Perrigo Company plc (PRGO) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Perrigo's Fiscal 2014 Third Quarter Earnings Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Art Shannon, Vice President of Investor Relations. Please begin.

Thank you very much, Melissa. Welcome to Perrigo's third 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 press release is available on our website. Also on our website is the slide presentation for this call. Before we proceed with the call, I would 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. Following management's review of the presentation, we will open up the call for questions. [Operator Instructions] I'd like to now turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome, everyone, to Perrigo's third quarter fiscal 2014 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. Now let's go through the agenda for today's call. I will begin by providing a few comments on the quarter. Next, Judy will go through the details of the results from the fiscal third quarter and walk through our new guidance for consolidated Perrigo. Then I will provide an update on each business area as well as an overview of our expectations for the rest of the fiscal year. We will conclude by providing you an opportunity for Q&A. First, the team delivered all-time record quarterly revenue and record third quarter adjusted operating income. This significant milestone was achieved despite a weak cough, cold and flu season compared to last year. Also, during the quarter, we acquired a number of OTC products in Australia and New Zealand. We executed on our integration plan for Elan by transferring the development of the D5 asset, and we sold our interest in Prothena. The Rx team shipped the generic versions of Vanos, Prandin and Neptazane to our customers, while the Nutritionals team partnered with KanPak to manufacture store brand adult nutritional drinks. Now let's discuss our fiscal third quarter. On Slide 3, our quarterly performance is highlighted by all-time record net sales of over $1 billion, a 9% increase on a consolidated basis, with great numbers for adjusted gross profit and operating margin and record third quarter adjusted operating income. On to Slide 5. Let's review the business units. We had a difficult quarter for our Consumer Healthcare and Nutritionals businesses. Consumer Healthcare was flat this quarter versus last year's all-time record third quarter. Sales for the quarter were $537 million, with $12 million of new product sales. However, as we stated in February, it was a weak cough, cold and flu season. No one would have expected the season to be so slow with the kind of winter we experienced. Retailers have stated that foot traffic in their stores was down in the quarter due to numerous storms across the country. This, coupled with retailers aggressively reducing their inventory, made for a very tough quarter across-the-board. We realize that this segment missed your consensus numbers and our internal expectations. There were 3 factors impacting our sales, as follows: year-over-year, our cough/cold category and analgesics sales accounted for approximately 40% of the miss; and the inventory reduction by our retailers accounted for approximately another 40%; and finally, due to the freezing weather throughout the country, especially in the south, the normal tick and flea season in the Southern U.S. was nonexistent through March, which accounted for approximately the remaining 20%. Turning to the rest of our businesses. Our Rx segment grew sales 18%, with an adjusted operating margin of 45%. Our Nutritionals segment grew sales 3%, and adjusted operating income grew 16%. Now let's look at the OTC market on Slide 6. The main driver of market share change is the return to the market of a major national brand analgesic and cough/cold/flu player after [ph] multi-year assets. We will expect this trend to continue for the next couple of quarters as we anniversary their return to the market. Store brand does continue to gain share in diabetes, smoking cessation and infant formula. For some perspective on our results, let's look at a year-to-date growth rate for all of our segments. Despite all of the challenging dynamics in our CHC business, net sales are up 6% year-to-date, and that is compared to an all-time record performance last year. Our Nutritional business is up 13% year-to-date, and our RX segment is up 31%. Now let me turn the call over to Judy.

Thanks, Joe. Good morning, everyone. As you just heard, the team was able to post record revenue as well as record quarterly adjusted operating income and adjusted gross margin despite a dynamic and, quite frankly, difficult quarter. Our planning had always anticipated that the second half of our fiscal year would be more heavily weighted than the first. And our February guidance anticipated an even heavier fiscal fourth quarter as we considered timing of new product approvals, robust animal health introductions, et cetera. As I'll discuss in a few minutes, the 9% revenue growth in this fiscal third quarter brought us over the $1 billion mark for the first time, a cause for celebration. However, the results admittedly fell short of our own expectations and have created an immediate impetus driving many directed initiatives around the organization for the remainder of the year. I'll talk about priority setting for our fourth quarter and going into fiscal 2015 in a few minutes. But now, let's dive into the fiscal third quarter results by business segment beginning on Slide 7. Net sales were essentially flat in Consumer Healthcare. We had approximately $12 million in new product sales, $6 million of inorganic growth attributable to the acquisitions of Velcera and OTC products acquired from Aspen Global and also saw an increase in sales of existing products of $17 million, primarily in the smoking cessation and dermatologic categories. These combined increases were offset by a $36 million decline in sales of existing products in the cough/cold, contract manufacturing and analgesics categories. Two major headwinds which we highlighted last quarter also impacted year-over-year net sales this quarter. First, sales within our U.S. contract manufacturing business were down more than 25% year-over-year, as a certain contract customer that we supplied product to in fiscal 2013 resumed production at its own facilities, thereby reducing the need for products sourced from Perrigo. This decline impacted Consumer Healthcare's top line by nearly 200 basis points in the quarter. Second, the return of product to market by a specific national brand competitor impacted year-over-year net sales, particularly in the analgesic and cough/cold categories. Now I'd like to discuss how the "perfect storm" of unexpected exogenous factors, including many of which you've heard and read about endlessly in the news, impacted Consumer Healthcare's net sales this quarter. First, as Jeff Needham discussed at Analyst Day, this cough/cold/flu season was much weaker than last year's and yielded a very difficult year-over-year sales comparison. In fact, according to IMS FAN data, the incidence of cough, cold and flu was down double digits year-over-year. Second, according to the most recent Morgan Stanley retail atlas report, approximately 36% of all retail outlets in the U.S. and Canada are located in cold climate zones, with another 24% located in the southeast, which saw its own share of ice storms throughout the quarter. As we've all heard in recent reports, U.S. retailers have been affirming lower year-over-year consumer foot traffic trends due to this inclement weather. We believe that this factor impacted our sales as well. And lastly, our net sales were impacted by inventory reduction programs at a number of our retail customers, which Joe highlighted just a few moments ago. Adjusted gross margin contracted 140 basis points, primarily due to underabsorption of fixed production costs relative to lower volume output year-over-year. As we frequently discuss, our high-efficiency and high-volume production is a terrific competitive advantage for us. However, the significant scale of these Consumer Healthcare plans create unique challenges for us when sale volumes drop rapidly below our plan for thresholds. And as Joe mentioned, we closed our plants more this winter than the last 10 years combined, clearly a factor we had not anticipated. The team controlled variable SG&A to compensate for the slower-than-expected quarter. But given the significant number of known and potential Rx-to-OTC switches on deck, they continue to increase their investments in R&D for future expected approvals and launches. These important business investments drove the incremental decrease in adjusted operating margin you see here. On Slide 8, you can see that net sales within the Nutritionals segment increased more than 3% year-over-year, as new product sales contributed $7 million and existing product sales increased $4 million. These increases were partially offset by $6 million in discontinued products. While we did see a net increase, year-over-year, net sales growth was constrained by 2 major factors. First, net sales were lower in our oral electrolyte solutions category due to the weak cough/cold/flu season, as the severity of winter illness is a major driver of product usage. Second, while consumers have accepted the plastic tub within the infant formula category, as evidenced by store brand market penetration of approximately 12%, 2 major infant formula manufacturers launched value-size promotional items during the quarter. While we anticipate launching store brand versions of these items within the current calendar year, these promotional items have caused a short-term disruption in market share gains. Sales within the VMS category were 11% higher year-over-year, fueled by the launch of insync, our internally developed natural probiotic, which is sold as a national brand. We expect full distribution of our insync over the coming months at multiple retail outlets. The adjusted gross margin in the Nutritionals segment increased 230 basis points, driven by the higher relative adjusted gross margin of the insync brand and improved operating efficiencies over the last year. The adjusted operating margin grew, but at a slower pace than adjusted gross margin, as we chose to make more incremental promotional and selling expenditures related to the launch of insync. As you can see on Slide 9, the Rx team continue to perform extremely well on nearly all metrics. Net sales within our Rx segment increased 18% to $223 million in the quarter due to new product sales of $33 million and incremental net sales of $17 million from the Rosemont and Fera acquisitions, partially offset by a decrease in existing product sales of $9 million and $8 million of discontinued products. Adjusted gross margin increased due to acquisitions, favorable product mix versus last year and higher margin on new product sales. The adjusted operating margin was affected by higher DSG&A costs due to the inclusion of Rosemont, coupled with investments in our specialty sales force, which Doug Boothe highlighted at our Analyst Day in February. Next, on Slide 10, net sales in the API segment declined to $32 million due to a decrease in existing product sales of $17 million as a result of increased competition on certain products, partially offset by $8 million in new product sales. API growth and operating margins were impacted by the decrease in sales of existing products I just referred to and lower volumes, resulting in lower absorption of fixed costs. Turning to Slide 11. Specialty sciences revenues were $53 million for the quarter, representing 12% of Biogen Idec's global sales of Tysabri. Adjusted operating margin incorporated R&D investments related to the ELND005 clinical program, which was transferred to Transition Therapeutics during the quarter, plus other administrative operating costs. As we discussed last quarter, our consolidated adjusted effective tax rate for the full year was expected to be approximately 21% to 22%. The adjusted effective rate this third fiscal quarter was approximately 17.9%, lower than we had anticipated due to the actual jurisdictional mix of earnings before tax reported. This mix shift was a direct result of the relatively weak cough/cold/flu and retail season in the U.S. Now some quick highlights on our balance sheet, including cash, current investments and current maturities and short-term debt. Working capital was $876 million at the end of the quarter compared to $754 million at June 29, 2013, for an increase of $122 million, which is primarily due to the Elan acquisition and strong Rx organic growth. As of March 29, 2014, total current and long-term debt on the face of the balance sheet was $3.3 billion, flat sequentially from last quarter. Net debt, that is gross debt less cash, cash equivalents and current securities, was $2.7 billion, which equals a net debt-to-total capital at the end of our third quarter of 24%. Year-to-date net cash flow from operations was $401 million, even with the inclusion of an estimated $185 million of transaction and acquisition cost cash flows related to Elan. Now I'd like to discuss our updated earnings outlook for fiscal 2014 on Slide 12 in further detail. For Consumer Healthcare, we are making further adjustments to revenue expectations to reflect the weak cough/cold/flu season, the lower consumer activity at retail due to extreme winter weather conditions and inventory reductions we are experiencing at a number of our retail customers. Our expectations do include, however, the effects of an expected much stronger fiscal fourth quarter in our Animal Health category as we launch new products, such as PetArmor Plus flea and tick product, and as we move into what we anticipate will be a robust flea and tick season. Despite these headwinds, we are not making any adjustments to margins. Within the API segment, we are adjusting revenue expectations to reflect the increasingly competitive market dynamic of the products in our portfolio. And as such, you see here the impact both of the fiscal third quarter results and a more competitive fourth quarter than initially anticipated. Summing all of this back to the consolidated P&L on Slide 13. We now estimate consolidated year-over-year revenue growth to be in a range of 13% to 15% with no change to our expectations for adjusted gross and operating margin expansion. As noted last quarter, we expect the adjusted effective tax rate for the full fiscal year to be approximately 21% to 22%. As a reminder, we continue to expect our total shares outstanding to be approximately 134 million shares on a go-forward basis, which equates to a full year fiscal 2014 weighted average shares outstanding of approximately 116 million shares. All of these rolls up to an adjusted diluted EPS guidance range of $6.15 to $6.30 per share for full year fiscal 2014. We've adjusted our expected range of cash flow from operations slightly from last quarter, bringing it back to our original August guidance. Please note, though, that we expect to achieve this level of operating cash flow while absorbing approximately $190 million of Elan-related acquisition costs which were not in the original August guidance range. Despite a confluence of external dynamics that adversely affected several areas of our business, this team still delivered top line growth of 9% and adjusted net income growth of 31%. We believe that our overall diversified business model is strong, and we are fully aware of what our to-do list is to execute on our underlying longer-term plans. This team is laser-focused on mitigating the impact of external challenges through both cost containment and strictly prioritizing only those investments critical for our long term. Our CHC team is running hard to make the Animal Health new product and store brand launches on deck for the fourth quarter a success. Effective May 1, we will be realizing 18% royalties on all worldwide sales of Tysabri, increasing the anticipated run rate in our Specialty Sciences segment quarter-over-quarter. Through all of this, we remain firmly committed to doing the right things to drive new product approval, technology development and consumer awareness to enable the success of the many exciting growth initiatives we have on deck for our future. And now let me turn it back to Joe.

Thank you, Judy. It was a difficult quarter for our Consumer business, but we are working on positively impacting our business despite the weather and cough/cold/flu season. First, we have to bring the store brand version of new 600 milligrams ER back to the market, and I've challenged the team to relaunch this product as soon as possible. We have pathways to get this product to the market, but we are meeting weekly to improve upon our return-to-market timing. We are working with our suppliers to make API and excipients that meet our specifications. It is a top priority for us to bring this product back to the market in our fiscal 2015. Second, we are continuing to invest in future growth. As evidenced by what Judy stated, we continue to invest in important new products, anticipate reaping the benefits from those products in the future. We also continue to invest in research and development to be first to market in Rx-to-OTC switches, new products and innovation. These investments give us every reason to believe in the strength and long-term viability of our business model. That belief is further supported by the same 3 positive mega trends that we discussed at our Analyst Day in February: first, the continued movement of consumers purchasing store brand products, coupled with retailers promoting store brand products; second, the continued movement of prescription products switching to over-the-counter status; third, rising healthcare costs, combined with an aging population, will continue to drive the global need for low-cost healthcare products. Our business model is poised to take advantage of each of these mega trends, which is why we believe we have an attractive growth opportunity for the future. Now as you can see on Slide 14, our team launched a number of products thus far in fiscal 2014, highlighted by launches of our store brand versions of Mucinex allergy and Vicks Severe Cold & Flu store brand products. Year-to-date, we have launched an impressive $167 million in new products, and we anticipate launching over 75 new products across all segments, contributing more than $190 million in revenue this year. Moving on to our growth opportunities in our Rx segment. On Slide 15, we have a robust pipeline of 30 ANDAs pending FDA approval, representing approximately $4 billion in branded sales. This includes 7 confirmed first-to-file ANDAs, including the generic version of Androgel 1.62%. The positive momentum in this segment should continue with the best new product pipeline in our history. Additionally, in our nutrition business, we just received an approval to supply China with our U.S.-manufactured infant formula. In summary, on Slide 16, while we work through these near-term issues, the fundamental business remains strong. The strength of our enhanced platform for growth, combined with the mega trends I just reviewed, means that Perrigo is well positioned for further growth as we continue to execute on our mission of making quality healthcare more affordable for consumers. Operator, let's now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Louise Chen, Guggenheim.

And so I had a question on the Tysabri royalties. We get a lot of questions on that. And we've gotten concerns that a partial or a full divestiture of the royalties would be dilutive to earnings, at least for a short period of time while you decide what to do to reinvest the profits. So I'm just kind of curious, what is the right way to really think about this opportunity?

Sure. Well, let me start, and then Judy, if you want to add anything. First and foremost, I have to say that as we think about Tysabri, we really, really think this is a great asset with great escalating royalties. We believe that we have a great partner with Biogen. And we're -- in the MS category, we occupy a very important position for -- Tysabri occupies a very important position. So we really like the asset. It has -- as we've stated in the past, we are going to continue to evaluate all of our options for this asset. But as we approach the asset, we think it's a good long-term asset that has a great long life with a 1% tax rate. So I think the important comment that we would say is that we're obviously always been focused out of being a shareholder-friendly company. We're going to make sure that if we make any moves with this particular asset, they're aligned with other things that we are doing on our M&A strategy for the long term for the business. Judy, anything you want to add to that?

Sure. So Louise, as you think about this, we had always said that having this asset, it drives terrific cash flows. The EBITDA generation allows us to continue to march down on our delevering profile, to which we are committed. And we also -- it allows us then to go and reinvest and do other acquisitions and think about our future growth strategies. We're one to divest a portion of it, you are correct, because it is a royalty stream. That means it has 100% operating margin and it has a very, very low single-digit tax rate, which means were you to just sell off a portion of it and not reinvest, it would be dilutive because you would be taking out top line margin and a low tax rate. However, that is -- as Joe just said, we would not be divesting that just to divest it. And the whole point here is to have a strong balance sheet, strong cash flow generation and looking for opportunities longer term to reinvest.

Your next question comes from the line of Randall Stanicky, ARC Capital (sic) [RBC Capital].

Yes, just a couple of questions on Consumer. So if we think about that the midpoint of the Consumer revenue guidance reduction of about 250 basis points at the midpoint, that's about $52 million. I know, Judy, you called out 3 different components. The question is, how much of that is cough and cold that we're not going to see versus inventory in flea and tick that perhaps could be pushed into next quarter? And then maybe if you could comment on the swing factors between the 300 basis points range for next quarter.

Let me just address your first question on Consumer Healthcare first. As we looked at the adjustments, we took into consideration knowing that the extreme level of detail that we compile our forecast is different than you're able to do by doing your estimates. But suffice it to say that as we thought about Consumer Healthcare, about half of the change in the guidance adjustment came from what we experienced in Q3, and about half came with some of that spilling into the beginning of Q4. So about 60% Q3, about 40% into Q4. And the Q4 adjustments were to fully reflect Joe's comments already on Mucinex, to reflect a slower start that we had seen, at least at retail in the allergy season, and making adjustments that we thought were appropriate to fill out a very strong Animal Health big launch in Q4, but to make sure that we were reflective of the statistics we were seeing, at least in the month of April with respect to the outbreak of flea and tick problems throughout the country, given the strange anomalies we've seen in the season. So those are the moving parts that led us to adjust that range to where it is. And so your numbers were about right, in line with where we had been.

I mean, Joe, is there a way to help us get better visibility so that we don't see the quarterly volatility going forward? I mean, there's a lot of moving parts and seasonality in your business. The last couple of quarters have been obviously difficult from a variance to where the Street has been. Is there something you guys can do to help us out?

Well, obviously, we have a lot of discussions of that -- about that with our investor relations team and ourselves in finance and myself. And I think what we clearly have to look toward the future is providing a lot of visibility as best as we can to the question. So we're going to continue to work towards that. The other part on the winter, the cough/cold/flu season winter, I mean, I think that was being down 12% versus a year ago, was somewhat unexpected in terms of the magnitude, at least as compared with the weather that we experienced. On the question of some of the inventory reduction part that I talked about, we have seen that inventory reduction occur. It was something that we clearly noted. I think, though, really maybe the only thing I was going to say to comment on yours is that what was interesting to us is that in the full year-to-date, the numbers are not that different in terms of where we have achieved, I mean, in terms of where we have gone through for Consumer Healthcare sales being up 6% year-to-date, being clearly the direction of what we had expected, albeit we did have to reduce it. But it was -- there is some seasonality to what we've seen. And I think what we've tried to do, at least as I have been a part of Perrigo, is to diversify the business and continue to try to offset with some of the diversifications, things that we've seen with the Nutritionals business, 13% year-to-date growth, albeit this quarter not at that level, and our Rx business being up 31% year-to-date. I think we've tried to look at some diversification to try to offset some of these issues, but I agree that we need to do a great job or have better visibility into what we see as quarterly changes.

Your next question comes from the line of David Steinberg, Jefferies.

Just curious, you mentioned there was a -- you were producing for a contract manufacturer. They've resolved their issues, and that took about 200 basis points out of your top line. Just curious, do you have any other situations like that we should be aware of? And then secondly, on pricing. Obviously, the trade has a very, very high markup on your products. Any opportunity for price, particularly in the Nutritionals segment?

I'll take the contract question. So we have always had that contract manufacturing business for decades. This particular one contract was particularly large. We called it out last year as being a big bump. And this -- with that project coming to, for all intents and purposes, coming to a close, that is the one larger contract in our portfolio. The remainder, we have dozens of other smaller contracts with other third parties in our portfolio.

And David, on the pricing part of our -- of your question, I think what we -- how we approach the pricing. Is there opportunities in a couple of our different business segments? The answer is yes, but what I think we basically have tried to do, at least for the 7 years I've been at Perrigo, is to look at pricing to keep pricing flat to up slightly across our total Perrigo businesses across all of our portfolio. We believe that's probably the best approach to our pricing in terms of a prospect. That means in some quarters, in some business units, some of the pricing may be down, but in other business units, it will be up. And we're trying to balance that so that we keep our pricing flat to up slightly. But I absolutely agree that there are some opportunities for us in different business segments. We just want to be smart about how we look at those across our total business.

Your next question comes from the line of David Risinger, Morgan Stanley.

I have questions on, I guess, 3 topics, if that's okay. Well, I'll try to keep it efficient. First of all, Joe, if you could frame Mucinex so that we can better understand it. I think that it was a $600 million branded over-the-counter franchise. Could you just sort of characterize what your run rate is today? And then you mentioned reintroducing the 600. Could you just talk about what portion of the $600 million you are selling private label against today and then what portion you'll be selling against in a year so that we can understand whether you're just going to be targeting a fraction of the Mucinex opportunity in '15 or the majority of it and that type of thing? In addition, if you could just comment on Nasacort and just explain when we should expect that to launch, what quarter of 2015. And then on the Rx side, the sales growth was well below what IMS sales dollars implied. And the sales were down $23 million sequentially versus the December quarter, so if you could explain that and then what big Rx launches to watch over the next year.

Well, David, you've got quite a few questions here. I'll try to get -- make sure I get to them all. First of all, maybe on Mucinex, let me start there. At this time, in the Mucinex family, we are shipping very minimal amounts of Mucinex in -- and they tend to be the newer products that we launched, as I mentioned, the Mucinex allergy product. We are not shipping the Mucinex 600 milligrams extended-release product. We shipped that up probably through, I think -- as we made a note in October, we shipped it going into our second quarter, but there were no shipments in our third quarter at this time. So that's where we are with it. In terms of the question, the question of minimal sales for the Mucinex family of products at this time. The Mucinex family of products, though, is a very significant product category, and it continues to expand and grow. And Reckitt Benckiser does a nice job with the growth in the -- adding additional line extensions to the family. So we are going to be very busy with bringing out additional products there. In terms of 2015, it is our intent in 2015 to the return to the market with a 600-milligram product, the extended-release product, as well as to get the remaining members of the family through our partnership with another company to bring out some additional members of the family during the 2015 timeframe. That is all what we have for our plans. I probably will say more about that in August, when we come out with our 2015 guidance. But we do have plans in place to return to the market with the 600-milligram ER during our fiscal 2015 as well as bringing out additional members of the family of products. On the question of Nasacort, we think the Sanofi team has done a great job in launching the Nasacort product out into the marketplace. They've invested in the product significantly. At this time, we are still working with our partner, Teva, to get a product, a store brand private label product, in the market. We do not have a final path to the market yet, but we do expect to work through some of the questions and issues with our partners. But at this time, there is no specific date that I could share with you. But we are working very closely with our partner, Teva, and we'll have more to comment when we can get specific details about when we can enter into that marketplace. But once again, a good product. On the question of the Rx business, I can't really make any specific comments about IMS data. We do look at it, but I don't want make any specific comments on that. I think what I would simply say is that a couple of things are going on there, and it is really all around our new product launches during the quarter. We had the opportunity to launch Vanos. We launched Prandin. And we have -- just after our fiscal third quarter ended, we also launched an AG of Taclonex. That, though, does not show up in these results. It will show up in our fourth quarter results because it was after the quarter concluded. So I think that's really probably the comments I can offer on potentially any differences in the Rx businesses versus the quarter. The only final point I would say is that, clearly, the Rx business is one that we are going to continue to invest behind, both on the R&D side but also what we're doing by building a specialty sales force to help us with our ophthalmic products, which we think have some very significant opportunities for promotional support behind some of our products. And the team is building up that infrastructure to do that for the future. Judy, any comments you want to make?

Just getting just a tiny bit more granular for some color for you, David, is if I roll forward Q2 to Q3, as I noted on my prepared remarks, we specifically discontinued -- we had discontinuances of approximately $9 million in the quarter versus last quarter. And also, just we did have -- saw some shifts in inventory levels between end of Q2, which was at the holiday, and some of our retailers or some of our customers absorbed more inventory just at the very end there versus the end of Q3, when we saw some of those similar adjustments going on end of Q3 with a few of our customers rebalancing inventory. So not a big number, but if you take discontinuances and some of those small inventory shifts in a couple of places, it adds up pretty much to that roll-forward that you talked about on the quarter-over-quarter basis.

[Operator Instructions]

Your next question comes from the line of Jami Rubin, Goldman Sachs.

Joe, just I'll try to keep it to 1 slash 2 questions. You -- right, but you cite in your press release and during your prepared remarks that the weak results just -- was not just seasonality issues but the return of a competitor, presumably J&J. Why should that have been a surprise? And is J&J gaining more market share than you had anticipated? And how should we think about that going forward? And then just, if I may, high-level question, Joe. We're seeing a tremendous amount of M&A breakup, spinout activity across really global pharma, sec pharma. And what we're seeing is a lot of companies are looking to get more specialized, focusing more on what they're good at, getting out of what they're not good at. And yet, Perrigo is really going the opposite way by diversifying into other businesses. And I'm just wondering if you could share with us if you have any different thoughts on -- is that the right strategy for Perrigo? Because clearly, the last several quarters have been quite volatile for reasons that I understand are beyond your control, but you would think that with the more diversified portfolio of businesses, that should have ameliorated some of the ups and the downs. So if you could kind of comment on that. Is that still M&A strategy diversification the right strategy for Perrigo?

Thank you, Jami. A couple of comments. First of all, as I talk about really where we were talking relative to the quarter on the Consumer Healthcare, I've got to make a couple of comments relative to where we are. First, the real issue's on the miss. J&J was not a surprise. J&J returning to the market is not a surprise to us. We've known it. As we've stated going back, I guess, 3 years ago, we always felt when they came back to market, they were going to gain much of their share back. We had said 50% of the share, they gain. We still believe it's about that 50% range. [Technical Difficulty]

Number two, so J&J's return was not really a surprise to us. We're still at about expectation of keeping about 50% of the share we gained. On the question of the seasonality, there is no question that, that did affect our Consumer Healthcare business and any of our consumer businesses. Even the nutrition business was somewhat affected by the weather and then, more specifically, the cough/cold/flu season as it related to Consumer Healthcare. As I tried to make mention in my comments, we felt that as we thought about the miss that you were talking about, about 40% of it came from the weak season, a weak cough/cold/flu season. About 40% of the difference was what I referred to as some of the inventory reductions that occurred during the quarter with the retail customers. And then about 20% of it was the issue on the weather effect of -- relative to a late start with the flea and tick season in our Animal Healthcare business. On the issue -- the second part of the question, on our issue relative to M&A, as you know, what Perrigo is really trying to do is focus our M&A strategy on going after places where we think our model works really well in terms of trying to add that next new adjacent category, like ophthalmics, like what we're doing at pet care, adult nutrition, diabetes. The basic premise of what we're seeking to do, Jami, is simply saying we've got a great distribution channel with the large retailers, how do I get one more item on the truck that's at Perrigo today going to the large retailer that will be important to the retailer. Well, you may think that is a diversification. I simply would say to you that we believe that strategy allows us just to get -- be more important for our large retailers. And I think that is the overriding, what we believe, unique, sustainable, competitive position Perrigo has, is that we've got these relationships and distribution channel with the retailers. And therefore, by adding additional adjacencies, it allows us to have a longer-term stronger business with each of the retailers. Relative to the M&A activity, so I do think it's going to continue to be a very dynamic market with M&A activities, and companies will continue to look to find ways in which they will seek to have competitive advantage. And I think that's exactly what Perrigo is doing. And as we talked at the Analyst Day, we continue to look after what are those things that give Perrigo a unique competitive advantage. It is our distribution channel. It is what we do from a critical mass point of view. We clearly think it's the ability to have a quality reputation in the marketplace, this mass customization. Our #1 position in a number of our brands is really what's going to continue to drive Perrigo for the future.

Your next question comes from the line of Annabel Sam (sic) [Samimy] of Stifel. Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division: This is a little bit along the lines of Jami's question. But in terms of your guidance for retention of national brand, you've guided to about 50% in the past, I guess, was in your guidance. But you have said that, usually, you can see a little bit higher retention. So you're seeing some of these national brands coming back with greater force than you would have anticipated and especially now when you've got a lot of investment in consumer by larger players. Are you going to see an increase in competition and, I guess, increase in value promotions that the national brands put forth to gain that retailer share? And along those same lines, why were there such reductions in inventories in the retailer channel? Was it partly due to some of this increased competition?

Okay. So as we say -- said before, when we thought about what was happening when national brands were out of the marketplace, we did gain share. There's no question about that. As we see them return to the market, we normally -- when consumers make a move from national brand to store brand, we get 91% of them stay with store brand. In the case where they were forced to make a switch, such as the manufacturers not being able to supply, we felt the data was somewhere around that 50% range, is probably the most specific data. I will say, though, that we had panel data that said it was actually around 67%, but we said we'd be conservative and use the 50% number. And we haven't seen anything at this time that deviates from that 50% retention that we talked about before. So I feel pretty comfortable with where we are with our projections for retention. I do think there is going to be incremental branded efforts in the OTC market, but as we've said before, I think that's great news for Perrigo. That incremental activity in the branded OTC market is just going to be a stronger OTC market. We'll have more brands out there, which, in the long term, gives us more opportunities to launch the store brand Perrigo product for the future. So we actually think the activities in the larger branded pharma market are good news for Perrigo because we'll have more focus on OTC products. Companies are paying very high multiples to go and acquire businesses in OTC. And presumably, they're going to do that because they're going to invest behind those businesses, which we think is good news. Over the long term, they will drive the store brand business. On the question of store brands, though, I do -- I would say that the activities we're seeing in market share changes today are not unexpected when the national brands come back to the market after an absence. I would look to the categories in which there haven't been significant national brand reentries to really talk about how is store brand doing versus national brand. And that's in the areas of diabetes. That's in the areas of nicotine replacement therapy. Those are the areas where there haven't been disruptions in the market, and we're still showing some significant gains in those categories. On the last question of inventory, we just see that as just being -- the fact happens is that the large retailers purchased inventory early in our fiscal year in anticipation of the cough/cold/flu season. In the absence of a large season, they just worked down their inventory just through a normal process of working through inventory over time through the 6 months that -- since the quarter -- first quarter ending commentary. So that's really all that we saw in the inventory. Judy, you want to add anything?

On the inventory cycle, we always talk about how our business -- especially at this time of year, we would see that reorder point. And when we've seen many of you in January and February, talked at Analyst Day about what a slow season it was, that reorder point never really happened. And many of our retailers have year ends, fiscal year ends, in that January or February timeframe, after the Christmas holiday has passed. And as such, they were seeing sluggish retail numbers, and they're also going to be doing what they can to manage through their own financials through the end of the year, i.e. inventory management. So if you're not seeing a lot of foot traffic, there isn't a reorder point. You have inventory on hand, you're going to work it down. I wouldn't say -- I'd say when we were giving last guidance, that would be a surprise. As you look back and say what happened over the course of the season for the retailers and for us, the fact that they were working down their inventory is not entirely unprecedented, and hence, we wanted to plan for that also as we considered the dynamics through the remainder of the year, taking into consideration that they have been working down their inventories.

Your next question comes from the line of Marc Goodman, UBS.

So Joe, I know you don't want to talk about '15 yet with respect to guidance, but just based on the quarter and what's happened here, I mean, obviously, we've got some type of rebasing. Help us understand what's changed. I mean, if we look out to fiscal '15, does anything really change? Should we be changing our models in any major way? And then just I think someone previously, I forget who it was, asked the question about Rx products and launches over fiscal '15. What are some of the products that we should be expecting that could come in on a risk-adjusted basis as you guys start to think about your modeling for next year?

Let me start with the first question on the fiscal year '15. We don't specifically talk about the upcoming year until the August timeframe. But what I can say on this is very consistent with what we've said in the past relative to how we look at the total Perrigo business. As we said in our February Analyst Day, we expect to be able to grow the top line in this business by somewhere in that 5% to 10% range and then -- that's organic growth, and then to grow the operating income line approximately double that range, from a compounded annual growth rate for both of those numbers. So 5%, 10% compounded annual growth rate over a 3-year time period per year and then approximately double that on the operating income line. Having said that, we also do believe we could supplement that growth with -- based on history, what we've been able to historically is be able to show a growth rate of approximately 15%, 16% top line growth, which was half was organic, half was inorganic through M&A. I mean, that is the model that we continue to believe is appropriate for Perrigo as we add these adjacent categories into our business to help us to continue to grow. Specifically, on the organic commentaries, without getting into any specific products, Marc, what I've said is that we do expect additional products in the Mucinex family of products that we -- in our fiscal year '15. So that's something we've said previously. In the Rx category, there's a number of products that we have already talked about. We'll get the full year effect of all of those products for the launch of the fiscal year '15, products like Prandin, Nitrolingual, the Derma-Smoothe, the Cutivate, the Vanos, and then we have 3 additional products that we have not yet talked about launching. But those are important parts of our launch programs for fiscal year '15 and get the full year effect of that. Judy, you probably want to add some things to it. Part of his question...

Yes, Marc, I just wanted to add one item because you were talking about are you -- do you need to reengage '15. And to Joe's point, we talked about that at Analyst Day. We talked about those compounded annual growth rates going forward. You'll probably never meet a more self-aware and hard-on-themselves team as this one. And we've obviously looked at these numbers very carefully as we talk about finishing up the rest of the year and the run rates going into next year. But I would -- it behooves me to mention that even if you look right now at the midpoints of the ranges that we've just given you for fiscal '14, just taking into consideration the midpoint, this business is growing without Elan 10% year-over-year at the midpoint, 14% on the operating income line. And if you look at the midpoints of net income, take out the noise for all the share changes that have happened in the denominator, the business is growing in the mid-30% range. So yes, we're going to be doing some very careful evaluation of what goes into '15. To Joe's point, those compounded annual growth rates are still published. But I also know that while we are going to do a lot around focusing on cost and the right priorities of investment opportunities, we also can feel pretty good that we have double-digit top line, mid-teens operating income, mid -- double digits, mid 20s, mid 30s as you walk your way through the P&L and look at the growth rates. So we feel good about that.

Your next question comes from the line of Elliot Wilbur, Needham & Company. Elliot Wilbur - Needham & Company, LLC, Research Division: Question for Joe. I know the cough/cold is about 25% of your Consumer Healthcare business on a full year basis. But maybe you could just, for my own analytical framework, just a little bit of color commentary on the relative gross margin profitability of that line versus the rest of the business. And then the question I really want to ask here is, basically, when you go back in the war room and debrief after the call and after you talk to investors, I mean, do you really anticipate making any strategic or tactical changes in terms of how you manage the Consumer Healthcare business? Obviously, you can't control the weather or foot traffic. But if you look at sort of the profitability expectations for that business the last couple of years, I mean, sales have gone up about 50%. The margins, at least on a gross margin basis, have been stuck in the low-30% range despite the fact that you've enjoyed a very nice new product cycle. And I'm just wondering if you're, at this point, willing to discuss the possibility of some sort of broad restructuring of that business. It just seems like, from my perspective, anyway, that we should at least be generating profitability kind of in the mid to high 30s, which I think it's been kind of the longer-term target for some time.

Okay. Well, you've got a lot of great questions that are comments that -- let me try to address them one at a time here. Relative to our total business, the cough/cold/flu, which really brings in -- flu brings in analgesics, represents about 27% of our business. So relative to the totality of it, I agree with you. On the question of the gross margin percentage, it's roughly comparable to the rest of the business. It depends on which new products gets launched, et cetera, but it's roughly comparable with our total business. There's some areas of cough/cold/flu analgesics that are a little better in analgesics or others, but roughly comparable there. On the question of what we look at for our total business, and I guess you referred to it as a war room debrief or tactical changes, what we really continue to focus on, as I stated before, is our overall strategy is quality affordable healthcare. We're going to continue to focus on quality affordable healthcare and, importantly, launch new products. That's an important part of it. And we need to get the Mucinex product back into the marketplace. I absolutely think that, that's not something we're satisfied with, is being out of the market with Mucinex product. It's an important product. And more importantly, we've got to get it back in the marketplace. And that's something that we are working with meeting the team on a regular basis to get that to occur. So if there's an issue that we have that is something that needs some tactical work on, it clearly is Mucinex, as an example. But I would say it's for all of the other products. Relative to the question, though, I really do believe that the mega trends that have driven this business for the last 7 years are the same things that are happening today. We're still going to -- store brand is still going to take share away from national brand. Everything we've seen in that is still true. I will admit that as a result of those national brands being out of the market for several years, that we're having some disruption in that overall number. But if you look at the categories where there is no disruption, store brand continues to take share from national brand, and that's something we expect. I think the other thing that, in terms of growth, that you're asking about is how many products are going to go from prescription to OTC. We look at it as a very exciting time. But at the end of this month, we expect that we'll see Nexium launch occur. You know that Oxytrol has moved from prescription to OTC status, which opens up other products in the category of overactive bladder. We've seen Nasacort go from prescription to OTC, which opens up, I believe, other products that are nasal spray steroidal-type products. So I think there's a number of category movements that we are still very excited about. And what we're doing is -- as a management team, we had a choice. We could have hit a better number from an operating income if we cut back on R&D, and it's not my mindset to do that. I want to make sure that we are positioning this product for -- and the company for the future by getting these products to the marketplace as soon as possible. So those are the types of questions one faces in making decisions. Another area that we've made an investment in, and we think it's the right investment, is we're building some specialty sales capabilities in our Rx business for our ophthalmic products that we've acquired that are unique, promotable opportunities, and that's another area where we're going to invest for the future. So those are, I guess, what I would refer more to the tactical changes that I mentioned. But continue to reinforce our belief that we've got a great position, great opportunity for the future for Perrigo.

Your next question comes from the line of Chris Schott, JPMorgan. Christopher T. Schott - JP Morgan Chase & Co, Research Division: Just a couple of quick ones here. Maybe the first one, just so there's no confusion with the annual guidance versus the quarterly, given this kind of step-up in share count, can you -- let me -- can you just confirm what your actual 4Q EPS range is based on your guidance? I just to make sure we're all clear on that. Second question, OTC Singulair, just interested in any thoughts you might have had from the panel last week, what they'll pledge [ph] for the opportunity. And then a final quick one. Business development, you're obviously in some very attractive markets here. I guess just are you seeing signs of price inflation in the targets you're going after? Just it seems like, again, some of these markets are attracting more interest. Is that kind of raising some of the prices you're having to pay for these assets? Just any comments on that front.

Sure. I'll take the Q4 piece first. So that implies the full year guidance, which, as you very astutely note, is essentially Q4 guidance. The push, if you will, means that the implied range is approximately $1.52 to $1.67 for the quarter. That would imply also 116 million shares outstanding weighted average for the full year but 134 million shares outstanding in the Q4. And it also implies an effective tax rate of 21% to 22% in Q4 but also for the full year. So that's the implication for the Q4.

On the question of OTC Singulair, obviously, we are very interested in that question. We did have attendees at the meeting. I think I'd start with saying we think Merck did a very good job in presenting the data on montelukast and Singulair. Obviously, it was voted against, the movement from prescription to OTC. I think we're just going to continue to monitor the situation. We still believe that there's an opportunity there, but obviously, we've got to wait and see what the FDA decides on that question. I would simply say that we think Merck did a good job of presenting the information. We'll wait and see what the FDA makes decision. But as to our specific activities at Perrigo, we will specifically continue to work towards getting ready for a potential switch, realizing that, at this time, it is certainly uncertain at best as to whether the product will move. On the business development side, we have been very active. We've been talking to many different companies and looking at activities in the marketplace. And I do think the -- I've been in pharmaceuticals for 31 years. I'd say this is probably the most dynamic time for companies' movements in the business development, corporate development world that I've seen in 31 years. So it is a very active time period. Relative to what we're doing, I think Perrigo is going to continue to stay very disciplined in what we will offer for assets. We think it's -- we use a concept of return on invested capital for measuring any asset that we are going after. We will continue to take that same focus that we've taken for the past 7 years, but I won't discount the fact that the market is very dynamic at this time relative to M&A transactions in the marketplace. I think where we go with it, though, is we try to go after assets that play to the Perrigo competitive advantages that we've talked about before, being the customer relationships we had, how to find that next new adjacent category that comes into the marketplace. That's really what we're trying to do, and that's what we're going to continue to do for the future.

Your next question is from the line of Linda Bolton-Weiser, B. Riley.

So in terms of your operating margins in all the different segments, here in the third fiscal quarter, you're actually at the low end or actually below what the guidance is for the margins for the full year, and that's because you've been experiencing sequential declines in margins in almost all of the segments. So I'm just kind of wondering how to think about it heading into 2015. And I know you've alluded to things already, but I'm wondering if we should think about margin declines year-over-year in the first half of the fiscal year and then, as things improve, see margin increase in the second half? Because at the level your margins are at now, we're really not looking at margin increases in the first half of 2015. So is that an accurate thought process, if you could comment?

Right. Well, let me just start with -- I'll make a couple of comments. Judy, you may want to add to that as well. But I mean, I understand the nature of the sequential comment that you made. But I also think you have to go back to the year-over-year comparison. As a total company, the operating margin for the total company in third quarter fiscal year '13 was 22.6%, and today, I'm at 24% as a total company, albeit, though, I understand your comments relative to individual -- the individual business units. But where we are going with our business is that -- what I said before, Linda, is that what we are seeking to do is make some investments. We've looked at what we've done in the R&D part of our business. Our total R&D is up approximately -- I think it was 57%, 57% in the quarter for total R&D. Even absent the Elan effects, it's up dramatically during the quarter. Even if you take out Elan, it's up approximately 25%. So I think that investment is something that we feel very good about because we are looking for not just the next quarter, but we're looking for what opportunities are in front of us from an R&D point of view. It's all these new products that we expect to go from prescription to OTC. We've got to get ourselves ready for that, and that's why we're spending behind that. I don't really want to offer any other specific comments on our -- other than what we put in the guidance for our operating margins for the -- for each of the individual businesses. But just to be clear, know we're investing in R&D, know we're investing in adding some sales capabilities for our Rx business, which we think is going to help the long-term opportunities we have, for example, in our ophthalmic business. Judy, anything you want to add?

I would just say that as we think about next year and modeling out how FY '15 is going to look, obviously, one of the pieces we're going to be taking into consideration is volume and throughput. Because to the points raised throughout the morning on volume changes this quarter, in particular, and to some extent -- to a lesser extent but still there in our fiscal second quarter, is how do changes in volume impact our absorption in the plans and making sure that we're on top of that. Because to the points raised, when we come out and first have a dialogue about the year, it's based on one expectation of volume. And when no one's shopping and buying products, that dramatically changes the way that the plans can quickly react and absorb. So that will be part of the planning. And as we commented throughout this quarter and last quarter, in CHC at least, that had an approximately 150-basis-point impact on gross margin. So we will be working on planning for that appropriately.

Our next question comes from the line of Sumant Kulkarni, Bank of America Merrill Lynch.

Is there anything other than winter conditions that could have affected retail traffic, such as could this be a potential inflection point in the emergence of new selling challenges because of the Internet? And, second, does the company think it makes sense to have more internal national brands such as insync?

Sure. Good questions. I do believe the majority of what we've heard from the retailers, it is predominantly the winter conditions, the storms that I've talked about. At least as we've heard from the large retailers, we do think that is the predominant reason. I cannot, though, exclude that the Internet and e-commerce is having an impact, both in terms of foot traffics because that clearly is something we also know. But I would only say, as it relates to e-commerce, I think you know that one of the things that Perrigo has done certainly over the last 12 to 18 months is really make some investments into the e-commerce world to ensure that we are well represented in that space. And that's, hopefully, an opportunity for some significant growth in e-commerce for us, for that specific question. And then, I'm sorry, the second part of your question was...

More national brands like insync.

Yes. I'm sorry. Thank you. The question on insync is -- we think, is a very important question for Perrigo. I will say you're not going to see Perrigo try to launch national brands with a $200 million marketing and distribution and promotion budget. But we do believe there are some specific niches where we can take our technology, enter into the marketplace and have a national brand opportunity. But that also rewards the retailers with some promotional dollars but also delivers a quality product into the marketplace. We do think that insync is an important first effort on our part. But we do think there are other examples of insync-type products, and that, we think, is something that we talked about in the Analyst Day, was moving up the value-branded curve rather than just simply staying in the store brand business. So those are some things that we're doing. It's clearly -- the other example that I mentioned before is what we were doing in the Rx business with our Rx sales force as an opportunity. That's -- those are things we'll do opportunistically. We'll look for the opportunities and go after them where we see they exist.

Your next question comes from the line of David Buck, Buckingham Research.

First, on the inventory situation in the quarter, I know, Judy and Joe, you explained part of that. But why wouldn't we want to assume that retailers are going to be more cautious the next cough/cold season? And what gives us confidence that for the flea/tick season, which I believe was weak a year ago, you won't see a similar caution from retailers on that front? And then one separate question. For API, you obviously took down guidance on revenues. What will change in fiscal '15? And why shouldn't we assume that the fading of API, which is a high-margin business, continues into fiscal '15?

Sure. So let me just try to take the question on the inventory first. What I would say, David, is that there is always a certain amount of retail anticipation of the cough/cold/flu season. As you think about it, last year was a very strong cough/cold/flu season. So indeed, it was not surprising that, in our first quarter of our fiscal year, there was some anticipation of cough/cold/flu season and some activities that looked at that. When the season then did not develop anywhere close to the previous season, it was just a natural opportunity for retailers to work down their inventories, similar to the comments I made and Judy made. So I don't think there was any real surprises there. I mean, I guess the lack of the season is the surprise -- or a very weak season, I probably -- is better stated. A weak season was the surprise. But the fact that the inventory followed that down, that, I don't know it was very much a surprise. It just -- we just tried to put some -- give you some sense of that contributed about 40% of the miss that I mentioned in the call. On the question of flea and tick, we do look at that very closely in that we try to incorporate that into the guidance, as per the comments by myself and Judy. So we have tried to look at that in anticipation of our fourth quarter guidance. On the question of API, that really was really a result of just knowing that we had some competition in our business for API. But I think importantly, what we've said in the past is we do expect that the external sales of that business to ramp down as we increase the amount of vertical integration we get out of that business to lower our cost of goods across our total Rx and Consumer Healthcare business. So that's been just -- the vertical integration activities that we have talked about for our API business have been underway for quite some time. We still will opportunistically go after a raw material or an API that we can supply to others that is a challenging API because of -- it's a hormonal product or there's some -- it's an oncology product. Things that are challenges, APIs will go after. Absolutely expect to see more of our business shift towards vertical integration, consistent with what we've said previously. And I think I got all your questions.

Your next question comes from the line of Jon Andersen, William Blair. Jon Andersen - William Blair & Company L.L.C., Research Division: My question is on infant formula, which is a significant business for you. Can you talk a little bit more about the dynamic affecting that business in Q3 and how quickly you can respond? I think you mentioned, Joe, in the prepared comments that you've been approved to ship in China. How quickly can you initiate that effort? And what should we expect there?

Yes. Judy, do you want to take the first part of the infant formula question about Q3 and the size, the introduction of the [indiscernible]...

Yes. So qualitatively -- so we have our new tubs out. We've talked about that in great detail in these calls, and hopefully, you've seen the product on the shelf when you've been shopping. Just within this last fiscal quarter, the brands, with the same look and feel on the tubs, introduced a new value size that is same price, more quantity. We are able to ramp up to that, but it was the kind of promotional item that was on the shelves that attracted consumers. So we absolutely know how to do that and how to respond to it. And it's a classic example of the types of things brands always do to duck and weave, if you will, around the store brand competition. So it's -- that's something we absolutely know how to go after and are addressing that immediately. So that was part of it. My prepared remark was sales were -- sales grew, but they could have grown more had that not happened. But again, the approach is we know how to get in there and deal with that immediately.

On the second part of your comment, you picked up my comment relative to our certification and accreditation by the People's Republic of China to get -- ship our products from the U.S. into China. That is absolutely good news on our part, we believe. We were approved. Perrigo was approved. But also, the 3 other expected branded players from the U.S. also were approved. So Abbott, Mead Johnson and Gerber were also approved. What we're really -- what I think the opportunity here is that the -- China, as a country, is sanctioning our products to be introduced into China. There are some other U.S. manufacturers of infant formula that were not approved based on -- these companies make product here in the U.S. and ship it to China, but they were not approved to go into China for the future, is how we understand this rule to be. I don't think it will make a significant change in how we look at China, but it will reduce some of the product coming into China from U.S.-manufactured sources that is not approved for future entry into China. So that really, we think, gives us an opportunity for the future.

Joe, maybe I can just drop in with a little color. If any of you are wondering, well, wait a minute, I thought you already were approved to be selling products in China, and I thought you already were shipping despite at a lower rate than you had anticipated. In just the recent months, we had the inspectors from China were in the U.S. visiting sites and going through a process to add additional approvals for those companies that they were going to give an official stamp of approval to. So that is the development that Joe just referred to and the inspections that just happened. So we were approved under old standards. The standards were upgraded. We went through that process, and we got approval just now to be able to say, unequivocally, we can continue on with our business as we had anticipated.

Your next question comes from the line of Tim Chiang, CRT Capital.

Joe, as you -- certainly, you guys now have a PLC status, and you have an attractive offshore corporate tax structure. As you look at M&A, I look at your businesses, and certainly, your prescription pharmaceutical business is still your highest-margin business. It still seems to be your most profitable business, but it's only about 20% of your total revenues. I mean, when you look at M&A, do you have a target as to how big you want some of these divisions as a percentage of your total revenues? Do you want to get bigger in prescription pharmaceuticals?

Sure. So I agree with your -- all your comments. I would say that, relative to our business, the Rx business is an important business to us. We absolutely agree. We take a very specific approach to the generic Rx business that we have and try to find specific niches where we can be unique or be one of 2 players or 3 players, not one of 20 players. That's what got us into this area of what we refer to as extended topicals. So drugs that are absorbed topically, including dermatology, respiratory, nasal, ophthalmic, those are all the same categories we are still interested in. So if there are specific opportunities for us to improve our position in these categories called extended topicals, we clearly will seek to do that, both here in the United States and around the world. So absolutely, those are things that we are interested in doing. On the question as a percentage of our business, I do think we can grow the Rx business both organically and inorganically. Yes, I agree. But I would say, the majority of our business we still expect to be the consumer-facing businesses of our Consumer Healthcare store brand OTC and store brand private label of our nutritional products, will still remain the majority of our business. But I do think there are some select opportunities to increase the size and the scale of our Rx business, sticking to this commentary of really trying to stay in areas that we are more niche rather than being a commodity generic Rx player.

And maybe I have one follow-up for Judy. Judy, do you have a target in terms of where you want to be on a debt-to-EBITDA basis? I guess you guys are, what, 2.5x levered? A lot of your peers are well north of 3x levered, even 4x levered. Is that -- would that be an acceptable target to you?

So my visceral, off-the-cuff response is no because we are an investment-grade company. We have investment-grade debt. We have stated a commitment to delever down. We are -- we believe, right now, with -- there are no GAAP EBITDA numbers, but we believe we are south of 3x levered right now and that we are on a path to delever down towards 2x levered. Remember that we have new public investment-grade debt. That was -- we did our first IPO in May and our second IPO as a PLC in November, when we were working on the path of closing Elan. And as such, we needed to prove that we have a track record of being able to have a balance sheet that deserves that investment-grade status. And we're committed to investment grade because there's no better and deeper pool of resource to be able to fund long-term growth initiatives than the investment-grade market. And so while there are those in our universe who don't have an issue being more heavily levered today because of the relative expensive levels of debt today, if there are shocks to the system, the change between investment grade and high yield become fairly dramatic. So in order to be able to have a real long view on long-term growth initiatives, we are committed to that investment grade and, as such, are going to be -- at least in the short term, while we prove our credit worthiness at an investment-grade level to the agencies, we'll be working on that delevering scenario.

Operator, I'm going to conclude the call at this time. I would certainly like to say thank you for everyone for joining us on today's call. Perrigo remains committed on growing our business and focusing on quality affordable healthcare. Thank you very much, everyone. Have a good day.

Thank you.

Thank you for joining today's conference call. You may now disconnect your lines.