Joseph C. Papa – Chairman and CEO
Judy Brown – EVP and CFO
Chris Schott – JP Morgan
Perrigo Company (PRGO) 30th Annual J.P. Morgan Healthcare Conference January 9, 2012 1:30 PM ET
Chris Schott – JP Morgan
Good afternoon. My name is Chris Schott and I’m an analyst at JP Morgan and very pleased to be introducing Periggo this morning. Perrigo, very exciting story coming off a couple of strong years and from Perrigo we’ve got Joe Papa, the company’s Chairman, President and CEO as well as Judy Brown, the company’s CFO. With that I am going to turn it over to Joe.
Joseph C. Papa
Thank you, Chris. It’s a pleasure to be here today to talk about Perrigo. Perrigo is this year a 125 year old company. We are celebrating our 125th year in business this year. But a company that is not only 125 years old, but a company that is poised for continued strong growth behind a couple of key factors. Number one, just the move to what I would call quality, affordable healthcare and what we are doing in the store brand Private Label space. Number two, it is an increasing number of products that are moving from prescription to over-the-counter and our very strong position in the over-the-counter store brand space as more and more products go from prescription to OTC. Number three, for us clearly it’s going to be in the past and certainly in the future new products, new products, new products. We’ve had great success launching new products and we expect to continue to be able to launch new products going into the near future. And finally, it’s also a story that is involved with mergers and acquisitions. I am delighted to say this morning for example we just announced an acquisition of a smaller company, a bolt-on company in the diabetes space that’s going to help us to continue to improve our offering in the store brand Private Label space for diabetes.
So let me move to the presentation. I refer you to our SEC filings for some of the risk statements that we have there relative to the company and refer you to the SEC filings.
Let me move though to give you a broader sense of Perrigo. Perrigo predominantly is a consumer healthcare store brand Private Label Company. Consumer healthcare represents approximately 60% to 61% of our business. To that we supplement it with the nutritional store brand opportunities. So that is about another 18%. So about 80% of our business is what I would call over-the-counter and nutritional store brand Private Label business where we make products for the Walgreens, the Wal-Marts, the CVSs, the Rite- Aids, the Targets, Costco, you name it. We make a version of a product that offers the same quality, safety and effectiveness as the national brand, but a much better savings for the consumer and a much higher margin for the retailers.
In addition to that we have an RX business, generic RX business predominantly focused on what I would call extended topicals generic prescriptions. Think of things that absorbs topically. So dermatology, respiratory drug absorbed topically through the lungs, nasal products absorbed topically though the nasal mucosa as examples and then finally we have an active ingredient business that represent about 6% of the business and that’s where we make many of the active ingredients for other pharmaceutical companies around the world, but also for our own vertical integration. So that gives you the sense of our 2011 sales in a relative percent. But far and away the majority of our business consumer healthcare or nutritional store brand Private Label representing about 80% of our business.
Well, this looks at our P&L statement. You can see we’ve grown dramatically 2007, we were about $1.4 billion Company. We are really relatively double that now since – in the last five years. So significant growth in the top line. Importantly, it’s about a 19% top line growth. We’ve been able to leverage the P&L and show significant operating income compounded on a growth rate of about 45% and really by leveraging what we are doing in sending more products, adding more products as we send our products from Perrigo everyday going to our large retailers out there. Really the growth driver is very much what I talked about before, growth in store brand, international, our Rx performance and clearly the new products will have about $190 million of new product revenue just this year, our fiscal year 2012, representing over 45 new products. We always talk about since we launch about one new product a week at Perrigo. Really speaks to the competitive side of launching store brand Private Label products.
One thing I talked about before was the fact that we do both organic growth and inorganic growth. This looks at our six year compounded annual growth rate. Organically it’s been about 10%. The inorganic compounded annual growth rate has been about 47% as you can see as we’ve looked at from 2005 going forward to 2011. So strong focus on organic growth, but also looking at appropriate M&A activities to drive the bottom line for our customers.
We are one of the world’s leading pharmaceutical manufacturers. That may be a surprise to some of you, but when you talk about actual volume out the door, we do over 45 billion tablets a year. Turns out every second, everyday, somewhere in the world, approximately 1,400 people take a Perrigo product. So every second of everyday somewhere in the world, 1,400 people are taking one of our products. It just really speaks to the critical mass of getting tablets out the door from our facilities around the world.
If I move to our largest segment, consumer healthcare. It has seen also very significant growth, essentially doubling as well since 2007. Importantly, we’ve been able to dramatically also improve our operating margin from about 7.5% somewhere to the 18%, 19% range. So very strong growth in leverage in our operating margin as well in the consumer healthcare, our largest business.
This slide really just steps us back and to say why do we exist as a company? This looks at how we position our products relative to the national brand. So on your left hand side is Nicorette. It’s a branded nicotine gum. The cost to retailer for that is about $57. They sell it for $71. There is about a $14 profit or about 20% profit for the retailer. Conversely, on your right hand side, you see what we do with our nicotine gum. We sell it to the retailer for about $23; they sell it for $53. They make significant higher absolute dollar of profit, about twice the profit as the national brand and importantly certainly on percentage a much higher profitability.
Critical to this equation though is also the saving for the consumer. Usually there’s about a 25%, 30% saving for the consumer and this is in essence the reason we exist. We are same quality and effectiveness in terms of our manufacturing capabilities, but offer the consumer about a 25% to 30% saving and obviously much higher margin for the retailers and this is really what’s driving the profitability for the retailers and why they continue to give us more shelf space for the products.
This is the all category review data through December the 18th and this looks at this year versus the previous year for the major categories in which we compete. I won’t go through all of them, but you can see from the dark blue on this chart that store brand clearly is driving many in these categories. If you look at OTC as a total category, we are up 6.4%. The national brands are down slightly about 2.5% and the categories growing about 0.3%, but the important point here is that store brand continue to drive the categories through most of these with perhaps just exceptions of vitamins and infant formula and to some degree of smoking. But smoking cessation, it really is just a – there’s a brand new launch for the national brand and it’s going very well, gives us more opportunities for us to go after for the future.
Talking about Perrigo, one of the things that we think we do well is launch new products. This is Cetirizine. I’ll just talk about it quickly. We launched this product in a very crowded market. There were seven total OTC approvals for Cetirizine which is the store brand of Zeotech. We launched against a total of seven, ourselves plus six others. Usually in that kind of competitive multi storage market you would think we get somewhere in the 15% share. We have actually over 80% share of this market from the day we launched and as we sit here today we still have over 80%. So clearly, there’s something here that is different from the casual multi storage market and what we do in terms of driving store brand share, but importantly holding onto our share of this business represented by this 80% store brand share that Perrigo has today.
So as part of what we do is not only make the tablets, but we put together a full marketing program for the retailers to help them be successful and it’s successful in driving store brand volume share. In this chart, you can see store brand Cetirizine has moved from – in the first 12 months moved from essentially zero share up to well into the 48%, 50% range. So in just really a year’s time we were able to move product from national brand, over-the-counter products to store brand and you can see usually ranges for these more recent launches, somewhere in that 40% to 50% range within the first 12 months. So we feel very good about our capabilities to educate the consumer, educate pharmacists about the importance of the quality and the effectiveness of our product to allow the movement from national brand to store brand.
One recent launch just to give some indication of what we do behind making tablets is our Fexofenadine launch program. We put together a full turnkey program for the retailers that start with direct consumer marketing. We put at-launch web banners; at-shelf messaging because most consumers don’t know initially that Fexofenadine is comparable to the national brand Allegra. We try to help educate the consumer so they understand that and indeed they feel comfortable using a store brand version or generic version of the national brand. But there is a lot of education that goes on there. We do pharmacy marketing, we do off shelf displays, we do end cap displays at the isles. Many different tools to help the consumer understand that you have a quality product, but is more affordable and better value for you as a consumer.
This is one of the slides that actually shows what happened. Many of you know Allegra was a prescription only item and just in the last year it went from prescription to OTC. As it switched to OTC you got a continued expansion in the category. As products move from prescription to OTC, the category grows. There is some cannibalization, a slight amount of cannibalization, but overall you get continued strong growth within the category as you move products from prescription to OTC. This is a continuing theme that we saw with Loratadine, when Cetirizine launch and now we see with Fexofenadine launch as well. So continued strong growth and gives us good opportunities for strong growth for the future.
One of the questions we often get, well, that’s great, what about the future? What does the future look like? And we’ve talked about we have more than 45 new products to launch and over $190 million of revenue in our fiscal year ’12. But to be clear, many of these products that we plan – the larger products we plan to launch are second half weighted products. In other words the timing and the expectations for this launch will occur in the second half of our fiscal year 2012 which is between January and June of 2012. So we can see, we have a generic version of Clarinex, unclear whether that will be a prescription product or an OTC. I think it still has a very high probability it could be OTC but unclear at this time, Prevacid generic version, Deson, Allegra D-12, Mucinex, Claritin D and Rogaine Foam, all very significant products that we expect to launch in the next six months for a store brand, over-the-counter view of those products. So we are excited about what that means for the future for us and in total we think the launch over 45 new products, over $190 million of sales which for a company our size really drives the top line and bottom line for us as a company.
Beyond that, clearly you have to look at what the future will look like and we are delighted that we think that over the next five years we think there are approximately over $10 billion to $15 billion products that are prescription items today that will move over-the-counter in the next five plus years. So we are really excited about what it means for the future for us. Many of the remaining non-sedating antihistamines like the Clarinex, like the Allegra D12, we expect to have those over the counter. Also the rest of the proton-pump inhibitors. We know Prilosec has switched, Prevacid has switched. We’ll launch our version of Prevacid later this year in May of 2012, but also then the rest of the proton inhibitors like Nexium, Protonix, Aciphex are all examples of potential switch candidates and then we think of some other exciting ones like potentially Voltar and Topical Gel Diclofenac Gel, all representing good switch candidates to move from prescription status to OTC that will help drive our growth beyond just the next 12 months.
On the right hand side of your page also though is there are some potential switch categories. We do not include those in our numbers. So I’m going to say that again. We do not include those potential switch candidates in our numbers. If they are to switch though, they would be very important and very significant products, obviously led by the statins category as potential switch candidates moving from prescription from OTC for the future.
One of the other things we’re focused on I told you and I mentioned was the area of adjacent categories where we can add an adjacent category and bring that into our portfolio and make us more valuable to our retailers. Today we compete in about $40 billion of categories. We think there are incremental adjacent categories beyond that that we can go after, led by areas of diabetics which is what we talked about this morning. Also adult nutrition, wound care, ophthalmics, all areas we think would be very exciting areas for entry for Perrigo to bring a store brand Private Label offering to our retailers which would help try to offer a quality product, but make it more affordable for consumers around the United States and the world for that matter. So that’s what we’re excited about for the future is looking at these new adjacent categories for future growth.
I mentioned the acquisition this morning. It was – we acquired a business called CanAm. They’re expected to generate about $40 million of sales in our calendar year 2012. We paid about $36 million in cash for that opportunity. It critically gave us a position in some of the areas of diabetes that we were not in today. So for Hypoglycemia it gave us both a branded product for Dextrose tablets, but also gives us opportunities for Glucose Gel, Glucose tablets, other areas in the store brand space as well.
Insulin delivery gave us access to syringes, pen needles, alcohol swabs, lancing, wound care and also in the compression stocking. Importantly, these opportunities represent about somewhere around $1.5 billion branded opportunity that we now have positioned with a store brand offering and indeed we can offer the full portfolio of diabetes from the blood glucose monitors and strips that we had before, now also these new products that will help us to have a full line offering for the retailer. So we’re really excited about that and we also think it gives us some interesting ways to go in the future. So for example think of sugar-free cough syrups. Think of sugar-free nicotine lozenges, things that we can do that also expand this portfolio as we think about the diabetes opportunity for the future.
Nutritional business is really a business that’s been a very significant grower for us especially with the acquisition in 2010 of a business called PBM, so a very exciting business opportunity. This will be a business that has continued growth opportunity from new products and I’ll talk about some of those in just a second, but also increasing store brand penetration especially in the area of infant formula. This is – we acquired PBM. It’s an infant formula company. It’s one of only four manufacturers that can manufacture infant formula in the United States, the other ones being Abbot, Mead Johnson and Nestlé.
So we are the only store brand Private Label manufacturer of infant formula in the United States. So it gives us a good opportunity for continued growth in that category. This just looks at some of the opportunities we see. Hypo-allergenic, a nice opportunity. We’re not there yet but we hope that would be something for the future. Comfort Care, we have approval now of that product. So we’re excited with that. We have some additional soy and organic opportunities, ultra culture opportunity and then we have what I would call on the right hand side of the page, international opportunities to bring that product which is made in USA which has an important quality perception to other countries around the world. So very exciting opportunity for us in the nutritional space and the growth that that entails for us for the future.
We did do two deals we announced in the China market, a very large market. Actually over $5 billion market where we have a non-exclusive arrangement to make product in the United States and ship it to China which is an exciting place to be relative to having a quality product made in the USA which has a very high quality perception in China that we’re excited about shipping into China. We already have been shipping some product, but we think this will dramatically increase the opportunities for us in the future.
The RX generics and topicals business is an important part of our business. Once again we’re not trying to be the – compete on the next oral solid dose in this RX business. What we’re really after is looking at the extended topical products, products that are dermatologics, respiratory, nasal products, ophthalmic products in which we can compete against some of the other players. We are now one of the larger players in the extended topical space as a result of some of the initiatives we’ve put in place over the last five years in terms of growing this business and we feel that there’s still very significant growth drivers for us in this business.
One is through new product, but also last year we acquired a company called Paddock. Paddock Labs became a part of Perrigo and it’s doing very well in terms of the growth for us in this business. Also, because of some issues from some of our competitors, we have a fairly favorable pricing environment at this time and that’s allowed us to continue to grow this business and be successful and also importantly, expand the margin, the operating margin of this business.
Importantly, as you look to the future, we have 41 ANDAs pending. That’s our largest number ever and gives us good hope for the future in terms of continued strong growth as well as some first to file and on the bottom of the page just some of the other products that have been disclosed publicly that we expect over the next 6 to 12 months in terms of launch opportunities for Duac, Clobex and Cenestin products. So exciting opportunities in our RX space for good, strong continued growth of the business.
API, last area I’ll talk about, really once again an active pharmaceutical business opportunity. It’s not going to be the fastest growing part of our business, but as you can see from the adjusted operating margin, has had some significant improvement in the adjusted operating margin behind some of the things we’ve done and really that is the focus in areas of this business where it’s more difficult to make the API. So think about drugs that have a different double bond configuration. Think of steroidal products, think of cancer agents as all areas that we are focused on to ensure that we’re going to be adding real value to our customers.
So that’s been part of what we’ve been able to do in terms of driving mostly the operating margin of the business. The other thing this business does for us, Perrigo to be clear, is that it helps us understand how much should we pay for raw material. Having that information is very valuable if our chemists can start with a raw material and say going to this final active ingredient you should be able to buy that for $400 a kilogram and we know today we’re paying $700 a kilogram. That allows us to have a very strong negotiating position as we go out and talk to our current suppliers of the product.
It is not our intent to make every raw material that we have, but clearly it puts us in a very good negotiating position where we know and understand how much these raw materials should cost us starting at these raw materials and ending up with a finished active ingredient. So it’s very helpful for us in that sense of the business.
Just in summation, where are we with our guidance. As I remind you we are a July 1st fiscal year start. We did our initial earnings guidance in August with 15% to 18% top line growth. In October we updated that guidance. We said we indeed we think we’ll grow faster. We’ll grow at 17% to 20% and then you can see right down through the adjusted consolidated gross margin of 35 to 38, consolidate operating margin of 20 to 22, estimated worldwide tax rate of between 27 and 29 and that we’ve increased our diluted EPS from 450 to 465 to our October guidance of 465 to 480 between a 16% to 20% year-over-year growth rate and obviously we’ve improved our cash flow from operation.
So that’s really the Perrigo story. We are excited about our future based on as I started at the beginning, the move to store brand and continued strong move to store brand, the movement of products from prescription to OTC. Also the success we’ve had in launching new products and finally as we’ve been able to look for other organic and inorganic opportunities for growth. That concludes what I wanted to say at this time. There is a couple of minutes for additional questions if I should open it up for questions, Chris.
Yeah, let me open it up to one question just and we’ll reconvene around the corner in the Olympic Room. But can you talk a little bit about the kind of national brands environment between Ortho-McNeil coming back to market and then some of the news out of Novartis recently procured Sedrin, kind of what dynamic you’re expecting as we head into calendar 2012 on the firm.
Joseph C. Papa
Sure. Well, first of all J.J has had some issues that they’ve been working on from the consumer products and they’ve talked about reentering into the liquid market in October, November, December of 2011 and they said they would reenter in the oral solid market January, February, March of 2012 with a complete return sometime around midyear 2012 at least is what I’ve heard from them you can share with me. I have no reason to doubt that. I will say that the liquids at this time, they’re not fully back but they do have some products, but it is clear that they probably only have some of the products back at this time. They’re not completely back at this time for example in the Tylenol suspension.
Novartis has said that they were going to stop shipping and recall some products. Those products represent somewhere around a branded opportunity of about – what appears to be about $200 million from the IMS data, but I don’t have their internal data obviously. For us, knowing those products, knowing the discounts on those products, it probably represents somewhere in the $70 to $100 million store brand opportunity for us if it was a full year event. I don’t know at this time whether it’s a three month event, a six month or a year event or beyond.
So what we will do is clearly we’ll go out and talk to our retailers. In fact we already have. There are some opportunities for us to get some incremental commitments from the retailers for additional product, but as to the duration of this at this time it’s probably too early for me to make any comment on how long it would be a duration. From our point of view we’ll take a quarter at a time in terms of how we look at the business opportunity. But clearly we’ve got capacity, we’re able to ship additional product should the retailers need that product.
Thanks a lot. Meeting around the corner at the Olympic Room.
Joseph C. Papa
Thank you very much for your interest in Perrigo.