Perrigo Company PLC (PRGO) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Janelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Perrigo fiscal 2005 earnings announcement conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Doug Schrank, Chief Financial Officer of Perrigo. Sir, you may begin.

Thanks, Janelle. I would like to welcome you on the conference call, and we're delighted to have you join us, and thank each of you for your interest in wanting to learn more about Perrigo. We especially want to thank those of you who are joining us from Israel, where this call starts at 6:00 in the evening.

First, let me dispense of the SEC Safe Harbor language. These conferences include our views of where the business is going. We will make forward-looking statements we believe to be reasonable, but can give no assurance that those statements will prove to be correct. We have prepared a detailed discussion of the many factors we believe may have a material effect on our business on an ongoing basis, and have included this discussion on pages 33 to 44 of our form 10-K for the year ended June 25, 2005. That's the new 10-K which was filed the morning.

Additionally, at certain times, we will use non-GAAP financial measures that we believe better describe the ongoing financial results and trends of the business. The required reconciliation of these measures to GAAP measures is included in our press release, which -- which has been filed on form -- on a form 8-K that may be accessed from our web site at www.Perrigo.com.

With these formalities completed, I would now turn the call over to Mr. Dave Gibbons, Perrigo's Chairman, President, and CEO. Dave?

Thanks, Doug. Fiscal 2005 was a very busy year.

Perrigo made a major strategic move as we gained entry into the generic market in a big way with the acquisition of Agis at the end of the third quarter. This acquisition gave us a platform for growth in generic pharmaceuticals and established position in API and enhanced our store brand portfolio and expanded our manufacturing and R&D capabilities. We are really pleased with the new opportunities that this acquisition will open up for us. We also realize that the purchase price accounting and its write-off of in-process R&D, write-off of inventory step-ups, and other required accounting adjustments make it very difficult to compare historical results. We will do our best to simplify this for you.

Our generic pharmaceutical business now has 42 topical ANDAs approved and marketed, five solid dose ANDAs approved, 15 ANDAs pending approval, and five patents granted with 17 pending. This complements the 48 ANDA approvals, with three pending in our consumer health care business. In addition, our active pharmaceutical ingredient, API, business, sells to more than 25 countries and has 25 USA drug master files or DMFs, 14 in Europe, seven in Canada, and there are additional DMFs pending.

Going to our consumer health care business, at the same time that our organization was putting enormous effort into the acquisition, the consumer health care business encountered a variety of challenges. The cough, cold, and flu season got off to a very slow start. A historically slow start, and did not gain momentum until January and February. The severity and the fever/flu impacts were lower throughout the year. Reorders didn't materialize as expected as the season hit so late. As a result, retailers left the season with their inventories 5% to 10% below what they had been a year ago. This reduced our sales and the number of units that we produced.

Consumer health care gross margins for the year dropped from 29.8% to 26.6%. With the reduction coming from reduced volumes, higher material costs, higher obsolescence, and two product recalls. And we did have two significant retail-level product recalls in consumer health care during the year. They reduced operating income $10.3 million. If you remember, Loratadine syrup was recalled in the second quarter, and more recently, infant drops were recalled because of potential dosing confusion related to the syringe that was included.

Maintaining the highest quality standards has always been one of our most important goals. We are enhancing our new product processes and reviews, which were the focus of both recalls. These actions include a formal executive review of quality, prior to each product launch. And a lean sigma focus right now on the new product process.

Last year also we reached a settlement with the FTC related to a 1998 agreement between Alpharma and Perrigo for a children's ibuprofen suspension product. During the fourth quarter, we recorded a charge for $4.5 million for the anticipated costs to settle private class-action lawsuits related to that FTC settlement. Now before we discuss the outlook for fiscal year 2006, I'd like to turn the call back to Doug for his financial review.

Thanks, Dave. Before I get started, let me remind you of the timing of the Agis acquisition. It was completed on March 17, 2005, and if you remember, the acquired balance sheet was included for the first time in the consolidated balance sheets for Perrigo at the end of our third quarter. The operating results were included for the first time in the fourth quarter of this year. In addition, the acquisition resulted in new business segments.

We realigned our segment reporting following the acquisition, and now have three reportable segments, aligned primarily by product: A consumer health care, generic pharmaceuticals, and API approved pharmaceutical ingredients along with an "Other" category. Consumer health care included the US, UK, and Mexico operations, and the "Other" category consists of two operating segments with sales primarily to the Israeli market for consumer, pharmaceuticals, and medical diagnostic products.

Now as part of this acquisition, we had a number of recurring charges. I'm going to give them to you on a pretax basis, and they're included in our annual results, and they're unusual in nature. And many of them relate to the acquisition of Agis. There's about six of them, so I'm going to kind of walk through them for you. The first one is the write-off of in-process R&D. As you know, the US accounting standards require the write-off of the net present value of future cash flow for products and development which are not yet commercially viable. This charge has no tax benefit and totaled $386.8 million.

There's also a charge to cost of goods sold for inventory step-up. US accounting standards requires that profit in acquired inventory be included in the acquisition beginning balance sheet and written off to cost of goods sold as the inventory is shipped to customers. The expense of the inventory step-up both in the year and in the fourth quarter was $23.4 million. The costs related to the acquisition for tax and accounting advice and integration support, which is included in SG&A, is $5.6 million for the year with $1 million of that reported in the fourth quarter.

There's a one-time charge for operational improvements in our consumer health care business of $3.2 million, and a one-time charge for asset impairment of $3.2 million. Again, in the consumer health care business. As Dave mentioned, the settlement of the class-action lawsuit took place last year. But we recorded a $4.5 million charge in this fourth quarter for settlement with third parties. I won't summarize the charges, but in total, those pretax charges I've just discussed totaled $426.7 million.

In addition to those charges, there were other significant charges for product recalls for Loratadine syrup, $8.3 million in the second quarter, and infant drops, $2.0 million in the fourth quarter. These charges impacted operating earnings by $10.3 million on a pretax basis, $6.6 million after tax, or approximately $0.09 per share.

With all of those adjustments out of the way, let me turn to the annual results. Consolidated sales were $1.024 billion compared with $898 million in fiscal 2004, an increase of $126 million or 14%. Incremental 2005 sales included $110 million from the Agis businesses, $12 million from the Perrigo UK acquisition, and reduced by about $7 million for the product recalls. Gross profit was $260 million, a decrease of $8 million compared to a year ago, and the gross margin percentage was 25.4% compared with 29.8% last year.

The only nonrecurring charge to affect gross profit was the inventory step-up charge which reduced it by $23.4 million. Excluding this charge, gross margin would have been 27.7%. The impact on gross margin as a result of the cost of the Loratadine and infant drop recalls reduced gross margin almost one percentage point. So if you include that in the adjustment, the margin would have been 28.7%.

The reported consolidated loss was $353 million for a loss of $4.57 per share. Excluding the nonrecurring charges for IP R&D, inventory step-up, acquisition costs, the operation streamlining, the employee termination benefits, and the FTC settlement charge, that income would have been $62.6 million or $0.81 per share. The impact on that net income as a result of the charges for the Loratadine and infant drop recalls was $6.6 million or $0.09 per share.

Let me turn to the new segment starting with consumer health care. Sales were $933 million versus $898 million last year, up $35 million or 4%. New products related to the Agis acquisition accounted for $20 million, and the year-over-year increase due to the Perrigo UK acquisition added $12 million. New products sold in the smoking cessation, feminine hygiene, and foot-care categories added sales, were and offset by sales returns related to the recalls of Loratadine syrup and infant drops, a sales decline of a starch-blocker product, and decreases in volume and price related to cough and cold, analgesics, and gastrointestinal products.

Gross profits of $248 million decreased $20 million from last year's $268 million, and gross profit as a percent of sales declined from 29.8% to 26.6%, down 3.2 percentage points. About half of the 3.2 percentage point decline in gross profit percentage was related to lower production volumes. About a quarter was caused by the product recalls. And about one quarter was associated with inventory obsolescence, which included a fourth-quarter charge of $3.2 million for pseudoephedrine-related inventory. And Dave will talk more about that in a minute.

Operating expenses were $162 million in fiscal '05, up $2 million from fiscal 2004. Operating expenses actually increased where related to the operational improvement adjustment of $3.2 million. The asset imparment of $3.2 million, the estimated settlement of class-action lawsuits of $4.5 million, and just the simple addition of Agis consumer health care business to the -- to the Perrigo business, which added another $2.4 million. That $13.3 million increase was actually offset almost entirely, all but $2 million, by a reduction in employee bonuses and a strict spending control that was implemented in the last half of the fiscal year. Operating expenses in fiscal 2004 also -- that's last year, included a $4.7 million charge for the FTC class-action settlement.

Operating income for consumer health care was $87 million in 2005, versus $108 million in 2004. But if you exclude the nonrecurrent charges for operating, streamlining, employee termination costs, and class-action settlement charge, and the inventory step-up, operating income in 2005 would have been $98.3 million. The impact on operating income from the product recall was a reduction of $10.3 million.

Let's move to generic pharmaceuticals. This segment was established actually for Perrigo in fiscal 2004 as we entered the generic prescription drug market. Virtually all of the net sales and gross profit for fiscal 2005 result from the products acquired from Agis, and were included for the first time in the fourth quarter.

Net sales were $32.6 million. Gross profit was 20.9% of sales. Gross profit included a charge of $5.5 million for the write-off the inventory step-up. Excluding that charge, gross profit as a percent of sales would be 38%. You should also realize that gross profit includes a charge of $1.6 million for the amortization of intangibles required by purchasing Agis in the fourth quarter.

Operating expenses were $17.5 million, versus $5 million in the prior year. Approximately three-fourths of the increase resulted from the acquisition of the Agis business, and including spending by Agis, R&D spending increased $6 million year over year. Turning to the API business, net sales were $23.4 million, gross margin loss was $2.4 million, and included a charge of $12.5 million for the write-off of inventory step-up. Excluding this charge, gross profit as a percent of sales would have been 43.4%. Operating expenses were $4.8 million, and the operating loss was $7.1 million, including the charge for the write-off of the inventory step-up. Without this inventory step-up charge, operating income would have been $5.4 million.

The other category included the Israeli businesses for consumer, pharmaceutical, and diagnostic products. Net sales were $34.8 million. Gross profit was $7.6 million, or 21.8% of sales, and includes a charge of $4.4 million for the write-off of the inventory step-up.

Excluding this charge, gross profit as a percent of sales would be 34.4%. Operating expenses were $12.2 million, and the operating loss was $4.6 million, including the charge for the write-off of the inventory step-up. Without this charge, the operating loss would have approximated $200,000. Unallocated expenses were $394.6 million, and include a $386.8 million charge for the one-time write-off of IP R&D, $5.6 million for expenses related to the acquisition of Agis, and unallocated corporate expenses of $2.2 million.

Let me turn now to the fourth-quarter consolidated results. Net sales were $325 million versus $206 million last year. An increase of $119 million, or 57%. The Agis acquisition accounted for approximately $110 million of the increase. Gross profit was $65.7 million, an increase of $2.7 million versus the $63 million in the prior year. The gross profit percent of sales was 20.2%, compared with 30.6% last year. The gross profit was impacted by the nonrecurring inventory step-up charge of $23.4 million. Excluding this charge, gross profit would have been 27.4%.

Operating expenses increased $20.3 million from $50.7 million to $71.1 million, due mainly to the Agis acquisition. And the reported consolidated loss was $7 million, or $0.07 per share. Now excluding the following charges: the nonrecurring charge for inventory step-up and the pretax basis of $23.4 million, the class-action settlement charge of $4.5 million, acquisition costs of $1 million, and including a charge for the infant drop recall of $2 million, net income would have been $13 million or $0.14 per share versus $0.16 per share last year.

Let me turn briefly to the balance sheet. The total assets at June 25, 2005, reached $1.7 million. An increase of approximately $946 million from last year. This significant change reflects assets acquired in connection with the purchase of Agisd these acquisition assets were partially offset by a reduction of cash in investment securities used to affect the transactions.

Total liabilities at June 25, 2005, increased year over year by almost $900 million, representing mainly debt of $281 million, and Agis liabilities and the $400 million fully secured loan, which is offset by a $400 million deposit in the asset section of the balance sheet. Cash flow from operations was $78 million, which includes $10 million of Agis-related acquisition expenses compared to $119 million last year.

The increased use of cash is primarily due to the decrease in net income of $29 million, that's excluding the write-off of IP R&D and the inventory step-up charge, and the increase in working capital. For the year, capital expenditures were $27 million, and are expected to approximate $45 million to $50 million in fiscal 2006.

With that summary and lots of charges to reconcile, let me turn it back to Dave. He'll about the outlook.

Thanks, Doug. Before the acceleration of the move of pseudoephedrine to behind the pharmacy counter, and, in fact, even in some cases, to the discontinuation of some pseudoephedrine-based products altogether, fiscal 2006 had been expected to be a very good year for Perrigo. The pseudoephedrine issue has changed that.

Pseudoephedrine has been front and center with the US news media and retailers. Politicians have been very visible, acting to find a solution to the increasing abuse of methamphetamine and the related crime and damage to communities that it causes. Because pseudoephedrine can be illegally converted to methamphetamine, state agents are determined to remove pseudoephedrine from retail shelves in the belief that increased access will help solve the meth problem.

Since June, our pseudoephedrine business has been in a state of flux due to state legislative initiatives and retailer actions in response to those initiatives. These changes are having a greater negative impact on our fiscal 2006 business than we had earlier anticipated. The sales of pseudoephedrine held steady until near the end of the fiscal year.

Let me give you some facts. In fiscal 2005, annual sales were $182 million of pseudoephedrine versus $190 million in fiscal 2004. $3 million of the pseudoephedrine sales shortfall occurred in the first nine months, and $5 million occurred in the fourth quarter. Because the 2004-2005 cough, cold, flu season was less severe than the prior year, this sales decline was not unusual at all.

Given our continuing discussion with major retailers and our constant review of the legislative activity at the state and federal government level, we expected reductions in pseudoephedrine sales for fiscal 2006. Up until July, we had estimated pseudoephedrine sales for fiscal 2006 would be approximately $149 million, down $33 million from fiscal 2005. We expected reformulations to phenylephrine-containing products to offset maybe half of that shortfall.

Given the level of new products in fiscal 2006, including high expectations for smoking cessation, we forecast very good growth in total for consumer health care in fiscal 2006 when we were in our planning process in May and June. All of this has changed recently as our major retailers accelerated the move of pseudoephedrine to behind the pharmacy counter. In June, our largest customer announced that they would be dropping many pseudoephedrine tablets, putting others behind the counter, and leaving only pseudoephedrine liquids on the retail shelves. In early August, one of our largest drug store customers announced that they were moving all pseudoephedrine products, liquids as well as tablets, to behind the pharmacy counter by the end of October. Our initial thinking was that only tablets would move behind the counter in the pharmacy.

So the political pressures and retail changes that we were seeing caused us to revisit the fiscal 2006 sales forecast for pseudoephedrine. And today, we estimate sales for fiscal 2006 for pseudoephedrine-based products to be approximately $110 to $120 million, down $60 million to $70 million, or about 35% down from fiscal 2005. This would include the major customer impacts that I have outlined, the discontinuation of sales at some customers who do not have pharmacies so have no counters to put the material behind, a reduction in total SKUs because there's not enough room behind the pharmacy counters to put all the products there. And an overall sales decline because the consumer needs to cope with the inconvenience of going to the pharmacy counter to purchase pseudoephedrine-based products.

And we don't have any historical precedents on this scale to tell us how many consumers will do this. Even though we know that pseudoephedrine products are safe and very effective, in fact, better than the alternatives, when used for relieving cough, cold, and flu symptoms. So here we have a situation where Perrigo is being hurt, but also the consumer is being hurt by the difficulty and availability of pseudoephedrine-based products for this coming cough, cold, and flu season. In total, this sales reduction substantially reduces production volume in fiscal 2006.

We've been working hard to reduce costs appropriately, understanding that as our replacement products become available throughout the next 12 to 15 months, we expect to see volume in these products start to pick back up. We are also increasing our resources on lean sigma process improvements that are focused on reduced production costs, inventory management, and scrap. We estimate that operating income will be reduced approximately $30 million in fiscal 2006 because of pseudoephedrine issues. As we progress through the season with significant gaps on retailer shelves and we have to adjust to this significant volume reduction.

We are accelerating the formulation and validation of phenylephrine-based products. A majority of the brands don't currently have products with phenylephrine available on the shelf, so creating national brand equivalent formulations is difficult for us. Although the cough, cold, and flu season starts in September, we will only have a limited number of the reformulated products ready for this season. Despite pressure to bring the phenylephrine products to market as quickly as possible, we absolutely will not compromise on our quality and compliance processes. We will ensure that the new products are stable, safe, and effective, and that the appropriate regulatory requirements have absolutely been met.

Moving on in general to consumer health care, let's take a look at new products. As you all know, new products are very important to the business, and can fluctuate pretty dramatically sometimes from year to year. New products have accounted for sales of $45 million, $70 million, and $38 million in the previous three fiscal years respectively. Roughly an average in -- low $50 million range per year.

We continue to believe that fiscal 2006 will be an outstanding year from a new product perspective, with total new product sales for consumer health care exceeding $90 million this year. These products include smoking cessation products, pain relief arthritis, pain relief extended release, and additional acetaminophen-based national brand equivalent products as well as other new products.

Looking ahead to consumer health care financial results for fiscal 2006, we anticipate consumer health care sales for fiscal 2006 to be -- to come in approximately at $1 billion, up $70 million from last year with the addition of a full year of the Agis over-the-counter topical products. Operating income is expected to be approximately $105 million. This is $30 million below what we had only recently expected. Because of the new products, we expect to increase operating income slightly above fiscal 2005 before those one-time adjustments that Doug talked about, and despite the uncontrollable outside factors that are hitting us this year. This is not what we wanted or expected, but it's a good result given the negative impact of the pseudoephedrine sales decline.

Looking at our prescription pharmaceuticals, API and other Israeli businesses, sales for these businesses which are comprised essentially from the newly acquired Agis including prescription pharmaceutical , API and other Israeli-based businesses, are forecasted to be $390 million in fiscal 2006, versus $91 million in fiscal 2005, which represented only one quarter of ownership. Operating income is estimated to be $42 million, which excludes $5 million for the write-off of inventory step-up which will occur in the first quarter.

On a comparative basis, we expect that these segments will yield despite a challenging competitive landscape, approximately 10% sales growth compared to the previous 12 months, and even higher growth in operating income. This growth is attributable mainly to the performance of the API and prescription pharmaceuticals businesses with our recent launches of Mometasone lotion, which was a Paragraph IV exclusive launch, an important launch of an authorized generic, and a number of other prescription generic and API products that are expected to be launched during fiscal 2006.

Our R&D effort continues to be strong with new generic and API products currently in various stages of development, which will contribute to a bright future for us in this arena. One example of an important R&D and regulatory accomplishment is our recently filed Paragraph IV application for clobetasol foam, the generic equivalent to Olux, product of Connetics, with current sales annually of $70 million. We believe that we are the first to file for this product, and we're not aware of other generic companies who plan to file for generic topical foams. The development of clobetasol foam is consistent with our strategy to work on hard-to-develop products that require complex, multidisciplinary expertise.

With respect to the integration of the Agis business, we regard fiscal 2006 as a transition year. We expect significant expenditures that are related to the acquisitions, such as in areas as information systems and financial integration, et cetera, and we expect those costs to decline over time. On the other hand, we'll only begin to realize the savings of the cost synergies from the acquisition in this fiscal year. Thus, we have good reason to believe that the operating results of the acquired business will further improve in the coming years.

And finally, taking a look at consolidated results on a consolidated basis, we expect that sales for fiscal 2006 should be approximately $1.4 billion, up $370 million or 36% increase versus 2005. Net income is expected to be $72 to $76 million, and earnings per share is expected to be in the $0.74 to $0.78 cent range before the inventory step-up charge of $0.04. Our forecasted earnings changed $0.20 per share in the last month due to the acceleration of the expected pseudoephedrine sales decline.

Our usual sales -- I'm sorry. Our usual seasonal earnings pattern will look different this year as we absorb the costs of lower production volumes in the first quarter with the lower than usual cough, cold, and flu orders coming in from some of our retailers, and as our new product volumes don't really kick in until toward the end of the second quarter. Disappointing, no question. However, we'll work through the fiscal 2006 issues.

Our core strengths continue to exist in the consumer health care business, and we are very encouraged so far by what we see in our newly acquired RX pharmaceutical -- sorry, prescription pharmaceutical and API businesses, which are off to a very good start this year. Now, we would be happy to answer your questions. In addition to Doug and me, Mori Arkin, who heads our global generic business, and John Hendrickson, who heads our consumer health care business, are also available to answer your questions on those business segments, and we'd be happy to take questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Derek Leckow of Barrington Research.

Thank you and good morning. A couple of questions. First of all, let's start with the consumer health care business. Doug, what was the internal growth rate for revenue for that segment if you tried to exclude Agis for both Q4 and for fiscal year 2005?

Derek, if you -- if you start with the annual results for 2005, about $1.024 billion, Agis was about $110 million. The UK acquisition, which is about a half year that is not comparable is about a $12 million effect. And currency is about $4 million. So when you do that, the overall business that -- the pre--Perrigo business or Perrigo business before Agis is relatively flat. It's pretty close to zero.

Okay.

In the fourth quarter, if you start out with the $324 million in sales for the quarter, again, deduct Agis of 110 in currency of about one in the quarter, you'll end up with -- I think it turns out to be 213, right around there, which is up 3.5% to 4% over last year.

That's despite your retail customers being down between 5% and 10% on certain cough, cold, and flu products and as well as the initial impact of the pseudoephedrine changes, is that right?

Yeah. As Dave -- first of all, pseudoephedrine really didn't have a very significant impact year over year, it was only down $8 million to $9 million. Not a very significant impact. If you remember the cough, cold, flu season, it peaked late. The retailers depleted their inventory and didn't reorder. So that hurt us a bit year over year.

Secondly, getting to the outlook issues. Starting with Agis, what is your expectation for the Agis, -- as I look at your assumptions here, I'm trying to gauge what the Agis business contributes in 2006 to this guidance. In other words, what -- kind of a revenue contribution are we looking for from there, and also is it going to be profitable and at what point during the year do you expect Agis to be -- becoming accretive?

Well, I think Dave pretty well described in his outlook. He pretty well described what we thought the Agis contribution would be for the year. In total, the pharmaceutical, the API, and the other Israeli businesses forecasting a sales of about $390 million with operating income of $42 million, which excludes the $5 million write-off. So I mean, that's a pretty good contribution year over year.

And we would obviously instead of being flat, we would have been positive had we not had the pseudoephedrine issue affect us in the last four to six weeks, if you think about that $30 million that affects the bottom line year over year. Put a tax rate on that. You'll find that -- it -- it probably comes out somewhere between $0.18 and $0.20 cents a share. And we would have been up. Unfortunately, and realistically, pseudoephedrine hit us, and we've got to deal with it.

Just trying to model out the quarters, and seeing when Agis itself becomes profitable. Seems to me you've got Q1, you've got integration and sort of transitional costs that you mentioned. The -- some of the investments that you're making there in terms of putting together the systems and so forth. Is it Q2 that we start to look for a lift from the earnings contribution there?

Derek, let's leave this for the last question for now so that we give others an opportunity. But as we look forward on the quarters, the -- the cost to integrate Agis is not a one-quarter phenomenon, putting systems in place and making changes like that really will go on pretty -- pretty consistently for four quarters. And some of that will even roll over.

The real issue on the quarters, as Dave mentioned, is that with the pseudoephedrine issue and with our retailers who are really not sure how to react in their cough/cold categories, and with our new products hitting at the last or in the end of the second quarter and beyond, we'll probably be hurt more in the first quarter than we are in the rest of the quarters. And then we have to wait and see how the seasonality of the cough/cold season plays out, as well as the ordering pattern of our retailers. So it's going to be a complicated year. And we will keep you updated every quarter.

Sorry, just trying to get to the assumptions on the Agis side. But the thing you mentioned about pseudoephedrine, clearly there's a relationship between moving the products off the shelves and behind the counter. And it sounds to me like you guys have sort of taken a worst-case scenario view of that. Would that be an accurate statement?

This is Dave. I don't believe that we've taken a worst-case scenario view. I think we have tried to take an accurate view based on what we now see retailers doing. Obviously that could be impacted depending on what the season does. If we have a strong season, if it hits early, it could help us. And also consumer behavior is a great unknown here.

We think pseudoephedrine-based products are the most cost effective. And, in fact, the most effective products available for cough, cold, and flu symptoms. And a lot of consumers, if they feel that way will seek out those products. But that remains to be seen. This is kind of new territory to have a common, by far the most common cough, cold, and flu, over-the-counter product available behind the counter in so many places. So it's -- honestly, I -- we wouldn't have put that in as a worst case. We put it in because that is truly what we think would happen.

Thanks for the comments. I'll jump back into queue for now.

Thanks.

Thank you. Our next question is coming from Chuck Cerankosky from Key McDonald.

Good morning, everyone. Got a question about the pseudoephedrine reformulation process. To what degree is Perrigo able to have a product sort of staged or maybe only formulation staged, Dave, and how fast can you follow the branded guys to market as they launch individual reformulations?

In general, Chuck, it is a complicated process when you have as many products involved as we have. Some of them ANDA products, some of them monographed products. And we want to get out there on the leading edge. We're working on reformulating a whole, broad range of these products. But it does make it difficult when -- when, even when you see the people like McNeil with Tylenol and GSK, Novartis, Schering, Wyeth, P&G, they're all in various stages of trying to reformulate.

And we see ourselves as -- in fact, we just had this discussion. We see ourselves as somewhere in the middle of the pack. We do see some people that are maybe little bit ahead of us in reformulating on some of the brand and getting out there ahead. We see others that we, we think are maybe little behind us. But it -- it is complicated, Chuck. Maybe I'll ask John Hendrickson on another line. John, do you have any specific comments you'd want to make in terms of the staging of the reformulations?

Dave, I think you answered it well. It's not a direct one for one substitution, because the duration of phenylephrine versus pseudoephedrine is different. And so there's -- the brands can do a number of things to reformulate the product. And in general while we can sort of estimate what that is, we still have to wait to see what their products come out as before we decide which direction to go with the national brand equivalent product.

Thanks. All right.

Next question.

Thank you. Our next question is coming from Linda Bolton Weiser of Oppenheimer.

Thanks. With regard to Agis, I guess when you first announced the deal, I don't remember you ever talking or quantifying synergies, and you had commented that the deal was expected to be neutral without including synergies. So now that you're mentioning possible cost synergies, can you comment on the quantity of that, possibly? And also, how do you -- how are you thinking about possible revenue synergies? Do you still expect those over time?

Linda, this is Doug. Let me answer the cost/income synergies. I think we talked about in the earnings release about $8 million of costs this year. We think that that will be offset by approximately the same amount of synergies. Which gets us if you start looking at just the one-time cost versus the synergies in the first year, it keeps us relatively neutral, which is exactly what we said when we made the acquisition.

On the revenue side, and -- and I'll try to answer it, but I think Dave and John are probably a little bit better to answer it. We've obviously consolidated sales forces on the OTC side as well as on the generic prescription side. We're seeing the -- the opportunities present themselves as we have different salespeople calling on our retail customers. We're trying to -- I think the real core on the revenue side is to expand some of the Agis products into our existing retailers, where they're not.

And then overall, it's to really improve the new product process as we -- as we leverage the R&D capabilities both within Agis and within Perrigo. I mean, we have some very strong folks in both places. That will, as they work together, will enhance the new product cycle. So that's how we've always thought about synergies and costs, and that's why we've always said at least in year one we thought we would be neutral.

I think the most impactful synergies are going to come in the area of RX to OTC switch opportunities. Getting additional firepower behind the development of some of the new products, Linda. And in terms of the acquired over-the-counter products, I think the biggest opportunity we have there would be to expand distribution on some of those items. In terms of bottom-line contribution, I don't expect a big, bottom-line contribution coming from the acquired over-the-counter products. I see it more as a terrific, long-term opportunity to get the new product engine functioning very -- very well into the future.

Okay. And there's been some real negative sort of publicity and media commentary in Israel about what's going on between the two management teams. Do you all think you could comment on that and how that's going.

You know, I saw something on that at the end of last week. And we don't usually comment on rumors. I would think in any -- in any merger that probably there are similar rumors that go around. And -- I don't want to give -- I don't want to give credence to anything because there isn't any reason to. I can just tell you that I saw that Mori had denied, absolutely denied anything there, and that to me is very -- an accurate way to handle it and the right way to handle it. And the two management teams are working well together.

We continue to work well together. I would anticipate that just as before Agis within Perrigo, we worked well together. Had lots of issues to handle, and we worked through those. We'll have issues to handle in the new management team, and we'll work through those without any big issues either. II would just -- I guess I'm not surprised to see something, some rumors come out. But it's -- there's just nothing, nothing there, Linda.

Okay, that's good to hear. And just on the pseudoephedrine issue, when all is said and done here, do you think that FY '07 will get things back to a more normalized growth rate in your OTC health care business?

Yes, we would anticipate that. The consumer health care business I think is a very strong business at its core. And I, we've -- I think we have our challenges to get all of the phenylephrine products reformulated and out to the market, and that won't necessarily be easy. But right now we're anticipating that we would be as much back to normal as we can in fiscal '07.

We'll have most of the reformulated products out there for the start of the cough, cold, and flu season. And our anticipation would be that we'll be in a good position with them. Whether we'll -- whether we'll get all of that lost business back is always hard to say when you -- when you drop $60 n to $70 million worth of business, Linda. It's not easy to -- to be 100% sure you're going to get all that back when you go through the reformulations.

Okay. And just on house keeping, Doug, maybe you could give some guidance for FY '06 on what you're using for tax rate, shares outstanding, and maybe even interest expense.

Well, I can try. Tax rate, I think -- first of all, let me just tell you where '05 finished out when you kind of work through the adjustments. It -- it's close to a 35% tax rate. I think when you look at -- at '06, you're probably going to be in the 34% range plus or minus. Interest I think is somewhere between $13 million to $14 million. And your third question was -- I can't remember.

The share count --

If you look at the share count in the quarter, I think it was 95 million. And if you look at that, you'll notice that because we're in a loss position, there are no shares outstanding for options, stock options. So you probably need to add a couple million shares for that. So that gets you into the $97 million. So I mean, I think most of that information you can glean from the fourth quarter. But hopefully that helps you.

Okay. Just one final one. Like on cash flow. Do you expect the operating cash flow -- do you have a projection for that for FY '06 or should it decline in line with net income?

I think if you're looking at operating cash flow for '06 and if you look at '05, it ended up at about $80 million. As given the net income decline next year versus this year, I'm looking at an operating cash flow in the $80 million to $100 million range.

Okay.

And of course as both Mori and Rafi over in Israel know, and Dave and John know here, we will continue to work on working capital to hopefully drive that north. But that would be our -- our real forecast for the year.

Okay, thank you very much.

Thank you. Our next question is coming from Joe Norton of Banc of America Securities.

Yes. Good morning. A couple of questions for you. The first one, more sort of on a housekeeping. Going forward, are you guys going to continue, is this going to be the new reporting structure where we just get -- I guess the question is, will we get any detail on the operating expenses like we used to in terms of selling and administrative, R&D, et cetera, or are we just going to get gross profit and operating profit?

Joe, I would tell you that once we get through the complication of this one with all of the one-time adjustments and recalls, etc., we'll go back to a much more simple and -- and direct reporting result. Obviously all of those numbers are in the 10-K and in the earnings release. We elected not to go through all of them because of the complication of you've got Agis for the first time, Perrigo for both years. We just elected not to do that. We will put that back in once we get through this year.

Okay, understood. Thanks. And just getting back into the Sudafed. So it sounds like, this is your most realistic forecast right now. Just kind of wondering, if that -- if that sales number turned out to be better or worse, sort of like what could make it worse, what could make it better, relative to what you see right now.

I probably touched on some of the points there, Joe.

I know the seasonality --

And the other thing is consumer behavior. Will the consumers go to the pharmacy counter and ask for the pseudoephedrine-based products. Will the pharmacists direct them to the store-brand product in order to save money and get the same effectiveness? That's kind of the real question there.

How much room is there behind the pharmacy counter to stock a full line? All those things are a little up in the air. It's a little different situation than we've ever quite had before. And it is just hard to tell how consumers will behave in this situation. So in addition to the -- to the seasonality factor, it's also the consumer behavior factor.

And does the current forecast include much in the way of reformulation, or just sort of what you have in the bank today?

The current forecast has very little in terms of reformulated products for this season.

Okay. But it sound like you do think, after this year, it's's a good possibility that -- that that -- that you could get that segment back to where it was, say, in '05?

I'm -- I'm not 100% certain that we can get it all the way back to where it was in fiscal '05 because whenever you have a drop as significant as that drop is, and then you're introducing the new -- the new formulated products, you don't always -- you can't be 100% sure that you'll get all that back. But we certainly also have a lot of new products in other areas that should be able to help make up any volume loss that we would have in the cough/cold category. And certainly we -- we know we're going to close that gap. We'll drop this year to $110 million on this $120 million. Will we get all the way back to $180 million, $190 million, Joe, I'm not sure. We're certainly -- that would be the goal.

Okay. And then, I think you guys said the overall impact this on operating profit next year would be $30 million. Was that correct?

Yep, that's what we said.

Can you give us any more detail on that. How much is -- I don't know if you can look at it this way. But how much that is one time in nature and how much of that is just kind of the loss of the margin?

Joe, that would be difficult to give you at this point.

Okay. I think that covers it for me, thank you.

Thanks, Joe.

Thank you. And our last question comes from Elliot Wilbur of CIBC World Markets.

Thanks for taking the question. I had a couple of questions with respect to the Agis pipeline. Specifically you mentioned that you filed what you believe is the first Paragraph IV application for clobetasol foam. I assume that this occurred within the past several weeks and that the F.D.A. has in fact accepted the application. Could you just confirm that. And whether or not you have provided notice to the innovator of that filing.

Mori, I'll toss that one to you to give an answer to.

Yes, I got the acceptance to file. And we sent the notice to the patent holder. And all this has happened in the last day. So it's not yet on the web site of the -- of the FDA.

Okay. And then just maybe could you give us some sort of prognostication with respect to the potential launch timing. Obviously would anticipate that the innovator would file a lawsuit, and they'll probably have a 30-month stay of approval. But I'm just wondering if there is anything unique about the foam application that might require more extensive FDA review than your -- than your standard topical product.

No, we don't expect any special problems on the regulatory side. Other than the patent point of view we're not challenging the validity of the patent. But we are circumvening, we are designing around the patent. So we are not infringing rather than challenging. Because challenging is always more complex and more lengthy with the lower chance of success. So we are pretty confident that our 30 months would be our worst-case scenario if we can not get it earlier.

One final question. Would it be reasonable to assume that a perhaps an NDA for a beta methazone foam wouldn't be too far beyond?

You ask me whether it is reasonable to assume. It is reasonable because that is the same technology. I would not comment now on products which have not yet been applied.

Thank you.

Thank you all. Appreciate you taking part in today's conference call.

Thanks.

Thank you. This does conclude today's Perrigo conference call. You may disconnect your lines, and have a wonderful day.