Perrigo Co. F2Q08 (Qtr End 12/29/07) Earnings Call Transcript

| About: Perrigo Company (PRGO)

Perrigo Co. (NASDAQ:PRGO)

F2Q08 Earnings Call

February 5, 2008 10:00 am ET


Arthur J. Shannon - Vice President Investor Relations and Communications

Joseph C. Papa - President and Chief Executive Officer

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


Daniel Rizzo - Sidoti & Co.

Randall Stanicky - Goldman Sachs


Good morning. My name is Nelson and I will be your conference operator today. At this time I would like to welcome everyone to Perrigo’s second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Art Shannon, Vice President of Investor Relations. Sir, you may begin your conference.

Arthur J. Shannon

Thank you very much, Nelson. Welcome to Perrigo’s second quarter 2008 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the press release is available on our website at Before we proceed with the call I’d like to remind everyone that the Safe Harbor language contained in today’s press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and our subject to the Safe Harbor created thereby. Please see the cautionary notes regarding forward-looking statements on page 1 of the company’s form 10-K for the year ended June 30, 2007.

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

Joseph C. Papa

Thank you, Art, and welcome everyone to Perrigo’s fiscal 2008 second quarter earnings conference call. Joining me today on the earnings conference call is Judy Brown, Executive Vice President and Chief Financial Officer. For our agenda today, first I will provide a brief perspective and discuss a few highlights from the quarter. Next Judy will walk through the detailed financials and talk about our outlook for the year, and then I will discuss our opportunities for Omeprazole, Cetirizine, and provide an update on our OTC business. This will be followed with an opportunity for questions and answers.

So let’s get started. Once again, all our segments performed very well on high revenue volumes. We had record sales with double digit sales growth in each of our business segments, plus record operating income up 85% from last year on a 390 basis point improvement in gross margins. These improvements along with the continued focus on working capital generated $67 million in cash flow from operations up $43 million from last year. Judy will discuss our new cash flow expectations for the year shortly. This is another very strong request [inaudible] as a result of ongoing quality problems at an OTC competitor this quarter. This keeps us on track to meet our previously stated target of $90 million to $100 million in annual sales as our team continues to meet our customer needs. Perrigo is also gaining market share in the vitamin business. As we’ve told you repeatedly since our competitor’s [coffee] problems began, we are looking at these sales as part of our business and working very hard to keep these sales in the future no matter who is in the marketplace.

Many of you have asked us about the cough/cold season. While the overall cough/cold market is down 4% from last year, I am delighted to share with you that Perrigo’s OTC cough and cold category is up 11% over the same period a year ago. Within the cough/cold category, our combined pseudoephedrine phenylephrine product sales were up more than 20% versus last year, reversing a three year trend. We’ve also been busy exploring international store brand opportunities and we closed the acquisition in January of a privately held Galpharm Health Care, the leading supplier of over the counter store brand pharmaceutical products sold by supermarkets, drug stores, and pharmacies in the UK. Galpharm strengthens our footprint for future expansion into Western Europe. This acquisition is expected to add more than $55 million in sales annually and be accretive to earnings in the first year.

This type of acquisition is similar to the Glades acquisition in our RX business. These ROIC driven acquisitions add to our products lines and utilize our existing customer relationships to expand the breadth of product offering for our customers. The RX business continues to benefit from the Glades acquisitions. Sales in the Glades products was up 37% in the quarter over last year. The API business also experienced strong growth with sales up 21% over last year. I’m sure we’ll have plenty of questions surrounding the Omeprazole and Cetirizine opportunity so I will get into detail on that shortly but first let me turn the call over to Judy for more detailed financial review of the quarter.

Judy L. Brown

Thank you, Joe. I am delighted to have this opportunity to share our second quarter results with you this morning. The financials really do speak for themselves. The team is continued to focus on realizing significant revenue growth while at the same time executing against operational improvement objectives and investing in future growth. As we continue to be optimistic about prospects for the balance of the year, we’re updating our earnings guidance for the full year as well. I’ll walk you through those assumptions in a few minutes after explaining our second quarter and year to date results in a bit more detail.

Consolidated second quarter sales were an all-time record for Perrigo at $435 million, an increase of $65 million or 17% from last year characterized by double digit sales growth in each of our operating segments. Consolidated gross profit of $130 million was an increase of $34 million from last year, while gross margin was 29.9% of sales, up 390 basis points when compared with last year’s 26%. Consolidated second quarter net income benefited from the strong volume and was $34 million compared with reported second quarter net income of $21 million last year which included costs for a product recall of approximately $3 million after tax. The second quarter of last year also included a small restructuring charge for the closing of two consumer healthcare manufacturing facilities. After tax this charge was $417,000 or less than $0.01 per share. Second quarter diluted earnings were $0.36 this year compared with $0.23 last year and included expense of $0.03 per share for the product recall.

Now to provide some color to the results I just outlined, Ill take you through a review and discussion of our business segments beginning with consumer health care. Consumer health care sales increased $44 million or 16% to $320 million, coming from gross of $37 million domestically and $7 million internationally. New product sales, mainly in smoking cessation, cough/cold, and nutrition, contributed $10 million of this increase in the quarter.

As Joe just mentioned, we’ve continued [inaudible] our customers during the ongoing absence of a key competitor in the marketplace. This led to more than $20 million of growth this quarter as well. Offsetting the strong domestic consumer healthcare sales gain was the impact of our proactive exit from the fiber laxatives and effervescent cough/cold product lines which had sales last year of $8 million. Our international operations in the UK and Mexico also performed well in the quarter, growing 17% year-over-year through both new products and increased unit volume. Additionally the impact of a favorable foreign exchange rate contributed 7 percentage points of this growth.

As Joe noted a few moments ago, on January 9th we announced the acquisition of Galpharm Health Care Limited, a leading UK based supplier of OTC store brand products to the UK market for approximately $86 million in cash. As t his transaction occurred after the end of the second quarter, we will include the results of operations and opening balance sheet of Galpharm for the first time in the third quarter of fiscal 2008.

This quarter consumer healthcare’s gross profit increased $27 million or 45% from last year’s $86 million. The gross profit margin was 26.9% of sales, a 540 basis point improvement from last year’s 21.5%. The margin increase was driven by the favorable contribution of the new products in the portfolio and production efficiencies on much higher volumes through the plant. Also in the second quarter of last year, gross margins were negatively impacted by approximately $5 million of product recall expenses.

Operating expenses increased $6 million or 14% due largely to higher wages and benefits. As a percent of sales, operating expenses in the quarter were 14.9%, down from 15.2% a year ago. Consumer healthcare reported operating income of $39 million for the quarter or 12% of sales. This compares with $17 million or 6% of sales last year.

The RX pharmaceutical segment continues to perform well this quarter, growing both organically and inorganically. Net sales for the second quarter of $39 million were a 37% increase from $28 million last year. This improvement included a $7 million contribution from the products acquired from Glades pharmaceuticals as well as increased volumes of existing products.

Gross profit increased 56% to $18 million or 46% of sales due to increased unit volume and favorable product mix. Pricing pressure on existing product partially offset the favorability of new products and the addition of Glades to the portfolio. It should be noted that in the second quarter last year we recorded a $5 million charge related to the accruals for customer programs which included estimates for rebates and chargebacks.

Operating expenses were up $2 million but were down 300 basis points as a percent of sales when compared to last year. Operating income was $8 million compared with $4 million last year.

The API business showed strong revenue growth again this quarter posting net sales of $35 million up $6 million or 21% from the second quarter last year. New product sales of $3 million as well as higher volumes and many existing products drove this improvement. Gross profit, however, was down 3% in the quarter to $12 million. Despite higher sales volumes versus the second quarter last year, an unfavorable year-over-year product mix and higher unabsorbed production costs during the quarter caused a decrease in the overall gross profit realized.

Operating expenses were $8 million, up $2 million from a year ago due to an increase in research and development spending, a withholding tax assessment, and other employee related costs Operating income was $3 million down fro $6 million last year. In the other category, which is our Israel based consumer products and pharmaceutical and diagnostic product business, net sales were $42 million up $4 million or 11% compared with $38 million last year. The impact of a favorable foreign exchange rate was partially offset by a one-time sales tax assessment at the top line.

Gross profit increased $1 million or 8% primarily due to changes in the foreign exchange rate. Operating expenses increased 8% or approximately $1 million due to higher selling and administrative costs. Operating income was $3 million up 11% compared with a year ago.

Lastly, unallocated corporate expenses in the quarter were $5 million, compared with $4 million last year due to higher employee wage and benefit costs. Effective tax rate for the quarter was 25.7%, up from 16.8% in the second quarter last year. Last year foreign source income which is generally taxed at a lower rate than that in the US was a higher percent of total income. Also last year we recognized a favorable impact in the domestic effective rate following Congress’ renewal of the R&D tax credit.

Now let’s continue with a recap of the six month year to date results. Consolidated six month sales up $818 million increased $107 million or 15% from a year ago with sales up in all segments. Consolidated gross profit was $247 million, an increase of $58 million or 31% from last year. Gross profit increased in all of our business segments. The gross profit margin was 30.2% of net sales up from 26.6% a year ago. Consolidated operating income was $95 million, up 82% from $52 million last year driven by higher sales across the board and strong margin improvement in both consumer health care and RX pharmaceuticals. This translated into a consolidated operating margin of 11.6% of sales, up 430 basis points from the same period last year.

Consolidated net income was $68 million, up from $38 million last year. Note that last year’s net income included $4 million of costs for a product recall and $417,000 restructuring charge I noted earlier. Reported earnings per share for the six months of fiscal 2008 were $0.72 per share compared with $0.41 per share last year which included expense of $0.04 per share for the product recall and less than $0.01 per share for the restructuring charge.

The year to date effective tax rate was 23% in fiscal 2008 and 18.4% in fiscal 2007. Foreign source income for the first six months of fiscal 2008 was 45% of the total income before income taxes down from 80% during the same period in fiscal 2007. This shift in income was the main lever which raised our ate versus last year.

Again, let’s go to the operating results by segment, starting with consumer health care. Consumer health care sales increased $71 million or 14% to $588 million driven by several positive factors. Organic growth of 13% was driven by new product sales of $20 million including our introduction of coated fruit flavored nicotine gum, a few smaller cough/cold items and nutrition and launches in the UK and Mexico. We enjoyed sales of over $40 million year to date as a result of the continued absence in the OTC marketplace of a key competitor and our team continues to be intensely focused on retaining this business as Perrigo’s into the future. Our international consumer health care operations also performed very well year to date, posting a $14 million or 20% improvement in sales with favorable currency contributing 7 percentage points of this growth. .

Inorganic growth from our acquisition of the pediculis side products purchased from Qualis also added to the top line growth. These growth factors were partially tempered by the year-over-year impact of our strategic exit from the fiber/laxative and effervescent cough/cold product line which contributed $15 million in the first half of last year.

Leveraging the strong sales growth, consumer healthcare gross profit increased to $158 million, a $43 million or 37% improvement from last year. The gross profit margin was 26.9% of sales, a 460 basis points improvement from fiscal 2007. Approximately three-quarters of this improvement in gross margin is the result of production efficiencies, focused inventory management, and lower obsolescence costs. The remainder of the year-over-year improvement is the result of the negative impact that product recall expenses had on our gross profit margin last year. Year to date operating expenses increased $9 million or 11% in the wake of a 19% increase in research and development outlays.

Our spending pattern in R&D has been more front end loaded than last. On the SG&A side we’re spending more in promotion and sales activities in preparation for new product launches and are experiencing higher wage and benefits cost as we invest further in IS infrastructure this year. As a percent of sales, however, operating expenses for the first six months were 15.3%, down from 15.6% a year ago. In all, consumer healthcare operating income was $68 million or 12% of sales, up from $35 million or 6.7%of sales last year.

The effect of higher sales volumes continued to drive efficiencies throughout our operations in the first half of the fiscal year. Year to date RX pharmaceutical sales were $74 million up from $60 million last year. Service and royalty revenue contributed $11 million, essentially flat to last year, and revenues from the Glade product acquisition were $14 million. The inorganic growth in the Glades acquisition was partially offset by pricing competition on existing products. Gross profit was $33 million or 44.6% of sales, up from $25 million or 42.2% of sales last year.

Operating expenses were up $1 million for the period but down 310 basis points as a percent of sales as a result of the greater leverage from higher volumes. Operating income was $16 million up 67% from $9 million last year. Net sales for the API segment were $73 million, an increase of 26% from $58 million last year. Gross profit was $27 million, up from $22 million a year ago and higher volumes and a favorable product mix versus last year. Operating expenses were $16 million compared with $12 million last year as a result of a 33% increase in research and development spending, higher employee related costs, and the withholding tax assessments. Operating income of $11 million was essentially unchanged from a year ago.

Net sales were $83 million up 10% over last year in our Israeli pharma and consumer products business due to the impact of favorable foreign exchange rates on both businesses. Gross profit was $29 million up 10% again as a result of exchange rates and a favorable sales mix. Operating expenses increased 13% or $3 million due primarily to increased promotional activities, higher employee related costs, and an Israeli holding tax assessment. Operating income for the segment was $6 million, up 3% from last year. Unallocated corporate expenses for the six months were $5 million compared with $8 million last year. The decrease was mainly due to the favorable settlement of a legal claim which offset expenses in the first quarter of 2008.

In summary, we’re pleased with the excellent first half results. All segments are growing their top lines, new products launching, and our operating team’s focus on achieving production efficiencies and managing working capital and I’d like to remind you that these results still do not yet include our Cetirizine and Omeprazole store brand launches which we expect to contribute quite positively beginning in our third fiscal quarter ending in March.

Now let’s move on to the strong story of the balance sheet this quarter. Working capital excluding cash and investments was $333 million at the end of the second quarter versus $292 million last year, an increase of $41 million. As a percent of annualized year to date net sales, this represents 20.3% down 30 basis points from last year. Debt to total capital was 24.8% at the end of the quarter, down from 29.3% last year.

Accounts receivable were $311 million compared with $247 million a year ago reflecting our higher fiscal 2008 sales volume. Inventories were $326 million, up only 1% from $323 million at this time last year. As I noted in the last earnings call, we are placing weekly focus on these balances and the importance of remaining lean even with double digit sales growth and the preparation for upcoming significant new product launches.

Accounts payable were $194 million compared with $173 million a year ago, also reflecting increased focus on working capital management. Cash provided by operations was $67 million in the second quarter, up $43 million from this time last year and a record for this fiscal quarter. Cash provided by operations was $95 million for the first six months compared with $18 million last year. We are very pleased with this performance which was related to both our increased earnings and the timing of the inventory payable cycle.

Capital expenditures to date were $14 million despite the slow start to our spending so far in the year, we still anticipate spending between $40 million and $50 million for the full year. In the second quarter we repurchased 1.1 million shares of Perrigo stock for $31 million under our [10-B-5-1] stock repurchase plan. This takes our year to date repurchase tally up to 1.32 million shares totaling $35 million. We are taking a more aggressive approach to our share repurchase and received board approval on February 1, 2008 to repurchase up to an additional $150 million of stock over the next 2 years. We paid cash dividends of $9 million or $0.095 per share for the six months of fiscal 2008, an increase of nearly 10% from last year.

Given our excellent performance in the first half of the year, we continue to view fiscal 2008 with a great deal of optimism so we are updating our full year fiscal 2008 guidance to reflect several factors, but in order to be able to really understand the components of our revised forecast for the full year, I think it makes sense to first level set everyone on the critical assumptions we’ve been using and help paint a picture of how these have evolved over the course of the year.

First and foremost, it is important to comment on Omeprazole. On December 10th we announced our expectation for the product launch of Omeprazole in the third fiscal quarter of 2008. At that time we provided pre-launch product specific guidance of $0.20 to $0.25 per share for this year. Our guidance does not reflect any change to this previous guidance.

A critical assumption for fiscal 2008 surrounded the absence in the market of a large consumer healthcare competitor. At the beginning of the fiscal year, it appeared that this company would be coming back online near the end of December. Over the last months we’ve been carefully monitoring publicly available information and revising our expectations of how long we will be servicing our customers at these higher levels. As of today, we have forecasted that our key consumer healthcare competitor’s return to the marketplace is increasingly uncertain and will be even later than anticipated months ago. As such, we now expect that the new business awarded to the consumer healthcare segment will continue throughout the full fiscal year.

The next critical assumption we made in the creation of our earnings guidance was with respect to our ability to execute against our own operations and sales goals. As I just spent time outlining for you over the last several minutes, the team executed well in the first half of the year, even when compared to the high bar we had placed before them. We’re expecting the second half of the year to be a very busy period with important product launches and higher volumes through our factories. Our operating team remains razor focused on productivity during this busy time. Our revised guidance reflects our confidence in the operating team’s ability to continue to execute at this higher level of demand and expectation in the back half of the year.

The fourth item which is playing a critical role in the revision of our earnings guidance is the ate we use for income taxes. As you may remember our original guidance regarding taxation assumed a rate of between 25% and 28%. This was based on our expectations at that time of the world wide income mix. Our revised sales forecast reflects new expectations of our global product portfolio. Given changes to that portfolio, we now expect the full year tax rate to be in a range of 21% to 24%. With this perspective we now expect full year 2008 EPS to be in a range of $1.50 to $1.60 per share, up 69 to 80% from last year’s adjusted EPS and an increase from our most recent guidance of $1.32 to $1.47 per share. I’d like to again reiterate that this guidance includes our current estimate of $0.20 to $0.25 per share for the launch of Omeprazole, unchanged from December 10th.

With this change to EPS guidance, we also now anticipate cash flow from operations in a range of $180 million to $200 million for the full year.

Now let me turn it back to Joe.

Joseph C. Papa

Thanks, Judy. Now that Judy has given you all the details of our second quarter and our outlook for earnings and cash flow, I’d like to talk about executing on our plan. This quarter is another example of the company executing our plan. When I joined Perrigo 16 months ago I stressed the importance of executing on our five priorities of quality, customer service, new products, low cost structure, and people development. The first and foremost priority for us is quality. Our team is focused on meeting quality goals while continuing to challenge our cost structure. We are achieving our financial results while increasing our quality expenditures for quality prevention and appraisal by approximately 10%. This focus on helping us to reduce our overall total cost of quality. Quality will always be an important priority for us at Perrigo as we have seen in the market a company cannot afford to cut corners in quality.

Our second goal is about customer service, executing good customer service is essential to our sustained growth. We have approved our customer service levels since the middle of last year but we realize we still have room for improvement and are maintaining our vigilance in this area. Our third priority is about executing our new product launches and building our pipeline. Cetirizine was launched during January, ahead of the launch of the national brand. We have an excellent cost position and expect to have more than 80% market share for store brand cetirizine despite numerous other competitive approvals. We have customized marketing programs with on shelf displays, print ads, pharmacy introduction kits, on shelf signage, and more. We believe no other store brand marketer can offer these value added programs to the retailers which is why we expect to have more than 80% of the cetirizine market share.

On Omeprazole OTC, our next product launch, is the largest product launch in our 120 year history. We expect Omeprazole to add $150 million to $200 million in annual sales after it’s launch in the next 6 to 7 weeks. Think about the size of this product. We are building more than $120,000 in-store promotional displays to launch Omeprazole OTC. Our team is working 24 hours a day, 7 days a week, to get this product to our customer shelves. There’s genuine excitement throughout the company surrounding this product and our customers are feeling it too. Look for it on the shelf soon.

In the smoking cessation category, we continue to gain share. Coated fruit nicotine gum is just the latest addition to our offerings and is another exclusive store brand product for us. This year there are more exciting new products coming to the market. We have an opportunity of approximately $1 billion at retail in exclusive new products over the next year and we continue to build our new product pipeline. Adams Respiratory filed suit against Perrigo after we filed an ANDA with a paragraph 4 for a generic version of Mucinex of guaifenesin extended release tablet 600 mg, a $100 million plus name brand product. I feel very confident in our position that we do not believe we infringed any valid or enforceable claims of their patent. The 30 months stay began on September 27, 2007.

In fiscal year 2008 we plan to file more than 10 ANDAs with more than half of them being paragraph 4 filings. We’ve increased our funding of R&D and all of our business is to keep on this pace to ensure that this important growth engine is sustainable.

Our fourth priority in order to be a leader in our space you must be the low cost provider. We have re-organized the Perrigo supply chain into a global organization and we are working to improve our supply chain and have implemented numerous major value stream initiatives this year. As an example we plan to be vertically integrated on store brand cetirizine which helps position us as the low cost provider for this important product.

Finally, people are the key to executing this plan. We are constantly working to find the right people to grow with the company. For example, major pharmaceutical companies have been reducing their workforce. In Michigan we’ve reached out to the scientific and technical community and have recently added more than 25 highly skilled and motivated employees to our ranks from the big pharma companies. Perrigo is committing to having the right environment to foster growth in its people. Our management team had met with many of you during the past couple of months at various conferences here in Michigan at our headquarters and we will continue to do so. I believe that all companies are judged on their last quarter’s performance and that our Perrigo management team will continue to stay focused on the work ahead in executing our plan for the next quarter and beyond.

Since the second half of last year my team and I have been focused on improvements in our working capital and cash flow from each of our business units. We will continue meeting weekly to focus on the metrics that help us to manage inventories and improve our processes. These volatile market conditions [I like] the fact that we are positioned as a company with the ability to generate cash on a solid foundation. We are well on our way to meeting our revised goal of $180 million to $200 million in cash for the year.

Overall, it’s an exciting time for us at Perrigo. Our base business is executing well so we can create full year guidance. We are taking advantage of current market conditions, investing in our future, and are being selective about strategic acquisition opportunities which can help us deliver value to both our customers as well as to shareholders. We will stay focused on priority and we will execute on our plan.

Now let’s take your questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) Please hold while we poll for questions. Our first question comes from Daniel Rizzo of Sidoti and Company.

Daniel Rizzo - Sidoti & Co.

Good morning guys. I think you said that your cough/cold sales were up 11% despite weakness in the market? Is that strictly market share gain from minor health?

Joseph C. Papa

Yes, the answer to the question, I’ll go back specifically to what I said. That the overall cough/cold market is down 4% from last year. That’s including both store brand and national brand. I am delighted to share that our Perrigo store brand cough/cold is up 11% predominantly reflecting some of the gains we had in the Leiner pick up from their quality issues, but also just some incremental new product that we’ve added to the portfolio. So really two areas, the Leiner pick up for products like loratadine as well as the new product introductions that we have, also including some of the gains on pseudoephedrine and phenylephrine have really been the three primary areas.

Daniel Rizzo - Sidoti & Co.

Okay, and Judy may have said this, but do you expect Leiner health to be shut down for the rest of your fiscal year?

Judy L. Brown

Our updated guidance reflects our assumption that we will service those customers throughout they year, yes.

Daniel Rizzo - Sidoti & Co.

Okay. Thanks guys.


Thank you. Our next question is coming from coming from Randall Stanicky at Goldman Sachs.

Randall Stanicky - Goldman Sachs

Thanks very much for the questions. I just have a couple. The first is a follow up. Judy, can you just be more specific, what did you have in guidance with respect to Leiner before and now? Is it the $90 million to $100 million, is that the total, the way we should be thinking about it?

Judy L. Brown

That would be a reasonable assumption, yes. That was the assumption we had given at the beginning of the year of the magnitude of the space. We said our original guidance assumed presence in that space for half a year and we’re now assuming we’re there for the full year.

Randall Stanicky - Goldman Sachs

Great. So just to be clear there, the guidance increase today doesn’t include a change in that assumption?

Judy L. Brown

The guidance today includes our new assumption that we’re present for the full year, the full $90 million to $100 million. Our earlier guidance had only reflected a portion of the year.

Joseph C. Papa

If I can add to Judy’s comment, when we originally acquired the business, as Judy mentioned, we picked up $90 million to $100 million in annual sales. What we could not guarantee at that time was the duration of how long we would hold onto that business, and given the fact that in the current environment it appears that our competitor will be out for a longer time period, we have now, as Judy mentioned, increased the probability or certainty that we would keep that business for the full year.

Randall Stanicky - Goldman Sachs

Got it and is it possible to quantify that or to be proportional to the run rate that we’ve been talking about which I think has been roughly $20 million.

Joseph C. Papa

It’s a little bit more than $20 million but yes. In some quarters a little bit higher just reflecting the fact that there’s some cough/cold influence in some of the business.

Randall Stanicky - Goldman Sachs

Got it and then just two more quick questions. Judy, obviously, great job on getting the tax rate down. Can you talk about the sustainability of that? It sounds like that is an ongoing run rate. As we think about fiscal ’09, not asking obviously for guidance, but is there a way or an opportunity to further decrease that or is that the new way to think about the more sustainable tax rate for Perrigo going forward?

Judy L. Brown

As we talked about in September at our analyst day, obviously the focus of the tax team is continually finding and implementing tax planning measures so that is their modus operandi. Their entire focus is also driven on looking at the global product portfolio so at the time of our September meeting, I reflected the belief of the tax department given the knowledge of our overall long term product portfolio that the tax rate would be coming down from above 25%, between 25% to 30% zone, down to mid-20s and eventually getting down to 20% to 25%. As you can see, with this year’s forecast and earnings guidance, we’re at that ballpark already for this year and if I look to the future, obviously the specific rate to your comment, hard to give guidance for next year, given that we don’t have a full year top line forecast out yet for ’09, but we will look at the product mix and with tax planning measures in place, we believe that the mid 20s is still a reasonable assumption as a starting point for your modeling and obviously as we know more about the product mix, we will then be revising and being much more specific in the exact percentages for an ’09 run rate, but certainly we’re not in a place where we’re going back to the old days of 30 plus percentage points on taxes. Again, being more specific in ’09, but I refer you back to the September information that we presented in New York.

Randall Stanicky - Goldman Sachs

That’s helpful. And just Joe, a last question, just a more theoretical question, and I think Judy, you mentioned the more aggressive stance in terms of buy back going forward. I’m just curious as to why, with rates decreasing, obviously equity valuations lower than they were a few months ago, what are you seeing? Are you not seeing opportunities from the acquisition front that you would have thought or as it just an internal change in view of capital uses?

Joseph C. Papa

Let me add to one comment that Judy made on tax before I get into your second question here on the buy back. Relative to the tax team, they have done just an outstanding job in accelerating some of the programs we had in mind but they were just able to move through them much quicker. Obviously some other activities and new products have occurred. The team is just working really well in executing our plan and just getting things done faster, so much credit to Judy and the entire tax team and what they’ve done with the tax efforts so far this year. On the question of extending the buy back, we looked at our utilization of cash and capital and obviously we’re generating significant amount of cash as exemplified by this particular quarter. We still are looking at the future as to where we go. We think we’ve got a very solid organic growth in our business and therefore we’re generating significant cash, we’re looking at what we can do with that cash, at the same time, we are continuing to look at acquisitions such as the Galpharm acquisition where it’s a nice tuck in, allows us to improve our position in Western Europe, but at this point we feel there is an opportunity to [light] some of the cash in buy backs and we’re going to do that while we still continue to look at acquisition opportunities, but we don’t feel we need to do any acquisitions if we don’t have good, solid organic growth.

Randall Stanicky - Goldman Sachs

Great. Thanks for the call.


There appear to be no further questions at this time.

Joseph C. Papa

Thank you everyone for your interest and your questions. I know Judy provided an excellent review. I think you answered most of the questions that possibly could exist so thank you everyone for the interest in Perrigo. Have a great day.


Thank you. This does conclude today’s’ Perrigo second quarter earnings conference call. You may now disconnect and have a wonderful day.

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