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Executives

Arthur Shannon – VP, IR and Communication

Joe Papa – President, CEO and Chairman

Judy Brown – EVP and CFO

Analysts

Greg Gilbert – Bank of America

Randall Stanicky – Goldman Sachs

Linda Weiser – Caris & Company

Derek Leckow – Barrington Research

Louise Chen – Collins Stewart

Perrigo Company (PRGO) F3Q09 (03/28/09) Earnings Call Transcript May 7, 2009 10:00 AM ET

Operator

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo Fiscal Year 2009 Third 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.

Mr. Shannon, Vice President of Investor Relations. You may begin your conference.

Arthur Shannon

Thank you very much, Crystal. Welcome to Perrigo's third 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 perrigo.com. Also we are webcasting this call with a slide presentation.

If you need a follow-on with the webcast or access the presentation on perrigo.com in the Investor Relations presentation section.

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?

Joe Papa

Thank you, Art and welcome everyone to Perrigo's third 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. Then I will provide an overview of our cost management efforts in the quarter and our decision to exit the Consumer Products business in Israel.

Next, Judy will walk through the detailed financials and I will give you an update on our earnings guidance and new products as well as an update on other business units. This will be followed by an opportunity for Q&A.

This quarter reflected the strength of our private label store brand Consumer Healthcare business while we worked to mitigate some of the challenges in other business segments. We achieved record third quarter sales and record adjusted third quarter earnings from continuing operations led by our store brand private label over-the-counter business.

Total new products sales which includes Consumer Healthcare products were launched in the last 18 months were $93 million in the quarter as Omeprazole, Cetirizine and the launch of Famotidine Complete continued to meet or beat our expectations.

Now, if you look at slide one in our presentation, the second row shows the overall domestic OTC consumer market was down 3.1% in the quarter versus last year and national brand sales 7.3%, while store brands gained 11.7%.

I would also like to highlight that the cough/cold category was down 5.5% while store brands grew more than 11%. This shows that consumers are realizing the value of store brand in a challenging economy and that Perrigo is uniquely positioned to deliver that value to consumers and to deliver quality, affordable healthcare products to meet the world’s growing needs.

Last quarter, I told you that we did and would be focused on controlling cost in a difficult economy. During the quarter, we reduced operating expenses by 14% compared to last year at this time. To be fair, a part of that was the result of reduced spending compared to last year’s Omeprazole launch, but most of the reduced expense was in the Rx and API groups.

Even with these cutbacks, we though are continuing to invest in quality and research and development. As we previously communicated to you, Perrigo continuously evaluates the (inaudible) of its business based on the overall strategic shift for the Company and on return on invested capital. As a result of this review, we now view the consumer products business in Israel as a non-core to the Company.

We have engaged two investment banking firms William Blair and Poalim Capital Markets to help us find the right buyer. Judy will explain our reporting of that business shortly.

Overall, I have been delighted with the quarter with the performance by the team by growing store brand sales and our ability to manage expenses and obtain productivity improvement to meet the increased demand for store brand.

This quarter also represents another important milestone. It is the first time in our history that we have achieved $0.50 earnings per share in a quarter. I’m sure we’ll have plenty of questions about our revised guidance and our market share gains, so I’ll get inside the detail on that shortly. But let me turn the call over to Judy to go through it in more detail. Judy?

Judy Brown

Thanks, Joe. Good morning everyone. This quarter, the team was successful in implementing a number of improvement initiatives and we ended the quarter in line with our expectations. That being said, we recognize that a number of challenges remain and are focused on driving improvements in those areas.

On our second quarter earnings call, we outlined several factors that would influence our performance for the remainder of the fiscal year and those factors are playing out much as we had expected.

During the next few minutes, I would like to provide some quick highlights of the financial results for the quarter as well as update you on our expectations for the remainder of the year.

Before we discuss our results in the third quarter, however, I want to first point to the introduction of the discontinued operations line on the face of the income statement. As Joe just mentioned, in March 2009 as part of our strategic business portfolio review, the Company committed to a plan to sell its Israel Consumer Products business.

The financial results which were previously reported as part of the Company’s other category has been classified for all periods presented as discontinued operations in the condensed consolidated statements of income, which can be found in our 10-Q which will be filed later today.

Sales for the quarter for this business was $18 million this year, down from $23 million last year and gross profit was $5 million this year, down from $8 million last year. The Consumer Products business had an operating loss of $2 million versus $500,000 last year.

The net impact in the third quarter of segregating the results of Israel Consumer Products into discontinued operation was $0.01 benefit to earnings per share from continuing operations. Please also note that as you now look at the financial information for continuing operation for US GAAP, a portion of general corporate overhead expenses which has previously been allocated to Consumer Products business is now presented fully in consolidated, unallocated expenses.

So, before we move on, I want to underscore again and that all of the rest of my comments this morning are based on the continuing operations of the Perrigo business and do not include the Israel Consumer Products business which is now presented as discontinued operation.

Year over year, we had a strong quarter. As you can see on slide number two, consolidated net sales increased 5% to $506 million. Consolidated GAAP gross profit was $150 million, nearly flat versus last year. Consolidated GAAP income from continuing operation was $46 million, up $6 million from last year.

After reviewing the figures we released this morning, you will see that there was one item in the third fiscal quarter 2009 and three in 2008 which we’ve excluded from our analysis of the adjusted operating basis financials.

As you can see on slide number three, we incurred a pre-tax charge of $700,000 to cost of sales for the remaining step up in value of inventory to the Diba acquisition this year. Similarly, last year related to the Glades Pharm acquisition, we incurred a pre-tax charge of $3 million for the step up in value of the acquired inventory along with another $3 million pre-tax dollars of in-process research and development expenses.

Additionally, last year, we incurred restructuring charge of $300,000 before tax. Please note, that you can view the impact to these items on the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in Table 2 of the Appendix to our press release sent this morning.

Now, I will take you through the financial analysis of our fiscal third quarter based on adjusted results from continuing operations, that is the GAAP figure excluding the previously mentioned charges.

Looking to slide three, consolidated net sales from continuing operations were strong at $506 million, an increase of $25 million or 5% from a year ago. The sales growth was driven by the Consumer Healthcare segment reflecting incremental new product sales, higher unit sales of existing products and the inclusion of sales from JB Labs, Unico, Diba and Brunel.

This growth was partially offset by two one-time items that benefited the fiscal year 2008 third quarter, a $9 million one-time cash payment in Rx and an accrual reversal in API of $5 million. In addition, sales were offset by unfavorable changes in foreign currency exchange rates and sales mix in certain segments which will be discussed in more detail shortly.

Adjusted consolidated gross profits from continuing operations was $150 million, down 2% from a year ago, reflecting the absence of the one-time items in Rx and API just discussed as well as the raw material pricing pressure in the Nutrition business.

Adjusted gross margin was 29.7%, compared with 31.9% last year. Adjusted consolidated operating income was $73 million, up $7 million at 10% from last year due primarily to our focus on controlling operating expenses.

Through better SG&A leverage, we were able to increase adjusted operating margin 70 basis points from last year, up to 14.4%. Adjusted consolidated income from continuing operations was $47 million compared with $45 million last year. Adjusted earnings per share from continuing operations was $0.50, up from $0.47 last year.

Now on to business segments, on slide four, you will see Consumer Healthcare third quarter net sales increase $46 million or 12% to $419 million. It is worthwhile to note that this quarter is the anniversary of our very successful launches of Omeprazole and Cetirizine last year. So, I would point out that this 12% growth is on top of the launches last year.

The net sales increase resulted from approximately from $31 million of new and existing product sales primarily in the gastrointestinal, cough/cold, smoking cessation and nutrition categories. And another $39 million in organic increase from the acquisitions of JB Labs, Unico, Deba and Brunel.

These increases were partially offset by unfavorable changes in foreign currency exchange rates of $12 million as well as the absence of $10 million of net sales from the UK's Vitamin, Minerals, and Supplements business which was divested at the beginning of fiscal 2009. In total, inorganic growth in new product sales are strong and our base business remains healthy.

Adjusted gross profit of $117 million was up $6 million from last year. The adjusted gross margin of 27.9% was a decrease of 180 basis points from last year, due primarily to lower gross margins this year associated with Nutritional Product category and higher relative production costs.

In addition, there was some downward pressure in gross margins due to the inclusion of the relatively lower margin in JB Labs and Diba businesses added to the Consumer Healthcare portfolio this year.

These pressures were partially offset by favorable product sales mix both foreign and domestic as well as margin contribution from the acquisition of Unico.

Third quarter, adjusted operating expenses for fiscal 2009 decreased 4% or $2 million compared to fiscal 2008. Both administrative and selling expenses decreased year over year, while spending increased in research and development by $2 million.

The decrease in administrative expenses were due primarily to lower insurance cost and a one-time reimbursement of legal expense, partially offset by the inclusion of expenses related to the new acquisition.

The majority of the decrease in selling cost related to lower sales commission, promotional cost and marketing cost versus fiscal 2008, which if you remember included higher promotional cost related to the launches of Omeprazole and Cetirizine. These decreases were partially offset by the inclusion of the expense for Unico.

As a percentage of sales, third quarter fiscal 2009 adjusted operating expenses decreased 220 basis points compared to third fiscal quarter 2008 as the team has been focused on controlling costs throughout their business.

In total, Consumer Healthcare had adjusted operating income for the third quarter of $63 million, up $8 million or 15% from last year. Adjusted operating margin in this segment was 15% of net sales, up 30 basis points from last year, reflecting the team’s hard work and implementing productivity initiative and managing costs.

Looking next at Rx Pharmaceuticals on slide five, third quarter net sales in Rx were $42 million, down $7 million or 15% compared with last year. This decrease was due primarily to the absence of the fiscal 2008 receipt of a one-time cash payment of $9 million from a customer in lewd of expected future minimum royalty payment.

The decrease in net sales was also due to $2 million reduction in non-product revenue as well as pricing pressure in the competitive market place for generic drugs. Despite these pressures, the increased sales in our existing portfolio of products by $5 million and finally it should be noted that we have not yet received approval for our Tri-Cyclen generic Nasacort filings which is necessary to receive the next milestone payment.

Gross profit in Rx was $16 million, down $6 million from last year. Gross margin was 38.7%, a decrease from 44.3% a year ago, reflecting the absence of the $5 million gross profit contribution from the one-time customer payment in fiscal 2008.

Operating income was $8 million, down from $11 million last year and reduced gross profit contribution, offset by $2 million reduction in Rx operating expenses.

Overall, we are very pleased with the results of the Rx this quarter in light of continuous pricing and competitive pressure coupled with the absence of a milestone payment in the quarter related to Tri-Cyclen.

Sales of our existing portfolio were up $5 million and we’ve reduced our operating cost by $2 million. We are confident the segment is in a strong position to capitalize on the new product pipeline ahead and remain a solid contributor to our Perrigo business portfolio.

Now, looking at the API segment on slide six, API net sales in the third quarter were $31 million, down from $38 million last year, primarily due to the absence of a one-time $5 million accrual reversal related to a long standing customer contract negation which was recognized in fiscal 2008.

Additionally, API sales were negatively impacted by $2 million due to unfavorable changes in foreign exchange rate and another $2 million from lower sales volumes of the existing products. These decreases were partially offset by $2 million in new product sales and payment from partners related to international product development agreement.

Gross profit was $11 million, down from $3 million, down $3 million last year due primarily to the absence of the one-time $5 million accrual reversal I just mentioned as we all as $1 million unfavorable change in foreign currency exchange rate.

These decreases were partially offset by favorable contributions from new products and some price positive pricing activity in the quarter.

Operating expenses were $7 million, down 18% from last year, due primarily to the lower employee related cost, favorable changes in foreign currency exchange rate and a decline in research and development costs.

API operating income was $4 million, down from $6 million last year due primarily to the absence of the one-time $5 million accrual reversal I just mentioned

In the other category which now includes only continuing operations of our Israel based Pharmaceutical and Diagnostic business, third quarter net sales were $14 million, down 32% or $7 million from last year.

The decrease was driven primarily by $4 million impact related to a change in a customer contract, where by fiscal 2009 sales are now being recognized on a net basis. In addition, sales were unfavorably impacted by $1 million related to changes in the foreign currency exchange rate, lower sales in the Diagnostic product line and changes in the sales mix of existing products in the remaining portfolio.

Third quarter gross profit remained relatively flat at $6 million. Gross profit margin for fiscal 2009 increased 1310 basis point compared to fiscal 2008 due to the change I mentioned a moment ago in a customer contract being recognized now on net basis.

Third quarter operating expenses for fiscal 2009 decreased 30% compared to fiscal 2008 due to primarily to lower employee related expenses and a slightly favorable change in the foreign exchange rate.

Adjusted, unallocated corporate expense for the quarter were $5 million, down from $8 million in the third quarter of last year. This decrease was due to lower incentive related employee wages and benefits versus fiscal 2008.

Now some comments on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $375 million at the end of the quarter, versus $348 million at this time last year.

Accounts receivable were $331 million compared with $347 a year ago, reflecting more normalized sales patterns in the quarter versus last year, which you may remember when we were in the middle of our Omeprazole launch near quarter end.

Inventories were $383 million, up from $336 million at this time last year. The increase was driven primarily by the acquisitions of JB Labs, Unico, Diba and Brunel as well as some higher priced raw material on hand in Nutrition.

Accounts payable were $233 million compared with $216 million a year ago, tied mainly to the inventory cycle.

Cash provided by operations was $66 million in the third quarter compared with $39 million last year. This is a record for our fiscal third quarter. For the first nine months of fiscal 2009, cash provided by operations was $102 million, down from $132 million a year ago due mainly to an additional $34 million of incremental tax payment this year versus last.

At the end of third quarter, cash in investment securities were $198 million, up $133 million from $65 million at the same period last year. At the end of the quarter, we had an additional $200 million of untapped capacity on our existing bank revolver.

Our total and long-term debt on the basis of balance sheet is $891 million, but includes $400 million back-to-back loan which is completely offset by the $400 million restricted cash deposit in non-current asset.

Net of the back-to-back loan, our external debt was $491 million. As of March 28, our debt to total capital was 36.9% and our net debt to total capital was 22%. Both of these ratios have increased from the end of fiscal 2008 as we have put our cash to work through the purchases of JB Labs, Diba and Unico.

While our total debt to total capital ratio is higher than prior periods, we still have access to additional liquidity and believe that our current balance sheet and capital structure remains strong.

In the first nine months of fiscal 2009, we paid cash dividends of $15 million or $0.16 per share. And yesterday, our Board of Directors approved another quarterly dividend of $0.055 to shareholders’ of record on May 19th.

In summary, looking to slide seven, we are on track to meet our guidance provided on the February earnings call. We told you in February that you could expect consolidated Perrigo revenue growth of between 13% and 18% for the full year.

We expect to meet this range even with the change in discontinued – in continuing operation. We stated that we expected that consolidated adjusted gross margin to be down 100 basis points to 200 basis points from last year and that guidance remains intact.

We are still expecting to maintain our annual consolidated R&D spending level of approximately 4% in net sales as quoted in February in order to keep moving towards more new product launches in the future.

Also as stated in February, we expect distribution, selling, general and administrative expenses for the fiscal year to be approximately 13.5% of sales driven by cost containment initiatives. We continue to expect total operating margin to be in the 11% to 13% range.

With that said, we are revising our full year fiscal 2009 adjusted earnings guidance and narrowing the earnings per share from continuing operations from the previously quoted range.

In our second fiscal quarter earning release, we quoted a range of $1.75 to $1.90 adjusted earnings per share. We are now narrowing that range to be $1.80 to $1.90 adjusted earnings per share from continuing operation.

This implies an improvement in earnings per share from continuing operations of between 15% and 22% on an adjusted basis year over year. This change is based on an updated effective tax rate for the full year of approximately 26%, down slightly from the 28% annual effective tax rate we quoted last quarter due to updated projections on the mix of income and recent resolution of several tax audits.

Please note that this full year earnings guidance excludes any contributions from the discontinued operations of the Israel Consumer Product business which in our previous annual February guidance had been expected to contribute $0.03 earnings per share for the full year.

For the year, we are reaffirming our operating cash flow to be between $190 million to $220 million. Our full year, CapEx projection remains in the range of $55 million to $70 million and will include expenditures that are newly acquired Michigan and Mexican facilities as well as production expansion projects underway in South Carolina and Allegan, Michigan.

And now, let me turn it back to Joe.

Joe Papa

Thank you, Judy. Now that Judy has given you all the details for the quarter, I'd like to talk about our guidance and the recent developments in our OTC and Rx business and then talk about out operations.

First, let me talk about our revised earnings from our continuing operations guidance. We revised our range as a result of the performance of our private label store brand operating unit in Consumer Healthcare.

New products are clearly driving our business. Sales of Omeprazole, Cetirizine, Famotidine Complete and the launch of Ibuprofen PM are going as we expected. As we have previously communicated our domestic Nutritional Products category continues to be impacted by cost for raw material purchase earlier this year.

You will notice that impact to our gross margin in Consumer Healthcare. We have made progress but we are not still satisfied with this product category and will continue to focus on Nutritional operating improvement.

Our margin would be in line with our original guidance of 30% if not for the (inaudible) in the Nutritional Product category. This is a near-term issue that we are in process of reversing but impacted the quarter and expect it will continue through the end of this fiscal year.

Second, we continue to execute our building of portfolio product with the addition of new products in our pipeline. If you would, please, look at slide eight, during the third quarter, we added $93 million in new product sales.

Cetirizine, the store brand comparable to Zeotech continues to perform well. Our data currently shows that store brand are selling more than national brand with more than 50% market share. Also, we have maintained our 80% plus market share of the store brand Cetirizine market despite numerous competitors.

On slide nine, you could see that our store brand version of Omeprazole OTC is capturing nearly 40% of the market. Recent sales data shows that we are on track to reach the high end of our original annual sales guidance range of $150 million to $200 million. Also we received final approval from the FDA for OTC Ibuprofen and Diphenhydramine Citrate Tablets.

We will begin product shipments to retailers during the quarter and the launch has gone well. This product is comparable to Wyeth Consumer Healthcare Advil PM tablet indicated as a pain reliever and a night time sleep aid.

Estimated brand sales for the product for the 12 months ended December 21st were $71 million. The smoking cessation category, we expect to have competition in Coated Nicotine Gum. Watson announced that it was coming to market with Coated Gum products but did not enter the market during this quarter. They have been competing with us in the Coated/Uncoated category for several years.

We expected them to enter the Coated Gum product line this calendar year, but this is factored into our guidance. The cough/cold season was very weak this year. In fact, it was very similar to the past couple of years and this was factored into our original guidance.

The H1, N1 influenza outbreak is the cause for concern for all of us. We have seen increased cost – product reorders for some of our products but do not expect any material changes in this business segment at this time. As a reminder, the cough/cold category represents approximately 12% of our Perrigo revenues.

There was some confusion last quarter when I talked about our inventory at our retailers. You may recall that I said we achieved strong sales last quarter despite the average inventory – our retail has been down 8% as compared to the same period last year. To anticipate your question, this quarter, inventory levels were relatively flat compared to last year.

On the Rx side of the business, we told you last quarter about the settlement of patent litigation related to Nasacort AQ brought by Sanofi-Aventis against Barr Laboratories, our product – our partner in this product launch. We are awaiting final approval from the FDA at this time. We have received some additional comments from the FDA and do not expect this approval in our current fiscal year which means the milestone payment are not included in our guidance for fiscal year 2009.

Nasacort AQ unit sales were approximately $325 million for the 12 months ended November 2008. On March 17th, we announced that our partner Cobrek Pharmaceuticals filed an ANDA for Clindamycin Phosphate Foam, 1% a generic version of Evoclin Foam 1%.We believe that Cobrek is the first to file ANDA with a Paragraph IV certification against Evoclin.

Evoclin Foam 1% is a topical antibiotic invited – indicated for topical application in the treatment of acne and had sales of approximately $44 million for the 12 months ended January 2009.

As you know, we are constantly striving to be first to market in our Rx and OTC business units. We have exclusive product offerings of more than $1 billion over the next year and we are investing in R&D to keep the pipeline robust.

As a reminder, we believe more than $10 billion in branded prescription sales today will switch from Rx to OTC in the next 5 years and our goal is to be first to market with those products.

Next, I want to talk briefly about our API business segment. The quarterly results are still weakened by a sales mix of existing products. This was somewhat offset by more than $2 million in new product sales.

Our team is focused on making the necessary expense adjustments to be on track to make the revised plan. The team has managed expenses effectively during the quarter and we expect that to continue for the remainder of the fiscal year while we will continue to make progress with our new product.

Finally, our operations have been able to meet the demand caused by our success. We are setting Perrigo record for making the over-the-counter Ibuprofen tablets and we are on track to make more tablets than any time in our Company’s history.

As we have previously communicated, we will continue to focus on execution, the retail data for our new products is encouraging and we are optimistic about the future of Famotidine Complete, Omeprazole, Cetirizine and other products in the pipeline including the launch of Ibuprofen PM in this fiscal year.

On the Rx side of the business, we increased third quarter net sales on existing products by $5 million while reducing our cost by $2 million. In a difficult environment, the team has enabled to meet its goal without the benefits of new products in the arch group.

In this challenging economy, we are working together with our customers to make consumers more aware of the store brand proposition. Unlike other private label products, OTC Healthcare products and generic prescription drugs are FDA approved.

The data is showing that consumers are making the value judgment as store brand share in 10 years to grow. In a world, rising healthcare cost coupled with aging population, Perrigo is uniquely positioned to meet the need for quality, affordable healthcare products.

Now, let’s take your questions. Operator, we open up the lines for question, please.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Greg Gilbert with Bank of America.

Greg Gilbert – Bank of America

Good morning. I have a few – nice to see some operating margin improvement versus last quarter even that vitamin drag but other than managing raw material cost and bringing packaging fully in-house which I think you are already doing, what else are you talking about doing to improve the margin structure there?

Joe Papa

Hi, Greg, Joe Papa. Your question – clearly the big part of what we got to do is work through the inventory of raw materials that were previously at the higher price of the – from a cost of goods, raw material cost. That was really the – we probably worked through that inventory, Greg, on the raw material as we worked through that raw material that in our inventory that will bring down the effective cost of goods of our products.

Greg Gilbert – Bank of America

Okay. About the need to do additional things now which you have already articulated?

Joe Papa

No. I think that’s a primary portion. Obviously, we are – the other part of what I said before, just to remind you that we are also seeking an additional sourcing of raw materials to seek better cost of goods by bringing all suppliers for those raw materials

Greg Gilbert – Bank of America

Okay. My second question is about new launches. What is your guidance in terms of Rx and your other consumer launches for the remainder of this year? Can you offer a sneak preview on what could be launched on those businesses next year?

Joe Papa

Yes. As you know, Greg, we really don’t talk about our next fiscal year until the August timeframe. So, I can’t really speak much about that. But I do think there are some products that you are aware of that in terms of expirations of 30-month space and other things that will happen over the next 12 months. Relative though to – going back to the first part of your question, the current fiscal year, there are few small products introductions but they are very limited. The majority of the products with the performance of our existing products, the primary driver for our remaining 3 months will be the performance of our existing products and as they gain incremental market share in their respective markets.

Greg Gilbert – Bank of America

Okay. Thanks. And one more on the business you plan to divest. Do you have sense for the level of interest yet and as you look ahead to having some proceeds there? How you are prioritizing the use of those funds?

Joe Papa

Thanks, Greg. Relative to our Israel Consumer Products business which we have announced that we are divesting this morning, it’s still too early for us to make any comments about the interest level in that business. It is a good business. It is actually a business that has good history, has some good brand in that business; the (inaudible) brands are very strong brands in Israel. So, we do expect to see interest in the business but really it is too early to make any specific comments towards the process of selling that business. Relative to the use of funds for that, clearly there will be opportunity for us to either look to additional tuck in acquisition such as the ones we have done in the past and or just general cash for operations. There really is no specific comment I can offer at this time about any other opportunities with that cash. Judy, do you have anything else on the cash or do you want to make comment?

Judy Brown

We would go into that as the uses that Joe laid out focusing on internal investments that we talked about in increased CapEx this year and we have been doing the investments in our own operations to handle enhanced capacity with the success of the business over the last few years as well as obviously to Joe’s point on looking at M&A opportunities as they arrive.

Greg Gilbert – Bank of America

Thanks.

Operator

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

Randall Stanicky – Goldman Sachs

Thanks very much for the questions. Just a follow-up on Greg’s questions, did I get the cost allocation on the divestiture of the Israeli business. But are there any implications once that divested either from a cost allocation or a tax perspective?

Judy Brown

Good question. As we move forward in this process, we will be even more clear. Once the divestiture would be completed, what I would expect is that we would continue as Joe highlighted in his comments, the process of organizing the cost centers in the functional support cost for Israel and that process is happening right now. You already see the cost savings reflected in the SG&A reductions in the remaining businesses there and that will continue and then to add to that there was some general corporate overhead cost that are added back into the general corporate line as I made the comment. But as you can see those are also down overall as well. In terms of overall profitability, the remainder of the business is in line with the forecast that we just laid out for the remainder of the year.

Randall Stanicky – Goldman Sachs

And on the tax side?

Judy Brown

On the tax side, the Israel Consumer Product business on a standalone basis actually had a higher relative tax rate which was not in a tax – a low-tax zone. In Israel, for their average tax rate was in the high 20s about 29%. So, it actually had a slightly negative impact for us compared to our overall blended rate globally. So, the divestiture that business would have a benefit to us on go-forward basis but only to the extent of 50 basis point to 100 basis points.

Randall Stanicky – Goldman Sachs

Okay. And then Joe, just a question on the API business. Was that or is that a part of the strategic review when you think about the portfolio of businesses that you want to be in?

Joe Papa

Good question. Yes, we continue to look at our strategic planning process which at all of our business in terms where we are moving the business. We look at all of the business. The other thing as we highlighted, we also do is look at return on invested capital for all of our businesses. We believe the API business still has synergies with both our Rx business and our over-the-counter business as an example what are the things I think you may recall. We look to source our raw material Kurezene [ph] from our API business as an example. And we think those kind of synergies help us, as well as it helps us with the opportunity to just be a better procurer of raw materials as we utilize some of the knowledge and our expertise in our API business. So, we will always continue to evaluate business as we go forward, but at this time we feel the API business is a good business for us and has good synergy with the remaining Consumer Healthcare and Rx business.

Randall Stanicky – Goldman Sachs

And then just a quick one, $0.10 range implied for the next quarter, any rationale behind I guess with that range, why is not tightened up a little bit more?

Joe Papa

Yes, well, I think both – may be Judy wants to make some comments on this well. I think what we are just simply reflecting is right now we are seeing very strong demand for our Consumer Healthcare business. It’s our – certainly our largest business. We just – always want to make sure that there could be some uncertainty in the economic conditions certainly in the United States and foreign exchange. So, we want to make sure we keep ourselves with a little bit of range there reflecting general market conditions. We still feel very good about our business. We feel we are executing very well. We are executing on the cost containment side. We have great demand for our products but I think we really want to just reflect just the general economic conditions and foreign exchange, Judy –?

Judy Brown

And I would like to add to that by just noting, as we have spoken last quarter, as you know, we talked about the API business being heavily weighted for the second half of the year. Sequentially, you have seen improved performance certainly in this third fiscal quarter and we mentioned the activity and the contribution this quarter of the VA [ph] sales. I would like to add though that there are additional sales expected in the fourth quarter and incentives are discrete items on that part of the maintaining a range, a smaller range. But obvious to your point, it’s still a $0.10 range to make sure we that we can consider about the economics as well as some discrete items that are in our fourth quarter range.

Randall Stanicky – Goldman Sachs

Got it. Last quick one and I will jump out. Joe, would you point – would you be willing to put any color on what you are expecting in terms of – you have done a great job obviously growing your Omeprazole, Cetirizine share, potential for an Indian based competitor coming on Omeprazole, would you put any color on what you are expecting when that occurs? Thanks.

Joe Papa

Sure. Good question. It’s probably – and that has obviously been an important product for us and we feel very good about out performance with Omeprazole. I think the issue on this potential product, the only one that I’m aware is the Dr. Reddy product. As we look at the products, we look at it more of a line-extension product rather than a competitor product to us. Is there issues with competition? Yes, there could be. But if you think about it, one product is the magnesium sock, the other product is a base. One product has a capsule formulation, our product is a tablet as well as the national brand is a tablet. We view this as being potentially a line extension for other – even just the regulatory pass way considerations. But we are aware of the status. We are obviously closely monitoring that. We will be prepared and I just remind you that this even if you look at our products Cetirizine where we entered the market with numerous competitors, I think at the time there were six to seven competitors including Perrigo and yet we still hold over 80% market share of Cetirizine in store brand. We expect that we will continue to hold a dominant market share, a significant share of Omeprazole certainly as the competitive Omeprazole product could be more viewed as a line extension product.

Randall Stanicky – Goldman Sachs

Great. Thanks.

Operator

Your next question comes from the line of Linda Weiser with Caris & Company

Linda Weiser – Caris & Company

Hi, thanks. Is there a way to quantify how much your 12% Consumer Healthcare growth rate in sales was impacted by pipeline in the prior year period from the new products?

Judy Brown

On a year-over-year basis, our inventory levels in the channel are flat. And if I roll forward on as we did in our prepared comments, we roll forward, the incremental new sales. Our incremental new sales were still contributing in Consumer Healthcare in the quarter approximately $40 million. So, our incremental new products and base volume growth were about 150 basis points increase year over year. So, in terms of, if you remember the – Clobetasol [ph] launch was in March of last year, and we said at that time that it was approximately a coded [ph] worth of sales. And that has in fact proven to be true. We have an increase in our overall Omeprazole numbers from our original guidance. But year over year, one month sales were about one quarter of last year versus a one full quarter this year.

Linda Weiser – Caris & Company

Okay. And then you – is there any way to – I mean the reallocation of the expense in Consumer Healthcare into un-allocated expense, what was the operating margin in Consumer Healthcare have been if you hadn’t done that? Like, would it still have been up 30 basis points or did that change the year-over-year change in that margin because of the reallocation?

Judy Brown

Let me make sure, first of all that I understand I question. You are referencing the comment I made about the previously absorbed cost for the Israel Consumer Products business that are now part of the general unallocated cost, correct?

Linda Weiser – Caris & Company

You mentioned that there was some reallocation –?

Judy Brown

Correct.

Linda Weiser – Caris & Company

Yes.

Judy Brown

For the full year, just as you think about how to model this going forward, that business absorbs approximately that was expected to absorb approximately $1 million of general corporate cost. None of that will touch Consumer Healthcare. It also is into the unallocated corporate expense bucket which is as you know from looking at the P&L, it’s own section in the segment. It will not – does not impact the Consumer Healthcare comparable to margins etcetera.

Linda Weiser – Caris & Company

Okay. And then can you comment – I mean you had originally had some statements that Omeprazole would be $180 million to $200 million of sales I guess in this year. I mean has it reached the upper end of that? Can you give us some sense about how it’s doing relative to that original guidance?

Joe Papa

Yes. Just to remind you, Linda, it’s Joe Papa. This is a reminder. We have always said the annual sales guidance for Omeprazole would be $150 million to $200 million. And I think the best answer I can give you right now as we continue to reflect that kind of range. We are at the higher end of the range, but clearly are still believe that will be $150 million to $200 million.

Linda Weiser – Caris & Company

Okay. And just in terms of the API and the Rx profit margins, I know you might not want to say much about next year of the sustainability of margins, but at least going into the fiscal fourth quarter, can we assume that flat sequentially is at least minimum expectation?

Joe Papa

Judy, you want to comment on that one?

Judy Brown

As I commented earlier on Randall’s question, particularly with API, API was going to be very heavily weighed in the second half of the year. And so, our expectation in that operating margins in the fourth quarter would actually be ticking up – also the comment about our expectations of some discrete related activity in the fourth quarter. So, by definition that would tick up the fourth quarter margin’s growth and operating margins in that business. And that is then how we get to our expectations of the earlier quoted full year rate for the API business. In terms of Rx, sequentially I would not expect a significant change quarter over quarter in that particular business unit in terms of the percent margins on operating margins or gross margins.

Linda Weiser – Caris & Company

Okay. And then just on the industry like – it seems than in Vitamin that store brand is gaining less share than in some of the other categories and national brand is holding up a little better. Is there some reason for that in Vitamins?

Joe Papa

Well, actually the data that we have actually would say store brand is outgrowing the national brand, albeit at a slower pace than the rest of the category. If that is your comment, do you think that’s true? I think the issue really on the Nutritional side of the portfolio especially as they would relate to national brands that there is a significant amount of new products. But if I give you the specifics, we look at the category data from my slide one, Nutritional category growth is 6.1%, the national brand is 5.8% and store brand is up 7%. So, we are still seeing slightly better growth in store brand. However, clearly Nutritional products from national brand are up more than any other category of OTC and Nutrition. So, there is some good national brand growth that’s mostly coming from new products, but we certainly look at that as certainly an opportunity for the future for store brand.

Linda Weiser – Caris & Company

Okay. Thanks very much.

Operator

Your next question comes from the line of Derek Leckow with Barrington Research.

Derek Leckow – Barrington Research

Thank you. Good morning and congratulations.

Judy Brown

Thanks Derek.

Derek Leckow – Barrington Research

I’m just some work on for the longer-term organic growth rate of the store brand industry and then reflecting on your large market share of that industry, you’ve got 80% share. And how do we think about the longer term, only we find three years out of it say, is this industry still going to gain that share from the national brands and then also we are looking at 1% or 2% price inflation and so it’s the real organic growth rate literally on that 5% mark, is that reasonable?

Joe Papa

Well, you’ve got a lot of great questions in there, Derek. Let me just comment back at may be where you are starting. So, we would say we are over 70% market share of the store brand market. We wouldn’t say over 80% just from a starting point of view.

Derek Leckow – Barrington Research

Okay.

Joe Papa

Relative to question though, where is that growth – if I understand it – where is growth going to come from? We think it’s going to come from a couple of important characteristics. Number one, first and foremost is new – it’s all going to be about new products. The strength of new products and the switching from products that are prescription today that are expected to go over-the-counter is really going to be one of the primary drivers for the growth in the store brand over-the-counter market. Remember, I always said the $10 billion of branded products that are prescription today that will switch over-the-counters status. I think the first place to start with. The products categories in there are clearly are the (inaudible) the rest are non-stating and remains potentially also some products in the topical or dermatology space we think our candidates switched over the counter status. And I think that’s going to be the biggest driver. Second driver, though clearly whether you look at the current economic conditions or just in general as consumers get more comfortable with the value proposition of store brands, we do expect the store brand share of the total over-the-counter market to continue to rise from where it is today. We expect continued growth in the store brand utilization as consumers feel more comfortable with the value equations that store brands offer knowing that our products are also approved by the FDA of having the same active ingredients, the same formulations and therefore, delivering the same efficacy as national brand. I think those would be the primary drivers of our expectations.

Derek Leckow – Barrington Research

Overall, store brand category right now is probably around a quarter of the industry?

Joe Papa

Somewhere close to that, yes.

Derek Leckow – Barrington Research

Alright. So, as you guys look at your plan here for the next three years, what’s sort of internal growth rate you view? I mean is it really the $10 billion, is this going to be – we are going to see maybe half of it come in the next three years or is it a smaller number than that, do you think? And just any kind of commentary what’s the rate level of internal growth to expect from that business, obviously it’s growing faster than most other categories?

Joe Papa

Yes. I think you have chance to talk a little bit more about this in August. I think it’s the first time and I would offer. But just try to give you some general comments right now. As we look to – we do think that those products will switch in the next five years. Now, the only thing I want to give you caution about, there is a dramatic variable on how quickly that effect Perrigo’s sales. In the case of product like (inaudible) if that products which is like a clear next gen as an example, that will likely be a product that we will have immediate access to the market with that product because we have a submission for that product. And they will not likely be a 3-year exclusivity based on historical (inaudible). However, in the case of the proton pump inhibitors that switch. So, for example we expect Prevacid to switch sometime later this year. It is likely that product if it does switch later this year would likely get a three-year exclusivity based on the data that was submitted associated with that switch. Now, these are general assumptions that we utilize as we do modeling and try to put a probability factor on when we can launch products. But those are the things that we try to think about relative any individual product in our categories which that could occur. Now, obviously our – we are never perfectly correct. We just try to get a probability factor that allows us to give a good indication of what’s going to happen with any new product launch in a category.

Derek Leckow – Barrington Research

Okay. Thanks. One final question, if I use 15% operating margin, after that takes place you just mentioned of the question?

Joe Papa

And so growing our operating margin from the 13.5% to somewhere around the 15% area. That’s a strong increase that will be candid. But we obviously are going to continue to try to strive to leverage our P&L with the operating margin but I think the new products are clearly going to be more than the things that drives our success in improving that operating margin as you have evidenced by what we have done in the past quarter and what we have done in the last 8 quarters.

Derek Leckow – Barrington Research

Thanks very much.

Operator

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

Louise Chen – Collins Stewart

Hi, good morning. I got a few questions. First one, I guess, is with respect to fiscal 2010, maybe can you talk qualitatively about some of the opportunities with respect to the approval that you are expecting and for Mucinex (inaudible)?

Joe Papa

You got my list. I’m Joe Papa.

Louise Chen – Collins Stewart

Hi.

Joe Papa

Good comments. We, as I said really reserve comments for the fiscal year 2010 to our August timeframe. That’s really when we talk about the next fiscal year. But I think you picked some of the important category. We believe the (inaudible) and the end of the stay is February 2010 event, the 30-month stay. And as I said before we feel very good about our prospects for that intellectual properties relative to what’s happened in terms of intellectual property being a dilate [ph] or tablet and our product not being a dilate or tablet. Relative to some of the other products that you certainly mentioned, we do believe we’ve got opportunities on the products and other products, the launch product. The other thing I would refer to, I can’t go into individual products but I would always remind you that as other products have switched in the past that are some products out there that switched recently in the end of their three-year expiration date has or will expire in the near future. That will give us some good opportunities to launch our version of those products into the market place in the near future. So, there’s some good opportunities out there. We are going to go into more detail but if you look at some of the more recent over-the-counter switches that occurred, two to three years ago I think it will give you some indication of what we will expect which product areas we will expect for next year.

Louise Chen – Collins Stewart

Okay. And then maybe you should talk a little bit about some of your key drivers for growth in 2010 just broadly speaking?

Joe Papa

Sure. Clearly – one of the areas we will continue to focus on is new products. The new products are so important to our franchise as they are with every over-the-counter and our ex-franchise that new products will always be a part of what we are doing. I think the second thing you are seeing in our current quarter and beyond is the operating expense leverage that we are executing on. And that’s something that will help to drive our bottom line portfolio of what we are doing. So, that’s part of it. I think I had spoken about in the past that we have seeking to stabilize the pricing environment and a pricing environment that has in past climbed in terms of pricing. We are now seeking to hold that flat slightly up tick in the pricing environment. And without I cannot leave this topic without also saying that the Nutritional profitability will be an important driver for our fiscal year 2010. We’ve taken some very significant hit to that business this year, but we do believe that once again as I said in the past calls that Nutrition over the next six months we think can improve in profitability and that will certainly help, be a driver for our fiscal 2010. Most importantly, we will talk about that in August.

Louise Chen – Collins Stewart

Okay. Let me, just one last question on your Consumer business overseas. You mentioned some intention to enter other markets Brazil and Canada. Can you help a little bit more about that?

Joe Papa

Yes. That’s pretty straightforward. We have a business in the – some healthcare business in England. We have a business in Mexico. We have relationships in Canada. What we are seeking to do is they we’ve got a great portfolio of assets being the products that we have, approved products, the formulations that we have. We believe that we could take those product formulations and bring them overseas to other locations. As we look at what we have done in England, what we see as an opportunity is that, we take the product portfolio we have in England and expand that to the rest of Europe. It’s not going to be something happens overnight to be clear. But we do think that especially as the branded companies like the Reckitt Benckiser will take the Mucinex product from Adams here in the United States to Europe, there will be an opportunity for us to take our store brand equivalent of that product into Europe as an opportunity. I’m happy to also say that we at Perrigo are working very hard in this. We have a dedicated team led by the (inaudible) at Perrigo are working on this opportunity are very seasoned and experienced person at Perrigo with experience in GE and other locations. So, we are selecting the markets, working on it to see what are the best opportunities for us to move forward leveraging our current franchise and bring it to other countries around the world.

Louise Chen – Collins Stewart

Thank you very much.

Judy Brown

Thank you.

Operator

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

Greg Gilbert – Bank of America

Hi, just two quick follow ups for Judy. You said the business that the business to be divested was retranslated to generate $0.03 in EPS for the year. Can you give us for each of the quarters of the year, the sales contribution and the EPS contribution so far? And the second question is, on your guidance slide where you talk about growth rate. Are those growth rates apples-to-apples considering the divestiture or not? Thanks.

Judy Brown

Sure. The time – specifically on consumer products. So, the first – I would also say the year-to-date contribution bottom line from Consumer products in 2009 has been minimal. Typically that is a very backend loaded business as well. Their biggest quarters in the year are normally the first and the fourth related to seasonal holidays. In Israel, year to date, I don’t have the first and second quarter specifically broken out here but we will provide that to everyone to create visibility for updating your models certainly subsequent to this call. But just to give you some flavor, top line in that business in the quarter as I mentioned with $18 million and year-to-date with $67 million. It was forecasted to be approximately $90 million for the year which was in our original guidance at the beginning. We talked about bottom line contribution, operating income year to date in that business where there was actually a lot about $2.5 million and operating income in the third quarter typically again a loss of about $1.5 million. So, big contribution, it was expected to be a strong fourth quarter with seasonal sales and that was going to be the big compensation to drive profitability in the fourth quarter and thereby create that original $0.03 of EPS which was built into our February number. When I provided the guidance update on slide, I believe it is seven, those growth rates have been adjusted to reflect I should say how our forecast and the guidance that we are providing you is adjusted to reflect like for likes, so it’s apples-to-apples excluding consumer products in both years but let me reiterate that, with the exclusion of that business, these ranges that we originally provided still hold. So, the 15% to 22% growth rate of adjusted EPS from continuing operations is on like-for-like basis.

Greg Gilbert – Bank of America

Thanks. That’s helpful.

Joe Papa

Ladies and gentlemen, I think that’s going to conclude our call for today. I thank you very much for your interest in Perrigo and we look forward to talking to you next quarter. Thank you. Have a good day.

Operator

This concludes today's Perrigo fiscal year 2009 third quarter earnings results. You may now disconnect.

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