Bradley Joseph - Perrigo Co. Plc Uwe Röhrhoff - Perrigo Co.

Plc Ron L. Winowiecki - Perrigo Co.

Plc

Chris Z. Neyor - JPMorgan Securities LLC Patrick R.

Trucchio - Berenberg Capital Markets LLC Louise Chen - Cantor Fitzgerald Securities Jami Rubin - Goldman Sachs & Co. LLC Elliot Wilbur - Raymond James & Associates, Inc.

David R. Risinger - Morgan Stanley & Co.

LLC Gregg Gilbert - Deutsche Bank Securities, Inc. Randall S.

Stanicky - RBC Capital Markets LLC David Maris - Wells Fargo Securities LLC Ami Fadia - Leerink Partners LLC David Michael Steinberg - Jefferies LLC

Thank you. Good morning, everyone, and welcome to Perrigo's Second Quarter 2018 Earnings Conference Call.

Hope you all had a chance to review the press releases we issued earlier this morning. A copy of the release is available on our website, as is the slide presentation for this call.

Joining today's call are Perrigo President and CEO, Uwe Röhrhoff; and Perrigo's CFO, Ron Winowiecki. I'd like to remind everyone that during this call, participants will make 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 earlier this morning. In addition, in the appendix for today's presentation, we've provided reconciliations for all non-GAAP financial measures presented.

Turning to the agenda on slide 3. First, Uwe will discuss this morning's announcement of a planned separation of the Prescription Pharmaceuticals or RX business, and provide additional details on milestones related to our value-creation roadmap, including commentary on this morning's licensing agreement for the exclusive U.

S. rights to pursue regulatory approval for the non-prescription version of Nasonex.

Uwe will then go on to share performance highlights for the first half of the year. Next, Ron will discuss second quarter performance results by segment, the strength of our balance sheet, and our updated 2018 guidance.

Finally, we will then open up the call for questions. Now I'd like to turn the call over to Uwe.

Thank you, Brad. I will start my comments today on the announcement to separate the RX Pharmaceutical business.

As I've commented many times during my first seven months at Perrigo, each of our segments are well-established and are starting from a position of strength in their respective markets. The Perrigo's consumer and RX platforms are both well-positioned within their respective spaces.

They are navigating divergent industry dynamics with unique, strategic, financial, and operational opportunities and requirements. As part of our value-creation roadmap, which I will discuss in more detail in a minute, we performed intense bottoms-up market analysis of each of our respective segments, including outside and customer surveys, competitor analysis and market diagnostics.

At the risk of oversimplifying, the RX business model operates in an innovative product-driven marketplace that requires intense agility and focused portfolio management, servicing a limited number of distributor. This business model is distinctly different from our durable consumer businesses, which creates customized solutions, combining the capabilities of fast-moving consumer goods and self-care solution by leveraging a complex supply chain designed to meet customers at their point of purchase.

During the final phase of our value-creation roadmap, which include an extensive portfolio review, we have concluded that a separation of the RX business creates value for Perrigo shareholders and better enables the RX business to capitalize on its platform of differentiated generic pharmaceutical products. Importantly, today's announcement enables management to focus on expanding our leading consumer businesses, while unlocking potential value for shareholder.

By committing all our energy and capital to meet the healthcare needs of consumers and customers, Perrigo is better positioned to execute on our growth initiatives. In summary, the value-creation potential of our respective consumer and RX businesses is greater as two separate companies.

The Perrigo leadership team is committed to driving the most effective operating and financial structure for each respective business. We have engaged external advisors to assist in the separation process and management is working closely with these advisors and the board.

The board will consider all value-enhancing options including a sale, merger, or tax-efficient separation to shareholder. The separation is expected to be completed in the second half of 2019.

Throughout this process, our top priority remains driving individual growth strategies for both the RX and consumer businesses and delivering on our commitments for innovative high-quality solutions to our customers. Going forward, we will not disclose any further developments about the separation process until the board has approved a specific action that the company deems appropriate.

Turning to slide 6. I will briefly discuss the framework used for our value-creation roadmap.

As previously discussed in March, we initiated the comprehensive review of our businesses to develop the roadmap designed to drive top-line growth, increase operating income and strengthen our position as a market leader. The output of this exercise represents intense efforts by more than 60 members of the Perrigo team to review our competitive positioning, better understand our customers and develop our long-term strategic roadmap.

I am encouraged by the exciting opportunities presented throughout this process and believe we can drive both organic and inorganic growth, enhance our capabilities and increase operational efficiencies with a focus on driving total shareholder return. I look forward to providing a comprehensive update on the specific initiatives identified in our consumer businesses during a conference call and webcast scheduled for September 25, 2018.

Turning to slide 7. As an outcome of the value-creation roadmap, this morning we announced an exciting new pathway for growth within our OTC franchise.

This growth pathway illustrates our commitment to: one, execute select RX to OTC switches; two, expand categories with new brand offerings; and three, provide opportunities for future store brand alternatives. This announcement exemplifies one of the organic opportunities identified from the value-creation roadmap to drive long-term growth; in-licensing opportunities, expand our Consumer Healthcare Americas growth strategy and leverage our existing infrastructure; and efficient supply chain, enhancing our durable OTC portfolio and establishing a framework for selected future switch opportunities.

Given our competitive differentiation, we are the only OTC manufacturer who's vested in and committed to driving holistic economics for our retail partners by providing a brand and store brand version of a self-health solution. Turning to slide 8.

The Nasonex product acquisition is a first of its kind for Perrigo, and provides us the opportunity to expand and strengthen the allergy category. As other products in the intranasal allergy category have previously switched from prescription to OTC status, we are working diligently to bring this important product to consumers and customers more quickly than the average five-year OTC switch timeframe.

This is a perfect example of the type of opportunity we are seeking to capitalize on as we execute our strategic roadmap. Now, turning to our operational highlights on slide 9.

For the first half of the calendar year 2018, our adjusted EPS met our operating goals. In our CHCA Americas business, store brand continues to gain share, as evidenced by our market-leading OTC and infant nutrition franchises, which grew approximately 2.5% combined versus prior year.

The adjusted operating margin for this business continues to be durable, achieving 20.9% in the first half of the year, a 30-basis-point improvement compared to prior year. The performance of this business remains strong, despite challenges we are experiencing in our animal health business, which Ron will discuss shortly.

Turning to our Consumer Healthcare International segment. For the first half of 2018, on an organic constant currency basis, net sales were relatively flat versus prior year, excluding exited businesses.

Benefits from our focused brand strategy and insourcing initiatives drove improvements in the adjusted gross and operating margin. Adjusted gross margin improved 260 basis points and the adjusted operating margin increased 190 basis points to greater than 16%, as we continue to fund increased investments for growth with gross profit expansion.

In the first half of the year, we experienced weakness in the RX business due to a shortfall in new product launches, coupled with challenging market dynamics, which resulted in price erosion higher than our expectation. Despite these challenges, the business realized an adjusted operating margin of approximately 40% in the first half of the year, while making higher investments in R&D, demonstrating our commitment to drive our pipeline.

The underperformance in the segment has been disappointing and is the primary reason for changes to guidance. Finally, our durable platform once again delivered consistent cash flow.

Adjusted cash flow conversion to adjusted net income was nearly 90% for the first half of 2018. Utilizing our strong free cash flow generation and balance sheet flexibility, we repurchased approximately $265 million worth of our shares during the first half of the year.

To-date we announced two important decisions that illustrate our commitment to shareholder value creation. First was a separation of the RX business that will enable us to enhance the value-creation potential of our respective consumer and RX businesses.

Second, we announced an innovative pathway in our OTC franchise to expand our growth strategy with the Nasonex RX-to-OTC switch. We look forward to sharing strategies identified from our value-creation roadmap on September 25, 2018.

Now I will turn the call over to Ron.

Thanks, Uwe. Let me start by saying our durable consumer businesses continue to deliver consistent performance results as both of our consumer segments grew over the last 12 months on an organic constant currency basis, as store brand continued to gain market share and our CHC International team continued to execute on our focused brand strategy.

Each of these businesses are well-positioned heading into the second half of the year. Next, I will discuss our performance results for the second quarter, followed by our updated guidance for 2018.

Turning to slide 11, you can see our reported results for the second quarter. Net sales were $1.2 billion and reported net income was $36 million.

The primary adjustments to GAAP results are driven by the exclusion of $87 million of non-cash amortization expense and $53 million in acquisition-related charges and contingent consideration adjustments. GAAP tax expense as a percentage of pre-tax income was 34.5% in the quarter, compared to a non-GAAP tax rate of 18.1%.

The difference is primarily due to the tax effect of the pre-tax adjustments. Turning to CHC Americas results on slide 12.

Net sales in the quarter were $597 million, compared to $605 million in the prior year, or a decline of 1% on a constant currency basis. The lower net sales were driven by a decline in the animal health business.

Sales in this business were approximately 23% lower than the prior year, due primarily to channel dynamics and a late start to the flea and tick season. Our market-leading OTC and infant nutrition franchises grew approximately 1% combined compared to the prior year as we continued to drive growth.

Sales in the infant nutrition were strong as we continued to expand our product offerings to customers. OTC net sales performance was driven by strong net sales in the cough/cold/allergy category, partially offset by price erosion consistent with historical levels, coupled with the lower net sales in the smoking cessation category.

New product sales for the quarter were $15 million. Adjusted gross margin for the quarter was 34.5%, 120 basis points below the prior year, due primarily to lower sales of higher margin product in the animal health business, in addition to higher input costs.

The team continued to drive profit improvement initiatives to offset these higher costs. However, timing and amount of the improvement may vary from the actual cost increase.

The adjusted operating margin for the quarter was 20.4%, 60 basis points lower than the prior year, as the team proactively reduced selling and administrative expenses compared to the prior year, partially offsetting the lower gross margin in the quarter. For the first half of 2018, adjusted operating margin was 20.9%, a 30-basis-point improvement over the prior year, illustrating the durability of this business.

Turning now to CHC International on slide 13. Net sales in the quarter were $381 million, compared to $377 million in the prior year.

Net sales declined by approximately 2% compared to the prior year on an organic constant currency basis. Net sales were lower in the anti-parasite, lifestyle and analgesic categories, in addition to discontinued products of $8 million.

Sales were slightly lower in the quarter due to orders that will now ship in the second half of the year. Partially offsetting these effects were new product sales of $19 million.

Adjusted gross margin was 53.3%, an increase of 160 basis points over the prior year, driven by the improved product mix, new product launches and the continued benefit of insourcing initiatives. Adjusted operating margin was 15.2%, an increase of 60 basis points over the prior year, as the team continues to fund increased investments in growth.

For the first half of 2018, adjusted operating margin was 16.1%, an increase of nearly 190 basis points over the prior year, as the team continued to deliver on our profit improvement initiatives. In the first half of this year, our commercial teams continued to improve product mix, including the launch of new products with higher margins, and prioritized growth investments, providing the baseline for future growth in this business.

Turning to RX on slide 14. Reported net sales in the quarter were $209 million, compared to $240 million last year.

New product sales of $8 million were more than offset by lower net sales of existing products of $35 million, due primarily to price erosion. Compared to the same quarter last year, price erosion was approximately 11%, which was greater than expected, primarily driven by partnership products.

Due to the pass-through of price changes to the affected partners, the impact on gross margin was at a lesser effect than net sales. Adjusted gross margin was 55.1% in the second quarter.

Compared to the same quarter last year, adjusted gross margin was lower by 370 basis points due to a strong product mix in 2017 and the effects of year-over-year pricing. Sequentially, adjusted gross margin was relatively consistent in the first and second quarters of 2018.

Adjusted operating margin was 39.4% compared to 46.5% in the prior year, due primarily to gross margin flow-through and higher R&D investments as a percentage of net sales. For the first half of 2018, adjusted operating margin was approximately 40%, while investing approximately 13% more in R&D compared to the prior year.

Turning now to slide 15. Our balance sheet and cash flow generation remained strong, underscoring the strength of our businesses.

As of June 30, 2018, total cash on the balance sheet was $527 million and total outstanding debt was approximately $3.3 billion. During the first six months of 2018, we generated $255 million in cash from operations.

Excluding $50 million related to the Merck Nasonex licensing investment, which is included in GAAP cash flow from operations, year-to-date adjusted cash from operations would total $305 million. This results in a cash flow conversion as a percentage of adjusted net income of nearly 90% for the first half of the year.

We believe our strong cash flow, combined with the strength of our balance sheet, differentiates us in the marketplace. Our capital allocation decisions are focused on total shareholder returns within the context of our long-standing commitment to investment-grade financial policy.

As part of our disciplined and balanced capital allocation strategy, we completed approximately $157 million of share repurchases and paid $26 million in dividends in the second quarter. Year-to-date, we completed approximately $265 million of share repurchases and paid $53 million in dividends.

Now let's discuss our updated guidance beginning with each segment on slide 16. In CHC Americas, our durable platform continues to gain share in a soft consumer market.

We continue to expect net sales of approximately $2.44 billion. As a quick reminder, excluding the impact of the animal health business, the net sales guidance includes approximately 2% growth versus last year, driven by our market-leading OTC and infant nutrition businesses.

As discussed during earnings call in May, this guidance includes the loss of partnered product in the animal health business, which impacts the second half of 2018. Adjusted operating margin in the CHC Americas business has been operating at or near record levels, driven by continuous improvement initiatives and supply chain efficiencies.

Due to the lower performance in the high-margin animal health business, coupled with higher input costs, we now anticipate the adjusted operating margin to be approximately 21%. In CHC International, due primarily to unfavorable foreign currency movements, we are adjusting calendar 2018 net sales guidance to approximately $1.52 billion.

Second half growth in this business is expected to be approximately 2% to 3% on an organic constant currency basis, as the team continues to drive our focused brand strategy. The actions we have taken to expand the adjusted gross margin profile in this segment enable us to fund investments to drive organic growth, while still improving adjusted operating margin to approximately 15.5%.

In RX, we're updating our 2018 net sales guidance for the year to $880 million, with adjusted operating margin guidance remaining unchanged at approximately 40%. Turning to slide 17, let me provide more specific details into the changes in the RX segment guidance.

Number one, generic ProAir. As a reminder, on May 11, 2018, we issued a press release stating we expected to receive a complete response letter from the FDA for a generic version of ProAir, and no longer expect to achieve our goal of a fourth quarter 2018 launch and the approximate $0.09 adjusted earnings per share benefit.

Subsequently, we have received the complete response letter and remain committed to bring this important product to market. Number two, other new product delays, including authorized generics.

The RX team has had a keen focus on maximizing its business development program through in-licensing and creating partnerships on specific products. The team was opportunistic and signed partnership agreements for a number of authorized generic products, which were expected to launch in 2018.

However, those launches have now been delayed. Number three, scopolamine.

As discussed last quarter, the RX business experienced a supply disruption in scopolamine, a key product launched in the fourth quarter of 2017. As a reminder, this is a partnered complex patch product.

The team has identified its stability, deviation, and continues to work with our partner to remediate the issue. That said, we no longer anticipate a re-launch of this product in 2018.

And finally, challenging market dynamics, including greater pricing headwinds than anticipated. Consistent with our practice of updating guidance grounded in the current fundamentals of the business, our updated guidance for the second half of 2018 includes a price erosion assumption, consistent with our experience in the second quarter.

Now let me discuss how these updated guidance assumptions impact our expected phasing during the second half of the year, particularly in the RX segment. We expect approximately 35% of 2018 RX adjusted operating income to be realized in the fourth quarter due to timing of new product launches.

Slide 18 depicts the adjustments to our 2018 consolidated guidance. We now expect consolidated net sales of $4.8 billion to $4.9 billion due to the changes on the RX net sales guidance, as well as $65 million of unfavorable foreign currency movements.

In addition, we now expect new products to be greater than $200 million, lower than previous expectations due to the RX dynamics I have just outlined. Adjusted operating income guidance is now expected to be in the range of $960 million to $990 million.

After taking into account minor adjustments in interest, other and adjusted effective tax rate, our adjusted EPS guidance range for 2018 is now at $4.75 to $4.95 per share. Consistent with the change in our adjusted operating income guidance, our 2018 guidance for adjusted cash flow from operations is now approximately $675 million, which is approximately 100% conversion at the midpoint of our earnings guidance range.

In summary, we continue to drive growth in durable operating margins in our consumer businesses despite a soft consumer marketplace. In addition, the team is moving forward with executing our plan to create two separate companies with independent strategic, operating, and financial platforms to enhance the value-creation potential of each respective business.

And finally, we look forward to discussing our value-creation roadmap in September. I will now turn the call over to Brad.

Thanks, Ron. Carrie, can we please now open the call for questions?

Given, how many people are on the line looking to ask a question, it'd be great if we can keep to one question, please.

Morning. This is Chris Neyor on for Chris Schott.

On the RX and consumer franchise separation, are there any meaningful ties or potential dis-synergies that we should be thinking about as you move to split these two business units? Thanks.

Yeah. Thank you for the question.

We, obviously, during our value-creation roadmap exercise have done that analysis and we believe there are no meaningful impacts from the separation. However, we have a detailed process on minimizing the separation impact for each individual business, and we believe that the advantages of the separation far outweigh those marginal separation issues.

Yeah. Chris, I would add too.

I mean, Uwe is 100% correct. We've carefully studied it.

And if you think of the businesses themselves, within each respective segment, they're already integrated on the sales, marketing, distribution, regulatory, R&D functionality. It's really been kind of a natural evolution.

We've been migrating those functions into our businesses to continue driving agility. And as we look at the businesses, the integrated back-office work and those types of things, really we're now at a dispositive consideration.

And the choice really was about the separation strategically to create independent operating platforms. So, if you think of the core functions in the value-creation process, the value chain in the business, they're already kind of – these are architectures already existing in those respective businesses.

Thanks for the question.

Thanks. Good morning, everyone.

My question is in regards to the recent draft guidance provided by FDA regarding the RX-to-OTC switches. There have been two categories that Perrigo recently removed from its list of potential switches, including statins and BPH.

So, first, based on what you've seen and heard in this guidance and from the agency and from CHPA, do you think the FDA's flexibility on product labeling and its consideration of technology-enabled approvals for OTC products will make it more likely the innovators will attempt switching studies in these categories? And secondly, do you think innovators will wait for final guidance?

And if so, when should we anticipate the final guidance? And finally, are there any other additional categories we should be thinking about as being more likely to switch, given a more accommodating FDA and executive push to expand OTC in the U.S.?

Thanks very much.

Hi, Patrick. This is Ron.

Thanks for the question. I'll start and Uwe certainly can provide additional commentary.

So, listen, the FDA movements are favorable for our business model, I almost call it validating our business model, right? Gottlieb in 2017 clearly stated that getting more products to over-the-counter is one of the core initiatives under his agenda to save consumers' value in the healthcare space in the U.S.

So the trend is very positive. And you've seen, whether it's legislative or regulatory movement, you have the monograph Modernization Act.

You have the recent indications about reinstituting where consumers can use their flex dollars, health spending dollars, for buying OTC products not quantified yet but in draft form. You're seeing things around smoking cessation products, which really fits in the sweet spot of our portfolio.

So I'm answering broader than just your one question because I think it's important to understand the indicative trend in the policy framework of the FDA is clearly favorable to our business model, and I almost call it validating our business model as a quality affordable self-care provider. Now, having said that, you asked about specifics, you asked about specific categories and class of trade.

And the saying I use, and I think it's one I want to make sure we use in the sense, let's not get ahead of our skis. We like the trends.

We certainly have seen what they're talking about relative to certain class of trades. We've talked quite openly in the past that we think it's interesting to discuss a third class of trade where there's a pharmacy intervention.

Some of the class of trades you talked about are that way in the UK, where it's a very natural market structure to have an over-the-counter application with a pharmacy intervention framework. And that would fit, again, right into our business model.

So, again, I don't want to say what class of trade specifically and I don't want to speak on behalf of the innovators. That's not what our role should be.

But I will say, think of our business model, our business model is designed to meet consumers at their point of purchase and our business model is designed to point at all the RX-to-OTC switches. And Perrigo will be there when we see those class of trades move in that direction.

I mean, that's the way I would ask you to think about the answer to that question.

Yes. And to add on to that, the Nasonex in-licensing activity demonstrates clearly our commitment to take a more active role in this type of environment, however, only in selected criteria where we have a clear right to win and where we have identified that we can leverage our capabilities and expand categories where we are already present with significant store brand products.

Thanks, Pat. Next question, please.

Hi. Thanks for taking my question.

I just had a question on the generic business. So, given your announcement today, how did you think about the valuation for your generics business in light of the environment today in generics?

What is the timing behind doing something strategic and how much leverage could you put on this business if you separate it out?

Well, from a strategic perspective, I think this is a very, very attractive business because of its differentiated product portfolio in extended topical, its sustainable margin profile and excellent cash flow generation. So, if you take a look at this business and compare it into other business, I think it is of prime quality in the market.

And we have identified here a pathway with multiple options, which includes a sale, includes a merger to create a more valuable company that addresses the market needs, or the separation as a stand-alone company to better capitalize on the market dynamics that we see here in a company that is lean, that has significant agility to answer to the market needs. And I think, with that, we have a unique leverage to get the best shareholder value-creation option executed that we can find here in the near future.

And we are not on a time constraint here.

Yeah. You asked about timing, we talked openly in our press release, Louise, you'll see that.

Because of regulatory considerations, there are things that we'll consider in all the three options Uwe talked about. And we're saying the separation will likely be over the course of 2018, likely in the later half of the year.

And to Uwe's point, to be clear, we're coming at this from a position of strength, great asset, great cash flow characteristics. We're going to set up the best operating platform.

But the timing is going to take a duration of time to do it right and do it well.

And what about the leverage on the business for RX, if you decide to separate it?

Yeah. I mean, it's not proper for us to comment on capital structure of that business, Louise, that's just not – and again, remember, there's multiple forms of execution here.

So we're talking about maybe one form versus two or three we can consider. So it's just not fair for us to comment on that.

Okay. Thank you.

Thanks for the question, Louise.

Thank you. Just a couple if I may.

Do you think that the negative growth in the CHC business this quarter is a one-time, or would it have been negative the last couple of quarters if you back out flu? And how should we think about CHC growth going forward, especially in the fourth quarter and the first quarter when you will face hard flu comps?

Will they continue to be negative is the question? And my second question on the generic business is that your 40% operating margin is still about 1,000 basis points higher than your peers.

Yes, you do have a differentiated product portfolio. But just was wondering, given the environment that we're in, if that 40% operating margin is still durable and how long do you think that can last?

Or is that a margin that you think can continue to grow?

Yes. Thanks, Jami.

So listen, I'll take the first and then I'll let Uwe comment on the first as appropriate and/or take the second one as well if that's fair. So we'll tag-team the response.

For the consumer businesses, think about these a little bit on an LTM basis. CHC International has been growing circa 2%, CHC Americas growing circa just short of 2%.

Pet health is the dynamic. We've been very open about that.

It's a business that has been challenged in its marketplace. So it's an asset we're looking very closely at.

If pet health were excluded, you'd find CHC Americas growth north of 2% on an LTM basis. So I think that's the way to answer that question is, we don't look quarter-by-quarter, we talked about that.

Before we were a little soft in CHC International this quarter, partially by design. Again, we're improving our product mix.

So part of that product mix improvement is you're launching new products, but then you're phasing out some additional IDs (35:00) or cannibalization. But you're taking some old products off the market, while you're launching better products to improve the margin and growth profile of that business.

So those are some of the dynamics that were softer in CHC International as an example in this quarter. On a go-forward basis, we expect both businesses to grow.

Relative to the market, CHC Americas store brand continues to gain share. If you look at our operating guidance – and again, I hate to say pull out pet health, because we own pet health to be clear.

But our market-leading OTC nutrition businesses are growing in a positive way the second half of the year, directly answer your question. And you heard in my commentary that CHC International is expected to grow 2% to 3% the second half of the year as well.

So we think they're in great positions. Again, if you look on an LTM basis, or when we're thinking on a go-forward basis, we feel good as the market grows within those respective businesses.

And I'll let Uwe comment on the second RX question if that's fair.

Yeah. Maybe to add to Ron's comment, the driver for this growth, the 2.5%, has not been the cough and cold.

We have a very diversified product portfolio that is doing very well, with the exception of the disappointing performance on the animal health business, and we will deal with that. On the RX side, yes, if you take a look at our performance, given the significant price concessions that we have seen and still maintaining a 40% operating margin, speaks definitely for our ability to manage this business.

Nevertheless, it is extremely important in this business to launch new products consistently. And in our case, for the first half of the year, this was more a question of when to launch rather than if we launch it.

So actually, we expect those products to come to market later. But I think the underlying message for the first half of the year, if you look at something positive, is that our ability to manage the margin is pretty strong in that environment.

And I think that indicates how good the asset is.

So just can I follow-up on the CHCA business? Would you expect then, even with difficult comps, there was a huge flu season last year, that that business will continue to show growth even with difficult comparisons in the fourth quarter and the first quarter of next year?

Yes. If you recall the flu season was really more of a Q1 this year dynamic.

It really was not a Q4 dynamic. We did have good growth last year and so good observation and we appreciate that.

Remember, we were launching certain products last year that drove that growth.

Okay.

It was not a seasonal effect. So the callout is really the seasonal effect was in Q1 of this year.

Thank you.

Yes. And don't forget that we tried to expand here the allergy category.

That's a very attractive category for us. It has seen good growth.

We had the ODT Omeprazole launch in the GI business. I think we have a fairly good analgesics performance.

So this is more than a cough-and-cold company.

Thanks, Jami. Next question, please.

Thanks. Good morning.

Question, I guess, probably best directed to Ron. As we sort of do the back of the envelope calculus here around the generics business, one question I had was in just sort of thinking about potential G&A allocation.

How much of the unallocated G&A expenses do you think could actually be offloaded to that business on more of a permanent basis, such that the consumer business isn't fully burdened with that, outside of some temporary transition services agreement? And then just a follow up to that from kind of a high level, without that income stream in the Perrigo business, what could we be thinking about in terms of impact on the marginal tax rate?

Thanks.

Thanks, Elliot. It's dangerous when you get the calculator out, right?

So understand the question for sure. So if you think about the overarching business structures, you have two businesses that have very strong margin profile.

RX, 40%, as called out earlier, certainly strong against its peer group. And then you take a look at our consumer businesses, you have CHC Americas running at 21%, 22%.

You have great margin expansion in CHC International, call it circa run rate 16%, while we're investing for growth. So the momentum in the margin expansion continues to remain very strong.

And in the consumer businesses, you also have great free cash flow characteristic, as you well know. The other part that I just want to call out, because it goes a little bit to structure and a little bit on the enterprise framework, is that company is a very strong, diversified global enterprise.

You're going to have 40% of your revenue base in that enterprise in non-U.S. jurisdictions.

So having said that, from a structural standpoint, we're very confident looking at the margin profile, that as we set up a separate strategic and operational and financial framework, both companies will be positioned in a very competitive way relative to their respective peer groups. So we're carefully working through that process.

But I don't want to get into is there $1 of overhead between company A and company B. You can rest assured we've carefully studied our structures with the needs of the respective businesses, the competitive, I'll call it, P&L profile of each of the respective businesses.

And we're very confident we'll set up an operating and financial model in those businesses that'll be competitive to their relative peer groups. Now, having said that, the tax rate – I don't want to comment specifically on taxes.

I'll say this, I think you'll find that the tax rate of both companies – and I can't speak about RX as a stand-alone at this point because it's not spun yet, or it could be sold, or it could be merged. So there is no way to articulate the tax rate.

But I think you'll find the remaining tax rate within our consumer enterprise will be competitive, is the best way to think about it. Certainly can't – what rate (40:53) to you at this point, Elliot, for sure.

Thanks, Elliot. Appreciate the question.

Yes. Thank you.

So I was hoping that you could just discuss the outlook for CHCA margins longer-term? So, if we just sort of separate this issue of dis-synergies, are there real cost-efficiency opportunities ahead for this business or not?

And then, with respect to CHCI, I'd love to get a better sense for your visions for that business to compete as the number five player in Europe. Thank you.

Well, I'll take the first comment on the margin profile. We've talked about this before.

And I'll let Uwe comment about the CHC International business because I know we're excited to talk in September, so he can kind of give a little color to what we'll discuss from a value-creation roadmap. But from a margin profile, when we talk about CHC Americas, listen, the business is well-positioned as a market leader.

The business has been running at adjusted operating margins at record levels. And we talked about longer-term modeling guidance.

What we kind of say to everybody is, listen, model the top-line growth, and again we'll talk more about that as we get to September, but model top-line growth consistent with, I'll call it, your expectations. Already now we're growing above market index is the best way to think about it.

Store brand continues to gain share. When you about operating margin profile, we say, in the Americas business, run your models pretty consistent.

In other words, we've expended margins substantially in that business over the last five years. But since we're running at record levels, we're not saying don't expand that every year by 50 to 100 bps.

Running at a pretty consistent, so the value creation will be more at the operating dollar level on the revenue line growth versus the margin expansion from a modeling perspective. Now, I do want to comment, because I think it's important to call out, we are continuing to see great margin expansion at CHC International.

As you know, we commented earlier our adjusted operating margins were up 190 bps, almost 200 bps year-over-year in the first half of the year. This year we have great momentum in the business.

Svend and his team have done a fantastic job. And we have talked about margins in that business being in the high-teens over the next few years, call it, three to four years, and we have a very industrialized plan to get there.

So we do see good expansion in the operating margin profile of the CHC International business, given the good work and platform that's been set by Svend and also Ron Janish in the supply chain team. Just want to make sure I call that out, we see some good expansion in that business.

I'll let Uwe talk a little bit about the competitive positioning at CHCI and ultimately some of the conversations we'll have later, so.

Yeah. And I encourage you to participate in our call on the 25 of September when we disclose more of our ideas and strategies to drive the consumer business.

It's pretty much all about committing again all of our energy and capital to meet the healthcare needs of consumer in that business, and that includes a multitude of activity. Of course, cost efficiency is one of the key elements of such strategy because we operate in an environment of providing quality affordable healthcare products.

So, that is always at the center of our activities. This, of course, includes all dimensions.

Of course, that includes overhead costs, the best set up of a lean company, and it includes operating costs. And you always can do something in those elements.

And we will share that with you, what our ideas are and our strategies are here in September. Specifically on the CHCI business, we have purchased a very diverse business with a certain complexity.

And I think our management has done a wonderful job so far on reducing complexity, focusing and executing on our focused brand strategy by reducing the number of brands and promoting the right brand. We have actually in parallel worked on insourcing activities and leveraging our production network, and we will continue to do that.

The margin steps we have achieved are just milestones on our pathway to have much higher margin targets that we aim to achieve in this business. But this will be achieved again in a step-by-step approach by doing exactly as much as we think we can do and what is healthy for the business.

And we will share that strategy with you on September 25 as well.

Thanks, Dave.

Thank you.

Yes. Hi.

Uwe, at our conference in May, I thought you suggested that branded OTC in the U.S. was not something you were very interested in.

So, should I take the Merck arrangement on Nasonex as a sign that you are in fact interested in branded OTC in the U.S., or is this more of a one-off situation? And the second part of my call may be for you and for Ron.

On the separation and the rationale to separate, it's not clear to me that removing RX from Perrigo would necessarily help Perrigo's remaining valuation. It's not clear to me that there would be overwhelming interest from buyers in what would be a pretty big generic acquisition in a challenging generic environment where you're delaying launches and not delivering on the current products, at least per recent forecast.

So, perhaps you have some non-public info and expressions of interest. But maybe you can help us with the rationale of separating those at least at a 30,000-foot view, knowing that we have a lot of wood to chop in the coming quarters in terms of actually executing on the separation.

Thanks, guys.

Yeah. I'll start with the first question.

And as part of our value-creation roadmap, we basically analyzed all of our businesses and, again, we had 60 people here internally involved, just internal people that were involved on developing growth strategies. The growth strategy development was grounded in the strong analysis of our capabilities.

And where we have the right to win and what competition here in the RX-to-OTC switch category, we have identified that there are selective areas where we have the right to win. And Nasonex is a perfect example for that.

We have a strong presence in the allergy sector. We actually have a significant store brand presence with similar products.

We have the regulatory knowhow, we have the production knowhow, we have the technical knowhow to do such, which we have acquired the license from somebody who does not have an OTC presence. And we really believe that in those selective cases, we can actually drive category growth by switching those type of products in a fairly short switching time and adding value with the store brand later on to our retail partners.

We believe that this is an attractive opportunity to help innovate the category together with our retail partners and our channels, and significantly improve our market position with such interval (48:56). I would say it's still a selective strategy.

I would not say it is a global branded strategy for the U.S. and it is mainly rooted in our right to win in certain categories with certain knowhow.

Yeah. I can start on your second question, Gregg, understanding the – if I'm framing it correctly, it's kind of what is the ultimate valuation you said remaining.

I guess, I would say, what is the valuation of the two independent companies relative to today's valuation is probably the better way to explain or for me to think about it at least. And you go back to the strategy, Uwe was very open in his comments, we have two business models well-positioned and we've described those on this call, so I don't need to repeat those comments.

However, they're very unique businesses. You look at the unique business of RX, it's in a product-driven marketplace.

It requires intense agility and a portfolio management kind of architecture. It distributes to a few customers.

And so, kind of a distribution model, right? We're really not selling through to the consumers or innovating to the consumer level.

It's really at a distribution level. So, if you think of that business model and how that is a dichotomy of Consumer Healthcare, Consumer Healthcare is really integrating solutions, a fast-moving consumer goods relative to self-care marketplace and integrating a complex supply chain.

So the value-creation exercise is really about two clear investment theses. A very clear investment theses relative to RX.

And you talked about will somebody want to buy an RX company. That's not the only value-creation opportunity here.

There's great optionality for how we can pursue the RX separation strategy. As you know, we've talked before, Gregg, about we were constrained for some time to do a spin due to the constraints we had to the original launch transaction.

Those constraints are now behind us in December this year. So you start thinking about spin, merge, valuation creation on a sale process, we think there's a great optionality.

And listen, we're in no rush. So we're preparing.

We'll have the asset in a great position to separate relative to its legal operating structure and we'll make sure we execute at the right time of value creation is a way to think about that component. While at the same time then you have a great consumer company relative to its market position as well.

At the end of the day, what – and you said it and I'm glad you brought it up, our commitment is to continue investing in these businesses, continuing driving the growth platforms. And again, we believe RX has a great pipeline, we owned this year.

This year we did not launch the products we expected, we own that. But, however, I'll go to Uwe's comment, I thought it was a very good one.

It's a matter of when, not if. We have a great pipeline.

Those products that are coming to market are driving that portfolio very hard. So we look at the investment thesis of RX as a very good strong investment thesis on a stand-alone basis.

But we're going to continue focusing on our business plan and our great employee base is going to continue driving value for customers as we stand here today. And that's what's most important right now is to make sure we execute on our business plan.

So, that's the way I want to make sure we think about it in the short-term from a business point of view.

Thanks, Gregg.

Thanks.

Great. Thanks guys for the question.

Uwe, Ron, why announce this RX separation today on a day where you're cutting guidance on the back of this business, as opposed to waiting till the September 25 strategic update events? And then, secondly, I didn't hear an answer to the dis-synergy question, which I think is going to be really important as investors try to understand the underlying earnings value of both of these businesses over the next 12 to 18 months.

And can you at least provide some buckets of where the overlap is? Where we should think about maybe needing some separate services?

And given the integration of these two businesses, maybe just comment on how integrated they are and how easily it will be to pull these businesses apart? Thanks.

Yeah. Thanks for your question.

It became clear during our value-creation roadmap process at RX and consumer business, would each benefit from a dedicated focus of individual management teams which can anticipate market dynamics and invest behind the business appropriately. So we always said it is our goal to get an alignment between management and the board to make the necessary decisions on the strategic roadmap.

And then it is the policy that once the decisions are made that we communicate those. We made decisions here on a couple of value-creation roadmap examples.

One is the portfolio review with RX and the other one is actually the RX-to-OTC switch, which was Nasonex. And since we have executed that, we wanted to share that.

There is certainly always an alternative, not to say something when you have made the decision, but that is not the policy of this management team and the board. So from that perspective, it is not driven by, as somebody could say, disappointing performance based on the guidance with RX, that is just a driver.

That actually has not driven this, because it is a result of a systematic evaluation process that has identified what do we need to do to better run the RX business going forward? And how to drive growth there?

What's the best organizational setup for this business? And it included and addressed (54:36) how integrated is the business really with the consumer business from a fresh look standpoint?

And what we have identified is that the benefit of managing this business separately with a focused team that can address the needs of an agile market environment with a strong focus on product development and a clear integration between R&D, technology management and operation, will benefit the growth of this business. That has of course a couple of, you call it dis-synergies, I actually say separation work, because I don't think they are dis-synergies because they can be managed.

That includes that we have a number of, I would say, fairly clean plans that service mostly the RX business. We have disintegration work on the supply chain side that is integrated, but more from a purchasing and from a planning perspective than from a distribution perspective that runs that.

We have already separate sales, marketing functions. We have a separate R&D function.

So we are fairly confident that the more on the administrative side work that needs to be done can be completed in due time and can actually result in a setup of a very lean and very efficient RX company and a very, very competitive consumer company. And so we are not concerned about dis-synergies.

Great. Thank you.

Thanks, Randall.

Hi. I was wondering if you could address how – everything that you said about the RX business and the rationale for that being separated doesn't fit for animal health.

It seems like that would fit the same thesis that there aren't a lot of synergies and there's not a lot of overlap in the R&D in the sale process. But maybe if you can tell us where you are on your thinking on the animal health business?

And why it's not part of the same spin-out or sale strategy? Thank you.

Well, today we made an announcement on RX. Animal health is obviously not an RX business.

So that is why it is not part of this announcement. However, as part of our value-creation roadmap, we have analyzed all of our businesses and we have identified what right to win they have.

Is the business a fit with our core capability? Do we have the right to win in the marketplace?

And is our return on capital compared to our cost of capital in the target range. That applies to all businesses.

There is no disagreement that the performance of this business is disappointing. And therefore, this is one of the businesses that is part of our ongoing analysis.

And if we make a decision to separate this business or sell it, we would inform you. But as I said before, the policy is that we inform you once we have made a decision.

On this business, we have not made a decision.

Thanks.

All right. Thank you very much.

Next question.

Hi. Good morning.

Thanks for the question. I guess, we've talked a lot about sort of the potential benefit of separating out RX sort of from the rest of the company and then what benefit that could have.

But could you also sort of focus on what areas you've identified that could help drive faster growth in the CHCA or CHCI businesses? Does the separation of RX allow you to reallocate capital or focus to be able to drive faster growth?

And how actively would you go after acquiring new or other branded products that could potentially switch? Could you sort of elaborate on that a little bit in terms of criteria?

And how you would potentially be able to drive that RX-to-OTC switch? Thank you.

Yeah. Thank you for your question.

And I must say that most of the answers I have to defer to our December (sic) [September] (59:38) 25 meeting. But I want to give you a little bit of how we think about it.

As part of the value-creation roadmap, we clearly have identified how can we accelerate growth for our consumer business. We have looked at organic opportunities.

We have looked at inorganic opportunities. We have looked at capital allocation to drive operational profits and operational efficiencies.

And again, we have looked at inorganic opportunities with respect to RX-to-OTC switches. As I said before, with respect to this one that we have announced today, that is a very selective strategy that is designed around our core capabilities.

It has to do with categories we play in and it has to do with assets available to switch that we believe have enough equity and that we can switch within our core capabilities in a fairly fast-track time. So I would still caution everybody to say this is a very selective area where we are playing.

And then this is our first product that we execute on. So this is one element of many which will drive our growth initiatives in the consumer business.

And there are many of those elements we would like to discuss with you in September 25. So I have to ask for a little bit of patience until we are ready to share that with you.

Thanks for the question, Ami. Next question, please.

Thanks. Further discussion on capital deployment.

So, in the last couple of quarters, you bought back a significant amount of stock that you refrained from any external strategies. And prior to that, obviously, you were right-sizing Europe, you were deleveraging and selling off your Tysabri royaltiy.

So my questions revolve around sort of the timing and nature of future acquisitions. And I assume you would continue as part of your lineages in making a lot of tuck-ins on the consumer side.

So you've refrained from making acquisitions during this period of not looking at the businesses. Will you still refrain from acquisitions during the period of time in which you're going to either sell-off or spinoff your generics business?

And then looking down the road, will you go back to your historical sort of small tuck-ins on the consumer side, or are you still potentially looking at larger sized acquisitions, PG (1:02:43), Omega, Mylan? And then, finally, with this split-off of the businesses, is the nature of the type of acquisitions be looking a little bit different?

Thanks.

Yeah. On the inorganic side, again, we are ready to share more detailed information about our inorganic strategy on the consumer side with you on September 25.

But it is clearly part of our growth strategy. And from a timing perspective, you can see that on the acquisition of the in-licensing rights for Nasonex that we are willing to take and capitalize on opportunities when they present themselves to us and when they fit our strategy that we have identified in our strategic value-creation roadmap.

So, from that perspective, we are completely committed to execute on opportunities that we have identified to be in our sweet spot. But the details, where that is and how we see that, we are going to share with you again on September 25.

Yeah. David, I would only just say as you, remember, sit back and look at the cash flow characteristics of the company, our strong balance sheet, and in the context of total shareholder returns and our commitment to an investment-grade credit profile, we have great liquidity, we have great cash flow to invest in, to Uwe's point, a very progressive inorganic strategy relative to the criteria tuck-on acquisitions.

And you think about it, and we've talked about this before, just to remind ourselves, in the balance sheet side, we only have $525 million of maturities from today until 2020. So, next two-and-a-half years, the cash available – and by the way, almost all of that is the term loan, which obviously a term loan is kind of a variable refinancing kind of structure.

So, having said that, we're in a great position from a cash flow standpoint, we're in a great position from a balance sheet point of view to execute the strategy that Uwe just outlined. So let's not forget that baseline we're starting from is very strong.

Great. And with that, Carrie, I think that's all the time we have.

And so we want to thank everybody for all your time and attention and thank you for your interest in Perrigo. Hope to talk to you soon.