Perrigo Company Executive Insights: New Products, Rx

On Tuesday, Perrigo Company (NASDAQ:PRGO) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

New Products

Frank Pinkerton – SunTrust: Thanks for taking the question and this one maybe a little long but Joe, can you speak to the $34 million in new products in the quarter? Was there more to that than just Claritin and Rogaine, and given that was a little bit ahead of what I was thinking those kind of products could do? What does that mean about your efficiency of launching and realization of profits from some of these products as we get to some of the larger things like Mucinex, Allegra and Prevacid?

Joseph C. Papa – CEO and Chairman: So, first of all Frank the launches in the quarter, was yes, there was more than Claritin, more than Rogaine Foam. Obviously the fexofenadine still is a new product launch for us, so that was in there as well which was obviously a very strong product, but on balance I think I’m pleasantly surprised about is the success we’re having with these new products. As I said to date, we’re at $160 million, 45 products. Our plan was $190 million of new product sales for the full year. We are well on track to surpass that $190 million just based on the $64 million we did in the quarter, so we’re delighted. We had always stated that we saw our new products second half weighted and we continue to say, we think they are second half weighted, which if you step back from, we think gives us tremendous momentum as we go into our fiscal year 2013, but clearly the Minoxidil Foam, the Claritin-D, the Fexo were all important product for us.

Frank Pinkerton – SunTrust: Just as a follow-up, you made a comment about utilization of manufacturing assets on the Consumer Health side and maybe this is a broader question, but can you just explain how light or our mild cough/cold season doesn’t translate over into maybe some pre-manufacturing or other things for the Novartis and Johnson & Johnson recalls. I know not all lines are converted one-to-one, but it was their inability to maybe pre-manufacture for some of these opportunities in the future and how certain are we in capturing some of these opportunities?

Joseph C. Papa – CEO and Chairman: I’ll start Frank and then Judy may want to add some follow-up, but as I think about it is there opportunity for us to move some of the manufacturing capacity we have from the weak cough/cold/flu season to pick up some of the opportunities for any of our competitors that run into problems on the branded side, and the answer is yes and we are doing that and certainly on a product like Excedrin migraine we see incremental demand for that product and we continue to ramp up for that demand. The only thing that I was trying to say with the difference on the recall – the Novartis situation, we think that that’s a $15 million to $25 million opportunity. They did not have a recall and therefore, it wasn’t withdrawn from the shelves, they was simply no further product going to the retailer therefore, really replacing as those future shipments materialize if you understand my point, it’s a different than a recall issue. So we’re seeing that, we will materialize now in our fourth quarter of our fiscal year. That’s the primary from the previous situation, where there actually one of the brand the competitors had actual recalls in the marketplace, which means that there is an empty shelf that you have to fill immediately. On the other part – probably let Judy talk more about the entire absorption of what we’re trying to accomplish with our business.

Judy L. Brown – EVP and CFO: So it’s all based on relativity and as I said, year-over-year volumes in the plant are just down dramatically. You remember, where we were at this point last year, tremendous pull as a competitor we’re pulling things off the shelf and we were meeting normal demand and compensating for that additional space on the shelf, so the production process was extremely high last year and this year while the procedures within the plant are actually more efficient than they were last year on a full unit basis we lack volume, although relatively lower volume year-over-year, just causing the drag on overall fixed cost absorption. So it’s not anything that isn’t completely reversible, when volumes are at a normal pace, but again, it’s back to the relative volume dynamics in the plant year-over-year.

Joseph C. Papa – CEO and Chairman: The $25 million cough/cold/flu that we just didn’t ship this year, versus what we would have shipped in a normal season. In fact, if we looked at the U.S. business, if I maybe add just one other point. I mentioned the U.S. OTC business was up 80%. If we add a shift to incremental $25 million of cough/cold/flu sales, the U.S. OTC business would have been up somewhere in the 15% range. So to give you some sense of how we try to manage through a challenging cough/cold/flu season.

Rx

Gregg Gilbert – Bank of America: I will ask one three part question upfront. First on Rx, what drove the $20 million or so sequential decline from the December quarter, and was there buy in retrospect? Second, Judy, can you talk to the tax rate, longer term, in light of the comments you made today about the rest of this fiscal year? Third for Joe, is there a risk that Nexium may not go OTC, or if it does, that there would be three years of exclusivity on that one? Thank you.

Joseph C. Papa – CEO and Chairman: I will start with the Rx business. I think the Rx business obviously continues to be very strong, Gregg, in terms of the total. We looked at the growth rate, still very strong. In fact, as we look at it, now we are actually increasing our growth rate 81% to 83% for the full year. So that was one part of it. We have in a quarter, some products that just – for example, (indiscernible) having some additional competition. Yeah. That clearly is part of it. But on balance, we are still seeing very strong growth in our Rx segment. So we feel very positive with that. I am going to take the Nexium question, and I will give it back to you Judy, for another question. Do I think that Nexium will go OTC, I believe the answer is yes. Can I be 100% confident? No, as you know, we do not control that decision. That decision in the U.S. is controlled by the innovator company, but I look at the success they have had with the Prilosec product, and look at that and suggest that that gives them a great opportunity for AstraZeneca to do something with the Nexium brand. Also number two I look at how much direct-to-consumer promotion they put behind the brand. They are clearly establishing Nexium as a very important brand for consumer. So I think those two reasons I do expect to see Nexium go over the counter. On the question of the exclusivity, I do believe they will get exclusivity. I do believe they will get three year exclusivity, because their current indications are for ulcers, and I’m not sure of the other one, I think it’s (indiscernible) something like that. But I do believe they will get a three-year exclusivity for frequent treatment of heartburn. But obviously that depends on the FDA. Judy you want to take that middle question?

Judy L. Brown – EVP and CFO: Sure effective tax rate. Great question given the volatility we’ve seen in the tax rate over the course of this particular fiscal year. I’m proud to say that as of right now, we are audited by the major taxing authorities on our major jurisdictions through fiscal year ’08. Have a few tax audits underway. But the main driver of course in this quarter was the fact that we resolved a few tax audits and had a few additional statutes expire. So we actually go through a process of evaluating the effective tax rate for a current year, and as we look forward by looking mainly at jurisdictional mix, as well as the process that we have to go through under U.S. GAAP to put together tax reserves in expectation of eventual tax audit resolution. So that process is reviewed in great detail by our team, by our auditors of what is an appropriate tax reserve to put in place by jurisdiction, and for specific line items. As you saw this year, we’ve had two quarters, where there have been positive adjustments in the first fiscal quarter as well as in this fiscal quarter and we’re very pleased to be able to announce those results and at the same time the key question is, so what’s the core rate going forward. As noted in my prepared remarks, if you take away that one-time adjustments or that tax benefit this quarter, you’re back to a core rate of approximately 29%. So to think about next fiscal year and maybe a little bit beyond that if you assume that the business stayed essentially as — mix stayed essentially as it is today, you’re exactly back to where we were in our original beginning of the year, pre-tax audit, tax rate guidance, which if you remember was 29% to 31% and that’s exactly where I would be modeling next year. In facts, that’s where we’re going to modeling next year as a starting point as we think about FY’13. So call rates 29% to 31% and this year we had the benefit releasing our tax reserves in accordance with the U.S. GAAP at the completion of these tax audits.