Perrigo Plc (PRGO) John T. Hendrickson on Q2 2016 Results - Earnings Call Transcript

| About: Perrigo Company (PRGO)

Perrigo Co. Plc (NASDAQ:PRGO)

Q2 2016 Earnings Call

August 10, 2016 8:30 am ET

Executives

Bradley Joseph - Vice President-Global Investor Relations

John T. Hendrickson - President, Chief Executive Officer & Director

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

Analysts

Jami Rubin - Goldman Sachs & Co.

Randall S. Stanicky - RBC Capital Markets LLC

Louise Chen - Guggenheim Securities LLC

Elliot Wilbur - Raymond James & Associates, Inc.

David Maris - Wells Fargo Securities LLC

Derek C. Archila - Leerink Partners LLC

Tim Chiang - BTIG LLC

Gregg Gilbert - Deutsche Bank Securities, Inc.

David R. Risinger - Morgan Stanley & Co. LLC

Marc Goodman - UBS Securities LLC

Douglas Tsao - Barclays Capital, Inc.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

David G. Buck - Northland Securities, Inc.

Sumant S. Kulkarni - Bank of America Merrill Lynch

Operator

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo calendar year 2016 second quarter earnings results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. I would now like to turn the conference over to Bradley Joseph, Vice President of Global Investor Relations. Please go ahead.

Bradley Joseph - Vice President-Global Investor Relations

Good morning and welcome to Perrigo's second quarter 2016 earnings conference call. I hope you all had a chance to review our press release, which we issued earlier this morning. A copy of the release is available on our website, as is the slide presentation for this call. Joining me for today's call are John Hendrickson, Perrigo's Chief Executive Officer, and Judy Brown, Perrigo's Executive Vice President, Business Operations and Chief Financial Officer.

I would like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for investors and shareholders and Safe Harbor language regarding these statements in our press release issued this morning. In addition, in the appendix for today's presentation, we have provided reconciliations for all non-GAAP financial measures presented.

Now I'd like to turn the call over to John Hendrickson.

John T. Hendrickson - President, Chief Executive Officer & Director

Thank you, Brad, and welcome, everyone, to Perrigo's second quarter 2016 earnings.

On slide four, you will see today's agenda. First, I will provide an update on progress made executing on the strategic priorities I outlined in May, followed by an overview of the quarter for the business units. I will provide you detail regarding the first phases of our strategic plan to improve operational performance, including an update on the specific actions we have already completed and some others underway. Then Judy will walk you through the financial results for the quarter as well as the details behind our guidance revisions. Finally, I will provide my perspective on our business for the remainder of the year and longer term.

I've just completed my first 100 days as CEO of Perrigo. They have been intense and challenging. They have also been very productive. I've been taking a comprehensive look at our business, strategically, operationally, and financially, and in doing so with an open mind as to the path forward. You should know that I remain committed to the four governing principles that I outlined in May: disciplined execution; taking swift and decisive actions where necessary; being transparent with our owners, customers, and employees; and above all, creating shareholder value.

In the first 100 days, I have met with many of our shareholders to hear your thoughts about our company and the opportunities ahead. I have met with a number of our customers to hear what they expect from me and from my leadership team. And as always, I have spent considerable time speaking with employees across our sites worldwide. I have looked at each of our segments under the lens of my principles, and there are several key themes you will see throughout our comments today.

Our Consumer Healthcare segment continues to operate with strong margins. Our near-term focus remains delivering additional operational efficiencies and predictable bottom line value while continuing to invest in future growth initiatives. The Branded Consumer Healthcare segment under the new leadership of Sharon Kochan, also in his 100-day role in that position, performed generally consistent with our expectations in the quarter.

Branded Consumer Healthcare continues to execute against our operating plan to enhance growth and develop the operating platform while at the same time prioritizing brand innovation and country-by-country channel strategies to drive the greatest value for shareholders. We have products in countries that are doing very well and some that are not yet meeting our expectations. As you know, this is a complicated, multi-dimensional business, and our plan will take time to generate margins commensurate with leading branded consumer businesses, but I think those can be achieved.

The Rx business has been our most challenging to predict the short term given price erosion and the competitive dynamics in the sector. Despite those challenges, we continued to deliver attractive operating margins versus our Rx pharma peers and believe in the long-term fundamentals of this business. Our comprehensive review of the business has resulted in lowering our outlook, primarily due to pricing expectations. We will share with you the changes we are making to deliver more predictable results under our new leadership.

Our Specialty Sciences segment performed above our expectations in the first half of the year. While the short-term result of this non-core asset has been predictable, we continue to evaluate its long-term contributions within our portfolio and the best strategic use of its cash flows.

Turning to slide six, as I stated three months ago, in accordance with good responsible leadership, my team and I are looking at ways to drive value across our businesses through the dual lenses of profitability and cash flow conversion. We're digging deep to determine the best ways to unleash more value for our core segments. We are taking actions to improve organizational effectiveness, operating leverage, and our overall cost structure. We had previously announced the sale of the U.S. VMS business, which closed last Friday, and the intent to sell both our API operation in India and our Etixx brand in Europe.

In addition, we're announcing today that we are beginning to explore strategic alternatives for our businesses in Russia, South Africa, Argentina, and our U.S. pet treats manufacturing operation in Kansas City. We will continue to look at our operations to deliver shareholder value while investing in growing our core. To that end, I'm not only working with my deep leadership team here but also with our strong advisor network to ensure we are reviewing all of our businesses with the appropriate critical eye.

Turning to slide seven, as for the quarter, our financial results were below internal expectations. And as to the headlines, while we delivered CHC operating income in line with our internal expectations and we continue to focus on improving the profitability of the BCH business, we continue to face pricing headwinds in Rx even greater than we had anticipated against the backdrop of a highly variable pharmaceutical pricing environment. To be clear, we missed our internal EPS in the quarter and expectations primarily as a result of the pricing impacts in the Rx segment. Judy will give detailed commentary regarding the final performance of our segment, but I'd like to provide a few observations now.

Adjusted operating margins in the Consumer Healthcare segment were greater than 20% and continue to track near all-time highs. The team is executing against its operational targets, with the foundation of making high-quality products. I'm pleased to report that the store brand version of Flonase launched in the quarter, and the segment achieved $32 million in new product sales. Infant formula and smoking cessation categories also continued to perform very well.

Branded Consumer Healthcare adjusted net sales were generally in line with our expectation. Adjusted non-GAAP operating margins were 15%, an improvement over the first quarter margins, although adjusted gross profit margins were lower primarily due to weaker product mix. This was offset by cost containment actions by the business unit in the quarter.

We continue to build out the acquired products in the weight loss and smoking cessation categories across the platform, which is going very well. Collectively, as you think about our business, our consumer-facing segments still represent over 70% of our adjusted net sales for the quarter.

In Rx, we experienced a weaker second quarter than forecasted, due largely to a more aggressive pricing environment. Despite these headwinds, we continue to focus on generating healthy adjusted operating margins and driving our deep product pipeline forward. Notably during the quarter, we received approval for and launched the generic version of BenzaClin.

Let me turn to slide eight to dive deeper into Rx and walk you through what we are doing to better address the challenges we are facing in this segment. As stated in our press release issued earlier today, we have revised our adjusted EPS guidance for the full year to $6.85 to $7.15. The predominant factor impacting the updated guidance is continued price erosion within the Rx segment.

Based on my evaluation of the segment, I want to first confirm that, despite lower guidance for the segment, I believe Rx is a fundamentally sound business with solid, strong long-term prospects. We remain in a leading market position with a deep pipeline into which we continue to invest. Our adjusted operating margins in the upper quartile of the Rx pharma sector remain very attractive. That said, Rx competes in a fast-moving dynamic environment, as evidenced by public comments from the sector's peer, who have also disclosed greater price erosion than expected. Against our own expectations, price erosion in the quarter was unfavorable to adjusted operating income by approximately $20 million.

In light of this price erosion and our performance against our expectations this quarter, we've taken an even more pragmatic approach to forecasting for the second half of the year. We conduct a thorough evaluation and added in any effective known price changes, all anniversary price erosions in the prior calendar year. In addition, we included incremental adjustments for potential additional unfavorable pricing trends, although so far in Q3 we have not seen the rate of change in the pricing environment moderate. Through this process, we arrived at a price erosion forecast for the second half of the year of approximately 9% to 10% compared to the same period in 2015. Judy will walk you through this process in even greater detail in a few minutes.

We continue to execute against our strategy for the segment, focusing on tougher to manufacture products with higher barriers to entry. We believe these products have greater longevity. As an example of the strategy, we are announcing today that we very recently purchased the remaining portion of the generic BenzaClin royalty stream that we did not own previously. As I just noted, BenzaClin was approved and launched in the quarter, and we see it as a longer-term asset from which we will now capture 100% of the economics.

While we continue to search for the best candidate internally and externally to lead this segment, I am confident in John Wesolowski and the rest of our highly experienced Rx team in their ability to drive operating margins built upon a deep pipeline, maintaining current partnerships, and developing new ones as well.

Now turning to the BCH segment on slide nine, we have also updated guidance to reflect our current estimates for net sales and margin mix. As we now anticipate lower revenues for certain high-margin products, we have developed a three-pillar plan to enhance profitability in the BCH business: review routes to market; optimize our portfolio; and enhance the segment's effectiveness to mid to high teen operating margins.

First, we are prioritizing brand strategies in core markets, which we expect to enable more predictable financial results. For example, last summer we acquired the Yokebe meal replacement product, which is now a direct complement to our weight-loss franchise, XLS. We now have a full range of weight loss tablet products, and now we have added meal replacement products to the franchise, providing our customers with a suite of product offerings addressing various consumer preferences.

At the end of this quarter, we rolled out Yokebe in the UK, Holland, and Belgium within six months post-acquisition of purchasing the brand in Germany, and now have concrete plans to launch in other markets before the end of the year. We expect this family to be a primary driver of new products for this segment and an exciting contributor to organic growth next year.

Another example has been our success with reinvigorating growth behind NiQuitin, the smoking cessation brand we acquired last September. We launched new market programs behind the core patch product and are rebuilding the mini-lozenge product distribution, which is gaining market share. In addition, new innovation will follow later this year to substantiate our global leadership position within the smoking cessation category.

Second, we are making structural changes that include actions already underway, such as aligning our presence in the markets we serve, by consolidating certain markets under efficient clusters, uniting our sales forces in certain markets, and considering partners who can better manage commercial sales efforts in particular countries. If we identify a particular product or geography that is not meeting our hurdle rate, then we will take action with a commitment to increase profitability and cash flow conversion.

For example, we continue to execute our restructuring plans announced in February. We have completed our sales force consolidation and realignment actions in both Germany and Spain and recently entered into consultation discussions with employees regarding the future direction of one of our BCH manufacturing facilities. We have also initiated the process to sell our Etixx brand in Europe.

Additionally, as I previously mentioned this morning, we are announcing further tangible actions to address market structures in certain countries, which will reduce operating cost and improve our profitability as we nurture sustainable growth in our top markets. This allows us to reinvest resources to high-performing parts of our business. Specifically, we are combining our markets under regional clusters and looking at alternative strategies for our businesses in Russia, South Africa, and Argentina.

Third, we are progressing with our integration plans to build out Perrigo's proven business processes onto the European platform. For example, we continue to have great success enhancing BCH's supply chain efficiencies. We anticipate approximately $40 million in savings per annum with projects that are already underway, which we expect to realize in the next two to three years.

An important element underpinning our plans is our people. We have a talented team in Europe, and we are excited about the new talent we have injected into the organization, including a new leader of pan-European marketing efforts, new country leadership, and increases to our integration team in Europe to accelerate our process transformation.

As I've said before, there's substantial work to be done, but I am confident we can create greater shareholder value by improving and further leveraging this important consumer platform. The path of steadily improving margins is multifaceted and it will take time, but the team has an actionable, multi-layered plan to improve profitability.

I'm now going to turn it over to Judy to go over some more details.

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

Thank you very much, John. Good morning, everyone.

On slide 11, you can see second quarter adjusted consolidated net sales were $1.4 billion, down $55 million or 3% year-over-year on a constant-currency basis, excluding sales from held-for-sale businesses in both of the periods presented. This was driven by certain categories within the CHC segment, which I'll discuss in a moment, offset in part by increased sales in the Rx segment, which were driven largely by sales related to acquisitions and new products.

Looking at the segment results on slide 12, CHC adjusted net sales were down approximately $63 million year-over-year or 8% on a constant-currency basis, excluding sales from held-for-sale businesses in both periods. This was largely attributable to a weaker allergy season compared to last year, timing of customer promotional programs, and lower net sales in the OTC contract manufacturing category. In addition, the analgesic category showed a net sales decline, due primarily to relatively lower pricing. These decreases were partially offset by higher net sales in the infant nutrition and smoking cessation categories. New product sales were $32 million, driven primarily by the store brand launches of Flonase and new infant formulas.

Adjusted gross profit margin remained strong at 36.6%, as we experienced favorable product mix in the quarter and continued to leverage our supply chain proficiencies, offsetting the effects of lower pricing in certain categories.

We continued to focus on our growth plan with increased R&D investments, which were 33% higher than last year on an adjusted basis. As John mentioned earlier, the priorities for this segment are twofold; first, delivering strong, predictable results by focusing on operational efficiencies; and second, investing in our future growth initiatives. The quarterly results for this segment are consistent with these priorities.

Turning to slide 13, in the quarter, Branded Consumer Healthcare segment's adjusted net sales were $394 million compared with $401 million last year. The team delivered top and bottom line results in line with our internal expectations. These results included $29 million from acquisitions, while new products contributed $28 million, led by innovation in the lifestyle category.

Offsetting the favorable contribution of acquisitions and new products, the segment experienced lower adjusted gross margin due to unfavorable product mix and the comparison with a significant new product launch in the lifestyle segment in the second quarter of 2015. The effect of lower gross profit margins was offset by cost control in this segment, resulting in adjusted operating margin for the quarter of approximately 15%, in line with our expectations.

Turning now to Rx on slide 14, net sales were $293 million, 5% higher than last year, driven largely by $44 million related to acquisitions and new product sales of $26 million. As John mentioned a few minutes ago, our consolidated earnings were short of our internal forecast in the quarter due to the continued price erosion in this segment, which obviously flowed through directly to adjusted operating income as well.

At a summary level, three factors affected year-over-year pricing in the quarter. First, the lack of an exclusive market position for two key products versus the prior year had an unfavorable impact. This first aspect was known and included in our May guidance. This impact anniversaried in the second quarter. Second, as previously discussed, there were a number of competitive product launches in the first quarter of 2016, which led to additional year-over-year price erosion beyond what the leadership team had anticipated. Third, there were continued pricing headwinds from consolidated buying groups.

These last two effects were considered in our May 12 guidance, but not sufficient to reflect current aggressive market realities. Our new forecast process has re-analyzed the pricing environment in even more detail through the prism of these second quarter changes, and I'll talk about that in a few minutes.

The Rx-adjusted gross margin was down 720 basis points due to this year-over-year price erosion and competition in the industry, which also impacted the adjusted operating margin.

Turning to slide 16 and an update on our balance sheet, as of July 2, 2016, total cash on the balance sheet was $642 million and total debt was approximately $6.4 billion.

As we have stated in the past, we are fully committed to our investment-grade ratings, which includes deleveraging our balance sheet through EBITDA growth and debt repayment. As part of that strategy, it has been stated, our stated commitment to repay our $500 million of senior notes that mature in November. We are following through on that commitment through a proactive redemption call of those notes, which we announced yesterday. We have elected to accelerate the repayment of that debt into September in order to clearly illustrate our unequivocal commitment to deleveraging and proactively utilize cash on our balance sheet, while doing so in a manner that will be cost-neutral to shareholders in our current year.

We are and expect to remain in compliance with our debt covenants under our credit agreements as we continue to take actions to strengthen our balance sheet. We have multiple paths to achieve that goal, including EBITDA and cash flow generation enhanced through expense and CapEx management, as well as the flexibility to pursue additional debt pay-downs and/or to opportunistically refinance our credit facilities in keeping with our conservative capital structure management philosophy.

We generated approximately $400 million of cash from operating activities during the first six months of the year. Remember that this includes the unfavorable impact of approximately $70 million from the normalization of accounts payable within Branded Consumer Healthcare I noted in the first quarter. Consistent with other activities the team is undertaking to drive performance at BCH, this action was successfully taken to establish a more sustainable and predictable cash flow pattern at the business and will not similarly burden our expected operating cash flow generation in the second half of this year.

With the changes in the forecast announced today, we are taking prudent, immediate steps to use our strong cash flow conversion to prioritize our capital allocation on deleveraging. While there may be small tactical bolt-on acquisition opportunities, the team is first and foremost focused on execution. We are committed to a long-term balance sheet and capital allocation strategy that creates value for shareholders. This strategy includes our commitment to our investment-grade ratings. As such, we'll continue to focus on debt repayment and do not intend to reenter the share repurchase market in the near term.

Turning to slide 18, our adjusted EPS guidance has been updated to $6.85 per share to $7.15 per share, reflecting primarily changes in the Rx segment. So let me walk you through our updated 2016 expectations by business unit so you can better understand the different dynamics by segment.

Guidance for the CHC segment remains relatively unchanged, as we expect 2016 adjusted net sales of approximately $2.6 billion, excluding contributions from the VMS business. We continue to anticipate CHC-adjusted operating margins in the second half of the year similar to those achieved in the first half.

We have tempered our second half BCH performance expectations for unfavorable product mix. We expect BCH-adjusted net sales to be approximately $1.3 billion and continue to anticipate low double-digit adjusted operating margin for calendar 2016. Note that we anticipate higher advertising and promotion spend in the third quarter versus the fourth quarter, translating into our expectation of adjusted operating income being more heavily weighted to the fourth quarter versus the third.

Now, let's walk through the forecasting process used this quarter in our Rx segment, which as stated multiple times this morning, has proven to be the most challenging area to forecast in this dynamic environment. We began by comprehensively reviewing all products irrespective of size on a bottoms-up basis, looking at both pricing and volume performance in the first half of the year versus previous assumptions, and then analyzing the second half of the year potential given current competitive dynamics. Excluding one-time items that impacted the first half of the year, such as known incidences of loss of exclusivity and floor stock adjustments, the year-over-year price erosion run rate in the six months ended June was approximately 9%.

Looking forward to the second half of the year, we conducted a comprehensive bottoms-up evaluation, adding in the effect of known price changes as well as the impact of anniversaried price erosion from the prior calendar year. On top of this, we included an incremental adjustment for potential additional unfavorable pricing trends, although thus far in the third quarter we have seen the rate of change in the pricing environment moderate. Through this process, we arrived at a second half year-over-year pricing erosion forecast of approximately 9% to 10% compared to the same period of the prior year. In addition, our updated guidance also reflects lower volume assumptions.

We thus expect Rx net sales for 2016 to be approximately $1 billion, with adjusted operating margin forecasted to be in the low 40% range for the year. The Rx team continues to focus on the long term by managing a balance of price, volume, market share, and expenses to limit the impact to operating margin.

On a consolidated basis, adjusted EPS for the third quarter of 2016 is expected to be the lowest of the year on higher operating expenditures for R&D and advertising and promotional investments.

Our adjusted effective tax rate for the year is estimated at 15%, and you should model 17% into the second half of the year.

Despite these announced expected changes in consolidated adjusted EPS performance, we continue to expect strong operating cash conversion in our business. Forecasted annual operating cash flow of over $900 million reflects a 90% conversion to adjusted net income. With over $640 million on the balance sheet and expanding operating cash flow, our platform continues to generate liquidity to execute on the deleveraging strategy discussed earlier.

Now let me turn the call back over to John.

John T. Hendrickson - President, Chief Executive Officer & Director

Thank you, Judy.

Turning to slide 20, we anticipate new product launches over $300 million in 2016. This by itself represents growth of approximately 5%. As a reminder, this year we have already launched fluticasone and half of the guaifenesin family of products. While not a comprehensive list, over the next year and a half we expect to launch the remaining store brand versions of the guaifenesin family of products and continue launch from our Rx pipeline, notably including ProAir.

I also want to note that we recently received tentative approval from the FDA for OTC esomeprazole magnesium capsules, the store brand equivalent to Nexium. This is a key milestone towards an anticipated 2017 launch of this key new store brand Rx-to-OTC switch product. The regulatory timing to market and what our position might be from a first-to-market standpoint is still unclear, but we do know that we are the first store brand or generic filer that's received a tentative approval, which is a very important step. We are currently working with our retail customers in making plans for launch the item as soon as possible after the late March 2017 market exclusivity period expires for the national brand. As I said, the exact timing of when we are able to launch remains undetermined.

Turning to slide 21, ultimately I am confident that we are on a course to improve our performance and address our challenges. We have well thought out plans in place and we'll continue to execute against it.

Before opening up the call for your questions, I'd like to close by underscoring some of the competitive advantages and why I believe they will drive long-term shareholder value. First, our durable CHC platform continues to leverage our deep relationships and our leading market position in store brand OTC, with numerous products, dosage forms, and supply chain capabilities. We own more OTC NDAs than any other manufacturer, including all the large branded pharmaceutical companies. Overall, the scale of our business is unmatched and operations continue to perform at the highest levels, delivering quality product into the medicine cabinets of consumers. Focusing on execution remains a priority as we continue to deliver predictable value.

Our European consumer platform is also a differentiator that draws on our consumer capabilities. We have been evaluating the segment country by country and are taking actions across the business, which I detailed earlier. We will continue to reinvest in the core to drive profitability in this segment. With our three-pillar operational plan in place, I have confidence that we will enhance profitability of the BCH segment by prioritizing brands and channels to ensure we are delivering the greatest value.

To reiterate, the Rx business has a deep pipeline of new products. It is committed to R&D investments. And we'll continue to offer differentiated products, particularly in those high barrier to entry areas, where Perrigo has exceptional capabilities. This segment continues to deliver attractive adjusted operating margins, and we are committed to building confidence in our ability to deliver improved results despite industry volatility.

Overall, we are focused on improving our profitability and reviewing all aspects of our business and performance against our objectives. While we mentioned some actions we are taking today, we will continue to look at all aspects of value creation to drive optimal value from our unique portfolio. Perrigo is a strong company with a bright future. Despite the challenging times in the dynamic Rx market, I have confidence that our people, our processes, and the plans they've laid out will deliver meaningful results. We have more steps to take, but we are on the right path and making progress daily against our stated goals.

Looking forward, I see a business with several great platforms of growth. There will always be a need for quality affordable healthcare, and Perrigo provides that to millions of consumers and patients worldwide.

Brad?

Bradley Joseph - Vice President-Global Investor Relations

Thanks, John.

We have discussed with many of you the potential of holding an analyst event this fall. Given scheduling and other moving parts, we will be in a better position to hold an event towards the end of 2016, likely in New York City. And we will keep you updated on the exact timing when we have solidified a date and venue.

Operator, can we please open the call up for questions? We ask the participants to limit yourself to one question. Thank you.

Question-and-Answer Session

Operator

Certainly. Your first question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs & Co.

Thank you. I'll try to limit myself to one question, and I'm sure the other questions will be asked by other people on the call. But, Judy, on the first quarter call, you said that your covenant coverage was fine even with your then earnings downgrade, and you gave us a lot of detail on this call about your commitment to bring down debt. But with EBITDA now revised down another 15% or so, can you still say you are comfortable with your covenant coverage? And is there a risk that your debt could be downgraded to high-yield given that you're only one notch above?

And a question to you, John. Does this put pressure on you to sell the Tysabri asset in order to avoid a downgrade? Thanks very much.

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

So thank you, Jami. I'll start with covenant point. So as we sit here today at the end of June, our leverage ratio was 4.7 times. We are well within that band at the end of the quarter. It does step down to 4.5 times in the back half of the year and then down to four times at the end of the first quarter of 2017.

But as commented on the call, we chose rather than waiting until November with the paper maturity in November of 2016, we said we have the cash on the balance sheet. We can proactively go ahead and pay down that paper in September, and we are proceeding on that path right now as we speak. That will give us even more headroom or cushion, again, not because there was a concern at the end of the year even with the adjusted EBITDA numbers, but just to proactively demonstrate to everyone that we are indeed focused on deleveraging and utilizing our cash to do exactly that.

In 2017, we have additional paper that will come due in Europe, and we intend fully to pay that down according to schedule. We could also proactively choose to early-pay a term loan given our cash flow planning if we chose to do so, and/or we could conceptually opportunistically have discussions around our credit agreements. But at this point, as we look at our EBITDA projections as well as the step down in the covenant leverage ratio requirements, we believe that we are comfortable but have plans in place to be proactive should any need require. And again, this is about demonstrating our long-term commitment to our investment-grade ratings and continuing to be able to demonstrate in a very public way that that is the intention of utilization of cash flow.

John T. Hendrickson - President, Chief Executive Officer & Director

And, Jami, on the second part, I'd go back to as we talked about Tysabri, non-core asset to us. We continue to investigate the best use of the cash flows and what they are. We don't feel the pressure to do something with it just for the debt covenants. We want to look at it and see what the best use of those cash flows are, but it doesn't necessarily need to take an immediate action just from a debt covenant standpoint.

Jami Rubin - Goldman Sachs & Co.

Thank you.

Operator

Your next question comes from Randall Stanicky with RBC.

Randall S. Stanicky - RBC Capital Markets LLC

John and Judy, near-term generic issues aside, just a bigger picture question. Has there or should there be a change in strategic thinking around the generics business? And I know it's a core part of the platform, but I'm thinking more a move towards 505(b)(2) or brands or allocating more capital towards R&D to bolster the pipeline. And then just the side points that I noticed that on slide 20 you talked to ProAir by the end of 2017. Has that moved from early 2017? Thanks.

John T. Hendrickson - President, Chief Executive Officer & Director

So let me take the first one, Randall. As I think, just stepping back on Rx again, if I go through it and look at it from my lens, still a solid profitable business despite all the negative pricing, et cetera. It still has a good return on invested capital, good operating margins. We feel that there are still barriers to those margins, again, despite the pricing challenges.

We feel we have a good pipeline, good link to our operations supply, all the things that you had mentioned earlier, and good switch support. Even if it's not specific products, just what we have there on the Rx side links into the OTC side. So those are all the pluses. I think that investing in R&D and in the right strategic opportunities with partners is certainly an opportunity there to expand that. But even without putting more in, we feel that there's a decent pipeline there.

Our ProAir, if I get into the ProAir one, as we look at, we're responding to FDA and going through the answers to their Complete Response Letter, getting all the data together for that. We have not necessarily moved out the detailed timing as we look at 2017. But being more realistic, we wanted to put in the normal timing for the FDA to respond, et cetera, so we talk about during 2017. In our minds, we're still targeting aggressively to get this done.

Randall S. Stanicky - RBC Capital Markets LLC

Okay, great. Thanks, guys.

John T. Hendrickson - President, Chief Executive Officer & Director

Thanks, Randall.

Operator

Your next question comes from Louise Chen with Guggenheim.

Louise Chen - Guggenheim Securities LLC

Hi, thanks for taking my question. So something that we've been asked a lot this morning is regarding your implied guidance for the second half 2016. And if we annualize that and grow that off the base to try to figure out what 2017 might be, it comes in well below consensus. So curious if that is the right way to actually look at 2017 EPS.

And then the second thing here is just on your outlook for the Consumer business over the longer term. I know that Jeff Needham continues to run CHC, and the margins were positive in the quarter. So how do you sustain them? How confident are you in new product pipeline visibility, and also the same thing with Omega? Thanks.

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

Let me start with the EPS roll-forward because that is an extraordinarily logical question given the dramatic update that we provided to guidance this morning. So logically speaking, if you were to take the first half of the year actual EPS generated and the midpoint of the EPS guidance we just provided you, it would imply a second half decline over first half. Annualize that into next year, and it obviously is going to be well off consensus for 2017, although granted, consensus as of this morning has not been updated to fully reflect the changes in the environment that we highlighted in great depth on the official comments this morning.

Suffice it to say, as we're looking at 2017 with our internal plans, the big drivers that we look at growth for next year, and there is implied growth in our 2017 plans off of our internal 2016 number, are coming from many of the things that, as John has already implied in the qualitative comments, which are: reestablishing bigger in-channel strategies in some of the markets in Europe that have been softer than had been originally anticipated; feeding the growth of the countries that are already performing quite well in advance of even market dynamics and continuing to feed that growth; right-sizing and organizing ourselves to drive back-office efficiencies and allow for expanded operating margins throughout Europe while continuing to fund advertising, promotion, and new product development within the European team. So we are most certainly planning for an improved 2017 year in Branded Consumer Health as the team is right-sizing and re-establishing themselves.

We have new products on deck for next year, a long list of new products. There is a particularly large one on deck for next year in Rx, which we moved from the end of 2016 into 2017, and at a healthy margin, plans to be a good contributor as well to the overall EPS growth of the year. And as John has likewise alluded to, taking a very hard look at how we spend in our SG&A and making sure that we are laser-focused and being as efficient as possible given the recent dynamics, so that we can in fact continue to drive bottom line growth.

So I'm not going to comment on consensus, as I'm presuming that at this stage, consensus has become a bit irrelevant effective 6:32 AM Eastern Time today, but we will be continuing to provide you more color to be able to model 2017 both on these calls, in investor presentations and conferences, as well as an upcoming Analyst Day.

Operator

Your next question comes from Elliot Wilbur...

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

One moment.

John T. Hendrickson - President, Chief Executive Officer & Director

One moment. Let me – I'm sorry about that. Let me just answer the first part I think it was of your question that you looked at, which is CHC margins. Judy alluded to some of that as she was going through. We feel that with the new product pipeline that we have, which provide good value to consumers and will have good margins there as well as the continued focus on the operating efficiencies of the business that we have a good opportunity to maintain solid margins in that Consumer Healthcare business. It doesn't mean we don't always have pressures, so I don't want you to think it's a panacea out there. It's a tough business. But because of our scale, because of our operating efficiencies, we feel we can continue to deliver those good results.

Operator

Your next question comes from Elliot Wilbur with Raymond James.

Elliot Wilbur - Raymond James & Associates, Inc.

Thanks, good morning. John, can I just ask you to clarify some commentary you made in your prepared remarks here that I'm not sure I interpreted correctly here? You said you made incremental adjustments for potential additional unfavorable pricing trends in Rx generics in Q3, but it wasn't clear to me if you were saying that so far pricing pressure has not materialized to the extent of the adjustments, or it's actually been worse than your adjustments. So if I could just get you to clarify that please.

John T. Hendrickson - President, Chief Executive Officer & Director

I will. And Judy – and I probably did misspeak in going through. Judy said it correctly in her statement. We have not seen it yet. So even though we've planned for more, it has not materialized yet.

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

And just suffice it to say, if I'm in any one of your shoes, I'd be listening saying, they've just changed guidance again in Rx. Is your current performance at least reflecting your current forecast? And the answer is yes. So, five weeks does not a quarter or second half of the year make, but just to give everyone at least some visibility to the fact that the performance of the team in July and early August is in line with the forecast we've put forward so far.

John T. Hendrickson - President, Chief Executive Officer & Director

Correct.

Elliot Wilbur - Raymond James & Associates, Inc.

Okay, and if I could ask a real question then, for John I guess. With respect to the Rx generic segment, the company over the years has done a very good job at plugging growth holes with small product acquisitions or even arguably financial transactions such as mentioned this morning, buying back the royalty stream. Now I assume that the prioritization around those efforts has been elevated in light of the pricing erosion on the existing business. But how should we be thinking about strategic options that you still have with respect to that business, and specifically thinking about potential platform-type acquisitions to potentially, even dramatically, expand your size and scale in that business?

John T. Hendrickson - President, Chief Executive Officer & Director

Thanks, Elliot. And by the way, thank you for catching and correcting our previous statements. So I appreciate that. So when I think of the Rx, we have had a good segment there, small acquisitions that have fit in or done some things to add to it. Let me do one clarity first. The royalty stream, which is a great one, we entered into this a long time ago with our partner. We actually make the product. We sell the product. We do everything with it. We just had a profit share with our partner who invested with it initially. And so it was one that fits right into our operating strategy because it's already within our sites, within our plants, so it was a very natural fit, that one.

I do think there are still strategic fits within our core segments within the Rx business that are open for investments and doing things. So I think it's not a debt opportunity, everything's gone. I think there are opportunities there for adding products, adding technologies that are niche, more unique, that could position us in a decent position in those. So we're looking at all aspects of Rx when we say what should we get into? Are there unique operating platforms that could set us apart from others and how we expand that, if we do expand it?

Operator

Your next question is from David Maris with Wells Fargo.

David Maris - Wells Fargo Securities LLC

Good morning. Judy, the last time you lowered guidance, you said that you had gone to your team and the guidance represented a worst-case scenario barring a nuclear war. And I know you didn't really mean that part of it. So first, should we consider this environment, the pricing environment, the equivalent of a nuclear war, like this is the worst that you've ever seen it, and maybe some color on why that is? But also what appears to be a clear lack of visibility given the repeated downgrades in the earnings guidance, and it's not over one product or a recall or a plant closure. It's a range of businesses. So is this trouble with the systems, the reporting systems, the managers in the business, the lack of negotiations with payers? What accounts for this lack of visibility from a quarter-to-quarter basis outlook?

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

So I'm not entirely sure I used the phrase nuclear Armageddon. But suffice it to say, the process that we went through last quarter, it starts with the Rx management team. And as you know, we've gone through an Rx management team change in the last few months, and we have seen continued price declines in the last few months. So I tried to elaborate in the prepared remarks, but maybe a little bit more color.

The entire Rx leadership team came together and sat down and then went through every single product this time, taking maybe a more jaded lens on the reality of the market in which they're competing. And as we commented on, I'll use the great analogy of Donald Rumsfeld. They first, in the past, went through the known knowns, their entire product lineup, what they know is happening, what they can actively see and manage, and included that in their forecast. And this is the marketing team, the sales team, the individual commercial members, as well as the folks who manage the contract filings. And went through the known knowns, fine, they did that in the past.

In the past, they stopped at some known unknowns with a little bit of wiggle room, but after the last quarter's performance also went a step further and aggressively went and made some modeling assertions on known unknowns, and as well went the next layer with unknown unknowns because after the second quarter and the cumulative effect of Q1 and Q2, the team under new leadership took a very different perspective on the potential for more dynamism on a go-forward basis, just given the rapid rate of change that they saw over the last six months.

So it's not a reporting system problem because it's the accounting and the debits and credits and the gross-to-net function as always, but rather a rapid pace of change, unlike anything they had ever seen in the past. A very open dynamic with that – between that team as well as the executive committee and talking very frankly and very openly about what they were seeing and putting forward assertions that made sense given the circumstances that we're working in today of trying to elaborate and be prepared for possible body blows if the pace of change were not to moderate as well.

So that is the type of process they went through. I don't want to use the analogy of nuclear Armageddon. But given the last quarter, they definitely pushed hard on the unknown unknowns as well to try to prepare for the worst-case scenario.

John T. Hendrickson - President, Chief Executive Officer & Director

And I would say, David, Judy said it well. The one thing, you have good visibility to first-to-files and those sorts of things and/or new approvals, so you see those. But once you're beyond that, there is not a great channel to see who is actually there. So you have to do estimates of, what do we think? Who could have this filing? Where would it come from? Where would they go? So you are doing some scenario planning on what do we think is going to happen with these products. So visibility to a big chunk, don't get me wrong, but then the others is a best well-educated plan around where do we think it's coming, and that's where we did a lot more work on how we look at that part of the business.

David Maris - Wells Fargo Securities LLC

And just as a follow-up, I think that what everyone is probably sitting here is if the last guidance was a worst-case scenario and now this new guidance, is it worst-case scenario again? And how do we have faith or how do you have faith that that's the case and visibility into that's the case? But I think you've addressed it, so thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

No, thanks for the question, David. I think it's a fair one.

Operator

Your next question comes from Jason Gerberry with Leerink Partners.

Derek C. Archila - Leerink Partners LLC

Hi, good morning. This is Derek on for Jason. John, I know you gave some commentary about the BCH turnaround. I just wanted to get a sense of where you are in the process there, as well as the sequential strength that we saw in the business in the second quarter. Was that mainly seasonality, or was that winning back some of the distribution business from prior years? Thanks.

John T. Hendrickson - President, Chief Executive Officer & Director

Yes, so where we're at, we talked about transforming it both from a product standpoint, which products we're going to launch across more pan-European, about which countries are performing and we have some great ones that are doing great. We have some that are underperforming expectations. So, looking at countries and saying what do we need to do to drive those, and then building out the platform. So if you think – and the platform that enables that whole thing.

So if you think of all of those, we are still on the early stages of expanding through. So we're going through. We're taking actions. We're trying to correct things as we go from both a brand standpoint. What are we putting innovation into? What are we driving? What's the focus for the team? From a country standpoint, it's going into countries and working that through.

And then platform, we've worked previously a fair amount on the supply side and operating side. And that's where we're seeing those benefits come through on the P&L from a savings standpoint, but we still have a long way to go on the total infrastructure side to enable it. So it is still another I'll say 18-month process to work ultimately through that to where in my mind, you have a well-oiled operating system. All that said, we have good countries, good parts, people are driving things. So it's not nothing happens till then. We're making changes all along that path.

As far as Q2 strength, I'll say the team did a great job of having some good sales and driving that, also having some good cost controls and driving it. As we look at the year and investments we want to make and where it pans out, we're not ready to count on a 15% operating margin repeating every quarter yet. We believe we'll eventually get there and then some, but just don't want to plan on that for the next half. So we've lowered the expectations so we can continue to build out our infrastructure for the long term.

Bradley Joseph - Vice President-Global Investor Relations

Next question.

Operator

Your next question comes from Tim Chiang from BTIG.

Tim Chiang - BTIG LLC

You mentioned a timeframe for this review and also a timeframe for fixing things in the various segments. Just going through what's happening on the Rx pharmaceutical side, is that a segment that's going to take longer to fix, or is it really a time constraint, or is it just your product portfolio has gotten old? Do you need to look for more acquisitions, more larger acquisitions to fix that, or is that something you can do internally?

John T. Hendrickson - President, Chief Executive Officer & Director

So again, if I step back big picture-wise and look at our Rx business, certainly it goes without saying that the pricing changes and dynamics there have been very large and certainly was a main driver of the quarter, a big part of our lowering guidance, so it's a big key.

If I step back then and say okay, let's look at the business today after all those changes, after we've built in the 9% to 10% for the back half, all of that, we still have a business with a great return on invested capital, a great operating margin, great new product prospects. And so while I think there are many things we can do to enhance that business and drive more value and products to it, the main dynamic right now is this pricing dynamic.

And that one is a – I've got to get through it, I've got to allow that to happen and have our new products start hitting in. We always described Rx as a leaky bucket. We knew this was going to be a tough new product year, and we've had more leaking out of the bucket from a pricing standpoint than we've been able to put in with new products and other kinds of pricing actions on the top. And so that's been what really compounded and added in this year. But in my mind, I look at the overall business fundamentals and they are still solid.

Tim Chiang - BTIG LLC

John, just one follow-up to that. Do you actually expect some form of a return to more normalized pricing by 2017 on your generic business?

John T. Hendrickson - President, Chief Executive Officer & Director

I would expect that. It's hard to tell what's normalized, but I would expect it to moderate back to what would be more normalized levels, which means there are always price decreases. But I would expect what we see this year to be more normalized as we get into future years, yes.

Tim Chiang - BTIG LLC

Okay, great. Thanks.

Operator

Your next question comes from Gregg Gilbert with Deutsche Bank.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Thank you, good morning. John, will investors have to wait until an Analyst Day late in the year to hear your thoughts on a long-term growth outlook construct, or would you care to share some thoughts now?

And secondly, do you want investors to assume that you've taken a fresh look at everything with a clean slate and that the final conclusion is that Russia and South Africa and Argentina and doggie treats or pet treats should go, or is there a larger assessment still underway that you'll report back on at a later time? Thanks.

John T. Hendrickson - President, Chief Executive Officer & Director

Thanks, Gregg. Let me tackle the last one first and your doggie treats. I like that. So I would say don't assume that that's comprehensive, the only things we looked at and it's done. We are looking at all aspects. Those were the ones we reached conclusions on over the last 60 days as we got those rolling and took actions on how we've got to change the way were doing things here, alter how we're doing it. So those were the immediate ones.

As we look at other parts of the business and those that are not performing as well as we want, we're saying how do we get those performing well, or is there another way to manage that asset or do those things? So this isn't the end-all for everything that's going on. It's sort of we're giving you what we've done today and moved on.

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

So maybe look at the long question you had on 2017 and thinking about a guidance view or a three-year perspective. Given the dynamism we've seen just in the last eight weeks, as we said on our previous call, in John's first 100 days we would then meet with our board, which we did, go through our normal business reviews and begin to plan for 2017 and the back half of this calendar year.

Given the changes that we've announced today, we wanted to be able to be very prudent, look at the whole portfolio. We're going to be doing that, as John mentioned, very comprehensively with our board, not only looking at our own plans, looking at the overall marketplace and environment. And all of that comes together to be able to prepare for that dialogue with the Street in terms of our perspective on 2017 and beyond, so that we're not only looking at the classic business unit stream. But putting that whole perspective together, as John mentioned, on looking at all assets, looking at the ones that are not perhaps performing in line with our expectations, and the road to recovery and investments required therein, and to be able to put all of that into a comprehensive view of forward-looking guidance rather than isolating it only to top line growth run rates, but really give you a broader perspective on the overall portfolio.

Gregg Gilbert - Deutsche Bank Securities, Inc.

And, Judy, that's very late in the year?

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

Correct.

Gregg Gilbert - Deutsche Bank Securities, Inc.

I'm pretty sure...

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

To allow us the ability to go through that, given the dynamism, again, of the moving numbers, particularly in Rx, and the impact that that has to how we look at the whole portfolio and investment strategy to be able to review that with our board, to be able to come back to you closer to the end of the year, which is when we'd probably want to provide more specific color to 2017, and if all goes well give guidance to numbers beyond that as well.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Thank you.

Bradley Joseph - Vice President-Global Investor Relations

Thanks, Gregg. Next question, please?

Operator

Your next question comes from David Risinger with Morgan Stanley.

David R. Risinger - Morgan Stanley & Co. LLC

Yes, thank you. My question is related to the big opportunities ahead. So with respect to OTC Nexium, could you help us understand how competitive you expect that market to be within a year of you launching, meaning maybe not on day one, but I thought it might be helpful if you could tell us how many manufacturers of generic prescription Nexium there are, and then how many of those you think will be competing with you in the OTC private label market in the U.S. next year?

And then on ProAir, I know it's a limited quantity launch, but how limited is limited? Because from a modeling standpoint, if you're limited to 20%, it's a lot different than if you're limited to 40%.

And then just one other, please. McKesson is joining with Walmart to squeeze generic companies further. Has that happened yet to Perrigo, or is that really a 2017 event? Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

So I'll take those, and some I may be able to give you color on, others not as much. So first of all, the Nexium question, esomeprazole magnesium, hard to know how many competitors are out there. It's not the easiest product to make. It's not the easiest product to sell, distribute, manufacture. My guess is there ultimately will be a few approvals out there on the market similar to what we have with omeprazole or lansoprazole. There are two or three suppliers out there on the market. We still with Jeff and his business have usually done a good job of getting their fair share of those complex products. So I don't think this will be a 10-person market. It's just a unique product, and at some point there's more complexity in there. So that's my perspective. It could be wrong, but that's in general where I think that market will end up.

On the limited guaranteed launch, we've not talked about that and at this point can't talk further about what that means and the quantities or volumes that that means. We'll have to come back to that one at a later time.

McKesson Walmart, so McKesson has distributed some of Walmart's products within our normal consumer business. Previously, some of their pseudoephedrine products or other products are distributed through McKesson. They've had that relationship on some of the OTC products. But as far as the full impact, it really is in 2017 where more of our products could cross over through McKesson in some of those distributions. But McKesson does do some distribution already with some of those major retailers on some of their more controlled type OTC products.

David R. Risinger - Morgan Stanley & Co. LLC

Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

Thank you.

Operator

And your next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Securities LLC

Yes, good morning. On the Omega business, can you talk about any progress that you've made on revenue synergies and when we can expect those to start kicking in? And then also, when you think about the cost savings that you have planned for the next couple of years and all the planning and stuff, what kind of operating margin is really the target? Is this a 20% operating margin business, or is it better than that? How are you thinking about that?

And then just you had mentioned $300 million of new product launches this year. Can you just help us understand where it's going to come from, the segments, and what's been launched already and just break that out for us? Thanks.

John T. Hendrickson - President, Chief Executive Officer & Director

So let me, Marc, tackle the revenue one. I'll probably toss the margin one back to Judy. But the revenue synergies is we've stepped back with Omega and the acquisition. We have a revenue synergy and we still target that. We have an operating synergy. We have a platform we maintain. We're on pace. We're driving the operating synergies. Those are going well, driving well.

On the revenue synergies, they are taking us longer than we had originally planned on, most of it due to longer regulatory pathways, so in other words, getting the ultimate approvals in the countries, moving products back and forth between countries and entities and doing that. So when we look at our models here, those synergies are pushed out further to the next one to two years out in our models, whereas the operating synergies continue at a more aggressive pace and we're able to deliver those faster. So in reality, we couldn't get the approvals and the regulatory drive as fast as we had originally planned on the synergies. Judy, do you want to take the margin side of the...

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

Let me just comment a little bit on the operating margin perspective on this business, which is if you step back and look at the gross margin evolution since we've owned the company, you'll see gross margins in the low 50%. Approximately 80% of the BCH segment business is coming from branded OTC. And as you all know, there's a small slice of the business that is coming from our distribution of certain generics in Belgium.

The top 20 brands make up about 55% of sales in this segment. Other owned brands make up another quarter of sales, so there's my 80%. Our top 20 brands are contributing gross margins in the low-60%, and the other brands are in the low-50%. So that blended rate in the mid-50% for the branded products is honestly in line or even slightly better than competitive peers in the European consumer space, so solid, competitive gross margins.

Our advertising and promotion spend for the business is in line with or frankly even a little soft compared to other players. And the main driving factor now for us to improve operating margins is finding ways to be more structurally efficient. So on a country-by-country basis, and we'll be elaborating on more of these in detail, finding ways to be more efficient in our go-to-market, and importantly on a shared service platform, finding ways that we can deliver back-office day-to-day services to the countries in a more efficient way so that the teams can really focus their time and their energy on sales, market, product development, go-to-market, and being close to their customers. So those types of initiatives, as John referred to, take more time. That's going to be the focus now. The transformation team is helping drive efficiencies across Europe to be able to drive more bottom line margin.

Should it be a business that has operating margins in the high-teens, nearing 20%? Absolutely. Do we have a line of sight to that? Does the team understand the implication and what has to be done? Yes. Does it happen tomorrow? No. But if you just look at the key metrics, product, gross margin, A&P, those are in line, and now it's about driving efficiency to the other lines to be able to progress our way towards high-teens operating margin, in line with the competitive dynamic of other branded consumer companies.

John T. Hendrickson - President, Chief Executive Officer & Director

And, Marc, to give you some color on the broader new products, the way I'd characterize it is about 70% of that new product number is the consumer-facing business. It's about in line with our business percent from a revenue standpoint. About 30% of it does fall into Rx in this year. And of the 70%, the U.S. CHC is a big chunk of that. We have some infant formula new products, the nasal sprays, both the Flonase equivalent, the Nasacort equivalent; the guaifenesin products. Those are some of the leading categories this year that drive chunks of that number.

Bradley Joseph - Vice President-Global Investor Relations

Thank you. Next question, please.

Operator

It's from Douglas Tsao with Barclays.

Douglas Tsao - Barclays Capital, Inc.

Hi, good morning. Thanks for taking the questions. Just maybe turning to the Consumer segment quickly, obviously as you noted, it was down 8% year to year. Some of that was seasonal related to the allergy business and contract manufacturing. Just maybe if we could understand where your market position is and when you think about your share on a per unit or per product basis, has that changed?

And, Judy, also I noticed you had very good performance in terms of the adjusted gross margin, although we didn't necessarily see that flow through to the operating margin, and we're just curious to understand what happened there. Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

Let me take the first one, Judy, and then why don't you jump in the second part? So it was a big year. We had a big second quarter on the consumer side last year driven by a few you said. There was also – the retailers were at a lower inventory position and wanted to get to a stronger level at that time. So there was just a myriad of things that just made that a big consumer front.

When I look at – just step back and look at market share or what's going on, first of all, we continue to do very well from a market share standpoint, grow with store brands, continue to do well and we as a percent of store brands continue to do well. The things that impact that, Douglas, as I look at it, are as brand launch, so we have the nasal spray product that launched. And when we are in those originally, they take share from cough/cold/allergy, those brands will. As we come in there, we start gaining our fair share of those categories. J&J started coming back on the shelf. And as they did, we maintained a good chunk of the share, but they do get some shelf spacing and part of that share. And usually once they're on, we're able to continue to grow and drive our share.

So you did have some dynamics, I would say, over the last couple years that have caused the share growth to not be as dynamic upwardly as it had been both in big new product launches and switches. Nexium, another example that takes share, and until we're able to be out there with that product, we're a little lower share of the whole category.

So that's what happens in the year-over-year, new product switches, those kinds of things dynamic that drive it. But I feel good about the position when we just look at share of products that we can compete in, how we're doing in maintaining and driving those higher, how consumers are doing at still buying retail brands at a value point versus brands. So I feel good about those initiatives.

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

On the margin front, agreed, 36.6% adjusted gross margin is a terrific number. And you look at historical run rates, as I noted, an exceptional quarter. The team performed very efficiently. And even if you talk about the mix dynamics and things that were – the ins and the outs on the top line, even with softer top line sales and speaking of conceptually lower volume, they still drove amazing efficiencies and kept that AGM up high.

Then you drop down. Why didn't it flow through all the way to adjusted operating margin? Very clear, the team made a conscious choice and did the absolute right thing, which was continue to invest incremental dollars in R&D. Even with that R&D investment, I would not say that anyone should feel badly about an adjusted operating margin of 20.7%. Yes, while it is down year-over-year, they could have chosen not to make those R&D investments to keep the AGM up or AOM up, but did the right thing to invest in the long term. And as you'll see, the R&D investments in this whole business are forecasted for the full year to be higher on a year-over-year basis to continue to fund growth in 2017 and beyond.

Douglas Tsao - Barclays Capital, Inc.

Okay, great. Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

Thank you.

Operator

And your next question comes from Annabel Samimy with Stifel.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

Hi, thanks for taking my questions. So I know you were just talking about market share. I was thinking from a broader perspective. You guys used to talk about megatrends and one of them being that you would be able to gain continued incremental share of store brand against national brand, about I guess 100 basis points a year. Is that trend overall still continuing, or are you tapped out on that market share at this point? I know you just went through some of the dynamics with certain products. But just as a megatrend, is that still continuing?

And then on the branded side, at what point – I know you had some good sequential growth. But at what point do you get back to a normalized annualized growth for that business, and what should we assume for that normal annualized growth? Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

Let me take the first one on store brand share and megatrends. So I would say if you step back with all the big picture – and this is a way step back – but we're all getting older. Healthcare costs have done nothing but go up despite everything we try to do to manage them down. We all need more healthcare and we frankly have less money to spend on it. So, from a macro dynamic – and that's a pretty global trend. So from a macro dynamic, looking for a value way to pay for some of those healthcare needs in my mind will continue to grow, so that challenge.

I think when you look at people from a pure store brand standpoint and looking at a value there, in my mind there are still potential for higher share gains. If you look at certain countries, certain product lines, the share is much higher than on every product line. So when I say can you keep growing share, my answer would be yes. There's still growth there from a share standpoint even in getting categories that are under their fair share, if you will, up to where a normalized fair share should be, there's opportunities. So I still think the growing share of store brand and total growing share is a trend that Jeff and his team are continuing to drive and get after that.

It happens not just with pure share growth and promotion, but bringing in new products. New products flows (74:04) new energy. They bring consumers to the market looking for those things and looking for equivalent products, so making sure they're out with new products, while it sounds like a new product play really does help drive share across the board because of those things. So, I think it's still good opportunities. The brands are out and doing good innovations, which I think is great because that drives interest in the market and provides new opportunities for us to continue to grow also.

The second part of your question was branded annualized growth and looking at that. And I'll go back to my premise of we're in a correction phase, getting everything aligned to make sure that we have a good operating platform, good growth vehicles and brands, good country operating performance, to continue to drive them. I think with the infrastructure of what we have, we should be able to grow our products faster than the general markets are growing in those countries.

And each country in Europe grows differently. I mean that's probably the biggest thing I've learned over the last 10 years is, we call it Europe, but it's not. It's each country grows differently, have different brand and product interests. I believe we can grow faster than those markets with the brands and the way we're positioning ourselves in those markets. But I'd rather – rather than give you a general number for Europe, I think we've got to hold back on that until we look at specific country growth and how we fit in there and give you broader guidance on that.

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

So just to build on what John said, while it would be imprudent, particularly in light of the answer I just gave Gregg in terms of an Analyst Day and specific guidance to get granular on the numbers, suffice it to say that I've had the pleasure of spending time with many of the country leaders. And I will tell you that their enthusiasm for our combined companies, for the platform, for the ability to grow and have investments beyond what they've had in the past and to really be able to hit the ground running now with Sharon's leadership and the reorganization of his team and to be able to really drive for the future is pretty exciting to be around. So I'm not going to quote a number, but suffice it to say, they're raring to go.

There are challenges. Certain countries are going to have changes afoot as their leadership teams are looking at a different way of driving their channels. But there is a lot of enthusiasm and excitement to definitely be able to take their product platform and grow beyond the market growth in their respective countries.

Bradley Joseph - Vice President-Global Investor Relations

Next question, please?

Operator

It's from David Buck from Northland Capital.

David G. Buck - Northland Securities, Inc.

Yes, thanks for taking the question. For Judy I guess, quickly on the tax rate, can you talk a little bit about your confidence in maintaining your current non-GAAP tax rate and any changes that you put in place after the guidance that came out from the SEC on how you handle some of the, I guess, extraordinary tax items?

And then one for John, on the Rx business, how confident are you that you actually get back to a "normal" pricing level versus 10% this year, given the comment that 2017 is when you could see more incremental pressure from One Stop combining with Walmart? If the Rx business is $1 billion this year, at 10% price it's down to $900 million before new products next year. So how should we be thinking about that as we look into 2017? Thanks.

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

Technically a three-part question. Thank you, David. Let's talk tax rate. How confident am I on the ability to execute on that tax number? For my colleagues in the executive committee who are listening to this call, I will say that the confidence in the ability to have the adjusted effective tax rate that we guided to today is entirely dependent on the jurisdictional mix of them delivering on their operating income earnings before tax in the updated guidance provided to you this morning. So if you feel good about the segment guidance, then by definition we should have a clear line of sight to delivering on that slightly higher tax rate. We had guided to 14% adjusted effective tax rate and updated that to 15% given updated mix of income in this new guidance. And if you do your math, that says a higher rate or around 17% on average for the second half of the year.

With respect to the GAAP/non-GAAP discussion, which is all the buzz at the moment, that is also for us a pretty cut-and-dry answer. The tax-related items that flow through on our GAAP/non-GAAP tables within our press release this morning are related to tax effect of those items that are included as adjustments, like amortization of intangibles, et cetera. So, we don't have any fancy math in there. It's pretty vanilla on tax-effected items on that list. So, I don't expect or anticipate any drama related to that particular item.

John T. Hendrickson - President, Chief Executive Officer & Director

I think, David, on the general Rx pricing looking forward, here's what I think about it. We currently are certainly at a much, much higher level. Some of that's the first-to-file items, et cetera. But even at the normalized rate, we're talking about in the back half at 9% to 10% that we have built in certainly abnormal. I believe that this part, as I look at it, will normalize back to a mean, and a mean is a 5% to 6% normalized price decreases. If you look back historically, those are the kind of numbers that you'd see in the industry, not the ones that we're seeing at this stage.

I don't have a better crystal ball. But when I look at it and say okay, it has to normalize out, a great generic industry, and eventually gets back to a normalized point. So you get back to 5% to 6% normal decreases without first-to-file, other items, but just normalized bucket increases, put new products on top of that, put on some pricing you might be able to get on other products that are way undervalued right now, to me you get back to a more normalized level. So that's the way I'd think about it.

Bradley Joseph - Vice President-Global Investor Relations

Operator, could we take one more question, please?

Operator

And your final question comes from Sumant Kulkarni with Bank of America Merrill Lynch.

Sumant S. Kulkarni - Bank of America Merrill Lynch

Good morning, thanks for taking my question. This is more on price erosion on the consumer healthcare side. I think you mentioned that analgesics, which is a pretty large category, had some erosion there. Should we still think about that business as being managed to roughly flat on price?

And second, on putting the share buyback on the back burner, is that out of choice or a lack of flexibility?

John T. Hendrickson - President, Chief Executive Officer & Director

So first of all, on the price erosion on consumer, we always have pricing on portfolios. Again, we talked about Rx because it's been so dynamic, but the consumer side isn't immune to those.

Typically, when we think about price erosion on consumer, we're able to balance that out with some pricing, some new products, and manage the overall portfolio when you look at it. But it has some of the similar dynamics. It's not quite as dramatic because your starting point is a lot different, but some of the same dynamics as the other business. Jeff and the team have managed it well to try and look at the whole basket and say, how do we get the value from the whole basket that we're bringing there.

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

And the analgesic category in particular, which I mentioned is simply the factor – as we all know, the return of brand to marketplace did not have any particular large new product launches there, and also just on a relative basis on a year-over-year. So overall softer seasons, and so it's on a relative basis. We just wanted to point that one out in particular as a lot of folks have been paying a lot of close attention to the analgesic category over the last 18 months.

I think your second question was with respect to putting the share repos on the back burner. Yes, I think that was pretty clearly stated in the prepared remarks. And at the end of the day, all of the comments and actions we're taking right now with respect to the balance sheet coming back full-circle to Jami's first question on this call, are about a prudent capital strategy and a prudent capital management strategy, making sure that we as a management team are considering the capability of building cushion, having optimal working flexibility as an organization. And at this point in time, given our commitment to investment-grade and our plans to continue on our debt re-paydown strategy, we believe that at this point in time it's the most prudent thing to do, to put that repo on hold and make sure that we're razor-focused on operations and the most optimal balance sheet possible.

Sumant S. Kulkarni - Bank of America Merrill Lynch

Thank you.

John T. Hendrickson - President, Chief Executive Officer & Director

And I would say related to – in general as I step back and think about the business, just stepping back and summarizing from an end standpoint, I remain – despite the overall guidance we've given which is down, but very optimistic about our business. When I think about our Consumer Healthcare, good strong business platform. We can add things to it. We can look at different ways of going to market with the platform, branded consumer, turning that around, driving it in the right direction. A good platform, still needs a fair amount of work, a fair amount of focus, but good driver thereof we need to do. Rx pricing has been very dynamic, but when I look in step back at the returns and the product pipeline, we feel good about those. So looking at those core operating assets, the core things that we have, I'm optimistic about where the business can go.

John T. Hendrickson - President, Chief Executive Officer & Director

So I want to thank you very much for joining us on the call today and all of the great questions. We look forward to talking to you in person. Thank you.

Bradley Joseph - Vice President-Global Investor Relations

Thank you, everyone.

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

Thank you.

Operator

This concludes the Perrigo calendar year 2016 second quarter earnings results conference call. You may now disconnect.

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