Bradley Joseph - Perrigo Co. Plc John T. Hendrickson - Perrigo Co. Plc Ron L. Winowiecki - Perrigo Co. Plc.

Gregg Gilbert - Deutsche Bank Securities, Inc. Randall S. Stanicky - RBC Capital Markets LLC Christopher Schott - JPMorgan Securities LLC David Maris - Wells Fargo Securities LLC Louise Chen - Cantor Fitzgerald Securities Candace Richardson - Goldman Sachs & Co. LLC Marc Goodman - UBS Securities LLC Annabel Eva Samimy - Stifel, Nicolaus & Co., Inc.

Douglas Tsao - Barclays Capital, Inc. David R. Risinger - Morgan Stanley & Co. LLC.

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo Third Quarter 2017 Financial Results Conference Call. Thank you. I will now turn the call over to Brad Joseph. Please go ahead, sir..

Thank you. Good morning everyone, and welcome to Perrigo's third quarter 2017 earnings conference call. I hope you all had a chance to review the press release we issued earlier this morning. A copy of this release is available on our website, as is the slide presentation for this call.

Leading today's call are John Hendrickson, Perrigo's Chief Executive Office, and Ron Winowiecki, Perrigo's acting Chief Financial Officer. I would 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 have provided reconciliations for all non-GAAP financial measures presented. Turning to the agenda on slide 3.

First, John will highlight the durability of our business model, illustrated by the continued strong margin profile of our businesses. Next, he will discuss the financial and operational highlights from the third quarter.

Ron will then provide details on our third quarter performance, along with comments on our balance sheet and our updated 2017 financial guidance. Finally, John will close out the call with our outlook on the business. Now I'd like to turn the call over to John..

Thank you, Brad, and good morning, everyone. Before jumping into results for the quarter, I would like to highlight some of the strategic initiatives that have enabled the strong business performance that we will discuss today.

First, when I was appointed CEO, I laid out a strategy to simplify our portfolio, focus our business model, and execute against our long range plan. Over the past year and a half, we've taken several specific actions aligned with that strategy. And I am pleased to say that these actions are, once again, driving positive performance results.

Perrigo is a well-positioned company that has the right to win in the markets where we compete. We offer quality, affordable health care products in an environment where governments, health care systems, and patients are focused on health care spending.

Our unique business model and diversified product offerings are focused on a number of key OTC and prescription categories across North America and Europe.

These categories not only represent solid growth opportunities for Perrigo, but also represent important treatment categories for patients and families, making Perrigo the ideal partner in a global effort to lower health care costs. On slide 6, you can see the established margin trends in our businesses remain strong and consistent.

We remain excited about the durability of our unique business model led by our consumer-facing businesses, which comprise approximately 80% of our net sales. In our CHC Americas business, adjusted operating margin remains strong at over 20% for seven quarters in a row.

And this quarter's 23.2% adjusted operating margin is a record third quarter for this business. This is a great performance by the CHCA team, a testament to our execution and strong customer relationships. In our CHC International business, we have increased the adjusted operating margin profile to the mid teens.

Growth in our core branded portfolio has resulted in the third consecutive quarter of meaningful year-over-year adjusted operating margin improvement and notably, year-over-year operating dollar improvement. We remain committed to achieving an adjusted operating margin in the high teens within the next three years.

And I am proud of the team's continued progress towards this goal. In our RX business, the adjusted operating margins remain strong at over 40%, driven by our new product pipeline and solid execution by the RX team on the base business.

Even in the face of some challenging pricing, our team continues to drive strong performance from our uniquely differentiated asset and from new product introductions. Our overall business model continues to enable consistent cash flow generation.

With a keen focus on total shareholder returns, we again repurchased 1.9 million shares in the third quarter, totaling approximately $133 million. I would like to again thank the entire Perrigo team for delivering excellent third quarter results. Turning to slide 7. New products remain the driver of future growth for Perrigo.

And each of our business teams is focused on driving our market leadership position through new products. This skill set is core to the Perrigo advantage. A good example of the team's distinct capability in developing new products is the speed at which our CHC Americas business is able to develop, gain approval, and bring products to market.

The launch of the store brand version of Nexium is a great example of that capability. The team was able to file our ANDA with the FDA for the store brand version of Nexium on the same day that the national brand launched. This enabled us to be the first to launch a private label Nexium equivalent into the market.

In the third quarter, our overall business realized $55 million of new products net sales, led by the generic versions of Axiron and the store brand version of Nexium. Turning to slide 8.

Our focus on operational execution has yielded positive results for our business during the quarter as, one, CHC Americas adjusted net sales grew over 1% versus the prior year, and store brands again gained share versus national brands.

Over the last nine months, against the backdrop of a challenging consumer OTC marketplace, CHC Americas adjusted net sales have grown approximately 1%. Two, CHC International constant currency net sales grew a solid 5%, excluding $42 million in the prior year for the exited unprofitable European distribution businesses.

Over the last nine months, the strategy of aligning brand prioritization, where we have the right to win, with disciplined ROI-based advertising and promotional programs, has yield approximately 2% net sales growth.

And three, in the third quarter, excluding the effect of Entocort, the RX team grew net sales approximately 4%, driven by our strong new product pipeline and solid execution on the base business.

Strong business performances across all segments, including the shift in operating margin performance in our CHC International segment and continued strong RX execution, have enabled us to increase our adjusted EPS range to $4.80 to $4.95, which Ron will cover in more detail shortly. Now I'll turn over the call over to Ron for some more details.

Ron?.

Thanks, John, and good morning everyone. Bear with me with my – as you listen to my raspy voice this morning. I helped kick off the 2017 and 2018 cough/cold season this week. Last quarter, the theme I used to describe our business performance was converting opportunities into bottom line results.

We are pleased that this theme continues, which is reflected in our performance again this quarter. Each of our businesses have developed a keen focus on execution, action, and capitalizing on opportunities, all of which have provided the foundation of our financial results in the first nine months of the year.

These results were achieved again against a challenging and dynamic market backdrop for each of our segments. Now let's turn to slide 10, where you can see our GAAP reporting results for the third quarter. Please reference the appendix for a more detailed reconciliation from reported to adjusted results.

I would like to take a moment to outline the effect of the favorable adjusted effective tax rate, or ETR, in the quarter. As you can see in this slide, our adjusted ETR is approximately 12% in the quarter, which contributed approximately $0.09 of upside to our previous guidance.

Year to date, our adjusted ETR is approximately 17%, which is lower than our previous guidance. Our ETR guidance has improved primarily first to the utilization of tax attributes supported by the improved business performance in the CHC International segment, and second, improved jurisdictional mix of income across the company.

For the third quarter, recall that accounting principles require what is commonly known as annualization of the expected decrease or increase of the annual tax rate to be recorded in the current quarter.

Accordingly, the third quarter tax rate is below the expected annual tax rate of 17%, due to this cumulative benefit for the first nine months of the year. Turning to the CHC America results on slide 11.

You can see that the net sales in the quarter were $599 million, compared to adjusted net sales of $590 million in the prior year, or growth of over 1% on a constant currency basis.

This increase is primarily driven by higher net sales in the GI category, in addition to strong performance in our Animal Health and Mexico businesses as compared to the prior year. New product sales in the quarter were $13 million, driven by the store brand launch of Nexium, which launched late in the quarter.

Offsetting these positive effects were lower sales primarily in the smoking cessation and contract categories, in addition to pricing pressure in certain OTC categories. Discontinued products were $3 million in the quarter. For the quarter adjusted gross profit margin was 36.4%, an increase of 100 basis points compared to the prior year.

Sell through of higher margin products, specifically in the Animal Health and Dermatology categories, in addition to positive contributions from supply chain efficiencies, offset price erosion in certain categories versus last year.

Adjusted operating margin was above 20% for the seventh quarter in a row, driven by gross margin flow through and lower selling and administrative costs due to restructuring actions and timing of R&D investments. The durability of this business is evidenced by the strong operating margin and continued consumer acceptance of store brand products.

Turning to slide 12. Net sales grew by approximately 5%, excluding $42 million from the exited unprofitable European distribution businesses and favorable foreign currency movements of $12 million.

This increase was primarily driven by higher net sales in the cough/cold, allergy, analgesics, and lifestyle categories, in addition to new product sales of $11 million.

Adjusted gross profit margin in the quarter was 51.4% or a 570 basis point increase over the prior year, primarily due to the cancellation of the unprofitable distribution businesses.

This segment also benefited from our strategy to insource more production of our branded OTC products, which helped to offset unfavorable effects from foreign currency purchases and a mix of lower margin products sold in the quarter.

Adjusted operating margining of 16.4% was driven primarily by gross margin flow through and lower operating expenses, primarily due to the improved sales infrastructure. The year-over-year adjusted operating margin improvement included advertising and promotion, or A&P, investments in line with the prior year.

Year-to-date adjusted operating margin was approximately 14.9%. Quarter by quarter, operating margin may vary by an estimated plus or minus 150 basis points from this run rate due to the timing of investments in innovation, A&P, or expenses to build out our back office systems in this segment, as I will discuss in more detail shortly.

As an example, the third quarter adjusted operating margin was clearly in the upper end of this range due to seasonally lower A&P spending as a percent of net sales.

Saying it differently, if A&P spending in Q3 was the same as the quarterly average percent of net sales in the first half of 2017, adjusting operating margin in Q3 would have been consistent with the lower end of our guidance range of 14% to 15%. Turning now to RX on slide 13. Net sales in this segment were relatively flat compared to the prior year.

Excluding the $10 million year-over-year impact of Entocort, net sales in RX grew approximately 4% compared to the prior year. New product sales in the quarter were $31 million, driven by the generic launch of Axiron, among other new product launches, which are offset partially by price erosion at the lower end of our previous guidance of 9% to 11%.

Adjusted gross margin was 54.9%, as price erosion in Entocort competition offset new product contributions versus the prior year.

Adjusted operating margin for the segment was 42.4%, consistent with the same quarter in the prior year due to lower selling expenses driven by the restructuring of the specialty pharma salesforce and timing of R&D investments. Excluding Entocort, adjusted operating income grew an impressive 10% in the quarter to $103 million.

The strategy in this segment of driving new product launches and proactively managing our cost base in the difficult to manufacture extended topicals market delivered solid results again this quarter. Now turning to slide 14. I will provide an update on our cash flow from operations and balance sheet.

In the first nine months of the year we generated $482 million in cash from operations. Excluding an unusual tax payment of $74 million and cash restructuring payments of approximately $48 million, year-to-date cash from operations would total $604 million.

Our team continues to focus on cash flow generation, as operational cash flow conversion as a percentage of adjusted net income for first nine months of the year was 116% excluding these two items.

As of September 30, 2017, total cash on the balance sheet was $776 million, and total outstanding debt was approximately $3.7 million (sic) [$3.7 billion]. As a reminder, we intend to repay approximately $370 million of debt due in December of this year.

Including this repayment, our total debt is expected to be reduced by approximately $2.6 billion in 2017. Our debt pay down actions this year continue to increase our financial flexibility, enabling the majority of free cash flow to be available for inorganic growth opportunities and/or returning capital to shareholders.

Our combined total debt maturities for the years 2018, 2019, and 2020 are approximately $550 million. We believe that this balance sheet flexibility, coupled with our cash flow conversion, makes us unique in this space.

Our capital allocation decisions are focused on total shareholder returns within the context of our long standing commitment to an investment grade financial policy. As part of our disciplined and balanced capital allocation strategy, we completed approximately $192 million of share repurchases year to date.

Perrigo's strategic priorities remain focused on driving organic investment and organic pipeline, targeting inorganic opportunities in our Consumer and RX businesses to achieve measurable shareholder value creation, supplemented by shareholder return programs.

On slide 15 you can see the bridge that walks from our adjusted EPS guidance provided on August 10 to the upgraded adjusted EPS guide provided this morning. The increase in guidance is primarily driven by three factors.

First, given strong execution across all of our segments in the third quarter and a lower adjusted effective tax rate, we are upgrading our midpoint adjusted EPS guidance range by approximately $0.25 per share.

Second, we used our balance sheet flexibility and strong cash flow position to repurchase $133 million, or approximately 1.9 million shares in the quarter, which represents a benefit of approximately $0.02 per share in 2017. This action in our – this action is reflected in our 2017 share count guidance of 143 million shares.

Third, accounting for favorable currency movements compared to the forecast provided against August 10, we are updating our adjusted EPS guidance range by approximately $0.03 per share. The result of these combined factors is a 30% increase in our midpoint adjusted EPS guidance to a range of $4.80 to $4.95 per share.

Our continued emphasis on operational execution and actions to focus and simplify our business model continue to strengthen our performance outlook. On slide 16 you can see our 2017 segment guidance. In CHC Americas we continue to expect approximately $2.4 billion in net sales.

This guidance has remained consistent since February 28, 2017, when we initially announced guidance for the segment. Our adjusted operating margin guidance is expected to be within the range of 21% to 22%.

At CHC International, given the actions we have taken in this business and the corresponding strong performance of net sales along with currency movements, we now expect approximately $1.485 billion in net sales. This quarter we are also upgrading our adjusted operating margin guidance for 2017 to approximately 14% to 15% of net sales.

This is driven by continued execution of our focused business strategy. Included in this updated range are seasonally higher fourth quarter A&P investments, which were consistent with the 2016 spending levels.

The CHC International team continues to look for ways to improve the portfolio with targeted streamlining and business development actions, executing on our insourcing strategy, and improving the cost structure of this segment.

In RX, given the continued strong performance of new product launches and execution of our diversified extended topicals portfolio, we now expect approximately $965 million in net sales. This forecast also includes an updated price erosion assumption. We are now anticipating to be in the high single digits for 2017.

RX adjusted operating margin is forecasted between 41% to 42% for the year. We have continued to upgrade both top line and bottom line guidance during the year for this segment, based on execution of our strong pipeline and our differentiated generics platform. On slide 17 you can see our increased consolidated 2017 guidance metrics.

Driven by the upgrades just discussed for our CHC International and RX segments, we now expect consolidated adjusted net sales of approximately $4.8 billion to $4.9 billion and adjusted operating income in the range of $990 million to $1.01 billion for 2017.

Regarding growth investments, third quarter consolidated R&D investments as a percentage of net sales were 3%, which is lower than our expected run rate of nearly 4% of net sales for the year, partially due to the timing of clinical studies and milestone payments.

This shift of approximately $10 million to $12 million is expected to be invested in Q4. Our expected adjusted tax rate is now forecasted at approximately 17% to pre-tax income due to the factors outlined earlier. Our full year adjusted EPS range has been updated to $4.80 to $4.95, a $0.30 midpoint improvement from the range provided on August 10.

This range includes the updated share count to reflect the buyback executed during the third quarter. The quality of business execution that we have seen through the third quarter not only provides increased confidence in our full year guidance, as illustrated by today's upgrade, but it also enables us to execute longer term strategic investments.

While we are pleased to be on track to achieve the benefits from our cost savings program, we plan to invest a portion of these savings back into the business in 2018.

These investments will be in such areas as continuing to improve the business capabilities in CHC International, including the IT infrastructure, and regulatory and compliance programs such as the new global data privacy regulation.

To give a tangible example of reinvestment back into the business, we are currently in the process of implementing a pan-European integrated sales and operating technology platform that will continue to improve our forecast accuracy, reduce inventory obsolescence and returns, and support our sales effectiveness programs.

Our guidance for operational cash flow has been increased to $620 million, consistent with the upgrade in earnings guidance for the year. Excluding the unusual tax payment for $74 million, cash restructuring payments of approximately $60 million, 2017 cash from operations would total approximately $750 million.

Despite dynamic end markets, our guidance reflects the benefits of our ability to focus, simplify, and execute our business model. On a constant currency basis, excluding divested and exited businesses, our CHCA, our CHCI segments year to date net sales growth for 2017 are approximately 1% and 2% respectively.

Excluding the year-over-year effect of Entocort, RX growth is trending above 2% in the second half of the year, driven by new product launches. These are overarching business trends are expected to continue as we enter 2018.

I would like to thank the entire Perrigo team for the quality of business execution that we have seen through the third quarter, which has played a large part in our ability to again upgrade our 2017 guidance. I will now turn the call back over to John..

Thanks, Ron. Slide 19, as you can see, store brand growth continues to outpace national brand growth in most categories. This was driven by continued consumer acceptance of store brand products and the launch of store brand products in categories where national brands previously held exclusive share.

The growth of store brand is particularly prominent in the GI and smoking cessation categories, as new store brand products continue to offer consumers an expanded selection of high value, quality alternatives to national brand products. Turning to slide 20.

We aim to be a retail customer's strategic partner in bringing innovation, content, and thought leadership in digital marketing and e-commerce merchandising, as we have done over the years with traditional brick and mortar retail.

We are building and investing in marketing resources and tools to enable our leadership in digital marketing and e-commerce.

We believe store brand share growth through e-commerce will emerge, as it provides our customers the opportunity to engage more directly and closely with the consumer to convey the compelling quality and value message of our products.

We are working on these initiatives with virtually all of our key customers, including traditional brick and mortar customers, many of whom have online presence. Turning to slide 21. We continue to focus on profitability and steady operating margin expansion in the international business.

The team is driving brands, innovation, enhancing e-commerce and digital capabilities, streamlining processes and functions, and engaging and developing our people. We still have a number of initiatives to optimize this business.

And given its improved performance, we are now reinvesting to drive innovation in building out back office systems for further support of our sales strategies. I am pleased with the margin expansion that the team has realized this year.

And we continue to target an adjusted operating margin in the high teens over the next three years, including additional investments to support our branded strategies. Turning to slide 22. We continue to execute and manage the RX business for the long term. The market size of additional opportunities remain sizable.

And the R&D team is busy adding projects and working hard to advance the pipeline. Many of the new products launched this year are expected to provide benefits beyond one or two quarters, a testament to the RX team's rigorous product selection process. Looking forward, we remain excited about the 2018 new product pipeline.

We remain optimistic about bringing our generic version of ProAir to market and continue to work with the FDA on answering questions pertaining to a complete response letter that we recently received. There were no additional clinical studies requested as part of the CRL.

And we are working to respond in the next few months with a goal of delivering this first to market generic product in 2018. In closing on slide 23, our businesses have performed well through the first three quarters of 2017 and we remain optimistic about the opportunities going forward.

Perrigo is well positioned to win in the quality affordable healthcare space. Our durable business model continues to deliver strong financial results and cash flow conversion in challenging and dynamic marketplaces. As discussed earlier, our Consumer teams are delivering at or above market growth.

Furthermore, the RX team is delivering on their plan, and we continue to expect growth in this segment. And with our enhanced balance sheet flexibility, the team continues to look for the best way to deliver value for our shareholders through investments in our organic pipeline, evaluating inorganic opportunities, and/or return of capital.

In closing, I believe Perrigo is a company uniquely positioned within the healthcare space. And that it will be an important part of the equation, as both public and private sector stakeholders search for ways to lower the cost of healthcare. I am proud of what we have done to focus our business.

And remain confident in our ability to continue driving value for our customers, consumers, and owners in the future. Before turning the call over to Q&A, I thought I'd give a brief update regarding our ongoing CEO search. As I commented last quarter, I remain excited by the level of interest received from many high quality candidates.

The board is working diligently in its search process and is focused on finding the right strategic and cultural leader for Perrigo. I personally remain committed to leading Perrigo and supporting a smooth transition, which has enabled the board to conduct a truly thorough search to find the next CEO. Thank you very much for your time.

Brad, I'll turn it back to you..

Thanks, John. Operator, I would like to open up the call for questions. We ask everybody to please limit yourself to one question. Thank you..

Operator. Thank you. And your first question comes from Gregg Gilbert with Deutsche Bank..

Thank you. Good morning, team. John, on the e-commerce comments, for whatever set of reasons e-commerce has been very small in terms of purchase of store brand OTC products for the industry and therefore to Perrigo.

Short of Amazon or someone getting in in a big splashy way and making a push, how do you think this will evolve? Is it a slow, steady evolution of more of these things going through to e-commerce and away from brick and mortar? Or could you see a more sort of abrupt change there? Thanks..

Yeah, thanks, Gregg. Thanks for the question. From my perspective, I would say until more – whether it's Amazon or others get more and more behind buying OTC and those kind of products online, it will be a slow and steady increase. If they put more energy, muscle behind it, I think it could grow faster than that.

But I think it's a more of a slow and steady, versus a dramatic shift within a quarter or something of that sort. It still is a – it's a good part of the business for both retailers and Amazon as they're getting into it. But as you said, still a relatively small percentage of the overall OTC market sold through those venues..

Thank you. Next question, please..

Your next question is from Randall Stanicky with RBC Capital Markets..

Great, thanks, guys. John, the diversified footprint has been delivering across all the businesses, which is perhaps support to keep that overall business intact. But specifically on the U.S. Consumer business, that's still the primary value driver.

Can you help us think about the growth in that business? And how do you get back to the 2% to 4% that you're targeting? We've now had two quarters in a row with $13 million in new product launches. You had some help from Nexium this quarter.

Is there a way to get us comfortable that we're going to see an acceleration in some of those new launch – product launch opportunities over the next call it one quarter to three quarter to four quarters?.

Yeah. Thanks, Randall. So a couple parts of that. I'd say first of all, just going to your – the new product side. First, just to be clear, Nexium, we launched it right at the end of last quarter. And so we'd expect to see bigger sales of that in the fourth quarter here and back half.

I think as I look at the growth, what gives me confidence is that store brand in the U.S. continues to gain share over brands. In other words, we're doing all the right things to drive share, to gain share. The markets have been tough.

So when you're looking at a relatively low growth market, I would assume over time it becomes a 1% to 2% growth market, in which case our numbers kick up higher than they are. Given what the overall market growth is, which right now over the quarter, Q3, was relatively small, less than a percent.

For us to grow more than that and continue to grow 1 times, 1.5 times that, I think is good performance. So part of it has to be the market has to kick in. I do like the fact that we're gaining share, even in a lower growth market right now in the U.S..

Okay, great, thank you..

Your next question is from Chris Schott with JPMorgan..

Great, thanks very much. Just was hoping to get a little bit more color on the RX business and base kind of pricing trends.

I guess specifically what was erosion this quarter? And how do you see the pricing dynamic shaping up as we start looking out to 2018? I guess specifically, it seems like you're talking about a 9% erosion in terms of the 2017 target.

Is that a reasonable range to think about as we look out to 2018? Or could we actually think about a smaller erosion rate as we start to think about next year's numbers? Thank you..

Yeah, thanks, Chris. Appreciate the question. So I would say in the quarter the erosion that we experienced was in line with our expectation, sort of that high single digit kind of erosion level. So it was in line with that. That's what we experienced in the quarter. That's what we would plan going forward for the next quarter, high single digits.

That's what's in our guidance numbers. I haven't seen it subsiding enough yet where I can see a trend change. So right now as we look at RX business, as we're looking at, say, the first half of next year, we would plan on relatively big erosion again as we look at that next year and going forward.

So I'm not saying that that will happen for the next five years. But I just haven't seen the trend change yet to where I can say, boy, there's all of a sudden a 5% number or something like that..

Yeah. This is Ron, but now I could just add, sometimes we focus on pricing, but at the end of the day it's about new products. Right? So take a look at that business, and essentially in the evolution of this business this year, we had $217 million of sales in Q1, $240 million in Q2, $251 million in Q3, and you'll see a sequential growth again in Q4.

So when we're focused on pricing, what I think we've asked you to do is looking at the quality of the business and how this business is growing with net pricing pressure. So although we're – and John has mentioned – experiencing the high single digits with new products – example, $30 million of new products contribution in Q3. We grew 4%.

That to me is the story. So pricing, you bet. It's a challenge. But it comes back to, how do you offset new pricing? Is through pipeline, it's through new products. And we're proving our capability to show net growth in this business. And as we've talked, we expect net growth in the circa 2% in the second half of this year.

So that to me is the ultimate metric of where the business trends are..

Thanks very much..

Great, Chris..

Your next question comes from David Maris with Wells Fargo..

Good morning. Ron, on taxes, what do you think the implication of the tax reform proposal would be if passed on Perrigo? And then, John, we've written a lot about Amazon as a potential disruptor in pharmacy. Just as a follow-up to the earlier question, do you think that they'll enter the pharmacy business? Thanks..

Yeah, thanks, David, for the question. Obviously, a very relevant and important topic for every company at this point. To start, Perrigo has always talked about we believe that tax reform is necessary. Modernizing what you could argue is an outdated United States tax code for competitiveness for the U.S. in jobs and investment is critical for the U.S.

economy over the longer term. You step back and think about Perrigo, kind of going to your question, we have over 10,000 employees. Our largest manufacturing footprint is here in the U.S. And our goal and our priority is to enable and deliver quality affordable healthcare to consumers around the world. So that's the business of Perrigo.

I think, David, we can agree to kind of three things to start with. Number one, we're very early in the process. The first H-1 bill was issued just a week ago. It still remains very dynamic. And I think we probably can agree the final reform to the extent it's achieved will not be like the first bill that was provided. So that's probably the first thing.

Number two, it's very complex. It's a very complicated process. And this goes to some of the amendments we're seeing already in the process relative to some of the architecture of the current bill. Tax reform is not simple.

The third part is every multinational company, of which Perrigo obviously is in that umbrella, will likely be affected by tax reform. And the question, kind of going a little bit to your question is, what's often asked, is this good or bad for you? In my mind, that not – it's not a binary question.

I think the issue we're all faced with is looking at what I call the building blocks and the systematic changes of the entire reform package. And then coming back and saying, what does that mean for Perrigo, our investors, and our customers? So again, we applaud the U.S. government for being serious about tax reform.

David, we're taking a very thoughtful process. We do see the House bill as what I'll call the opening bid. And we continue to monitor and evaluate again what I call the building blocks and systemic changes. But for us to provide a good/bad systemic indication at this point would not provide a very steady hand, thoughtful process.

So we're looking for what final reform is. Where does the final delivery of the legislative process come forth to? And we'll be very proactive in communicating and addressing Perrigo's situation at that time..

And, David, on Amazon, and I'll say online or those kind of things. I probably can't speak on Amazon on their exact intentions any more than what's out there publicly. What I can say is my belief is that given our pharmaceutical delivery systems and everything, there will be disruptors in the market.

There will be people, whether it's Amazon or others, that come and try and figure out ways to get products to consumers in a more efficient way and do those things. I believe that that's frankly healthy for us as a U.S. So I think there will be disruptors. I count on Perrigo as a company living up to our mantra.

Our mantra has always been, fast, fluid, flexible. We're going to react to situations, we're going to be a leader once we see where it's going and driving it. So whether it's Amazon or someone else, I do believe there will be disruptors out there on the buying, on the way of getting pharma products to consumers, on those kind of things.

And our view would be we plan to be right there with those as they take better shape..

Great..

Thanks, David..

Thanks..

Great. Thank you..

Your next question is from Louise Chen of Cantor..

Hi. Thanks for taking my question. So just another question here on this online vendor opportunity. So why have consumers not historically used online vendors more to purchase OTC drugs? You had mentioned that there have been a couple of endeavors in the space.

And could you elaborate a little bit more specifically on if Amazon were to enter the market, how that could help your business? Thank you..

Yeah, so thanks, Louise. Thanks for the question. I would say I don't have the – I want to be clear. I don't have the exact consumer – we did not do consumer studies yet to say why aren't you buying online or anything like that. So I don't have that.

My belief is in just my perspective in talking with others is that for the most part today, when you want to cure a migraine headache or do something and you go to your pantry and it's not there, you run to the store and get it. It's sort of a, as used as needed. You go get the cough/cold product when you have a cough or cold.

Most people aren't necessarily saying, is my product in my cupboard expired, should I buy more. Those kind of things yet. So I think it's more of a, I need it when I use it. I go to get it. Got pretty convenient locations locally to run and get that. I don't have to go to a large grocery store. I can go to anything that's close by if I choose to.

So I think that is part of it so far. I do think that Amazon, if you pull up Amazon and go through it, they have a number of products for sale there in the OTC categories. So it's not like the products are presented aren't out there.

I think as they get more behind the merchandising of it, just as retailers get more behind the merchandising, it will continue to evolve and grow as a online purchase source..

Thanks, Louise..

Your next question is from Jami Rubin of Goldman Sachs..

Hi, this is Candace Richardson on for Jami Rubin.

I'm wondering if you're still considering strategic alternatives for the RX business? Or do you feel like you have enough flexibility to further invest and diversify away from derm? Or is derm relatively inflated at this point in your view? And then secondly, can you just comment on product mix this quarter in RX? I know it was a pretty big benefit last quarter.

And to what extent was it a driver this quarter? And how should we think about that going forward? Thanks..

Yeah, so let me tell you, and it's probably pretty consistent to what I've said over the last couple quarters on RX. First of all, we like our business. We continue to invest in our business. We think we have a good pipeline, all those things. So despite the market dynamics and the craziness, we feel we have one of the better businesses out there.

And I think I've continued to say that relatively consistently. When you do have that and you have market disruptions, dynamics like you have today, we're looking at every way still, with the RX business and frankly all of our businesses, but to say is there other ways to create value.

Are there other things to do? Should we be adding products into our portfolio from the outside? Should we be doing other things? So I would say we continue to look at all of those options of increasing the value. But we think we do it from a position of strength. We don't feel we have to make moves.

We feel there's enough products in our pipeline and the extended topical area is broader than derm. We have nasal sprays and inhalation products, et cetera. But it's broader than that. And we feel there's plenty of products to continue to invest in, to continue to increase our R&D investments, to keep growing that category, and do what we do.

So with that, Ron, I don't know if you want to take her mix question..

Yeah, yeah. Yeah, you bet, John. So product mix was normal this quarter. We've kind of talked to investors across the board that if you look at a average gross profit margin, adjusted gross profit margin as the indicator, it's around 55%. This quarter, 55%. Now again, quarter by quarter we may vary off that 150 basis points plus or minus.

But a standardized margin in this business right now, it's about that window. And we are right there this last quarter..

I would say the one thing as you think about the operating margin, is Ron talked about in his part, the R&D investment. And so we had lower R&D, some of that lower spend translated down the operating margin higher number this quarter. Excuse me, yeah, this quarter.

So 100 basis points, 150 basis points normalize it between this quarter and next quarter, because we will be planning on spending that R&D in Q4, as Ron said in his comments..

Great. Next question, please..

Your next question is from Marc Goodman with UBS..

Yes, can you talk about the o-U.S. operating margin just a little more? You mentioned insourcing was a help in the quarter. How much was it a help in the quarter? And where are we in that process of starting to bring the products in? I mean is this the first quarter we've seen any impact? This is certainly first time you've actually mentioned it.

And then I guess I'm just wondering, if you didn't spend and you got such great returns on the top line, how did you do that this quarter? And why is there a need to spend next quarter extra money? Just, I'm just curious. Thanks..

Hey, Marc. I, yeah, I can take that one..

Yeah. Well, Ron will take that one, please..

But yeah, kind of a two-part question there. So first of all, we have talked about insourcing for some time, so hopefully that message has been clear, Marc, at least in my mind. We provided systematic commentary that that strategy started about a year and a half ago and we're starting to see the benefits.

If you look at the gross profit margin in this business, it's been running pretty much like clockwork at 51%, 52% adjusted GPs to sales. So pretty consistent performance. So we are seeing the phasing in. And as we've talked about before, just to put kind of an overarching metric on it, we acquired the assets of Omega, the branded business.

They were about 80% outsourced. Now our goal is to get that down to under 60% outsourced. And again we've said we're just about halfway through that journey, not quite. So figure a third to halfway through that journey at this point. So it's phasing into our performance as we speak. On the A&P piece, it's seasonal.

I mean if you look at the metrics, Marc, and trend backwards, this business, yeah, Q1, Q2, Q4, usually runs 12%. Q4 is a great example. You're spending into the cough/cold season. You're spending into lifestyle. We have lifestyle weight loss products.

You want to advertise and promote into "the January renewal cycle." And Q3 is always running around that 10% of sales. So there's nothing I'll call out that we've done dynamically different.

It is A&P aligned with our sales strategy is one of the key things Svend [Andersen] has done is ensuring our sales management model is aligned with our promotional programs. So we are making sure in a disciplined way that that A&P ties to our top line execution. And you're just seeing that in Q3.

Nothing unusual other than business discipline and again some seasonally lower attribution, just given the product portfolio in Q3..

I would say, Marc, the other thing that – if you think evolution-wise we still feel – and this has been consistent as we've talked about that. Over the next three years we can get to that high teens. In order to get there we've got to continue to do things fundamentally different.

So as opposed to just muscling through margin, doing some insourcing, it requires different infrastructures, different investments. We've been saving good money. We're making sure we're taking some of that and putting it back in the business to get to those higher margins.

So those investments of $10 million to $20 million that it will take to create a better infrastructure, we feel we're at a good position to initiate those and add those in. And those will be key parts of our 2008 (sic) [2018] investment strategy when you look at the expense side to get to those higher end margins ultimately. Thanks, Marc..

Thank you. Next question, please..

Your next question comes from Annabel Samimy with Stifel..

Hi. Thanks. So while we're on the topic of the International, so a lot of what you've done has been on the operating efficiencies, infrastructure, improving that margin.

Is it time to think where you can start bringing around the revenue synergy to bringing new products onto the platform? And have you identified those first areas that you want to sort of drive some revenue synergies from?.

Yeah, great question. So first of all, we are happy. We got out of the unprofitable distribution side. But we're happy with the 4% to 5% growth in that business that we had this quarter. We think that's very good growth for that business.

So even without adding in all of those, we do have a new product pipeline, new product launch within CHCI that phases out over the next three years, as they look at those kind of products. And we are looking for both internal synergies I would say, Annabel, as well as inorganic opportunities to add in products.

We feel like our infrastructure is more stable. Again as I said earlier, there's a lot more we need to do to get it to where it's U.S.-like, if you will. But it's a lot more stable. And we feel like we could add inorganic opportunities into that infrastructure and be able to absorb it and have gross profit flow pretty well down to the operating margin.

So we are looking at all of those. And we feel better about the positioning of our international business now, as we've made some of the initial changes. Thanks, Annabel..

Thank you. Your next question is from Douglas Tsao with Barclays..

Hi, good morning. Thanks for taking the questions. Just on the Nexium launch, which you got off and you indicated it in the prepared remarks that you expected that to sort of build as we go through fourth quarter. We know there's at least one other competitive entrant into that category.

So just sort of trying to think about how that will progress as we move through next year? And if you have any insight in terms of the competitive landscape in terms of how many you think there will be in say 2018?.

Yeah. So first of all, there is a competitor out there. We have that – we had that in our initial plans as we talked. There were three initial companies. One got the approval. Those were in our plans. We launched the product, expect to continue to build that through the quarter.

We would expect over time, as we've done in most of the other products, to have our fair share of that product category. Do we think we'll have other competition? I do. I believe ultimately there will be others out there.

But we believe because of our strength, et cetera, we will have our ultimate fair share of a good GI category, as we do in the other products that we have within that category, lansoprazole, omeprazole, those kind of products, we have a fair share despite competition.

And so we believe that we're able to do that, even though competition will be there..

Okay. Great. Thanks..

Thanks, Doug..

Thank you. Our final question is from David Risinger with Morgan Stanley..

Hey, David..

Morning, David..

Thank you very much. Hi, congrats on the performance. I wanted to ask about consumer healthcare. So could you just provide a little bit more context? Obviously the performance that you delivered was well above expectations.

But just sort of step back and put in for context for us why that segment revenue growth was only 1%, particularly when you launched Nexium? And then in terms of helping us understand how to think about that segment sequentially going into the December quarter, how much fourth quarter revenue variability is there with respect to the cough/cold/flu season? Meaning, is that a big swing factor in the fourth quarter? And maybe you could just talk about the range of possibilities for the cough/cold/flu season in the fourth quarter.

Thank you..

Yeah, thank you. So let me take the kind of first part of that. And, Ron, I think I'll toss you over for the second if you think of it..

Yeah..

So in general, we actually feel very good about the growth in the quarter of the business. And just because of where the category growth is, where the market is, the actual performance of the brands, et cetera, we feel pretty good about growing share and being able to continue to grow that.

We think then as market growth continues, we're a bigger share of that market, and it enables future growth. So in general, we feel good about that. I would say cough/cold – matter of fact, maybe, Ron, I'll toss both those over to you. Cough/cold and then variability.

I will say last year Q3, not that I'm trying to do too much of that, but we had a really strong last year Q3 with launches, with a number of things going on. I think it was 4% to 5% growth last year. So the 1% for us over and above that 4% to 5% number last year was actually a pretty good achievement as we looked at it overall.

Ron, you want to talk about cough/cold and/or the growth side?.

Yeah, so certainly I'll kind of go through a couple things. So first of all, again to your question, we did grow last year Q3, roughly 4% in Q3, 5%. Just to kind of put the comps out there that we're growing off of. So again, still good performance against those relative comps, number one.

The cough/cold dynamic, we've moderated – or I shouldn't say moderated. We put in a normalized cough/cold season. If you look at normal business patterns, it's usually a little higher in Q4 just due to some seasonality. If you look at our guidance model for this year, you're going to see in the 2.5%-ish to 3% uptick from Q3.

But that's pretty traditional. There's not a lot of difference from what we've seen in our historical patterns. So again, we're modeling on a normalized cough/cold season. We're not looking at any other kind of product – any kind of product dynamics other than the Nexium new product penetration that we see in Q4.

And again on a sequential basis if you model out in that 2% to 3% zone – that's what our guidance tells you to do – you'll come out what we expect in the Q4 sales line..

Thanks, David..

Great, thank you very much..

Thank you. I will now turn the....

Great. Well, thank you, everybody. I appreciate your questions and comments. We're excited about the results we've had, and we're excited about the future for the company and where we're headed. So thank you very much for your time..

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