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The Perrigo Company (NYSE:PRGO)

F2Q09 (Qtr End 12/27/08) Earnings Call

February 03, 2009 10:00 AM ET

Executives

Arthur J. Shannon - Vice President, Investor Relations and Communications

Joseph C. Papa - President, Chief Executive Officer and Chairman

Judy L. Brown - Executive Vice President and Chief Financial Officer

Analysts

Daniel Rizzo - Sidoti & Company

Linda Bolton Weiser - Caris & Company

Derek Leckow - Barrington Research

Gregory Gilbert - Bank of America

Randall Stanicky - Goldman Sachs

Scott Hirsch - Credit Suisse

Louise Chen - Collins Stewart

Operator

Good morning. My name is Thelma and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo Fiscal Year 2009 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Shannon, Vice President of Investor Relations. You may begin your conference.

Arthur J. Shannon

Thank you very much Thelma. Welcome to Perrigo's second quarter 2009 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 press release is available on our website, at www.perrigo.com.

Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page one of the company's Form 10-K for the year ended June 28, 2008.

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

Joseph C. Papa

Thank you, Art and welcome everyone to Perrigo's second quarter fiscal 2009 earnings conference call. Joining me today is Judy Brown, Executive Vice President and Chief Financial Officer.

For our agenda today, first, I will provide a brief perspective on the quarter. Next, Judy will walk through the detailed financials and then I will elaborate on why we are confident of our growth potential, including a new product update and the specific action steps we're taking across the business to adjust the challenges we face for the second half of the year. This will be followed by an opportunity for question-and-answer period.

Overall, let me get started; in the second quarter of fiscal year '09, we continued to demonstrate strong top-line growth in our core consumer healthcare OTC business, while we work to mitigate the challenges in our other business segment. We achieved record sales led by our over-the-counter business. There were three main drivers for OTC business success: first, new products; second, an increasing acceptance of store brand over-the-counter products; and finally, our recently-completed strategic acquisitions.

Let's start with a quick review of our new product sales. New product sales were $84 million in the quarter as Omeprazole, Cetirizine and Famotidine continued to perform well. I am very pleased with the work our team has done to deliver an increasingly broad portfolio of quality, affordable product offering through our shelves.

Our second top-line growth driver is store brand acceptance. As a perspective, the overall domestic OTC consumer market increased 4% in the quarter versus last year. However, nationally advertised brands are essentially flat year-over-year. During the same quarter, store brands gained nearly 17%. In Perrigo, sales gained 39% on the strength of new product launches and increased market share.

New product launches contributed to our growth rate to be clear. But, as several retailers have also commented, store brands are gaining market share. For example, analgesics is a major OTC category that has not seen significant new product innovation in the few last years. The category as a whole has remained relatively flat year-over-year.

In the same time period, national brands sold more than 2% during the quarter versus last year, while store brands in the analgesic category grew more than 5%. This demonstrates that consumers are recognizing the value of store brands in a challenging economy and that Perrigo is uniquely positioned to deliver that value to consumers.

One other consideration, the FY '09 Q2 growth in our store brand business occurred in an environment that retailers reduced their Perrigo inventory or day sales on hand by 8% versus the same period last year. So we got growth in a time period where inventory on hand at the retailers is down 8%.

Our fiscal second quarter results in our consumer healthcare business show that we continue to maintain our focus on delivering quality, affordable healthcare products to meet the world's growing need.

The third key driver is strategic acquisitions. We executed a pair of strategic acquisitions. At the beginning of the second quarter, we acquired Diba for approximately $25 million. Based in Guadalajara, Mexico, this store brand manufacturer of OTC and prescription products helps make us the leading store brand manufacturer in Mexico. We expect the acquisition to add approximately $15 million of annual sales in a country where store brands represent today less than 8% of the OTC category, but are growing very quickly.

Perrigo is now the leading store brand manufacturer in the U.S., Mexico and the UK. We will continue to look at growing internationally. On November 13th, we acquired Unico Holdings for approximately $52 million in cash. Based in Lake Worth, Florida, Unico is the leading manufacturer of store brand pediatric electrolytes, enemas and feminine hygiene products for retail customers in United States. We expect the acquisition to add approximately $50 million of annual sales and is accretive to earnings in the first 12 months.

Now, with all those positives, there is another issue that I want to briefly address, and that is the decline in our CHC FY09 Q2 Q gross margins. This was driven by two factors; product mix, where we saw an accelerating sales of our lower margin vitamin and nutritional products, and a short-term need to invest in external manufacturing output to meet the rapid increase in demand for these products. Judy will provide additional details on this topic.

Also, while consumer healthcare has been growing, API has had a very challenging first half of the fiscal year, as Judy will explain in detail in a few minutes. First half sales weakened almost 10% from the first two quarters last year as a result of reduced sales of two key products as well as slower demand for others. We are managing through these challenges by focused cost-cutting initiatives and new pricing strategies.

I'll explain more about that and other areas related to our expectations for the second half later, but first now let me turn it over to Judy. Judy?

Judy L. Brown

Thanks Joe and good morning everyone. The team has worked hard this quarter capitalizing on our strengths and adapting to changing market conditions in a dynamic economic environment.

In the next few minutes, I'd like to provide you some quick highlights of the financial results for the quarter, and help provide you better detail to understand why we see that growth continuing, and the basis of our financial expectations for the remainder of the year.

Year-over-year, we had a strong quarter. Consolidated net sales increased 29% to $561million, led by $84 million in new product sales across most of the businesses. Consolidated GAAP gross profit was $154 million, up $24 million or 18% from last year. Consolidated GAAP net income was $25 million, down $34 million from last year. Consistent with our historical practice of providing results on an adjusted operating basis, consolidated adjusted net income was $42 million, up $8 million or 25% from second fiscal quarter 2008.

Before reviewing our operational results, I would like to highlight those items that have been excluded from our analysis of the quarterly financials on an adjusted operating basis, consistent with our historical treatment of similar items. Starting with the most material item this quarter, we incurred a charge of $15 million or $0.16 per share related to the write-down of auction rate securities purchased in Israel from Lehman Brothers. These assets were written down from a face value of $18 million and continue to be held as non-current assets.

While we had discussed the fact that the market for these securities has been illiquid for over 12 months, the credit worthiness of the underlying issuers continue to deteriorate significantly in our fiscal second quarter as concluded in a formal valuation completed in January. As a result and in accordance with US GAAP, the impairment of these securities can no longer be considered to be temporary. And so, we have reduced the carrying value of these assets to our best estimate of their current fair market value.

In addition, we had several smaller charges related to our acquisition of JB Labs, Unico and Diba. We incurred charges to cost of sales of $1.4 million after tax or $0.02 per share for the value of step-up in inventory for these three acquisitions as well as the charge of $200,000 after tax for the write-off of in-process research and development related to Diba. In addition, we had a charge of $1 million after tax or $0.01 per share related to the impairment of certain fixed assets within consumer healthcare.

In total, these items had a $0.19 per share impact this fiscal quarter. We do not have any such items in the fiscal second quarter of 2008. You can view the reconciliations from the reported GAAP numbers to our adjusted non-GAAP numbers in Table 2 of the appendix to our press release.

With that behind us, I will take you through the financial analysis of our fiscal second quarter based on adjusted results, that is, GAAP reported figures excluding the previously mentioned charges.

Consolidated second quarter net sales were a record $561 million, an increase of $126 million or 29% from a year ago. The sales growth was driven by $84 million from new products, including strong sales in many of our consumer healthcare categories, which offset lower sales in API.

Adjusted consolidated gross profit was $158 million, up 21% from a year ago. Adjusted gross margin was 28.2%, compared with 30% last year. Adjusted consolidated operating income was $65 million, up $15 million or 31% from last year. Adjusted operating margin reached 11.5%, up 20 basis points from last year. Adjusted consolidated net income was $43 million compared with $34 million last year. Adjusted earnings per share were $0.46, up from $0.36 last year.

Now on the business segments, starting as always with consumer healthcare: Consumer healthcare second quarter net sales increased $126 million or 39%, to an all-time record $446 million. $77 million or 24 percentage points of these improvements came from new products, led by the growth of promoted and complete (ph) and the continued strong sales of Omeprazole and Cetirizine. Our existing product portfolio also grew this quarter, as store brand penetration improved within our smoking cessation and analgesic categories, and as our share of the nutrition store brand market increased.

Inorganic growth in the U.S. from our acquisition of JB Labs in September and Unico in November, contributed 10 percentage points of the sales increase. Our acquisitions of Brunel and Galpharm in the U.K and Diba in Mexico, contributed 6% of inorganic growth internationally. However, this top-line growth is partially offset by unfavorable changes in the value of the British pound and Mexican peso, versus the U.S. dollar in this quarter.

Adjusted gross profit of $119 million was up $32 million from last year's $87 million. Adjusted gross margin of 26.6% was down 40 basis points from last year, driven by a combination of factors. While the adjusted gross margin benefited significantly from new products and the implementation of new pricing activities in several existing categories, these gains were offset by a combination of higher production costs and a product mix effect of the nutrition product category.

As we've noted in the past, the nutrition category has the gross margins below the CHC average. As this category saw strong sales growth this quarter, adjusted gross margins have positive volume impact but a negative price impact to CHC overall.

Operating expenses in CHC increased $11 million in the second quarter last year, due to both business growth and acquisitions. R&D spending increased $4 million due mainly to the timing of clinical studies as well as the inclusion of expenses from JB Labs and Galpharm.

Distribution and SG&A dollar spend increased due to higher promotional activities and commissions related to higher sales volumes this quarter, the inclusion of JB Labs and Galpharm which added approximately $3 million in the quarter, and higher wages and IT investments in this quarter to support our rapid growth. As a percentage of sales, operating expenses decreased 180 basis points to 13.1% from 14.9% last year, even with the inclusion of the acquisitions.

In total, consumer healthcare had adjusted operating income for the second quarter of $60 million, up $21 million or 55% from last year. Adjusted operating margin in this segment was 13.5% of net sales, up 140 basis points from last year.

Looking next at Rx Pharmaceuticals; second quarter net sales in Rx were $40 million, up $2 million or 5% compared with last year. This increase was due primarily to new product sales of approximately $6 million, along with a slight increase in sales volumes in our existing portfolio of products.

These increases were partially offset by a $2 million reduction in non-product revenue, along with continued pricing pressure due to changes in customer mix and increased competition in the marketplace for generic drugs.

Gross profit was $16 million, down $2 million from last year. Gross margin was 38.8%, a decrease from 45.9% a year ago, reflecting the decline in non-product revenues and the pricing pressures I just mentioned, as well as unfavorable changes in sales mix of products. Operating income was $7 million, down from $8 million last year and reduced gross profit contribution, partially offset by $1 million reduction in operating expenses.

Next looking at API; where API net sales in the second quarter were $32 million, down from $35 million last year, due to lower sales volumes on two key products and unfavorable changes in foreign currency exchange rates. The gross profit was $10 million, down from $12 million a year ago on the lower sales volume of those two key products and the negative impact of foreign currency exchange rates.

Operating expenses were $9 million, up 5% from last year, due primarily to the recognition of a $400,000 loss on assets that fund Israeli post-employment obligations. In Israel, as required by applicable law, we have a deposited fund managed by financial institutions designated by management that are intended to cover post-employment benefits to our Israeli employees. Israeli laws generally require payments of benefits upon dismissal of an employee or upon termination in other certain circumstances.

The dramatic decline in the financial markets during the second fiscal quarter reduced the value of our funded assets, necessitating a charge to operating expense at the end of the second fiscal quarter. Operating income in API was $1 million, down from $3 million last year due to the decrease in gross profit and the loss on assets that fund these Israeli post-employment obligations.

In the other category, which is our Israel-based consumer products and pharmaceutical diagnostics businesses, second quarter net sales were $43 million, up 2% or $800,000 from last year. The increase in net sales was driven primarily by favorable changes in foreign currency exchange rates and an increase in existing product sales, partially offset by $2 million related to a change in the customer contracts from product sales to commission-based model.

Gross profit decreased $1 million or 6% due to increased pricing pressure. Additional unfavorable changes in sales mix and a slight increase in the cost of raw materials negatively impacted gross profit. Offsetting these decreases were favorable changes in foreign currency exchange rates.

Operating expenses were $13 million, up from $11 million last year due primarily to the recognition of a $2 million lost on the assets that fund Israeli post-employment obligations, as well as unfavorable changes in the foreign currency rate.

Similar to API, the other category was unexpectedly hit by the effects of the decline in the market value of this post-employment fund. As a majority of our Israel-based personnel work within consumer products or pharma diagnostic, these two businesses were proportionally charged to the majority of this fund decline. It is worth noting that this is the first time that we have experienced such a dramatic impact in these assets. Operating income in the other category was $500,000, compared with $3 million last year.

Now, a brief word about corporate expenses; adjusted unallocated corporate expenses for the quarter were $4 million, down from $5 million in the second quarter of last year. This decrease was due primarily to lower corporate administrative costs.

Now let's continue with the recap of the six month year-to-date results. Consolidated net sales for the first six months of fiscal 2009 of $1.142 billion, increased $223 million at 27% as compared to a year ago, with sales up in consumer healthcare and the other category.

Consolidated GAAP gross profit was $299 million, up 20% from $248 million in fiscal 2008. Consolidated year-to-date GAAP net income was $ 63 million, down from last year's $68 million. On a GAAP basis, earnings per share was $0.67 compared to $0.72 last year.

In addition to the items affecting the second quarter which we consider non-operating in nature that I noted earlier, we had a small charge in the first quarter of fiscal 2009 of $600,000 or $0.01 per share, related to a loss on an asset exchange in the UK.

In total, the adjustments in the first half of fiscal 2009 were $18 million after tax or $0.20 earnings per share. The reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers are available in Table 2 of the appendix to the press release we just released earlier this morning.

First half fiscal 2009 adjusted consolidated gross profit was $302 million, an increase of $54 million or 22% from last year. Adjusted consolidated gross profit margins decreased 130 basis points to 29%, as compared to 30.3% a year ago. Adjusted consolidated operating income was $124 million, up 29% from $96 million last year, driven by strong results in the consumer healthcare segment. This translated into a consolidated adjusted operating margin of 11.9% of net sales, up 20 basis points for the same period last year. Adjusted consolidated net income was $81 million, up from $68 million last year and adjusted earnings per share were $0.86 compared to $0.72 last year.

Now some brief highlights of the six months operating results by segment starting with consumer healthcare. Year-to-date net sales for the consumer healthcare segment were $813 million, an increase of 38% or $224 million compared to fiscal 2008. Included within these sales were $144 million of new product sales, led by Omeprazole, Cetirizine, Famotidine and Ranitidine, a $38 million increase from higher domestic sales at existing products and $71 million from our acquisitions of JB Labs, Unico, Galpharm, Brunel and Diba.

These increases in sales were partially offset by the absence of $16 million of sales from the divested vitamin,

Mineral and supplement business in the UK, and unfavorable changes in the foreign currency exchange rates of $10 million.

Leveraging the strong sales growth, consumer healthcare adjusted gross profit increased to $228 million, a $69 million or 44% improvement from last year. The adjusted profit margin were 28.1% of sales, 110 basis point improvement from fiscal 2008. The improvement was driven by increased sales of new higher margin products a positive pricing impact on a few key product categories. These were partially offset by a lower gross margin contribution from the nutrition product category.

Year-to-date adjusted operating expenses for fiscal 2009 increased 20% or $18 million compared to fiscal 2008. The increase was both inorganic and organic. Approximately half or $8 million of the increase related to operating expenses at our new JB Labs, Galpharm, Diba and Unico entities. The increase was comprised of an incremental $3 million for research and development spend on clinical studies, $3 million of incremental spend over last year on variable selling activities for new products, and incremental spending on IT projects to support our rapid growth. As a percentage of sales, fiscal 2009, adjusted operating expenses decreased 200 basis points compared to fiscal 2008.

Year-to-date, Rx pharmaceuticals sales is $74 million, flat compared to the same period last year. New product sales were $11 million, and increase sales volumes were partially offset by a $6 million reduction in non-product revenue along with continued pricing pressure and increased competition for generic drugs.

Rx operating expenses increased $600,000 for the period and 90 basis points as a percent of sales. The increase is primarily related to recognizing a $500,000 loss on assets that fund Israeli post-employment obligations, and increased research and development costs of $400,000. We continue to work on realigning expenses in our Rx business and for the first six months, we've reduced administrative expenses by $500,000 from last year.

Net sales for the API segment were $66 million, a decrease of $7 million or 10% from last year. Gross profit was $19 million, down from $27 million a year ago, due primarily to lower sales of two key products; unabsorbed production costs and lower volumes, and unfavorable changes in foreign currency exchange rates.

API operating income is $2 million, down $9 million compared to $11 million last year. This was a result of the lower gross profit along with the year-to-date loss of $500,000 on assets that fund the Israeli post-employment obligations.

In the other category, net sales were $89 million, up $7 million or 8% compared to last year, due primarily to favorable changes in foreign currency exchange rates. Gross profit of $29 million was down $600,000 compared to last year due to unfavorable product sales mix.

Operating income for our other category decreased $4 million compared to last year, due to the decrease gross profit contribution as well as the $2 million loss on assets that fund Israeli post-employment obligation.

Adjusted unallocated corporate expenses for the six months were $8 million compared to $6 million last year. The increase was due primarily to the absence this year of the $2 million favorable settlements of a pre-acquisition legal claim related to Agis which was recorded in the first quarter of fiscal 2008.

The year-to-date effective tax rate for fiscal 2009 was 30% compared with the actual rate of 23% for the same period in fiscal 2008. Foreign source income before tax for the first six months of fiscal 2009 was 19% of consolidated pre-tax earnings, down from 25% in the same period for fiscal 2008. Foreign source income is generally derived from jurisdictions of the lower tax rate than the U.S. statutory rate, and as a result, the effective tax rate was higher than the comparable period last year. Also, I should note that in the first quarter of fiscal 2008, we received a favorable tax ruling in Israel which resulted in a one-time tax benefit of $4 million, reducing last year's rates by approximately 450 basis points.

Now let's look at our balance sheet. Working capital, excluding cash and current investments was $433 million at the end of the quarter, versus $333 million last year, an increase of $100 million. Accounts receivable were $359 million compared with $311 a year ago, reflecting our higher fiscal 2009 sales volume and $28 million related to the newly acquired businesses.

Inventories were $431 million, up from $326 million at this time last year. The increase was driven primarily by the 38% top-line growth of consumer healthcare over this time last year and the requirement to have more inventory on hand to service this high demand. We typically respond to increased demand by holding more raw materials to maximize flexibility in our supply chain.

In addition, there were 28 million more dollars of inventory in our balance sheet at the end of the second fiscal quarter related to newly acquired businesses. Accounts payable were $266 million compared with $194 million a year ago, related to the aforementioned raw materials build in inventory and the $90 million related to the newly acquired businesses.

Cash provided by operations was $35 million in the second quarter compared with $66 million last year. For the first six months of fiscal 2009, cash provided by operations was $36 million compared to $93 million a year ago. The decrease in cash from operations was related primarily to $33 million of higher income tax payment in the first half of this fiscal year versus last year; higher bonus payments in the first fiscal quarter of 2009 related to our strong performance of fiscal 2008 versus last year, and the higher use of cash in the procure-to-pay cycle, that is inventory and accounts payable due to the inventory build I mentioned just a few moments ago.

At the end of the second quarter, cash in current investment securities were $162 million, up $60 million from $102 million at the same time last year. As of the end of the quarter, we had an additional $200 million of untapped capacity on our existing bank revolver. Our total current and long-term debt on the face of the balance sheet is $909 million that includes $400 million back-to-back loans which is completely offset by the $400 million restricted cash deposit in non-current assets. Net of the back-to-back loan, our external debt is $509 million.

As of December 27th, our debt-to-total capital is 38.1% and our net debt-to-total capital was 26%. Net debt-to-total capital has increased from the end of fiscal 2008, as we have put our cash to work through the purchases of JB Labs, Diba and Unico. However, with debt-to-total capital still below 40%, we are still within our target and in a sound position. With our current balance sheet, our operating cash flow and access to additional liquidity, we believe that our capital structure remains strong.

We repurchased 1 million shares of our common stock for $32 million and 1.1 million shares for $31 million during the second quarter of fiscal 2009 and 2008 respectively. Year-to-date, we repurchased 1.8 million shares of our common stock for $62 million and 1.3 million shares for $35 million in fiscal 2009 and 2008 respectively.

While we still have our 10b5-1 plan in place, we have not been actively repurchasing in the market since November. It is our belief that building and maintaining a strong cash position in this volatile market is one of the best ways to ensure strategic flexibility and to drive shareholder value. And as such, we have suspended repurchasing stock at this time. We are continually revaluating this decision as market events warrant.

In the first half of fiscal 2009, we paid cash dividends of $10 million or $0.105 per share. Additionally, on January 28th, our Board of Directors approved another $0.055 quarterly dividend to shareholders of record on February 27, 2009.

With the first half of the year behind us, and a challenging economic environment in front of us, we've spent considerable time evaluating both the risks and opportunities for the second half of fiscal 2009.

As you just heard, our API and other segments had a challenging second quarter of the fiscal year, as demand was much softer than expected, causing sales and gross profits to decline. On top of that, unexpected financial market changes in the fourth calendar quarter of 2008 caused large declines in our Israeli post-employment obligation funds, a force beyond any one organization's control.

For API, our earlier guidance estimated that this business segment would grow between 7 and 10% from fiscal 2008. We are now expecting that we will not be able to make up the API sales shortfall from the first half of the year.

Second half sales will improve from the first half, and more closely resemble the second half of fiscal 2008. We now expect the full year gross margins in API to be in a low to mid-30s. Leveraging lower operating expense levels, operating margins are still expected to be in the low teens; but again on full year reduced sales volume.

Consumer healthcare had a strong first half of fiscal 2009 with record sales. However, our adjusted gross margins were lower than we had expected, due mainly to some challenges in our nutrition category. We achieved positive market share growth in nutrition at a time when material's pricing was very high and our production capacity in that category was limited. These effects negatively impacted the overall CHC gross margins. We now expect to see the positive effects of the new pricing strategies in the second half of the year, but also expect that gross margin in this product category will still be significantly below the CHC average through this year and as a result, will be drain on the overall adjusted gross margin.

We've implemented strict cost-containment initiatives already that can be seen in the additional leverage of SG&A as a percent of sales versus last year, and we expect to continue to see the influence of these initiatives in the second half of the year.

We now expect that our full year consumer healthcare business will grow by more than 18%, but that adjusted gross margins will decline 50 to 100 basis points from the fiscal 2008 adjusted level of 28.7%. We still expect consumer healthcare adjusted operating margins to expand from last year's 13.5%, through better leverage and operating expenditures partially compensating for the change in gross margins.

As you'll recall, we stated in November that you could expect consolidated revenue growth between 13 and 18% for the full year. We're confirming this growth rate. We also stated that we expected the consolidated adjusted gross margins to be stable to the full year adjusted fiscal 2008 margins of 31.1%.

Given the second quarter challenges within API, the other category, the nutrition product category margin dynamics and our expectation for these areas in the second half of the year, we now estimate adjusted consolidated gross margin to be down 100 to 200 basis points from last year. We are still expecting to maintain our 4% consolidated R&D spending level as stated in November, in order to keep moving forward towards more new product launches in the future.

Distribution, selling, general and administrative expenses were expected to be 14% of net sales and for the first half of the year we were already below this level. With our additional cost-containment activities underway, we expect this ratio to decline another 50 basis points to approximately 13.5% of sales for the full year. We anticipated total operating income margin to be in the 12 to 14% range for the full year.

Our adjusted operating margin was 11.9% in the first half of fiscal 2009, and with some operating margin improvements in the second half of the year in Rx, API and other, we are forecasting consolidated adjusted operating margin percent to remain in that 12 to 14% range. Finally, we are continuing to use an effective full year tax rate of approximately 28% in developing our earnings guidance update.

For all of these reasons, we are revising our full year fiscal 2009 adjusted earnings guidance range to be between $1.75 and $1.90 per share, as compared to the $1.92 to $2 per share quoted in November. For the full year, we expect operating cash flow to be between 190 to $220 million, a reduction from the previous guidance of 210 to $240 million, as a result of the change in net income guidance.

Full year CapEx is projected to be in the range of 65 to $70 million and will include expenditures at our newly acquired Michigan, Florida and Mexico facilities, as well as production-expansion projects underway in South Carolina and Allegan, Michigan.

Now, let me turn it back to Joe for further discussion of the actions behind these updates to our guidance.

Joseph C. Papa

Thanks, Judy. Now Judy has given you all the details for the first half of our year, I'd like to provide some additional information on the new product performance for a couple of our key launches and also some of the challenges and action plans we have for the second half of fiscal year '09.

First and foremost our new products we continue to invest in and launch new products. During the second quarter, we added a record $84 million in new product sales. Cetirizine the store brand comparable to Zyrtec continues to perform well. Our data as of December 21st shows that Cetirizine store brand have averaged in the mid-40s in market share. Significantly higher than the traditional 20 to 25% store brand cough/cold category and market share. Also, we have named our 80% plus market share of the store brands Cetirizine market despite numerous competitors.

Our store brand version of Omeprazole OTC have captured nearly 40% of the market as we projected to you over a year ago, we expect the Omeprazole to add 150 to $200 million in annual sales and recent sales data shows that we are on track to meet that goal.

On December 29th, we announced that we received final approval from the FDA for OTC ibuprofen PM. We expect PM product shipments to retailers in the next few weeks. The product is comparable to Wyeth's Consumer Healthcare's Advil PM tablets indicated as pain reliever/nighttime sleep-aid.

Our estimated brand sales for the product for the last 12 months ending December 21st were approximately $71 million. During the first quarter, we began shipping Famotidine Complete chewable tablets, the national brand equivalent to Pepcid Complete tablets to retailers. It is estimated that Pepcid Complete have the annual sales of approximately $100 million.

Our launch is going well as we have 180 days of marketing exclusivity. However, we believe the exclusivity period will effectively last even longer as we are not aware of anyone else having filed an application for marketing approval of this product.

In the smoking cessation category, we now have competition in the coated nicotine gum. At the end of December, Watson announced that it was coming to market with the coated nicotine gum product. They have been competing with us in the uncoated gum category for several years. We expected them to enter the coated gum product line during the calendar year. So this was already in our original guidance.

In our Rx business, we announced the settlement of patent litigation brought by Sanofi-Aventis against Barr Laboratories. They developed the Triamcinolone Acetonide nasal spray product with us and are awaiting final approval from the FDA.

As a reminder, Nasacort had annual sales of approximately $325 million for the 12 months ended in November 2008. We are very focused on gaining final approval for this product which is an important driver for achieving our FY'09 Rx segment profitability.

Now, I'd like to read some of our challenges and action step for the second half of FY'09 but to be clear, our new products will continue to be an important growth driver for Perrigo. Let me talk about some of the challenges. Our API business has under performed. Our vitamin and mineral nutritional supplement our VMS category has increased sales but was impacted by a constrained raw material supply and higher costs and clearly the volatile global economy has impacted our results.

Let me start with the API business first; as Judy mentioned, API brought brunt of the changes in the global foreign currency fluctuations that we experienced. In addition, the weakening global economy has impacted demand for some of our products as customers delayed their orders to manage their costs and inventories.

Here are some of the steps we're taking to mitigate negative impact of these factors to our API plan. We're cutting our cost significantly in our API business and controlling our inventories and raw material supply. Second, we're focusing on increasing sales with potential new product approvals that we're working very hard to gain. Third, we're implementing pricing strategies to offset some of the weakness that we're experiencing in our API business.

And then second area, our VMS business or Vitamin Nutritional Supplement business, our VMS business grew sale as a result of issues encountered at a competitors operations during late summer and in to the swap (ph).

We made a decision to proactively ramp up our operations to meet the customers need for high quality products. In doing so we acquired additional raw materials like when the supply was constrained and the cost registered all time highs. The sudden influx of demand in our short-term capacity constraint required us to additionally invest in short-term external production assistance in order to service the high volume. The steps we're taking to meet the challenges in this area include, number one; we are qualifying additional raw material vendors to lower our costs.

Number two; we are improving our facilities to add flexibility to our internal operation. As an example, we've qualified our JB Labs acquisition to give us more manufacturing flexibility in Vitamin and Mineral Supplement business.

And finally, we are implementing some pricing strategy to reflect the commodity prices I discussed before. I've been very pleased with our VMS market share gains that have occurred in the past year and look forward to get this business back on track. This is a growing category, can be an important contributor for us in the future. The third challenge this quarter is the volatile global economy. As Judy detailed earlier, Israel requires that all companies to maintain the post employment benefits fund.

The depressed global stock market caused a loss on the asset which fund these post employment benefits. Also, wide swings in the foreign exchange rates added to our challenges during the quarter. In addition to the specific cost initiatives in Israel, we put in place strict costs containment programs around the world which we believe will offset some of our first half challenges that I just mentioned.

In summary, we're expecting to grow our earnings per share by 11 to 20% versus last year. We're going to focus on a couple of key strategic imperatives. First, we will continue to strive to be first in the market in the OTC and prescription Rx business. We have exclusive offerings that we expect to generate more than $1 million of branded sales that we have the exclusivity on, that over the next year or may be longer. We are investing to keep the pipeline robust; we are continuing to make an investment in our R&D programs.

We believe that more than $10 billion in branded prescription sales products will switch from prescription to over-the-counter in the next five years. And our goal, as it has been in the past, is to be first to market with those products.

Second, to ensure the API business segment has a stronger second half of the year, my team is focused on increasing sales through new products, implementing a new pricing strategy and making the necessary expense adjustments to be back on track with their revised plan.

Third, our operation has been able to meet the demand caused by our tremendous success in the over-the-counter and vitamin nutritional business. Our top line CHC growth trajectory has increased dramatically in the last two years and volumes to our plants have risen 30% during that period. During the period of extreme commodity price swings, our supply chain team will focus on continuing to manage the long-term impact of raw material pricing to the company.

We have and continue to ramp up production efficiencies to continue to meet customer demands for quality affordable products. Certainly there will be challenges to this kind of growth as Judy talked about some of those early such as the examples of working capital, but throughout this rapid period of growth we've maintained our high quality standard and continue to invest in our quality processes.

Longer-term, our OTC business is the clear leader in the category. We will have major new products in the verge of switching from Rx to OTC in our branded Rx to generic over the next few years.

Finally, in the challenging economy, we will continue working together with our customers to make consumers more aware of the store brand proposition. Unlike other categories of private label, OTC healthcare products and generic prescriptions drugs are FDA approved. The data is showing that consumers are making that value judgment as the store brand continues to grow share.

Additionally, we believe the balance sheet is strong and positions Perrigo to stay at the course in the current market. Rising healthcare costs coupled with an ageing population makes Perrigo uniquely position to meet the world's growing need for quality affordable healthcare products.

Now, let's open up the line to the operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Daniel Rizzo with Sidoti & Company.

Daniel Rizzo - Sidoti & Company

I think you indicated and may be you already talked about this, but consumer or customers are lowering the inventories or lowered the inventories in the second quarter. Is that continuing right now?

Joseph Papa

Yeah. Yes, Dan the answer to that is in the over-the-counter area, customers our customers, retailers have lowered their inventory and we do see that as we sit here today. The profit number is approximately 8% reduction in inventory in the retailers versus the same time period one year ago.

Daniel Rizzo - Sidoti & Company

Okay. And then again may be you talked about this but, you said that there was additional cost related to capacity constraints which you had to outsource some production capacities. Is that right?

Joseph Papa

That is correct.

Daniel Rizzo - Sidoti & Company

Did you.... what products were that for?

Joseph Papa

It was we as I mentioned in the script. We experienced tremendous growth in our vitamin and nutritional supplement business,

Daniel Rizzo - Sidoti & Company

Right.

Joseph Papa

As a result of the growth because of some of the issues that occurred in a competitor, we took on demand that was significantly beyond our past vitamin nutritional supplement business. As a result of that, we needed some help with areas that are within the critical path of manufacturing those products, when we took on that help and obviously we had to pay for that.

Now while that certainly is something that affects the near term, we did feel that strategically it is in best interest of our shareholders to take on that incremental investment which is what I will call today knowing that the long-term gains in market share and the profitability from those products is wanted and that's why we feel it was the right thing for us to do at this time.

Daniel Rizzo - Sidoti & Company

Okay. But that's still occurring to you still, I mean there you still add capacity in those products correct?

Joseph Papa

No, we actually because of some great activities by our team, we've been able to transition out of the external manufacturing into our facility at here, we have a facility in South Carolina as well as a facility that we recently acquired called JB Laboratories, the combination of the efforts in our South Carolina facility as well as JB Laboratories allowed us to take on the incremental demand required and allowed us to now... we're going forward from January, we no longer are seeking additional external support. There maybe a couple of products still coming in from past orders but no additional products will go forward as a requirement for external manufacturing help.

Daniel Rizzo - Sidoti & Company

Okay. All right, thank you.

Joseph Papa

Thank you for your question.

Arthur Shannon

Operator, by the way we're going to extend the after 11.00 O'clock as we allow and have enough time for few more questions.

Operator

Yes sir. Your next question comes from the line of Linda Bolton Weiser with Caris.

Linda Bolton Weiser - Caris & Company

Thanks. Just on the vitamins, I mean can you give us some sense of how much the vitamin and nutritional sales increased year-over-year in the quarter?

Joseph Papa

Yeah Linda, probably the best way I would say is, we talked about our top line growth of the CHC business being approximately 39% growth, the vitamin and nutritional supplement business grew faster than that. I don't want to give specific numbers because we don't talk about specific categories, but I can tell you that VMS business grew faster than our overall CHC business.

Linda Bolton Weiser - Caris & Company

That's helpful thanks. And just going forward in terms of how -- this impacts the mix of your business kind of on a permanent basis, because you are adding in certainly vitamins is lower margin then say zyrtec I would expect, right?

Joseph Papa

That is correct.

Linda Bolton Weiser - Caris & Company

But can you give us some sense of how vitamins compares to say aspirin and Ibuprofen profitability was?

Joseph Papa

Let me differentiate my comments some for the quarter comments and then some going forward. For the quarter, Vitamin/Mineral Supplement business was obviously at a lower margin than some other products you mentioned like in Ibuprofen. Having said that, we believe that through efforts that we are taking on in those, that I outlined in my script, certainly the issues that we are taking on for alternate vendors that have raw materials additionally, the ability to move the manufacturing from external sources back internally, we think that is going to help us get those products to a higher gross margin than certainly they were in the quarter and back to the levels of products like in aspirin, like in Ibuprofen; not to the levels of Cetirizine but certainly back to those type of levels. But that's really what we are focused on. We have a laser focus on getting that profitability of the Vitamin and Mineral Supplement business back to the levels of... that I referred to before.

Linda Bolton Weiser - Caris & Company

That's helpful. Thanks. And then just a question I mean the currency FX. Do you have like in FX, effects on just the sales growth in the quarter and then an effect on the bottom-line earnings growth and also, I mean maybe if you could just clarify more because I am confused, because you are manufacturing from API and Rx products in Israel which are being supplied somewhere in North America. So that's ... the shekel has devalued along with some of the other European currencies. So I'm confused about why this is a negative, wouldn't this be a positive FX?

Joseph Papa

Yeah, I am going to ask Judy to address most of the questions. Let me just make a couple of comments at the onset. I think first and foremost that we have in the past historically, had a little bit of, what I call, a natural hedge. Something's have gone up, something's have gone down. I think what is changed in this particular quarter is the magnitude of some of the change that occurred and maybe, Judy, you want to talk a little bit about some of the magnitude or some of the changes to address Linda's question.

Judy Brown

Absolutely. Thanks, Joe. So it was a multiple part question there and we highlight normally every quarter what the impact of foreign currency is on the top line absolutely, so that you can roll forward your expectations of growth inorganic, organic as well as impacts like this from foreign currency.

As Joe just said, we are in normal environment, naturally hedged. So if we get down to the operating income line and the net effect of all of the ins and outs of our multiple currencies and the natural impact that happens when you produce themselves (ph) in the same currency, we normally net down close to zero.

In second quarter, in particular, because of the more than two standard deviation move on the pound and the Mexican peso, and the continued movement in the Israeli shekel in that quarter, we did see some net effects drop through operating income. And on a high level just to give you an order of magnitude, as I stated in my earlier comments, the effects of foreign currency on the top line, on a consolidated basis versus last year was still ... it netted out... sorry, second quarter only versus last year was about $9 million, year-over-year.

Year-to-date though that netted out to almost zero, just in terms of, on the full year six months impact. But if you look at the full year year-to-date over last year variance on operating income, there still was a net impact. While the natural hedge activity in the Israeli-only consumer products and pharma businesses, and the Mexican and UK businesses basically netted themselves out versus last year, there still is a net impact within API. And that is because the API business, while the vast majority of the production is happening in Israeli shekel, they do transact their business in U.S. dollars, in the euro, in Japanese yen as well as shekel. So that is one where the flows were not able to be naturally hedged.

We're obviously looking at our expectations going forward, particularly, how it will affect that business and looking at ways to mitigate that. But in general, we do not have a complex hedging strategy for all of the global cash flows again, because even with these standard deviation movements, most of... rest of the world does net down to zero. This was a very unusual quarter with a volatility in the market movements around the world.

Linda Bolton Weiser - Caris & Company

Okay, thanks.

Judy Brown

Does it help (Multiple Speakers).

Linda Bolton Weiser - Caris & Company

Yeah. Thank you.

Judy Brown

Sure.

Operator

I am sorry. Your next question comes from the Derek Leckow with Barrington Research.

Derek Leckow - Barrington Research

Hello?

Joseph Papa

Hi, Derek.

Judy Brown

Good morning, Derek.

Derek Leckow - Barrington Research

Hi. So your operating income in the second quarter in your core business is up 45% and the other businesses are down 44% and your... so your total impact, here you talked a lot about this post-employment issue in the quarter and I guess you are continuing that out to Q3 and Q4. Can you quantify that and separate that out for us, so we can see what that impact was?

Judy Brown

For the full year-to-date, P&L impact of the Israeli post-employment benefit, the net impact for the company's first half of the year was about $3 million. And just to give you a sense of what this is just to put in context, it's similar in structure to the way a U.S. pension plan or the setup is required by law. As employers we make contributions into the fund every pay period for our employees and those assets then are held by financial institutions, after there has been the control of the... ultimately, the employee; like an employee might make a decision about their 401(k) assets. And as those funds then dropped dramatically in value as you all saw with the stock market declines in the fourth calendar quarter, that required us by law to take a charge for the decrease in those assets. The $3 million in the first half of the year that's across those Israeli businesses.

We can not predict what will happen in the second half of the year, so at this point we assume that that $3 million is a permanent charge to the P&L for the full year. If in fact the assets recover, we will be able to recover some of that loss. We would call that out obviously for the rest of the year. But right now, within our guidance for the second half of the year, we don't have any better position than to assume that that loss as it stands right now will stand for the remainder of the year.

Derek Leckow - Barrington Research

So that we don't project that 3 million across the next two quarters as well or...

Judy Brown

No...

Derek Leckow - Barrington Research

Have you already captured it...

Judy Brown

No. Right now we do not project a further loss. We assume right now that that loss stands and we breakeven for the second half of the year.

Derek Leckow - Barrington Research

Okay.

Judy Brown

We have baked into our own numbers, in the normal run rate, in operating expenses that you would have in your SG&A as a percent of sales ratio. We already put the normal contributions that we make for our employees just as a part of normal payroll costs.

Joseph Papa

That's exactly right. I think going I'd add to what Judy said, as we look at any forecast for the remainder of the year, it's always looking at sometimes that are going to be some of the positives sometimes it's going to be the negatives. I think as Judy said, we at this point think, we just look at this as being an expense that occurred in and one that's going to stay as such and we'll continue to look towards the pluses and minus for the rest of the year.

Derek Leckow - Barrington Research

Does this comparable profitability for the second half then look more flattish compared to last year? Is that fair to say for those businesses?

Joseph Papa

You're asking for... well obviously, the CHC profitability is really going to be factored by the sales growth. Sales growth numbers are significant with what we've been able to grow both from the acquisitions as well as what we've been able to grow from the new product introduction.

So we clearly going to see top-line revenue growth and as we projected for the full year, we're expecting top-line revenue growth being at 13 to 18% range and the EPS in the 11 to 20% earnings per share growth versus the rest of the year.

Derek Leckow - Barrington Research

I'm sorry I was just talking about... sorry Joe, I was just talking about profitability in the other businesses besides your consumer healthcare business. Would those return to a normal level of profitability in the second half or are we still expecting some erosion there?

Joseph Papa

Oh, I misunderstood your question. Judy?

Judy Brown

Sure and later when you referenced back to the formal finance comments, trying to laying that out for you. For API for the full year, we are expecting the second half of the year sales in API, top-line to resemble last year's second half.

Derek Leckow - Barrington Research

Okay.

Judy Brown

So for the full year, we are expecting API top line to be flattish to last year in total. So we will not fully compensate for the GAAP in the first half, but will get to a better run rate in the second half of the year. And we also expect that the profitability in the second half of the year will improve overall with cost containment activities and timing of some of the new products, as Joe referenced in his comments.

So second half of the year, definitely expected to be driving more value through operating income dollars in the second half of the year. In the other business, our top-line remains fairly consistent with this first half of the year run-rate and overall gross margins there also looking to improve a basis point or two year-over-year. So, similar to the earlier guidance we gave in that business unit.

Derek Leckow - Barrington Research

Okay. And then just shifting over now to the CHC business; in the vitamin-nutritional category, this momentum here where you're talking about faster than 40% growth, I guess that's going to carry through and that's why, just to make sure I understood this correctly, that's why the 50 to 100 basis point decline in CHC, you said gross margin, that's going to about... between 100 and 200 now versus prior expectations and that because... it's all because of that vitamin business, correct?

Joseph Papa

It clearly is a product mix issue, but also the issue is simply as how we are approaching the improvement in the Vitamin Mineral Supplement business. So its really a couple of factors that are really driving Judy's comments.

Judy Brown

And just to clarify, so and you can see this as you go through the prepared comments also. What we were expecting in consumer healthcare is that the adjusted gross margins will decline 50 to 100 basis points from last year. And we had originally thought that for the full year that the consumer healthcare gross margin would stay flat. So that new products would be offset by certain things that we would say flat year-over-year and now we're talking about of 50 to 100 basis points decline year-over-year.

The 100 to 200 basis point decline that you just referenced in change to adjusted gross margin is specific to the consolidated company. And that, just wrapping it up again, is the impact both of the change I just mentioned in consumer healthcare, coupled with the expectations for the contributions of the API business in the remainder of the year. So, I want to keep those two numbers target ranges separate.

Derek Leckow - Barrington Research

Thank you for clarifying.

Judy Brown

50 to 100 change.

Derek Leckow - Barrington Research

In CHC.

Judy Brown

In CHC fund and have in all of that translates rolled up into a 100 to 200 basis point change for the consolidated company versus being flat year-over-year.

Derek Leckow - Barrington Research

Okay. Thanks for clarifying that, Judy. I appreciate it.

Judy Brown

Certainly.

Operator

Your next question comes from the line of Greg Gilbert with Bank of America.

Judy Brown

Good morning.

Gregory Gilbert - Bank of America

Quick ones. Does the $15 million in based business growth excluding Nutritionals? Can you talk about that... definitional Judy, to what's in that and what's not in that?

Judy Brown

Sure. May be the easiest way to just conceptually roll forward consumer healthcare growth. If I break it down a little more granularity than I did in the prepared comments and our focus on year-to-date, we can breakout Q2 if you like as well.

In total, consumer healthcare grew 38%. As I commented earlier, new products were 23% of that growth. We did some acquisition in total, international and domestic about 12% of that growth. Where you'd say Judy, was it 35% what else is going on? We'd also divested some business. We divested new case VMS business as outlined in some more detail in 10-Q which is going to be filed.

We exited some product categories in the domestic CHC business, as we talk about always streamlining SKUs and we also had some FX impact within CHC because of the UK and Mexico. Those three items were 8%; negative 3% from divestitures, negative 3% from exit and negative 2% from FX, which gets us to 27%.

The volume and base business expansion year-to-date in consumer healthcare then is 9% growth. So even excluding the new products and excluding the effective acquisitions and divestitures, the base business of consumer healthcare was 9% growth. Similar roll forward for the second quarter where we saw 8% base growth excluding the effects of divestitures, FX and exit.

Gregory Gilbert - Bank of America

Okay, thanks for that. On Rx, what drove the sequential bump in sales given that the scripts were relatively flattish from 1Q to 2Q? And are there any other launches that you expect for the fiscal year for Rx?

Joseph Papa

Yeah, good question. In the business for our Rx generic business, what has happened is one of the synergies that we have seen within Perrigo is the concept of ORx. And that stands for prescription products, I should say, as only said they're different. Over-the-counter products that are still dispensed by our pharmacists and ORx business that happened with this business.

We have capitalized on that as a separate opportunity within our business led by the generic Rx team and they have found new market essentially for our products and they have capitalized on that and launched those products. That has been the biggest driver for us in that new product side, with these obviously other new product such as the generic ORx but other then that the ORx has really driven that business.

Gregory Gilbert - Bank of America

And launches about to be there in Rx?

Joseph Papa

Yes, we still expect some launches for the remaining portion of the year. There is obviously as in all our new product launches is some of that or ORx going to be -- really for the probability factor on any new products some will happen, so there are clearly those new product launches we are expecting for the remainder part of the year. The other part of this is very favorable to us that obviously we've talked about is trends still (ph) there is opportunity there to monetize that, and that will also be an important driver for the remaining portion of the year.

Gregory Gilbert - Bank of America

And lastly, Joe, its sounds like you have some near term actions plans for the API and other segments, but can you talk about to what extent those segments are core to Perrigo and whether you are exploring options for either or both? Thanks.

Joseph Papa

Let me start at API. API business still at this point we believe is a core business for us. It allows us to do the vertical integration. It also allows us to be smarter about our procurement of factor ingredients across both the Rx businesses as well as consumer healthcare business.

So, API business we feel are very favorable to us. I will say that with the other business, the Israeli business what we have said in the past and which we will continue to say is that we base all of our acquisitions and divestments on an ROIC model and return invest capital and we will continue to look at that.

There is value in our consumer products Israel business as an example because it helps us to introduce store brand cosmetics into United States. Having said that, we can look at multiple ways to do that and we will continue to assess our strategic alternatives with the Israeli consumer products business as we go forward.

Gregory Gilbert - Bank of America

Thank you.

Operator

The next question comes from the line of Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs

Couple of questions. Just a follow up on the generic question, what percent of -- I guess both your pipeline and your current portfolio of products is vertically integrated to with your API products?

Joseph Papa

I would say that currently it's in the single-digits as a percentage as we go forward, we will look to expand down single-digits and that's both on the generic ORx as well as our consumer healthcare products. So, a single-digits today is the best answer.

Randall Stanicky - Goldman Sachs

So the vast majority are sold to third parties?

Joseph Papa

Absolutely.

Randall Stanicky - Goldman Sachs

Okay. Is there any contribution for Nasacort for the settlement that you have factored in to your back half outlook?

Joseph Papa

Yes.

Randall Stanicky - Goldman Sachs

Do you will be willing to quantify it?

Joseph Papa

We don't give out individual product deal details. But there clearly is a amount that we have acknowledged. So for example in the 10-Q you'll see a number at $2.5 million in the second quarter.

Randall Stanicky - Goldman Sachs

Is that linked to approval?

Joseph Papa

That was in the second part of that, which I refer to this time.

Randall Stanicky - Goldman Sachs

Okay, but there is contribution factored in to back fiscal half?

Joseph Papa

That is correct.

Randall Stanicky - Goldman Sachs

Okay. And then did you give us an FX impact for your consumer business for the top line?

Judy Brown

For the top-line? I did, I commented on that in the script. I believe that the impact year-over-year FX was approximately $10 million.

Randall Stanicky - Goldman Sachs

And that's just in the consumer business at 10 million?

Judy Brown

That's in consumer healthcare. Yeah.

Randall Stanicky - Goldman Sachs

Okay. And than I may have missed this, but just in terms of widening the EPS range, can you help us understand what the bigger swing factors are?

Joseph Papa

Yeah, I Randall this is Joe. The issue and the widening of the guidance is really reflecting the global economy that we're in and some of the ups and downs and positives and negatives that we're trying to assess with the total market that we competed.

I mean if you look for example at the API business, we haven't lost any customers having said that the customers have pulled in their orders or reduced their orders. There is just more volatility in the markets than we have seen in the past. As a result of that, as we looked at all the positives all the negatives in our forecast, we just felt that a wider expansion of the range was wanted at this time.

We clearly still feel very strongly about we're doing in the consumer healthcare side, the new product side and what we've done in vitamin and mineral supplements. So there is still a less positive, but we did felt the economy was one that wanted an expansion in a range at this time.

Randall Stanicky - Goldman Sachs

And then the pressure or the economic pressure, are you seeing this primarily through unit pressure or is it more on the pricing side as you think about selling to your customer base?

Joseph Papa

Yeah, I think it's really... I have to segment my answer on that. In the API side, in the generic Rx side, I think there is some unit issue questions relative to how much customers are ordering. And I think if you look at the overall Rx market, you're seeing some declines in Rx. We can -- declines in the growth rates of expected growth rate I should say that way a little differently. Having said that, we think that the inventories have been reduced in API significantly. On a go-forward basis, we will see the numbers that Judy talked about for the full year API.

On the consumer healthcare side, candidly, we are seeing the situation actually accelerating the utilization of store brands. So in fact, it's a favorable factor for us on store brands where people are more as they go the shelves, they are looking at, here's the national brand, here is the store brands. We are seeing acceleration in utilization of store brands.

So, really, what we're trying to do in looking at any forecasters trying to weigh the positives and negatives and just, I guess, I would call the volatility of the total forecasts and that was really why the effects (ph), why the range and why we see some different factors and different weightings on some of the things that we see in API versus some of the things we are seeing in our core consumer healthcare store brand business.

Randall Stanicky - Goldman Sachs

You talked historically or recently about seeing pricing stabilize or even improve in consumer. Is that still the case?

Joseph Papa

That is true. That is the case. I think historically the way I would say is that our consumer healthcare business had declined in pricing on the 1 to 2% per range. Now I think it's fair to say that we've stabilized that pricing decline and in fact, we have a slight upturn in some of our pricing in consumer healthcare. And I think that's something that we expect is going to continue as that.

Randall Stanicky - Goldman Sachs

Okay, I'll stop here. Thank you, guys.

Operator

Your next question comes from the line of Scott Hirsch with Credit Suisse.

Scott Hirsch - Credit Suisse

Hi there. A quick question regarding the new products. Can you guys give us ... I know you guys indicating, but are acquisitions or the three new tuck-in acquisitions, are they factored into the guidance range now?

Joseph Papa

The acquisitions are factored in but not within our new products, if that's what you're asking me.

Scott Hirsch - Credit Suisse

So they are not part of new products?

Joseph Papa

They are not part of new products as we define new products.

Scott Hirsch - Credit Suisse

Okay. But they are now included in your annual expectations, I know previously they might not have been.

Judy Brown

Yes.

Joseph Papa

Yeah, the answer to that question is yea. Judy?

Judy Brown

So. If you want to just think very high level of about our top-line guidance, when we came out in November, our original guidance said that we will grow as a consolidated company 13 to 18% top line. We are confirming that guidance and that includes our acquisitions. So excluding our acquisitions, we are still looking at a strong 10 to 11% top-line growth and so you say to me why are you confirming your guidance range of 13 to 18%.

We have acquisitions concentrating in our global portfolio for some of the sales weakness, Joe just talked about in some detail with regards to particularly the API and the other businesses year-over-year. So as we look at our full back... at our full guidance for the year, we can confirm that top-line range with the inclusions now of those acquisitions.

Scott Hirsch - Credit Suisse

And just following up and I might be wrong in this, but I believe you said that JB Labs can do in roughly 70 and Unico annualized numbers are 50, and Laboratories give us a 15. Are they in for second quarter, are they in just for second half of this year? How much did they impact this year, getting a sense of how much they could annualize for next year?

Joseph Papa

Sure. Go ahead Judy.

Judy Brown

You can assume that all of the acquisitions are in for the second half of the year. We talked about those annualized rates. JB Labs was fully reflected in the second fiscal quarter. Unico was just basically December, so you only have about a month. Diba, you pick up about a month. Galpharm was fully in for the first half of the year, and Brunel was fully in for the first half of the year. So, in order for you to do your math, you can use that as a guideline to start annualizing our numbers.

Scott Hirsch - Credit Suisse

Okay. And then, just lastly, what are you thoughts on ... was Nicorette a very high gross margin product for you and your thoughts that last time coming in here, will be a big impact. You have done really good on competing with Cetirizine; do you think you can do the same with Nicorette?

Joseph Papa

Yes. First question was Nicotine is a polacrilex nicotine (ph) coated gum to be clear. So, it is a good product for us and has good gross margins. So our expectation is that we can compete with this. We expected Watson in. As I mentioned our ... we believe that we have the progress in place that will allow us to continue to have a good strong coated nicotine gum franchise and our expectation is that we will be able do that. Clearly, Watson will gain share but we expect to still hold a majority position in share with a good gross margin product.

Scott Hirsch - Credit Suisse

Okay.

Joseph Papa

Go ahead.

Scott Hirsch - Credit Suisse

And just lastly ... what was some of the motivation around settling both the NASACORT and Clarinex in the outer years. Is this just a function of what was the best decision at the time or was there other factors involved?

Joseph Papa

Yeah, I think both of this two separate diverse pair of effects here (ph). I mean, on the Nasacort that was a partnership product. We brought certainty to it, we brought some monetization to it in the near term. We felt it was... working with our partner Barr, it was good for. For Barr it was good, for Perrigo it was good for just going forward in terms of reducing uncertainty.

On the Clarinex opportunity, that potentially is a crowded market depending on whether or not it gives, stays Rx or whether it goes over-the-counter. We saw the clarity of this direction, reducing our expenses having clear decision. If it goes over-the-counter, we will have an opportunity to enter the market earlier and we will be well positioned if it stays in the Rx side. We've minimized the expense for that particular issue to fight that legal case and we find ourselves in a good position. So I think different fact patterns, but just certainly in both cases a chance to do the best things for the Perrigo shareholders.

Operator, I think I have time for just one last question. I know we've gone over but we note there has been a lot of questions than we wanted to try to give you as much detail an information as possible. But operator is there any more questions.

Operator

Yes. Your last question comes from the line of Louise Chen with Collins Stewart.

Louise Chen - Collins Stewart

Hi, just a few quick questions. Firstly on the raw material pricing; I guess in general it seems like raw material pricing is coming down. So can you explain a little bit more, why the vitamin business, the raw material costs were high and how long is it going to take to flow through in terms of the inventory?

And, secondly just on your end markets it looks like those are definitely still intact. You get very strong on the consumer business and can you talk a little bit about your relationship with Medco and then also, just what retailers are doing to promote store brands since you said that store brand has been increasingly favored by consumers.

Joseph Papa

Okay, there good questions. First, Louise on the Vitamin/Mineral Supplement, the raw materials that we acquired go back to some of issues that from a sourcing point of view that occurred during the time period of the late December to August-September, somewhat associated with the Olympics.

Second issue is there... I think you may have seen in newspaper, there is some Vitamin C pricing, I don't know somewhat of collusion but there is certainly some activities that have recurred in Vitamin C pricing that are causing some difficulties. I think that has sorted itself out and ultimately, because we've been able to go alternate venders of Vitamin C, we do believe that we can get the Vitamin C price of the raw materials under control and back to what, I would call a more normal pricing environment for product such as Vitamin C.

On the second question, so I think that just really reflects what happened. It will work through our system. We will get additional vendors on board, but it just takes some time and that's the activities that I outlined in our action plan.

On the question of Medco; we have very good relations with Medco predominantly in the generic Rx area, but we have had discussions with Medco on a variety of different issues. But good strong relationships with Medco and once again primarily on generic Rx area.

Finally the question on the retailer side; the retailer is looking to store brands as being an important driver for their growth and profitability. They have put additional promotional programs together. I think one of the best ones, the most visible one has been the Wal-Mart $4 program, where they have taken a $4-approach to their over-the-counter products and bundled that with other products to try to continue to increase the store brand utilization.

I think it goes beyond. Wal-Mart is clearly and the other retailers are doing similar program to drive utilization of store brand, because it's clearly good for the consumer, the ultimate end consumer. It's good for the retailer and obviously its good for Perrigo.

Joseph Papa

That really concludes I think, your question Louise. Thank you everyone for your questions.

Maybe just a couple of points; I know this has cleared some questions in your mind. We'll be happy to try to answer any questions anyone has. But, basically as I look at it, I think we had a good quarter with record sales. We are still projecting top-line growth of 13 to 18% for the year. We are still projecting growth in our earnings per share of 11 to 20% EPS share. And importantly, in a volatile economic environment, I think we've taken a lot of steps to ensure for the long-term period of the shareholders that we're doing the right things.

We clearly are working on making the business better off by looking at our cost structures. Number two, we are clearly continue our investment in research and development which we think is very important for the long-term success of our business. Number three, we're clearly taking market share especially in our consumer healthcare core business and the Vitamin/Nutritional Supplement, which I mentioned which we think is also very important over the long-term. And fourth, we are continuing, as evidenced by the three acquisitions that have occurred in the last four months, going after acquisitions to continue to acquire related businesses that will help us to grow our total consumer healthcare franchise and we think that's the good part of what makes Perrigo uniquely positioned to take advantage of the opportunities we find ourselves in the future.

Thank you very much for your attention today and we look forward to having further dialog in the future. Have a great day.

Operator

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

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Source: The Perrigo Company F2Q09 (Qtr End 12/27/08) Call Transcript
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