Perrigo Company plc (PRGO) Q1 2014 Earnings Report, Transcript and Summary

Good morning. My name is Melinda, and I'll be your conference operator today. At this time, I would like to welcome everyone to Perrigo's Fiscal 2014 First Quarter Earnings Results Conference Call. [Operator Instructions] Mr. Art Shannon, VP of Investor Relations, you may begin your conference.

Thank you very much, Melinda. Welcome to Perrigo's first quarter 2014 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. Also on our website is the slide presentation for this call. Before we proceed with the call, I'd like to remind everyone that during the process of this call, management 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 and on Slides 2, 3 and 4 in the accompanying investor presentation. Under Irish Takeover Rules, we are under increased scrutiny between now and the close. And for those of you accustomed to our regular and open communication and disclosure, this will be a change, so please bear with us during this period. Following management's review of the presentation, we will open up the call for questions. [Operator Instructions] I'd now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome, everyone, to Perrigo's First Quarter Fiscal 2014 Earnings Conference Call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. I have to start today's call by saying congratulations to Art Shannon and all the other Red Sox fans out there on the World Series victory.

Go Sox.

I know some of you may have questions regarding our definitive agreement to acquire Elan. As you know, under Irish Takeover Rules, we are limited in our ability to discuss forward-looking information. On the expectation that the transaction will close by the end of calendar 2013, we expect the transaction to be at least $0.10 accretive to fiscal year '14 standalone Perrigo adjusted earnings per share. In our fiscal 2015, we expect the transaction to be between $0.70 and $0.80 accretive to standalone Perrigo adjusted earnings per share. I will be happy to take any additional questions regarding Elan transaction during the Q&A. Today, we're going to spend the majority of the time focused on standalone Perrigo first quarter earnings. So in the next few minutes, I will provide a few comments on the quarter. Next, Judy will go through the details of the results from the fiscal first quarter, then I will provide an overview on each business area, plus expectations for the rest of the fiscal year. Following this, I will provide you an opportunity for a Q&A. First, let's discuss the fiscal first quarter. On Slide 7, you can see that this was another great quarter for Perrigo, demonstrating the strength of our platform. Our quarterly performance is highlighted by all-time record net sales of $933 million, record adjusted gross profit, record operating margins and record first quarter adjusted diluted EPS. Moving on to Slide 8, you can see the data for our first quarter by business segment. Consolidated Perrigo grew the top line 21%, with double-digit growth in every business unit. What you can't see here is that the consolidated organic revenue growth was 13%. The strong performance was driven by great execution across all business segments. Moving to our individual business segments. Consumer Healthcare grew 20% to over $538 million in sales. More than half of this growth was led by base business growth and the $17 million of new products and, of course, sales from the animal health acquisitions. The strength of our core business continue to impress in what is traditionally a very light first quarter. Our Nutritionals segment grew 25%. That's the second straight quarter of double-digit growth. We believe consumer acceptance of the new SmarTub container continues to gain traction. Our Rx segment once again achieved record results, growing sales by 25% and adjusted operating income growth of 34%. As you can see on Slide 9, store brand continues to gain market share versus the national brand across most categories, especially diabetes and infant formula. Looking at infant formula, this category was up 2.7%, with national brands up slightly, but store brands grew 7.7%. On Slide 10, you can see the strength in store brand market share growth in the infant formula category. Just in the past quarter, store brand gained 45 basis points just in the last quarter. With that, let me turn it over to Judy.

Thanks, Joe. Good morning, everyone, and happy Halloween. I'm very pleased to be able to share with you some more financial color on the terrific start to our fiscal 2014 this morning. I'll move directly into the business segment, starting on Slide 11. Consumer Healthcare's fiscal first quarter net sales increased a very healthy 20% year-over-year due to a combination of: An increase in sales of existing products of $40 million, primarily in the analgesic and cough/cold categories; new product sales of $17 million, primarily in the cough/cold and smoking cessation categories; and $42 million attributable to the acquisitions of Sergeant's and Velcera. Specifically, sales in the cough/cold category, which include the recently launched store brand version of Mucinex 600-milligram extended release tablets, were up an impressive 22% year-over-year. Additionally, despite the return to market of a major national manufacturer, sales within our analgesics category were up almost 16% year-over-year due to strong end consumer demand. The combined sales increase of $99 million was partially offset by a year-over-year decline of $7 million in sales of existing products, mainly in the contract category and $3 million in discontinued products. The 90-basis-point increase in adjusted gross margin was driven by acquisitions, new products, product mix, stable pricing and strong volumes across the broad CHC portfolio. We invested more in Consumer Healthcare R&D projects versus the first quarter last year and DSG&A spend was a slightly higher percentage of net sales after the inclusion of Sergeant's and Velcera expenses versus this time last year. As a result of these investments and the absence of a $3 million indemnification settlement payment the company received in the first quarter of fiscal 2013, adjusted operating margin decreased slightly year-over-year. On Slide 12, you can see that net sales within the Nutritionals segment increased 25% year-over-year, as existing product sales rose $21 million and new product sales were $5 million. In the spirit of full transparency, I'd like to remind you that our first quarter of fiscal 2013 was negatively impacted by an incremental $10 million of retail shipments at the end of June 2012 in advance of our planned July 1, 2012 shutdown of our Vermont Plant. Even if you were to include the additional sales from the planned shift, the Nutritionals category still grew a very impressive 14% year-over-year, driven by strong consumer acceptance of our new SmarTubs in the U.S. and growth of retail sales in Canada. The adjusted gross margin in the Nutritionals segment decreased 170 basis points due to a larger contribution of sales from the lower margin VMS and toddler foods category. The adjusted operating margin expanded due to DSG&A leverage on increased volume. Now turning to Slide 13. You can see that the Rx team's streak continues, as this business had yet another phenomenal quarter. Net sales growth of 25% was due primarily to net sales of $23 million from the Rosemont and Fera acquisitions, new product sales of approximately $15 million and robust gains in our organic Rx business. In fact, net sales, excluding the contribution from the acquisitions, grew an impressive 11% year-over-year. In Rx, the team was able to once again dramatically expand margins as the overall strength of the base business continued to be evident this quarter. Adjusted operating margin grew less than the adjusted gross margin as we invested more this quarter in R&D versus last year. Next, on Slide 14, you'll see that API's first quarter net sales increased by $7 million, driven by new product sales of $17 million, primarily from the recent U.S. launch of the generic version of Temodar, offset by the anticipated decrease in existing product sales of $11 million due to expected increased competition on select products. As noted previously, we plan only limited new product launches beyond temozolomide as we shift our investments more to projects which will allow further vertical integration in our portfolio and expect natural competitive dynamics to impact the rest of the existing portfolio. Over the long term, you should continue to expect third-party API revenues to begin to decrease while, at the same time, intercompany sales to Consumer Healthcare and Rx will be ramping up. Now some quick highlights on the balance sheet. Excluding cash and cash equivalents, working capital was $807 million at the end of the quarter, up from $639 million at this time last year. The increase in working capital is primarily driven from working capital needs associated with seasonal sales, acquisitions and timing of certain accounts payable payments. As of September 28, 2013, total current and long-term debt on the face of the balance sheet was $2 billion, essentially flat sequentially from last quarter. Excluding cash and cash equivalents, our net debt to total capital at the end of our first quarter fiscal 2014 was 32.1%. Net cash flow from operations for the first quarter was $99 million, up $54 million from the first quarter fiscal 2013. We spent $40 million this quarter on capital expenditures, focused on continuing expansion in our Holland and Allegan, Michigan facilities to keep up with increased customer demand and to prepare for expected Rx-to-OTC switch products, as well as our expansion in Israel, related to future generic launches and increased volumes for Consumer Healthcare products we manufacture there. On Slides 15 and 16, you'll see we're not making any changes to Perrigo's standalone guidance for fiscal 2014. Once again, the team performed extremely well, but we have no time to rest on our laurels. We are deep into a jampacked fiscal 2014. The normal cough/cold/flu season is just kicking off, multiple launches are awaiting greenlight, construction projects are getting the full advantage of a terrific Indian summer and the conclusion of several integration processes for our new businesses is at hand. A dedicated team is working hard to prepare fully for the close of our proposed acquisition of Elan by the end of the calendar year, readying our teams for the opportunities ahead. Our commitment to our core values and our humble roots will remain, all while we continue our mission of providing evermore quality health care products to an ever increasing number of patients worldwide, with an evermore substantive balance sheet and investment-grade profile. Now I'd like to turn the call back to Joe.

Thank you, Judy. I'd now like to just provide some additional thoughts on the business and going forward. First, the same 3 mega trends continue to drive our business: It's the movement of consumers and retailers from national brand to store brand products; second, it is the continued switching of prescription products to over-the-counter status; and third, the continued introduction of new product launches. As demonstrated on Slide 9, the market continues to move to store brand. In fact, store brands today represent 35% of the OTC market. In addition, Rx-to-OTC switches are expected to continue with $10 billion of branded Rx sales likely to switch in the next 5 years, with over $5 billion of that expected in the next 3 years, emphasizing some very significant attractive growth opportunity. We have all seen new categories making the switch, like overactive bladder and nasal steroids, with Nasacort OTC recently receiving FDA approval. Further, our company is poised to leverage new store brand offerings from our Animal Health business, upgraded better than national brand packaging for our infant formula and continued very strong Rx growth. In regards to our third mega trend, new products, the pipeline for our fiscal 2014 looks very robust. We anticipate launching over 75 new products across all segments, contributing more than $190 million in revenue for the coming fiscal year. Within any given quarter or year, there are a number of factors that affect our Consumer Healthcare business, and I'd like to discuss a couple of these with you right now. Within the liquid cough/cold space, a major branded manufacturer recently limited their shipments of nighttime and daytime cough/cold liquid products. Though it's too early to specifically assess any impact to us at this time, we will keep you posted on any further developments. As Judy just mentioned, the launch of store brand Mucinex 600 mg ER is off to a great start. We continue to work with one of our vendors to maintain a sufficient supply of raw materials for this product. However, recent API batches received did not meet our rigorous, high quality, internal specifications. The team is working very diligently right now to resolve this supply disruption as quickly as possible. To be clear, we are still shipping store brand Mucinex, but we will experience a gap in our ability to manufacture guaifenesin until this is resolved. Turning to Slide 18. You can see that our Nutritional business has numerous growth drivers in the coming year. A key highlight here is the introduction of the upgraded national brand style packaging, the SmarTub. As of July 2013, the company has successfully transitioned 100% of its core items at U.S. retail customers to the new plastic container. Moving on to the growth opportunities in our Rx segment. On Slide 19, you can see that we continue to be very well positioned. Over the past few months, we have launched 4 new products with combined branded sales of nearly $360 million. We have a robust pipeline of 28 ANDAs pending FDA approval, representing approximately $4.2 billion in branded sales. This includes 7 confirmed first-to-file ANDAs. Additionally, on Slide 20, we have a healthy leadership position across multiple technologies. We have the only FDA-approved generic topical foams. In our API business segment, we are very excited about the U.S. launch of generic Temodar, which is a very meaningful product to our portfolio with a first-to-file exclusivity. As you can see from the results this quarter, the launch is going very well. In summary, on Slide #21, Perrigo is poised for continued strong growth with a great start to our fiscal year '14. Standalone Perrigo is expected to grow adjusted earnings per share by 13% to 18% this coming year over last year's record performance. The business remains strong, and we look forward to closing the acquisition of Elan by the end of the calendar year. Once the company is combined, we will have a more enhanced platform for longer-term growth as we continue to execute on our mission of making quality health care more affordable to consumers. Operator, let's now open the call for any questions.

[Operator Instructions] Your first question comes from Annabel Samimy with Stifel. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: I had several, but maybe we can start with the guidance. You had some spectacular growth in each of your segments, and the guidance hasn't changed. So is some of that growth catch-up from last year, especially, I guess, in Nutritionals? Or is there just something that you're expecting later on in the year that's going to drag that down?

Well, first of all, thank you very much for the kind comments on the quarter. We are very excited. I think there was just great execution by the 9,000-plus Perrigo employees around the world. Relative to our guidance comment, for us right now, the big important factor for us is to get the Elan transaction closed, which, as we stated, we expect by the end of the calendar year. I think after that is closed, we expect to have more to say about -- after the Elan close, but I think right now, as we look at -- it's early in the year. We're excited by what the future holds, but I think we want to really focus right now on getting the Elan close at this time. And that was really the commentary on the guidance.

I would echo the same thoughts as Joe did. We always said that the second half of the year has the effect of new products continuing throughout the year. And frankly, to Joe's point, given all of the things going on right now, we felt it prudent at this time to remain with the current guidance as they've been. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Can you just tell us on some of your recent acquisitions, such as Rosemont, Fera or any of the pet care products? Are those tracking in line with your expectations? And particularly for pet care, are you now at a point with the regional approvals where you feel better about the growth rate going forward?

I'd say, in general, that we believe all the acquisitions in general are tracking close to our expectations, some ahead, some behind. But if you look at across the businesses, we feel very good about what they mean. We think the Pet Care business is still -- we still believe is a $200 million business. We believe it will grow at a high-single-digit growth rate. Until we introduce the store brand offering of our flea and tick products -- once we introduce store brand flea and tick, we think it has a chance to go into a double-digit growth rate. I will say, and I said publicly, we did have a little softer Animal Health business. And it was predominantly because of a lesser flea and tick season as a result of the weather. It wasn't as strong of a flea and tick season as perhaps the previous year, but that's just all normal seasonal variation that occurs within the business. The rest of the Rosemont and the Fera, the acquisition of ophthalmics, they're both contributing significantly to our business. There's going to be some ups and downs, but we're very pleased with the total performance of our M&A projects. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay. If I can ask one more, just on Nasacort, we all saw the approval for Sanofi of the OTC version. Now we don't know if they have exclusivity yet or not, but how quickly could you launch that product if they indeed don't have exclusivity?

Sure. It's a great question. And I have to say it right at the onset, right now, it's not entirely clear on the exclusivity position right now. However, having said that, I will say that I have looked at the Nasacort approval letter that was published on the FDA website. At this time, in the approval letter, there is no statement on exclusivity for the 3-year exclusivity, no 3-year market exclusivity. Can't say exactly if that will be the final disposition of this question. But at this point, we did not see it in the FDA approval letter. As you know, we received an approval for the Nasacort product with our partner and launched that product approximately 2 years ago in June. We've been out in the marketplace. We had previously fought the patent litigation on that product. Got the product approved. Got it to the marketplace approximately 2 years ago. So we do have the product available. It simply would be required for us to get a supplement approved to switch our product to OTC status. And depending on whether there's a 3-year exclusivity, we will be able to move very quickly or after that 3-year exclusivity. But at this time, we do not see any specific mention of a market exclusivity in the approval letter for the Nasacort OTC.

Your next question comes from David Risinger with Morgan Stanley.

I don't know if you can comment, but Royalty Pharma issued a press release that they're holding a debt-raising call this afternoon. Is that something that you can comment on?

This is probably not something we can make a specific comment on what Royalty Pharma's plans are at this time. I think all I can say about the Elan transaction is that we continue to make progress on it. And we, I think, have a -- there is a vote for the Perrigo shareholders and the Elan shareholders both scheduled for November 18, and at that point we look forward to going forward, but having -- assuming a positive vote. But really, there's nothing that we can say specific to what Royalty Pharma's plans are at this time. And that the only other comment I'd mentioned is what we said in the call. Our expectation this will close at the end of our -- the current calendar year.

Your next question comes from Tim Chiang with CRT Capital.

I sort of wanted to get your thoughts on just the overall story for Perrigo. I mean, heading into next year and assuming the Elan deal closes, could you talk a little bit about what your priorities are going to be? Do you think that more acquisitions are certainly something that you're thinking about? And how do you sort of roll that into your existing business?

Sure. I'll start and then Judy, please fill in. I think, first and foremost, I would comment that I believe that the basic mega drivers, mega trends that drive Perrigo's business will continue to be the same. Those mega trends that I mentioned before, with the movement of national brand product to store brand, consumers continuing to move from national brand to store brand. The second mega trend is this movement of Rx to OTC, switching to OTC. We continue to see that happening. And we expect that to continue to happen, specifically with products like Oxytrol and the Nasacort OTC. And then additional products, of course, like the Nexium product and other products that we previously talked about. And the third part for us has been, we continue focusing on new products. We have over $190 million planned for this year. We continue to want to launch these new products. We think they're going to be the mega driver for us to continue to be successful, to grow both the top line, but also grow the operating margin for the business as demonstrated in this current quarter. I would simply say that, historically, our business has been -- we've been able to grow on a compound annual growth rate. Approximately half of the growth has come from organic and the other half has come from acquisitions. We continue to believe that will be an important part of our business going forward. I will say that -- and as Judy has said publicly, and I've said publicly, that until we get -- once we close the Elan transaction, we will increase our debt at that time, and then we will seek to bring that leverage down to a more normal level. But Judy, maybe you want to comment on that and other areas of it.

Absolutely. After the close, of course, we'll talk more about long-term utilization of cash and, to Joe's point, our commitment to that investment-grade profile. And de-levering quickly after close in the next 12, 18, 24 months is going to be an imperative for us as we continue to look out in the field at opportunities, to Joe's point, to expand into adjacent categories, new geographies, et cetera. So same themes on a larger basis, and we'll be able to elaborate in more detail with some real data behind it in the coming calendar year.

Joe and Judy, just maybe one follow-up. It looked like your margins did quite well across the board. And can you just say -- I mean, is this all driven by new products? Or is there some seasonality with your business right here?

I think there's a couple of different areas. I'll start with -- as a general comment, the operating margin of the business have continued to go up. And it's really because we continue to bring out new products, as well as some of the acquisitions we've been able to do that essentially put more products on the trucks as we send those trucks to our large retail customers. And so, a little bit from the new products, both organically, as well as those that we've acquired through acquisition of things like the pet care, the infant formula business have been big drivers to it. Judy, anything you'd add to that?

High level of execution across the business units, I think, to a tee. We saw increased productivity across our manufacturing sites. We were humming along from a productivity perspective. Pricing initiatives were well received this quarter. And so you really get into the dynamic of a combination of all those fronts. When I made make my prepared remarks, I said in most of the businesses, it was a combination of a lot of positive factors. So really, we've seen the margin expansion by doing what we say we're always going to do, which is go after critical operating execution, as well as, obviously, bringing new products to market.

Your next question comes from Elliot Wilbur with Needham & Company. Elliot Wilbur - Needham & Company, LLC, Research Division: Just a question for Joe, I suppose, and maybe going back to your earlier commentary around Nasacort. I understand it's very early in the game, and we're in a bit of uncharted territory here. But curious to your thoughts on sort of the market potential for a product like that. I guess sort of talking to folks, it seems like the expectation is, "Well, this might be couple of hundred million dollar brand. And then, obviously, at some point it's a high value target opportunity for Perrigo." But I think if you look at the performance of generic fluticasone in the market over the past 5 years or so ever since that product went generic, I mean, it would suggest that there's potentially a massive market out there for a value brand in the OTC nasal steroid market. So I'm just wondering, you guys have really kind of had a chance to do sort of a deep dive at this point on what you think the overall market opportunity may be.

Sure. So a great question, Elliot. And it's been very much a topic for discussion within Perrigo. First of all, I'd say that you're seeing a couple of things. Number one, you're seeing the real benefit of us being both a generic Rx company, as well as an OTC company in that we brought out this product as a generic prescription product. Nasacort, before it went OTC, have the product in our portfolio and can now switch the product as this product becomes available. And I think that's really one of the great synergies that we have within the Perrigo story. And if you think about it, we started that product going back 6, 7, 8 years ago and, in fact, have had it in the marketplace for a couple of years before the product even went OTC. So I think that would be my first comment. I think the second comment I'd offer, though, is that it really, we think, gives us a chance to look at the entire class of product. Because one of the things that you rightly point out is that, this is important for Nasacort, absolutely correct, and this product going OTC. But we've looked at the nasal allergy opportunity. And while Nasacort is a couple of hundred -- $300 million-type product, the category is over $2.5 billion of branded sales. We think that what importantly here has happened is that the nasal steroid Nasacort has approved -- been approved for OTC status. It may open up the entire category for other nasal spheroid products to move from prescription to OTC. So we think that's an important characteristic. The second reason why we're very excited about Nasacort opportunity. It's really important for Nasacort, but importantly, it opens up the rest of the category. And I think the final thing I would say is that, we've done a very comprehensive review of what happens to products when they move from prescription to OTC. It was mostly led by our knowledge of what's happened with the non-sedating antihistamines. And as we looked at the non-sedating antihistamines and follow that category, to see even for a product like Cetirizine. We know that once the Cetirizine molecule went from prescription to OTC, the demand for the Cetirizine molecule rose dramatically by a factor of more than 2 to 3x what the usage was as a prescription. So those are the characteristics we're following and the ones that make us very excited about this Nasacort opportunity.

And our next question comes from Jami Rubin with Goldman Sachs.

Judy, just a follow-up on the operating margins within the Consumer Healthcare business. You did provide a very good explanation, but I just wanted to follow-up. The margins came in a little bit below a year ago. And I'm actually kind of surprised just given the significant revenue beat, and the fact that the revenue beat came from your in-line products, not the animal health products, where it sounds to me like, including those acquisitions actually put a little bit of pressure on the margin. So if you can talk about that. What the pushes and pulls were? And why, just considering the significant revenue, the operating margins weren't better? And then, I see you're reiterating your operating margin guidance for the full year of 18% to 22%. Clearly, that suggests a back-end loaded contribution from operating margin. If you could talk to that as well. And just to confirm, are you still expecting a stronger back half here given the strong performance we saw in the first quarter?

Sure. Wow, that was a -- hopefully, get that question.

I'm sorry about that.

Okay. I'll try and be methodical about it. So let's start with Consumer Healthcare margins. You saw that gross margins did in fact expand quarter-over-quarter. We saw some slight contraction sequentially. So the growth quarter-over-quarter, Q1 last year to Q1 this year, driven by base business expansion and acquisitions primarily. So you have the other -- the bucket of other initiatives I commented on. On a sequential basis, we did see a slight decrease because of the fact, frankly, as happens, timing on seasonality with animal health, animal health being more of a brand-type margin structure, you saw the impact in gross margins because of that. So just -- that was the explanation on the quarter-over-quarter. Dropping then down to operating margin. You are also spot on. It was a 30-basis-point decline year-over-year on Q1 operating margin. And that was entirely the effect of the fact that we chose to make a 20% increase, all-time record spend in R&D in the Consumer Healthcare segment. And without that increase, we actually would've seen operating margin expansion. But we had good projects on deck and didn't see the need to hold off on those just for the cosmetic of that particular quarter's operating margin. We do expect the operating margin, our forecasted operating margin expanding over the course of the year. And as my earlier comments for the entire company, when we talked about the full year, there is a back half weight that comes with, again, the pileup of new products compounding over the course of the year. So that is still part of our planning as we look at the full year. So looking at the strong margin performance, we feel very good about where we came out for this quarter across our businesses, and we maintained the guidance overall on our margins for each of the business segments. So I know that your model is sophisticated enough to be able to work that through and know that our operating margin this quarter was specifically impacted by the timing in R&D.

And your next question comes from Greg Gilbert with Bank of America Merrill Lynch.

I have a two-parter for Joe and Judy. For Joe, hopefully you can comment on this is as someone looking at Tysabri as someone that doesn't own it yet. But can you comment on your confidence in the growth of that royalty stream as it relates to your previous guidance comments in light of some near term growth headwinds on the product? And for Judy, does the new improved tax structure that you will hopefully secure change your long-term view on what appropriate leverage should be for Perrigo? Your leverage targets near term are very clear. I'm asking about a couple of years out and what the appropriate amount of leverage might be in light of the new structure.

Well, I'll start first, Greg. And relative to Tysabri, I think I can really just reiterate what we've said in the past. We're very excited about the Tysabri asset. We think it occupies a very important space in MS. And as a result of that, being in a highly efficacious space, we think that's an important place to be in order to help meet some of the unmet medical needs out there for MS patients. Beyond that, of course, the other part of what's important about that Tysabri asset is that it is an escalating royalty. The royalty will move from that 12% to the 18%, and for any sales above $2 billion will go to 25%. So I think it is a combination of being an important product for a very important category of MS, where there continues to be very significant unmet medical need that makes us very excited to be with this product. The other comment I would say is that we do feel very good that we're working with really, we think, the experts in MS. And working with Biogen as our partner, we think, is the other important part of why we're excited about Tysabri. Judy, I'll turn it to you.

Sure. Greg, on your question regarding the combination or the way to view the world in the future in leverage ratios in combination, in concert with the tax rate, I guess I look at it very holistically, thinking conceptually going forward in that, of course, with a relatively lower tax rate, one is in a position to generate more optimal EBITDA and cash flows. And therefore, you can -- you're in a position to think about what we want to do and investing in the future differently. But very importantly, I guess the overarching theme here without getting into specific metrics is, we are committed to an investment-grade profile. If we continue to grow at the pace that we've outlined in our S-4 with our forward-looking financial information and forecast, which exclude future acquisitions, and we continue to de-lever to the rate that we've committed to in this process, we can prove to the debt -- the important debt markets that we are committed to this newly minted investment-grade profile. And that we perhaps deserve to have a slightly higher leverage profile and maintain the investment-grade status. But I would be getting way out over my skis if I said, start naming specific numbers today. It's critically important that we prove our ability to de-lever quickly and ramp back up. And we think that if we can perform in line with our forecast, we will certainly generate very attractive cash flows that will be satisfactory for the equity markets and our reinvestment strategy and the debt markets for being a very high-grade performing debt.

And your next question comes from David Buck with Buckingham Research.

For Joe, a couple of quick questions on the OTC switches and then one for Judy maybe on the IRS interaction that you may have had ahead of the deal. For allergic rhinitis versus hay fever, is it clear whether or not there's a different indication between the OTC indication and the prescription indication? Or is it just a matter of more layman's language in terms of labeling for Nasacort? And secondly, what's the status for Oxytrol for women? Is that clear cut that, that gets the 3-year exclusivity? And then for Judy, can you remind us, what restrictions you would expect to have once you become a PLC in terms of divestitures and moving more flexibly after you become an Irish-domiciled PLC with use of cash, et cetera?

Okay. So David, I think, really what I can really refer to you is with the specific letter for the supplement approval for Nasacort OTC. The letter specifically talks about that the New Drug Application provides for over-the-counter use of Nasacort allergy 24-hour for the temporary relief of symptoms of hay fever and other respiratory allergies, nasal congestion, runny nose, sneezing and itchy nose in adults and children ages 2 years and older. I think that gives you a pretty broad platform for Sanofi and Chattem to bringing it into the marketplace relative to exactly where they will promote and focus on it. Probably, I have to leave that up for them to make the judgment as to what they're specifically going to go after, but I think the statement for their approval is a very broad statement in the approval letter.

Just to clarify, the question I guess is, is that broader indication, is that explicitly different to the FDA in terms of what would determine exclusivity? Or is it more of just using layman's language? I'm not...

I think it's very comparable to what the current prescription product is approved for to be clear. Very comparable to the prescription product, if that's what you're asking me.

Okay. And that would imply that they may not have the exclusivity?

Yes, but I don't have enough -- David, I understand your summation of the comment, but I think it's very early for me to make that comment. But I do think that from a historical precedent, your summary is correct.

Okay. And then just to follow-up, so Oxytrol and then any limitations on the tax rate?

Yes. So on the Oxytrol question, Oxytrol's got a different question. Oxytrol has some patent, some intellectual property around the product that is different. And I think that's probably going to be the more significant question on Oxytrol, some of the transdermal patents specific to Oxytrol. I think it can be worked around. And my expectation is that they will have a 3-year exclusivity. But beyond that, it's really going to be a question of us working very diligently to go after that product and design around that 3-year -- work through the 3-year exclusivity, but more importantly, design around the intellectual property that's known to us for Oxytrol. Judy, there was an IRS question as well.

Actually, I'm not quite sure what the IRS question was. If you could clarify?

Sure. So the expectation is, you'll have a reduced tax rate in the neighborhood of, I believe, about 19%. But can you make significant divestitures freely once you close the transaction and once you become a PLC? In other words, if you wanted to change the ownership of certain assets, what restrictions do you have? That's the follow-up to my question.

So once we close and complete the transaction, we will be an Irish company. And at that point, we are allowed to manage the business in a way that we see appropriate. We would look at any assets that are in our management. And like always, like we do today, consider the best uses of those assets. So there are no legal restrictions placed on us as to how to manage the business, look at the portfolio and review ROIC as we do today. I'm not sure if that's where you're thinking of going, but that's -- there are no rules that would prohibit our ability to manage the business.

Sure. So the question mark on Tysabri if you decided it's not part of the future, there shouldn't be any restriction in terms of divestiture if you thought that was the right determination?

There are no legal handcuffs placed on us.

Your next question comes from Louise Chen with Guggenheim.

The first question I had was on Sergeant's and Velcera, using that platform to sell generic animal health drugs, just wondering what your updated thoughts are on that opportunity? And then also on your lower tax platform once you close, along the 12.5% tax rate that you can leverage with new products, how far out is that in terms of you getting new products approved through that platform or putting new products through that and you beginning to leverage that tax rate? And then last question was just on -- and this may be getting a little further ahead, but on the adjacent store brand acquisitions or developing -- business development on that front, what are you thinking there in timing? After close of Elan, when would you resume looking at those kind of opportunities?

Sure. I'll take your first question and then your third part. And then probably, Judy, you can talk about the Irish portion and the products and the timing for that. So on the first question, Sergeant's and Velcera, we think are -- we're very excited. We continue to be very excited about the opportunity with the generic flea and tick products, launching a store brand version. As a reminder, we launched a store brand version to limited number of customers, mostly regional chains this year. We are still working towards the more -- the larger national customers launch for, we believe, for next flea and tick season. So next April, May type of timeframe. So that's an exciting part. We have not gone -- we have a limited number of product offerings for, what I would call, more of the generic animal health products beyond the flea and tick. But we continue to look at this as a platform to look at further enhancement of animal health as an important part of Perrigo for the future. Probably don't want to make any more specific comments about this individual products. On the last question, or specifically where we are going in M&A? The point for us on M&A is that we continue to be very interested in going after adjacent categories. Those adjacent categories, as we have said previously, will continue to be: The areas of ophthalmic, both for the OTC and generic prescription opportunities; adult nutrition; diabetes and pet care as all-important areas for us that we are interested in. And as also, as we said previously, we believe that we've got a great model for interior of the United States, where 80% of our sales are. We think there's opportunity to expand this model globally, and that's something that we would clearly look to do for the future. But as I've said and Judy has said previously, in the near term, we've got to look for any major opportunity. We've got to first de-lever our P&L, the debt level before we go there. Judy, do you want to make additional comments on the products and...

Sure. The question was about how fast could we begin to launch products within the domicile of Ireland. That is a question that's similar to any question you'd ask about our overall pipeline development process because we will start products from concept inception all the way through development and eventual approval. So it is a several-year process. We can start that right away. But it is not something that can happen in 3 months because we are not moving IP. We are developing IP. We'll be doing and owning the development process from our new location, and hence, it will take several years to bring products through development, through approval, to eventual launch.

Your next question comes from Chris Schott with JPMorgan. Christopher T. Schott - JP Morgan Chase & Co, Research Division: Just 2 of them. First, infant nutritional. Can you just talk about how you're thinking about price on this franchise moving forward? I believe this is still an area that's maybe priced at more of a discount to a national brand than your typical store brand offering. With the successful share trends, is price a lever we can maybe start thinking about over time here? The second one is following up on the tax issue. Assuming a product mix that's similar to what you'll have post the Elan transaction, just roughly speaking, how low do you think we could think about the tax rate getting if we look out, say, 5 or 7 years? Is something in the low-teens a possibility as you roll out these new products? It's always going to take time. But just as we think about longer term, how low can this rate go?

First of all, Chris, thank you for your comments on the quarter. I'll take the first point on the infant nutrition and Judy, you want to take the tax question. On the infant nutrition side of the business relative to price, I think you know that we are at a significant discount to the national brands. We are at approximately a 50% discount to the national brands. So there is an opportunity on pricing there. The other point I would make, though, is that's probably as important is that, when we switched to the plastic container, one of the comments that we made is that the plastic container is more expensive from a cost of goods point of view than the previous metal composite can. So as a result of that, we did expect some cost increase, as well as the point that it was less -- the plastic container was a new process for us. So there was going to be some learning curve. I'm delighted to say that we've gotten through the learning curve, and the team is doing a good job there with the plastic container at this point. We do think though there is some pricing that we need to go after as a result of the problems that the plastic container is a more expensive cost of goods sold. So that is something that we have done some work within the marketplace. And we'll have more to say about that in the future in terms of how that's progressing, but it really is looking at the incremental cost of the plastic container to be a national brand equivalent that we are going after. Judy, you want to take the second part of that question on the tax?

I love to talk about taxes, you know that. So on the question of how low can it go? First of all, you know that I'm fairly prudent when it comes to such things. So committing to a long term tax rate at this stage with 1 million variables would be ill-advised. But what I can say is, if you -- imagine a world where our mix of business doesn't change at all. We all know, if you look at the S-4 and the type of projections we've put forward, you see growth there. But as the jurisdictional mix didn't change at all, we go from a rate around 30% to the high-teens with this transaction. If nothing else changed, when the Tysabri rate changes from 1% to something more like 12.5% in 2020, you'd see a lock-step change for that stream of income on that date. But suffice it to say, to the earlier question, Louise's question about bringing new products to market, we plan to put new products in Ireland and begin the development process there. So there will be, in a few years, a stream that's coming from Ireland at a rate that's in the low-teens. You should assume that at some point in the future, after we've completed our de-levering process, we're doing more M&A. And we have committed to not only doing adjacencies in the U.S., but also doing international expansion. And you'll get the benefit of doing M&A from Ireland with, again, the lower rate. And you have to assume that we'll be continuing to launch products and selling them around the world from some of our foreign jurisdictions as well. So it's hard to commit to a specific number because there are a lot of variables. But we do have things at hand that would allow us to take advantage of having this new corporate structure, continuing to launch new products, continuing to do M&A and all from an advantage base.

And your last question comes from Jason Gerberry with Leerink Swan.

Just on the new product launch guidance, could you confirm. My understanding is that it's largely Rx driven. And I guess, I wonder, do you guys see any risk to regulatory delays in new companies. In generic space, they're citing delays to regulatory approval as the agency overhauls its ANDA review process as it implements the user fee? And then, I guess, just second question, does Perrigo have a broader interest in dry powder inhaler in the MDI space beyond Albuterol? Given that the pathway -- the regulatory pathway seem more clear cut, but capital barriers are still high. It kind of seems like it's in Perrigo's sweet spot for development. So just kind of curious if you can comment there.

Sure. Well, let me just talk -- the first part of your question was specifically in terms of our new products. As we stated publicly, we think we'll launch over 75 new products. That's more than 1 per week and over $190 million of product sales. We feel that, that's going to really be across our entire portfolio. The Rx team will have a good year to be clear, but we do expect also some nice products in the rest of our portfolios. Certainly is notable by temozolomide and what we're doing with our Consumer Healthcare business and also some the things we're doing in our Vitamin/Mineral Supplements. So we really see it as being a very diversified portfolio of new products. So in terms of where we've done. And I think Judy said that the numbers for the first quarter were very, very strong for us. On the question of this regulatory risk, I will say that we have experienced some delays in our approvals for some of our products. The Rx products, the 4 products that we have approved this year, is great. Great start to the fiscal year. I've also said publicly that some of those products we would have expected to see last year. So I think we did experience some delays last year. And as a result of that, we really tried to look at our probability weighting on our portfolio to try to anticipate some delays in the process that normally happen. I don't think that right now, it's -- we've seen major changes in what's happening. We really expect to see some continued new product approvals during the year. On the final portion of your question, on the metered-dose inhalers, to be clear, we're delighted to be the first to file on the ProAir product. We think it's a great opportunity for us. And we're very excited to go forward with that particular product. We like our spot. There is litigation to be cleared on that product, but we like our position on that litigation. In terms of other metered-dose inhalers, I'd say that the concept we've put forth in terms of having a program to look at whether it be other metered-dose inhalers or other products in the category fit very well with our concept of extended topicals. And by that, I meant, dermatology, respiratory, nasal, ophthalmic products that are of very high interest to us in our product selection process. So yes, the answer is clear. That is true. I will say the one area that you mentioned that I'm a little bit reserved on is the dry powder inhalers. I think the characteristics and the requirements for that area are significant, and I think that's a little bit more of a challenge than the metered-dose inhalers. So just -- not to pick words, but you said -- but I do think metered-dose inhalers and dry powders are a little bit different animals, so to speak, in this world of trying to get products to the marketplace. But on balance, we're very excited about our Rx portfolio. But it's really, it's all of our new products. Operator, I think that concludes our call for today. I'd like to say thank you to everyone, once again, for your interest in Perrigo. And we look forward to talking to you after the close of the Elan transaction, which, as I mentioned, that we expect it to be at the end of the calendar year. Thank you very much, everyone. Have a great day.

Thank you. This does conclude today's conference call. You may now disconnect.