Perrigo Company PLC (PRGO) 2007 Q4 法說會逐字稿

Good morning. My name is Cheryl and I'll be your conference operator today. At this time I would like to welcome everyone to the Perrigo fiscal year 2007 fourth-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Art Shannon, Vice President Investor Relations. Sir, you may begin your conference.

Welcome to Perrigo's fourth-quarter 2007 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the press release is available on our website at www.Perrigo.com. Before we proceed with the call I'd like to remind everyone that the safe harbor language contained in today's press release also pertains to this conference call.

Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended July 1, 2006. I would now like to turn the call over to Perrigo's President and CEO, Joe Papa. Joe?

Thank you, Art, and welcome, everyone, to Perrigo's fiscal 2007 fourth-quarter and fiscal year-end earnings conference call. Joining me today is also Judy Brown, EVP and Chief Financial Officer. For our agenda today -- first, I will provide my perspective on the quarter and the fiscal year's performance. Next Judy will walk through the detailed financial and talk about our outlook for the fiscal year 2008. Then I will discuss our new products, our acquisitions and provide an update on our OTC business. This will be followed by an opportunity for Q&A.

Overall fiscal year 2007 was a good year for Perrigo. Fiscal year '07 can best be characterized by a year of continuous progress. We delivered on our financial targets while improving our operational performance and we also strengthened our future potential. Let me take a minute and highlight some of our achievements this year by focusing on three themes -- delivering financial performance, improving operational efficiencies and strengthening our future pipeline.

We achieved our financial targets. We had record sales for the year in each of the business units. Fiscal year Perrigo sales were $1.447 billion, up 6% versus a year ago. Quarter four '07 sales were $374 million, up $19 million or 5% versus Q4 '06. Fiscal year '07 reported EPS was $74 million or $0.79 per share versus $71 million or $0.76 per share a year ago.

Adjusted EPS was $83 million or $0.89 per share versus $78 million or $0.83 a year ago. Reported Q4 EPS was $19 million or $0.20 versus $12 million or $0.13 last year. While adjusted EPS for Q4 was $23 million or $0.24 per share versus $18 million or $0.19 per share last year. Our balance sheet is stronger today based on operating cash flow of $129 million which exceeded our guidance. We improved our net debt position as well, which Judy will discuss in more detail in a minute.

Fiscal year 2007 was also a good year for operational improvement, our second theme. During the year we reorganized and made significant strides at globalizing our organization. Perrigo today is a stronger global organization; in fact, we continue to strengthen our global operations, quality, HR, IT and finance themes. We also established a new operating strategy during FY '07 and began attracting (technical difficulty) with weekly Consumer Healthcare, prescription Rx products and API leadership meetings. We believe this is (technical difficulty) important to drive our future success and capitalize on the synergies within Perrigo.

We've also aligned our organization to focus the efforts around our five key Perrigo priorities -- quality, customer service, new product innovation, lowering our cost structure and people development. This reorganization also helped us to greatly improve our customer service. We still have more work to do in customer service, but customers appreciate the progress we have made in fiscal year 2007. Perrigo did all this while helping to rescue our customers from a competitor's quality problem that occurred earlier this year.

My third theme is that fiscal 2007 was also a year for strengthening our future by growing our new product pipeline. We filed nine ANDAs and added $77 million in new product sales during the year with an additional $59 million in reformulations during fiscal year 2007. Perrigo continued to fund research and development; we invested $66 million in FY '07, an increase of 27% from last year.

We also made two strategic acquisitions; in Consumer Healthcare we announced the acquisition of several pediculicide products for $12 million in cash closed the transaction on July 2, 2007. These products compare to Rid and Nix. These are niche products that fit well with our current store brand portfolio when it helped broaden our offering to our customers. We already began manufacturing these products in our Perrigo New York facility in July.

Also on the Rx side we acquired nine generic prescription dermatologic products and four pipeline products from Glades Pharmaceuticals for $57 million in cash plus $2.5 million in other consideration for future R&D collaborations. These new products were a significant contributor to this quarter. These kinds of niche acquisitions are very attractive to us; we are able to add products to our portfolio without adding brick and mortar assets to improve our return on invested capital. We will continue to look for more of these types of acquisitions and other acquisitions in the future.

One interesting outcome of our new product success in acquisitions is that Perrigo has a more diversified portfolio. If you go back to fiscal year 2004, 28% of our revenue was generated by the Cough/Cold category. In fiscal year 2007 Cough/Cold represented only 13% of our revenues. To be clear, the Cough/Cold season is still important to us, but we will be more predictable and less dependent on Cough/Cold season in the future.

And we've also made progress on our portfolio review by closing two manufacturing sites and the rationalization of some lower margin products that will help us to improve our returns on invested capital. Now I'll turn it over to Judy for a more detailed financial review of the quarter and the year.

Thanks, Joe. I'd like to spend a bit more time this morning reviewing for you our fiscal fourth-quarter results as well as providing a very high-level summary of where we ended the year on an adjusted operating basis. This should then set the groundwork well for our detailed fiscal 2008 earnings guidance.

After reviewing the figures we released this morning, you'll see that there were two items this year and one last year which we've excluded from our analysis of the quarterly financials on an adjusted operating basis. In the fourth quarter this year we recorded a charge to cost of sales of $3 million after-tax or $0.03 per share related to the step up of inventory acquired from the Glades Pharmaceuticals product acquisition.

In the fourth quarter we also recorded a charge of $1 million after-tax or $0.01 per share related to the write down of a note receivable. In the fourth quarter of fiscal 2006 we announced the closure of two plants in the Consumer Healthcare business resulting in a restructuring charge primarily for the impairment of assets. This charge was $6 million after-tax or $0.06 per share.

Please note that you can view the reconciliation from the reported GAAP net income and EPS to these adjusted non-GAAP numbers in Table 2 of the appendix to our press release. No with that behind us, I'll put the GAAP figures aside and take you through the financial analysis of our fiscal fourth quarter based on adjusted results, that is the reported figures excluding these charges.

As Joe noted, we had a very solid fourth quarter. Consolidated sales were a record $374 million, an increase of $19 million or 5% from a very strong fourth quarter a year ago. The sales gain was driven by double-digit percentage increases in the Rx and API segments. Adjusted gross profit was $113 million, up $5 million from the year ago. Adjusted gross margin was 30.2%, basically flat from last year's 30.4%. Adjusted operating profit was $29 million, down approximately $300,000 from last year and 8% of sales. The adjusted consolidated net income was $23 million compared with $18 million last year. Adjusted earnings per share of $0.24 were a record for our fourth quarter and were up from $0.19 last year.

Now let's move on to a discussion of the segments focusing first on Consumer Healthcare. And as usual I'll start with a brief update of the Consumer Healthcare IRI point of sale market activity in the past quarter for key product categories. Remember that this represents sales to consumers while our sales are to retailers. Also the IRI point of sale data we review excludes Wal-Mart, Dollar and club store sales.

For the 13 weeks ended June 10th, the overall Cough/Cold market was up 5%. National brands continue to take a strong position in the Cough/Cold category launching many new products, including homeopathic formulations, line extensions, and new delivery forms like thin strips and vapors, and then supporting them through increased promotions and merchandising. Perrigo's 4% growth is outpacing overall store brand growth of 2%. Our strength has been driven by new distribution on sinus allergy liquid, nasal products and the focus on replenishing our customers' shelves.

The market for analgesic products was up 4% this quarter with growth coming from aspirin, ibuprofen and naproxen and, again, reflecting new products and increased national brand promotion across all segments of the category. Store brand growth was similar to the overall category and we were up 2% led by naproxen and ibuprofen. This category has been an important one in our market replenishment activities during the quarter.

The gastrointestinal market for both Antacid and Laxative products was up 4% due to growth in all segments. This brand growth continues to be fueled by Prilosec OTC which posted an impressive growth of nearly 10% for the quarter. Overall store brand GI growth was also 4%, but store brand antacid growth outpaced the category and gained share driven by the H2 antacid products. The biggest store brand voids in antacids today are against some of the strongest OTC brands -- Prilosec OTC, ranitidine 150 and Pepcid Complete.

The GI market represents Perrigo's largest opportunity space to date. Like store brands, we have seen double-digit growth in the H2 blocker products in the antacid category. We were down however year-over-year in the total GI category due to our decision to exit from the fiber laxative product family altogether. Our fourth-quarter sales last year were strong in laxatives prior to that exit.

The market for Smoking Cessation products, which we define as nicotine gum and lozenge, was up 10%. Perrigo's sales were up well over 50% led both by products where we enjoy first to market positions.

The vitamin market overall was up 4% on heavy promotions of brands, although not much innovation has been noted in this area on the branded side. Overall store brands suffered from these national brand merchandising investments declining 4% and we saw double-digit declines as well.

Now I'll move on to segment operating results in the fourth quarter. The Consumer Healthcare segment sales of $257 million were essentially flat versus fourth quarter last year when we benefited both from a good response to our early promotional programs for analgesics and formulated Cough/Cold products as well as from one extra week of sales in our reporting calendar in '06. New product sales led by Smoking Cessation were strong contributing $24 million in the quarter. Our coated nicotine gum and nicotine lozenge products continue to sell well and we look forward to launching the new Fruit Chill flavored gum soon.

Also note that this quarter we had sales of more than $10 million as we helped replenish certain products which were previously provided by a key competitor onto our customers' store shelves. Adjusted gross profit of $62 million was down from last year's $68 million. Adjusted gross margin declined 220 basis points from 26.4% in 2006 to 24.2% this year, but did show an improvement from the fiscal third quarter of 160 basis points. The primary driver of the decline from last year was the relative timing of our production cycle and the absorption levels of fixed costs in our plans this quarter versus '06 levels.

Adjusted operating expenses were $47 million in the fiscal fourth quarter 2007, up $1 million from 2006. An additional $4 million of research and development spending in the quarter was almost entirely offset by lower general and administrative expenses. In total Consumer Healthcare had an adjusted operating income of $15 million for the fourth quarter of fiscal '07 or 6% of sales versus $22 million or 8.7% of sales in the same period in fiscal '06 driven by lower gross profit dollars and higher R&D spending.

Looking next at Rx pharmaceuticals. Net sales in Rx were $44 million and included $6 million of service and royalty revenue. Sales were up $11 million or 34% compared with last year's fourth quarter. The products acquired in the Glades purchase performed well above our expectations and contributed the majority of this growth. Adjusted gross profit was $21 million, up $6 million from last year. Adjusted gross margin increased to 47.4% of sales from last year's 45.3% due to the improved product mix following our Glades product acquisition. Operating expenses were $9 million, down from $12 million in fiscal 2006 on lower G&A spending. Adjusted operating income was $12 million versus $3 million last year.

Next, the API segment. Net API sales were $34 million, up $7 million or 25% from last year. Adjusted gross profit was $16 million, up $5 million from last year. And adjusted gross margin was 48.1% of net sales, up from 41.6% last year. In 2006 we had an unfavorable product mix in the fourth quarter whereas this quarter we have been successful in selling a very favorable mix of products. Operating expenses were $12 million, up $6 million from last year due to both higher R&D expense and higher selling expenses related to commissions on certain key products in the portfolio. Adjusted operating income was $4 million compared with $5 million last year.

The other category includes the Israel based businesses for consumer, pharmaceutical and Diagnostic Products. Fourth-quarter net sales in this category were $39 million, up $2 million from last year. Adjusted gross profit of $14 million for the fourth quarter was unchanged from last year, although gross margin was 35%, down from 37.1% last year on an unfavorable product mix. Operating expenses were $12 million, up $1 million from last year. Operating income was $1 million compared to $3 million last year on increased SG&A spending related to timing of promotions in the quarter.

Now I'd like to walk you briefly through our annual results. Please remember that in the annual results of 2007 we did have four items unusual in nature, which I will go through very quickly. First, the fourth-quarter charge to cost of sales related to the step up of inventory of the Glades acquisition of $3 million after-tax or $0.03 per share. Second, the fourth-quarter charge of $1 million after-tax or $0.1 per share related to the impairment of a note receivable. Third, the recording of restructuring charges related to the closing of two Consumer Healthcare plants of $600,000 after-tax or $0.01 per share. And fourth, the third-quarter charge of $5 million after-tax or $0.05 per share related to the write-off of IP R&D associated with the Glades purchase.

In fiscal '06 we had three items that were unusual. First, the fourth-quarter $9 million restructuring charge on the closure of two Consumer Healthcare plants or $6 million after-tax, $0.06 EPS. Second, a first-quarter inventory step-up charge reducing net income by $4 million after-tax or $0.04 per share. Third, a second-quarter gain of $3 million after-tax or $0.03 per share for the sale of an equity investment in a Canadian distribution business. Again, the impact of these items can be seen in Table 2 of our press release.

So now, the annual consolidated results excluding these items. Consolidated annual sales were $1.447 billion compared to $1.367 billion in fiscal 2006, an increase of $80 million or 6%. Fiscal 2007 sales included $77 million in new product sales and double-digit increases in Rx and API segments. Adjusted gross profit was $406 million compared with $403 million a year ago.

The adjusted gross margin was 28.1% compared with 29.4% last year. Adjusted operating expenses for the year were $292 million, up $14 million from last year. This full year jump was driven entirely by increased R&D spending across all of the business units. The adjusted consolidated net income was $83 million versus $78 million last year. Adjusted earnings per share were $0.89 this year versus $0.83 a year ago, a 7% increase.

The fiscal 2007 reported U.S. GAAP consolidated effective tax rate was 17.1%, down from 32.6% last year. The effective tax rate on the adjusted operating results, excluding the unusual items I just noted, was 20%. As I've noted in prior quarters, this year's tax rate was positively impacted by the geographic mix of our income sources. In fact, this year 75% of pre-tax income was generated outside the U.S. where tax rates overall are lower.

As I've mentioned before, we also realized the benefit of several tax planning programs during the year and we believe that these will help keep our relatively lower effective rate sustainable over the longer-term, similar to other multinational pharmaceutical companies.

Now looking at our year-end balance sheet. Intensive focus during our weekly operational meetings enabled us to improve our inventory levels in the second half of the year and consequently also our operating cash flow and net debt position despite the closing of an acquisition and higher sales levels.

Working capital, excluding cash and investments, was $260 million at year end versus $240 million last year. This represented 18% of sales consistent with last year. Accounts Receivable were $282 million compared with $240 million a year ago reflecting both higher fiscal 2007 sales and the exchange rate impact on receivables denominated in foreign currency.

Inventories were $295 million, down $8 million from a year ago. We have improved our finished goods levels, despite the foreign exchange impact, while at the same time managing to raise customer service levels across the board. Accounts Payable were $164 million compared with $180 million a year ago reflecting relative timing of materials purchasing. Cash provided by operations was $129 million this year versus $127 million last year.

We exceeded even the high-end of our guidance of $120 million and then generated $55 million in the fourth quarter alone. Net debt to total capital declined 300 basis points from last year's 22.2% to 19.2% this year. I'm very pleased with this finish given the fact that we also executed an acquisition at the end of the third quarter this year. Capital expenditures for the year ended at $45 million, up from $36 million last year and in line with our expectations.

During the course of the year we repurchased 1.3 million Perrigo shares for $21 million under our 10B-51 stock repurchase plan. We also paid quarterly dividends totaling $16.5 million or $0.178 per share in fiscal 2007, a 6% increase from last year.

Now let me take you on to our guidance for fiscal '08. In order to understand the overall Perrigo earnings expectations for the year I think it would be helpful for you to understand a bit more about the direction of each of our business units starting first with Consumer Healthcare.

The last two years have been strong ones for new product introductions in Consumer Healthcare. We expect that trend to continue in 2008 as new products in this business will be an important driver of growth for Perrigo. We should see continued growth in the Smoking Cessation category with the introduction of our new nicotine coated Fruit Chill gum, the launch of store brand Cetirizine, new pediculicide products following our July 2nd close of the Qualis acquisition, and other new products in the analgesics, Bone/Joint and multivitamin categories. In total we would expect new products to contribute more than $50 million in sales next year. Our UK and Mexico markets performed very well in '07 and we also expect to see this continue in '08.

We expect that fiscal 2008 will be positively impacted by new business during our competitor's absence from the market. As Joe will elaborate on more in a few minutes, the team is focused on continuing to maintain high service and quality levels to our customers to retain as much of this business as possible throughout the year. Fiscal 2008 will see ongoing investments in quality and compliance systems. As Joe has discussed in previous quarters, these are a normal part of the operations of our business.

These investments are part of our gross margin improvement focus for fiscal 2008. R&D spend should again approximate 3 to 4% of Consumer Healthcare sales as we continue to emphasize new product developments. In total we anticipate top-line sales growth of 6 to 8% in Consumer Healthcare. Operating income should approximate $110 million to $115 million compared with adjusted operating income in Consumer Healthcare of $73 million in fiscal 2007, a 51 to 58% improvement year-over-year.

The Rx, API and other businesses will be positively impacted by the inclusion of a full year of the Glades volume plus additional new products led by clobetasol foam and Ciclopirox lacquer as well as some smaller API products. In addition, we expect the other category to contribute healthier returns to both growth and operating margins than in the past as new products are brought to their markets at higher gross margins.

These positives will be offset by pricing pressure on existing products in the Rx and API portfolios as well as a significant expected decrease in service and royalty revenue from 2007. R&D spend, which increased dramatically in 2007 from previous years, will remain at similar levels in 2008 as we continue to place high important on our investments in the future.

In total look for the combined Rx, API and other segment sales to grow between 6 and 8%. Operating income should be between $55 million and $60 million, similar to the adjusted operating income of $56 million achieved in fiscal 2007. On a consolidated basis our 2008 earnings are expected to be in a range of $1.00 to $1.10 per share, up 12 to 24% from adjusted earnings per share of $0.89 this year. And note, this assumes an effective worldwide tax rate of between 25 and 28%.

We expect our business to be positively impacted by the new business awarded to us recently due to our competitor's temporary market absence. This fiscal 2008 guidance includes reasonable assumptions based on market share and average product margins of the business which we will be able to service and maintain for the full year. This guidance assumes that they will return to the market during our fiscal year. Should conditions change we will update this guidance.

And of course we will continue to focus on driving strong cash flow performance in 2008 as well. Net income improvements next year will certainly help to create more cash flow next year, and on top of that we will continue to focus on working capital utilization which we believe has the potential to be an even bigger contributor to cash flow dynamics over the full year. In total we expect operating cash flow to approximate $135 million to $155 million. Our 2008 capital expenditures will be similar to last year and should approximate $40 million to $50 million. And with that let me turn the discussion back to Joe.

Thanks, Judy. Now that Judy has given you all the details of our fourth quarter and the full year and I discuss three key drivers for our future. First, we will continue to make investments in quality. This year we spent more than $16 million to improve our quality system. Our team is focused on meeting quality goals while continuing to challenge our cost structure. Quality will always be our primary goal. Perrigo's objective is to continually benchmark ourselves and to produce high-quality products.

Second, new product sales will be a key driver for Perrigo in 2008. In the Smoking Cessation category we continue to gain share, we received final approval for the coated fruit nicotine gum during Q4 2007 adding another exclusives store brand product to the category. During fiscal 2008 there are more exciting new products coming to the market -- Cetirizine, a generic version of Zyrtec should come to the store brand market, or over the counter market, after the patent expires in late December. We expect to be in the first wave to that market.

Also Famotidine Complete and Ciclopirox topical solution should begin shipping later this year -- this fiscal year. The omeprazole trial is scheduled for November 2007 and November 2008 is the end of our 30-month stay on that product. On Tuesday Adams Respiratory announced that they received a notification from Perrigo that we filed an ANDA with a Paragraph IV for a generic version of Mucinex guaifenesin extended relief tablets, 600 mg, a $100 plus million name brand product. They have 45 days from the receipt of our letter to take any action. FY 2008 we plan to file more than 10 ANDAs with more than half of those filing as Paragraph IV. We are increasing our funding of R&D in all of our business units.

Finally, I would like to discuss market conditions in the over the counter store brand segment. We continue to work very hard to rescue our customers from a competitor's quality problem. In fiscal year '07 fourth quarter we experienced incremental demand with additional sales of more than $10 million to satisfy our customers. At this point we can't confirm the duration of this opportunity; however, we are committed to satisfying our customers with quality products and building long-term relationships to make these sales as sticky as possible. I've been very pleased with the extra effort by everyone in our Consumer Healthcare group and our operations group and look forward for this dedication to continue to help us rescue our customers.

Overall our year-to-date bottom-line results have met our expectations but we are far from satisfied. Since the second half of this year the team and I have been focused on improvements in our working capital in each business unit. We will continue in fiscal '08 to focus on the metrics that help us manage inventories and improve our processes. We have changed management's long-term incentives to be based on return on invested capital for fiscal year 2008. I believe this is the best metric for growth and accountability.

In these volatile market conditions we are positioned as a company with the ability to generate cash on a solid foundation. This year we are again looking to generate more than $130 million in cash from operations on base revenues of more than $1.5 billion. Going forward I want to assure you that we are committed to continue our grow through the introduction of new products in all of our business units, improve our base Consumer Healthcare business gross margin levels and drive production efficiencies and value through the supply chain management around the globe.

Also, we will ramp up our production, increase our CHC market share and improve profitability. Overall we have many reasons to be optimistic about our future, we are well positioned to take advantage of market conditions, invest in our future and be selective about strategic acquisition opportunities which can help us deliver value to both our customers as well as our shareholders. Now let's take your questions. Operator?

(OPERATOR INSTRUCTIONS). Greg Gilbert, Merrill Lynch.

Good morning. I have a couple. You said your guidance assumes Leiner comes back at some point during the year. Can you share any color on what your customers are telling you on that front? Are you just being conservative in case they come back or do you have some specific intelligence that they're likely to do so? And also, how does the entry of Reddy into the marketplace factor into your guidance as well?

Greg, really what -- I think the quick answer to it and then I'll get into more details is that we're really trying to look at the marketplace, be conservative based on the facts that we know today. And as I think Judy has said and I have said, we can't guarantee the duration of the products. What we are doing though, we've rescued the customers from the competitors' quality problem; we are providing quality product and we are providing good customer service. And those are the things that we are continuing to keep our focus on.

As to the duration and the probability weighting on when they will come back, I think what they have said is that they expect to be back sometime later this year, later this calendar year. We're really going to make sure that we continue to do what's right and focus on the things that we can control relative to making sure we have quality product, make sure that we can continue to service our customers at the highest level and then obviously we'll make modifications in our outlook as we get additional information.

I think what we're really trying to say is we want this product to be ours. We've gone out, rescued them and we're going to continue to make sure that we will service our customers at the highest levels possible.

Any thoughts on Reddy in the guidance?

Yes, we've heard some information that Reddy is out talking to customers, by at this time we have not seen any specific products that they're out there with nor have we lost any business that we gained from this situation. There have been no losses of any of this business at this time.

On another point, what type of competitive environment are you factoring in for Cetirizine?

We are aware of multiple approvals for Cetirizine. Most of those approvals are companies that have a familiarity with the generic Rx market and less familiarity with the store brand markets. We are working very closely with customers and we'll continue to try to move forward with our programs with customers. But I am aware of the fact that there are multiple -- we expect multiple approvals out there at launch.

And lastly, Judy, do you care to share any color on the distribution by quarter for EPS?

I would say in general, given that we've talked about bringing Smoking Cessation product to the marketplace soon, we'll have that launch coming up in the near future. But also the classic seasonality would be reasonable to assume in the model. As you know, we don't give quarterly guidance. So as you're modeling out the year, something that follows a classic Perrigo dome would not be [unreasonable].

Thanks.

Linda Bolton Weiser, Oppenheimer.

Thank you. I guess I just wanted to ask a couple questions about the Consumer Healthcare sales growth in the quarter or I guess slight decline. The sales were up 10% I believe last quarter and I'm trying to figure out the delta change and what happened between third and fourth quarter. And I noticed that last quarter you had said that I think your analgesic sell-in was up 15% and your vitamin sell-in was up over 5%. So those would appear to be two areas where the growth came off quite a bit. Can you just give a little more color and is that the reason for the change in the growth between third and fourth quarter?

I was focusing in my discussion a bit on year-over-year fourth quarter this year first quarter last year and it's an important thing to note. When we did have a strong fourth quarter by all means in Consumer Healthcare, last year we had a very strong fourth quarter. As you remember, last year we were going through the reformulation introduction, a lot of the retailers were doing early promotional sell-ins on certain products trying to introduce their customers to new products, and we had an extra week in our calendar year with the anomaly that happens in many corporations who have the 445 reporting season. So last year strong year.

This fourth quarter, I think third quarter we had a strong quarter. Coming into this particular quarter, fourth quarter classically is a bit slower, so if I look at third quarter to fourth quarter I feel that it was still a solid quarter in the row. And the comment I just made to Greg a few moments ago about our classic dome seasonality, I don't know if someone had modeled a very big increase in the fourth quarter, but classically the fourth quarter is not a very big uptick for the Consumer Healthcare seasonality -- the last two years have been strong if you look at the overall seasonality compared to historical records.

Well, I guess I'm still confused because I see that in the third quarter you posted 10% growth against 9% growth in the prior year period, also a very hard comparison. Do I have my numbers right?

I would have to pull my third-quarter information, I don't have it right in front of me. I can grab it, but if that's what you have in front of you that's probably reasonable.

So the comparison was equally hard in third quarter and yet the growth was so much stronger. Maybe you could give us a little bit what Mexico and UK were? Maybe that -- did that growth fall off in the fourth quarter?

No, it did not. They were fairly consistent in their year-over-year growth throughout the year. Again, the third quarter of fiscal '06 was a fairly normal quarter overall in the year of '06. The fourth quarter of '06 was very strong. So if you look quarter three to quarter four our sales went up. Quarter three last year they went up dramatically again because of a combination of a few factors. So if we're trying to go with consistent 9% growth year-over-year every quarter, this particular quarter would be particularly difficult given the fact there was also an additional calendar quarter -- week to the quarter, pardon me.

Well, did something happen in vitamins? Because I think you said that your vitamin sell-in was up over 5% last quarter and now you said it was down double digits?

When I talked about the vitamin market I was talking about our growth in the space, store brand's growth in the space and the overall market growth. Certainly this particular quarter at the consumer level, IRI data has indicated that Perrigo's growth actually declined this particular quarter at consumer shelves; there haven't been a lot of new product introductions on the brand side. We're expecting some new product launches coming in vitamins in the coming fiscal year. And our new product launches frankly in vitamin happened in the first half of this year, whereas this particular quarter we didn't bring a lot of the new vitamin products to market.

the only thing I would add to what Judy says is that we do expect to be out with a Centrum reformulation during the upcoming fiscal year. You may know that Centrum has reformulated; our store brand version of that reformulation will be out during fiscal year 2008.

Okay. And can I just ask about -- I guess the Pepcid Complete and the Olux foam -- are you kind of saying you're intending to ship at risk? Because I believe there's an appeal on the Pepcid Complete? Is that kind of what you're saying because you are talking about shipping those in FY '08, right?

Let me maybe just back up a little bit to make sure everybody has all the background on -- and first I'll start with the Pepcid Complete. As a reminder, we have prevailed in that patent case. It has been appealed, as you've noted correctly. There are some things that we are evaluating at this time. I think it would be premature for me to say that we are definitively going out at risk, but we are certainly preparing for that and we'll be making a decision on that in the near future and we can provide further guidance on that after we make that final decision. So I don't want to suggest to you that there is a final decision there.

On the question of the Olux foam product, I just remind people that the end of the 30-month stay on that particular product is March 2008. There was a suit by Kinetix in October of 2005 and we end of the stay, the 30-month stay is March 2008. That is the current timing with that product. Once again, from a competitive point of view I don't think it's appropriate for us to speculate as to going out at risk at this time, but as soon as we make any judgment on that we will provide additional guidance to that question.

Okay, thanks. I'll let somebody else go.

Randall Stanicky, Goldman Sachs.

Just two questions. Joe or Judy, first, just to clarify and follow up on Greg's question, did you say the contribution from Leiner wins in the quarter was somewhere in the neighborhood of $10 million?

It was slightly more than $10 million, that is correct, (multiple speakers) sale.

Is that as a run rate in terms of sales the right way to think about it? In other words, have a lot of the easier wins been picked off already so as we go back quarter-over-quarter going forward, is that the right -- or close to the right number we should be thinking about in terms of revenue contribution?

No, let me be clear. What you see in fourth quarter, as you may recall, this problem first surfaced on March 23rd, the competitor did not make a decision to actually remove products from the marketplace until sometime mid to end of April. We got involved with this very quickly, we started the process, but there's a natural ramp-up time period that occurs during that fourth quarter. We needed of course to provide printed labels, we needed to get approval on those labels, there was a natural process of acquiring API, staffing up the actual labor that is required -- the direct labor that's required. So there's a natural run rate that occurs during the fourth quarter that is a ramp-up period.

As you move through fiscal '08 in the first quarter, obviously that will be more at the run rate -- where I think we've confirmed we have acquired approximately equal to our market share in the product that Leiner has -- the product that's been awarded from our competitor's issue. So approximately $90 million to $100 million is we believe the annualized number over a 12-month time period.

That you've won so far?

That is correct.

And that would assume maintaining that level throughout an entire fiscal year.

As we've stated I think fairly clearly, we can't guarantee that duration, but that is the annualized number should we continue to hold on to that business.

Got it. And Joe, you said before that the gross margin is similar to your overall gross margin on that new business?

Similar is correct, yes.

Okay. And how -- do you have a sense of how sticky that business is? If Leiner was to come back on in there, in terms of what you've modeled, a certain percentage of that business that stays with you?

This is a challenging question. We are doing everything that was in our control to make sure we produce quality product, to make sure we provide the best customer service we can provide to our customers. However, whether or not at this time we want to be pragmatic and maybe conservative on what we can put forward in terms of how long we will keep it, we are going to do everything within our control to rescue our customers and, importantly, to keep this business over the long-term.

And then just one more question. I'm not sure if it was brought up or not, but the SG&A number in the quarter looked a little higher than what we had been expecting. I think, Judy, we had a conversation actually on the conference call that we're thinking about an average run rate for the year-to-date in terms of the fourth quarter. I guess if that's the case what's changed since then and then how are we thinking about SG&A factoring into FY '08?

Specifically in the fourth quarter, as I commented briefly in my financial review, there are certain selling expenses that go along with the sale of key products, important products to our API portfolio that fluctuate with the volume of those businesses. We did well with those products this particular quarter which means that the selling expenses related to those are also higher. We had earlier than expected promotional activity in the other category as well as some promotional activity happening in Consumer Healthcare, again related to some new product and some preparation for some seasonal activity going on.

I would still expect that this quarter was about 16.4, I believe, 16.4% of sales including distribution costs for the entire company as a whole. The corporate aspect of that we've maintained and actually dropped overall over the course of the year. Full year 15.6%. If I look forward into next year I would expect the '08 run rate on SG&A is a percent to sales to stay stable to what we experienced for the full year in '07, again recognizing that with the selling component being an important driver there that you do see some seasonality as timings of promotions, merchandising, etc., is coming through.

That would imply a hard number of somewhere in the high 40s going forward which would revert from what we saw this quarter.

Yes.

And then the seasonality you mentioned, it looks like fiscal 4Q for a couple years it really has been high. Is that the quarter that we should think about being a little bit higher than the rest?

I would not say in every year you can make that assumption. The last two years it's been the case again because there have been some promotional activities that have happened in the fourth quarter. At the same time the second quarter classically, depending on how the Cough/Cold season is progressing, launches in new products we've had a few years where launches in new products have been occurring as we approach the end of a calendar year. Again, second and fourth perhaps just given the seasonality of the different business units is a reasonable expectation, but that can vary again, you could slide a promotion into the beginning of January. Second and fourth perhaps of the four quarters, the higher of the two.

Got it. And then just real quick, a last one for Joe. Has Perrigo's view to at risk launches changed since you've come on board?

I think probably the best way to say it is that to the best of my knowledge Perrigo has never had an at-risk launch at this time, so I really don't think there's any material change. Will we take a look at this as we get closer to the time period when we need to make a decision? The answer is, yes. We think we're pleased with our position from an IT point of view. However I think it's premature at this time to give you a specific answer on any question. So I don't think it's really changed materially; I think there really hasn't been a lot of previous precedent at Perrigo.

Okay, great. Thanks very much, guys.

(OPERATOR INSTRUCTIONS). Greg Gilbert, Merrill Lynch.

Joe, as we sit here today I know it's tough for you to speculate, but do you think that there could be an opportunity to settle either the Omeprazole or Olux cases and do you think the environment on settlements is sort of similar to how it has been in the past several years, i.e. that you can settle in an FTC friendly way?

I think that's a great question, Greg. I think it's a very challenging one to speculate on. I think the reality is that there are always opportunities to settle. I think right now we're going to try to continue to plan for moving forward with the litigation as planned. But if that opportunity prevails or certainly becomes available we'll take a look at it and make sure that we consider what's in the best interest of our customers and shareholders.

Should we -- I'm sorry, go ahead.

It's not -- in the case of certainly the Omeprazole, I have to be clear, it's not a [Churgo] litigation, it's our partner Dexcel that has that. Obviously we have a significant interest in that decision, but it is up to our partner Dexcel that would make that final determination.

Other than that difference between the two situations, should we be thinking differently about Rx versus OTC in terms of potential for settlement? I don't think we've seen as many in the OTC area, but I don't know why that is. Maybe we just haven't seen an opportunity yet.

I think there are definitely different market characteristics of what happens in a generic Rx world versus an OTC store brand business in terms of how quickly the generic erosion occurs. So I think there are definite differences. As you know in a generic Rx world, the generic erosion usually occurs within the first month. You can get to 80 to 90% levels of generic erosion in that time period. Store brands, there just tends to be a slower ramp to that time period.

Okay, and one last follow up. Joe, on business development are you focusing these days primarily on niche opportunities like the ones you've completed or are you also looking at some bigger opportunities at this point?

I think the way I'd answer the question, Greg, is that we feel very good about our prospects of internal development organic growth. However, we will continue to look at opportunities that fit within our market conditions. And therefore right now we believe the best place to go after is the niche opportunities where we don't have to acquire the bricks and mortar and it allows us just to improve our ROIC. However, if there are some opportunities that are acquiring companies with the bricks and mortar as well that we're still going to look at them, but we're really focused in this year and beyond on driving the ROIC for our shareholders.

Thanks a lot.

Linda Bolton Weiser, Oppenheimer.

Thanks. Just on the numbers, can you -- I assume the fourth-quarter adjustment to operating income for the inventory step-up for Glades is affecting the gross margin. Where would the impairment of note receivable fall in the consolidated income statement?

That was within SG&A on a reported GAAP basis.

Okay. And then in terms of the Consumer Healthcare guidance for sales growth for '08, you said 6 to 8% growth. I guess you said that $50 million of new product, that would be about 5% growth. And then if you were to keep the $10 million you've gained from the Leiner, that would be $40 million roughly on an annual basis roughly, that would be 4% growth. So that's 9% growth. So are you assuming you actually lose some of what you've gained from the Leiner?

I got the $50 million in new products and you said we retain the $10 million plus of Leiner --.

Well, you've got $10 million in one quarter.

Right, so that's 4.

So if you continue to have that I guess that will be $30 million to $40 million of incremental.

Now I've got your math, great. Just commenting on the overall growth rate then, there is some -- a little bit of cannibalization, I see a little bit that happens -- people may move from one coated gum to the Fruit Chill gum. There is also -- we are also rationalizing lower margin products from our overall portfolio.

The growth in the top line of Consumer Healthcare, to your point the majority is coming from new products and the new business opportunity afforded us through our competitor's situation. But there are also going to be products that are going to come out of the pipeline as we focus on those areas where we think we can get the best return overall.

If I could just maybe add just a little bit to what Judy said. As we try to put -- obviously the competitor quality issue is a big question for us in terms of what we put into our numbers during fiscal year 2008. What we basically have said, we are not aware of any losses of that business that we originally have obtained, so we know it's going to be more than 25% probability and it's something less than 100% probability. We felt we had to be somewhere in that range. We picked a number and put that in as our base case.

Obviously though, we can't guarantee that duration and therefore we wanted to be conservative until we found specific data points that allowed us to believe we can put more of that into the business or less of that into the business based on the knowledge we obtained at that time. So we're trying to be conservative relative to the numbers out there for the fiscal year 2008.

So what you're kind of saying is that excluding Leiner and new products your base business doesn't grow very much and it may even decline somewhat?

I think what I would say differently, there are going to be some growth and some declines depending on competitive challenges out there in the marketplace. We're just trying to titrate that based on our best understanding of those market conditions. There are going to be some cases where we're going to face some pricing issues, challenges, other places where we'll have better than expected results and we just tried to balance that relative to the year based on our previous knowledge of other years.

And I guess I'd just build on that also, the comment about new products in Leiner, we're losing business. New products are the lifeblood of this business and, as with any OTC or pharmaceutical business, it is critical -- there's always going to be natural rollover of the products available on the shelf, the new products being introduced by the brand are going to keep consumers focused on new forms and formulations. It's up to us to continue to bring those new products to market and the base business will erode without the new products.

The last three years have shown -- or the last two years plus our forecast for next year are very strong new product year. And I would say that we've been able, even with the complete changeover that's happened within the Cough/Cold space, we continue to grow the Consumer Healthcare top line despite losing over a two-year period nearly $100 million in Cough/Cold. So new products being an absolute critical driver and hence also the continued investment in R&D to make sure that we can offset the normal erosion that's going to happen in the OTC space.

Okay, thank you very much.

Thank you very much, everyone. Operator, thank you very much. I think this concludes our call. I just want to maybe make a couple of summary comments. First of all, thank you, everyone, for your interest in Perrigo. I think I would characterize it as a year we've made progress, but clearly we're looking at continuous improvement in our organization. I think we've got the right team for the future; the organization has embraced customer focused decision-making, and I think our new product pipeline is really one of the best ones we've seen in any years at Perrigo and we look forward to delivering on that in our fiscal year 2008. Thank you very much.

This concludes today's Perrigo fiscal year 2007 fourth-quarter earnings results conference call. You may now disconnect.