-third of the guidance change is related to the new product sales, can you just give us a little bit more color on that, because it seems that Nasacort went well, the Mucinex product is out. So just what are some of the bigger products that didn't come in? And also on that note is, does Flonase have exclusivity for three years? And then on the flip side, the generics business, where you have new product launches, to what extent was that the women's health contribution? And then related to M&A, it seems like you're making more of a statement related to M&A. Are you going to be using more M&A to balance the organic growth more to, it used to be about 50/50. Are you looking now to M&A to drive growth a little bit more now? Thanks.

[Joseph Papa:]

Annabel, I will try to hit all of those. But there's a lot there that...

[Annabel Samimy:]

They are all related.

[Joseph Papa:]

One big related question, happy to try to do that. So on the questions of new products, absolutely we are excited about Mucinex being back into the product category. We are excited about the opportunity to launch the Nasacort product, but there were some delays. We’ve talked about some of the delays partnered products that we had at Perrigo, we still believe that there are some opportunities, but we are not forecasting getting for example an omeprazole, flavored omeprazole product into the category this year. We are delaying our view on – reducing our view on some of these products that Judy talked about the letter to animal health. That was another important category for us. We are not including anything on the Mucinex family of products in terms of the sustained release products as example. In terms of the partnered products that we have, we are pushing off as a result of some of the delays that we’ve seen in the marketplace. On the question, the second question, of Flonase, I’m going to really talk about – it's unclear at this time for Flonase. Do I believe Flonase has a three-year exclusivity for the entire product? The answer is no. Do I believe they have a three-year exclusivity on specific allergic eyes, I do believe that they do have that, that exclusivity. As to how it’s going to play out between that time, whether or not we want to go to the market with Flonase prior to the expiration of the allergic eye data which is, as I said, we do believe that will be true, they will have exclusivity there. That’s unclear at this time. So right now, we are not planning for our Flonase product to get to the market as I sit here 2015. We are working very closely with our partner, though, to enter the product category with that, but that’s something that we’re not sure at this time to exactly the regulatory pathway for the exclusivity position for the product. So therefore we’re excluding it from our current fiscal year 2015. But I do think there are opportunities potentially for a carve out of the allergic eyes, but I just don’t want to go too far and say when we think that we’ll launch. I think we are still working with the regulatory side. On the generic performance, women’s health really was a very minimal amount of sales, less than $2 million. So very little as we got there with women’s health category, the majority of the growth was truly in these new products that we mentioned, specifically the Androgel 1% generic product. Final part of the question was the M&A, as you very appropriately pointed out, looked at growing organically and inorganically. Our history is we grew at about mid-teens growth rate. About half of the growth 7%, 8% was organic and the other half was 7%, 8% was in the area of inorganic M&A. I think we will continue to look to try to have a balanced growth with both M&A or inorganic as well as organic. Because of the iterative process we go through, some years you get more of a step function where you will have more growth from M&A, other years it will be more from organic.

[Judy Brown:]

And to be fair, we are commenting a little bit more on business development, our focus there, because frankly with the success of our business model and our strong cash flow generation, we are looking at generating more than $1 billion of operating cash flow this fiscal year and project that to continue to grow into the future. So that is an important part of our long-term investment strategy and our growth strategy, we will continue to talk to you about organic growth rate, because of our stated belief that starting to get into quoting growth rates that include M&A has the risk of, in the long run, promoting bad discipline and we like to stay very focused in our M&A on good disciplined investments that can make sure to generate solid returns on invested capital. We also are aware that we are going to stay to our stated goal of maintaining our investment grade, we will be delevering and spending this time now focusing on the best priorities to those cash flow that we’re generating and look for the best priorities to make the next growth acquisition in the medium and long term. So that’s the reason we’re talking more about it, because it is a very important and responsible part of our business model.

[Operator:]

Your next question comes from the line of Sumant Kulkarni with Bank of America.

[Sumant Kulkarni:]

Good morning. Thanks for taking my questions. I have three quick ones. The first one is on your outlook. What would need to happen for you to come in at the high end of the range that you have? And conversely, on the flip side, how safe is the low end? Second, when do you expect to participate in the other guaifenesin family? And do you have a partnership already there? And the third one is a bigger picture one. Are there any categories, and this is not on Rx to OTC switches, but large categories left in the US that may benefit from, for lack of a better term, Perrigo-ization, to the extent that they could cause an inflection on your consumer healthcare segment, which happens to have a relatively large base?

[Judy Brown:]

Probably I can take the first one, Joe. And I'm very excited to know that a verb has been invented about our company, Perrigo-ization. So what do we need to do to get to the bottom of the top end ranges that we are providing, and I’ll just provide this on an overall consolidated level just to give you the pushes and pulls. So obviously we talk a lot about flexing on new products. So what ends up happening, we do have fipronil plus, Frontline Plus products still in the forecast, depending on the outcome of that process, we’ve talked quite a bit around already this hour, that can be a good add to get us to the top end or it can come down and bring us closer to the bottom end. Execution of the second half promotional activity, there is quite a bit of promotional activity planned within our consumer facing businesses in the six months ending June and those goals need to be executed well in order to be in our forecast. So that’s an important part of getting to the midpoint of our guidance. Market formation on new products, we need to start talking about, and Joe has already mentioned, Nasacort, getting dummies into the market, variety of products, if those go well, we will end up towards at the top. If they do not go well, that slides down the tail. We have a competitor that has been out of the nicotine replacement market in the last month where they too returned unexpectedly and quicker than planned that would be a negative. So as those types of things, we’ve seen unfavorable trends in our VMS category, if those continue that’s a negative to our plan, because we have expectations that begins to stabilize in the second half of the fiscal year and we have upside potential as we have better contract sales within our infant formula business and/or we have upside as we have really strong Androgel continued pull through. So those are the yins and the yans within the 5% to 9% range on the consolidated revenue guidance.

[Joseph Papa:]

So on the question of guaif and the extended family of sustained-release products, yes, we do have a partner, we have not specifically named the partner, but many of you have a guess. It’s a good company, very good company and we think they are a great partner, but they have had some difficulties in getting their product approved by the FDA. We expect that will be someday resolved, we continue to look forward to getting those products to the market. But at this time, as we said on the call, we do not want to build them into our model there, not built into our model for the current fiscal year, we’ll continue to refresh that depending on what’s happened with our partner. But we do expect at some point to get to the market these products, but they’re not built into our numbers at this time. On the second part of the question, the category that Perrigo will continue to go down, I think clearly you said, the first and most important one, all these products that are prescription today they are going OTC that we are going to file every single category, whether it’d be nasal sprays or topical allergies, proton pump inhibitors, all those categories, overactive bladder et cetera. What other places we can go, though, that we do think do exist, we’ve talked about in the past wound care, wound care has been other category that they are quite expensive products that are used. And I'm not talking about bandages, tapes and things like that, but it is some categories of specific advanced wound care that we do think are opportunities to look at store brands opportunities. The other area is diabetes, we’ve done a lot with building a very large portfolio of diabetic products, you see some of the changes that are happening in the category as more and more people are going to store brand for the category, we want to build the largest portfolio of diabetic products, because unfortunately diabetes is a growing disorder that we’d like to make sure that we have the broadest portfolio available. Final area for us that we’ve talked about in the past, we’ve done some things, but there is more to do, is the category of pet health. We think pet health is another category for us and then probably you just mentioned adult nutrition, we’ve already started that, but that would be forthcoming in the near future as well. So I think those are probably the other categories, wound care, diabetes, pet health and then the adult nutrition categories as ones that we think there is a lot more to do there.

[Operator:]

Your next question comes from the line of Jami Robin with Goldman Sachs.

[Unidentified Analyst:]

Hi. This is [Aria] in for Jami. You mentioned some risk with competitor coming back with smoking sensation products. But I'm just not clear, is that in your guidance or is that just downside risk if they do come back to the market?

[Judy Brown:]

That is a downside risk to our model were they to come back. We have an expected phase back in of the competitor, that is downside risk.

[Unidentified Analyst:]

Okay. And then secondly I was just going to get some clarity on the vitamins business. So obviously it's going to be worse than you had originally expected for this year. But I guess just how should we think about it longer term? Should we assume continued pricing pressure, or will this start to be offset with the entrance into the gummy vitamins, and maybe the adult nutrition, so more for the future or the long-term thoughts on that business.

[Joseph Papa:]

Sure, thank you for that part of the question. The VMS category is one that we continue to follow very closely. What we are seeing, as I mentioned in the call, is there is product coming in from China into the United States that at this time we do not believe is properly labeled, made in China, and it’s being sold in the US. That’s something that we do think we will get resolved, but I don’t want to put a specific time on it because things like that take quite a long time. But that pressure on products coming in from China has been noticed in our pricing for our VMS category in the competitive side. So that is clearly an issue. Our response to that though is to go into products that we think are less commodity like and more importantly added value with the sense that we go along into the category, as you mentioned gummies as a category, it’s about $700 million category and that is growing rather quickly that we think is a great opportunity for us in which we did a partnership that we announced in early January with the largest gummy manufacturer in the world, which will take their gummy knowledge technology and put it together with our knowledge of vitamins and work together to bring out gummy vitamins and other gummy OTC products we think will be very exciting. In addition, the adult nutrition products will be – we will be entering into those, we’ve done a partnership there, we think that’s an important part of continuing to try to improve our nutrition business. So you’ve hit on two of the other very important things that we’re doing for growing the business. Operator, next question?

[Operator:]

Your next question comes from the line of Jason Gerberry with Leerink Partners.

[Jason Gerberry:]

Good morning. Thanks for taking the questions. Joe, just on the – going back to the Pfizer Lipitor Rx to OTC switch, can you talk about, now with they're going to data in six months from their user study, just a road map in terms of how this will play out. And I imagine there will be some advisory panels. But ultimately trying to get a sense of what would get you to bump up your odds of success from 60% to a higher threshold. And then my second question, just on SPMS opportunity for Tysabri, just curious your thoughts in terms of how much of the market's already off label and how big of an upside opportunity you think that could be? Thanks.

[Joseph Papa:]

Sure. Let me comment about that in general and then I will talk about Lipitor. As I said, my comment on – there has been a general comment that about 60% probability for them ultimately going OTC and it’s predominantly because of how the FDA and the medical world has changed their views of, you don’t necessarily treat only to a level of cholesterol, you now start to treat risk factors, those risk factors are something that people can say I know a man, I know were over the age of 55, I know family history of heart disease, or things like that, once you know those risk factors, you should be on a statin, almost irrespective of what the actual cholesterol number is. So it’s that move to risk factors that I think is the important question. I can’t say specifically anything about Lipitor, I think obviously we had to wait to hear what Pfizer has to say with that, I’d just simply suggest that we expect that we’ll hear more about their outcome of their clinical trial that we know they were – at least a clinical trial started on time, we expect to hear something probably within the next six months. As to whether or not they make the decision to go over the counter or to take the products to the FDA and bring it over the counter, I think we just had to wait to hear what Pfizer specifically says about Lipitor. My comment was more of a generic comment about what happens. The next part of the question you asked was SPMS, I think we are going to wait and see what Biogen says about that. All we’ve heard is that that would be a specific readout on their clinical trials sometime in the latter half of 2015, that’s calendar 2015, so we await that. In terms of the value of an SPMS indication, I’ve heard that there is some off-label usage. We've talked to some neurologists about that, we’ve heard some commentary on those lines, but importantly if this drug can show that it is effective in the area of SPMS, we do think there is a significant upside to it. There’s a whole range of options. I probably can't say whether it’s 10% upside or a 50% upside, there’s an entire range of thoughts on that. But importantly, if this product works for SPMS, that’s an very important improvement for patients that have that [indiscernible] and that would be a great day for the patients.

[Operator:]

Your next question comes from Douglas Dow with Barclays.

[Douglas Dow:]

Hi. Thanks for taking the question. It's just a quick one. Judy, if you could just review where you are, I think you noted that your debt levels pro forma for the Omega deal, if you could just provide some detail in terms of the break down between secured and unsecured?

[Judy Brown:]

Secured and unsecured in terms of our total debt?

[Douglas Dow:]

Yes.

[Judy Brown:]

It’s all.

[Douglas Dow:]

All unsecured, okay.

[Judy Brown:]

When you go over the 10-Q later today, you’ll see that our debt structure today comprised of term loans and covered bonds.

[Operator:]

Your next question comes from the line of Tim Chiang with CRT Capital.

[Tim Chiang:]

Hi. Joe, I had one question. This Androgel 1% launch, are you guys seeing any conversion from the higher strength branded product over to your lower strength generic product at this point?

[Joseph Papa:]

As you appropriately pointed out, we’ve only launched the 1% Testosterone product at this time. I think it’s too early for it, we’re seeing usage of our products, but I think it’s probably too early to say whether or not any of the specific patients that are on 1.16 will switch to the 1%. Having said that, though, when you can get, when the third party payer and patient can get a generic product with the same AB-rated as a 1% product, the use of the 1.62 with the co-pays of a branded co-pay versus the co-pay of a generic one, I’d guess you’ll see some transition on that, but I think it’s probably a little too early for us to say that and that we’re really in the first month of launch. We will look to continue to show that we have a great offering here with 1% AB-rated product. But I think we’re just going to have to wait and see what happens from the payer point of view and the patient point of view. We may see some, but it’s too early for me comment right now.

[Tim Chiang:]

And maybe just one follow-up for Judy. Judy, I think we had talked on the last call about your pro forma tax rate with Omega being around 19%, 20%. I noticed your stand-alone tax rate went down a little bit for fiscal 2015, to 15%. Will that positively impact your pro forma tax rate?

[Judy Brown:]

Excellent question. I would say in theory, yes. What moves the needle from our last guidance to this guidance, why did we go from 16% to 15% is jurisdictional mix. So as we think about the plusses and minuses that you see on the overall guidance page in the web material, you’ll see we’re adjusting down some of the consumer and nutrition numbers, we’re adjusting up the Rx number, particularly with respect to new products and that mix has helped favorably impact the effective tax rate. Now, we started talking about the rate, when we give new calendar guidance including Omega, again it come to the mix in that period ending December with jurisdictional mix, but conceptually that mix of income in the ongoing standalone Perrigo business were to continue, you would see a positive benefit. Again, out of my skies to talk about with Omega until we have those numbers consolidated in with us for the nine months ending December 31 when we give that new guidance.

[Operator:]

Your last question comes from the line of Linda Weiser with B. Riley.

[Linda Weiser:]

Hi. So Joe, just kind of a big, strategic question, when you think about future acquisitions and you think about some of the OTC areas, is there any possibility of combining with a branded OTC company in the US or is that not strategically, would that not make sense in the way that you interact with the retailers, or do you think over time there could be some possibility of that kind of a combination?

[Joseph Papa:]

I think, Linda it’s a great question, as we think about what we have accomplished in the past, store brands have been very, very important to Perrigo, it is our legacy business both as you think about consumer and our nutritional business. Having said that, there are places where we do think brands could work for us and we’ve launched a branded version of a probiotic, which we learned a lot about. It has some challenges to be clear, but we learned a lot about ability to launch brands to get store placement et cetera. So do I think there’s an opportunity for us to go into branded business in some select categories, the answer is absolutely yes. In fact, Omega I think is a proof point for that, because as we thought about going into Europe with our portfolio, we thought that there is the Omega example, just a best way for us to get that infrastructure and bring our product portfolio there. As we think about it in the US, we’ve tried with a product here and it had some mixed results. We had good store placement, but there is learnings there for us as we think about the future, I think it’s absolute reason for we will look at that as a way to continue to grow and drive shareholder value for the company. So I do think it’s a good question, Melinda. It’s one that we’ll continue to look at for the future. Thank you very much everyone for the call today. I would continue to say my confidence in the entire Perrigo team for what they have been able to accomplish and what we look forward to especially as we bring the Omega product portfolio to Perrigo and importantly as we think about launching a lot of these new products, we got a lot of work to do. We go a great team of people, all dedicated to make quality healthcare reality for Perrigo and for around the world. So thank you everyone for your attention today. Have a great day.

[Operator:]

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