Perrigo Company PLC (PRGO) 2008 Q4 法說會逐字稿

Good morning. My name is Judith, and I will be your conference operator today. At this time, I would like to welcome everyone to the Perrigo fiscal 2008 year end earnings 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). Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Art Shannon. Sir, you may begin.

Thank you very much, Judith. Welcome to Perrigo's fourth quarter and year end 2008 earnings conference call. I hope you had a chance to review our press release which we issued earlier this morning. A copy of the release is available on our website at 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 the call are forward-looking statements within the meaning of Section-21 E 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 June 28, 2008. I would now like to turn the call over to Perrigo Chairman and CEO, Joe Papa.

Thank you, Art, and welcome, everyone, to Perrigo's fiscal 2008 year end earnings conference call. Joining me today on the call is Judy Brown, our Chief Financial Officer and also Jeff Needham, our Senior Vice President of Consumer Healthcare Business Segment. For our agenda today, first I will provide a brief perspective on the quarter, next Judy will walk through the detailed financials in our 2009 EPS guidance and then I will give you an update on our very successful new product launches, for Omeprazole and Cetirizine, plus an update on our FY '09 guidance. This will be followed by an opportunity for Q&A with Judy, Jeff and myself.

My overall comment on the quarter is we continued to execute on our plan with a strong focus on quality, customer service, new products, and efforts to lower our cost structure. We had record fourth quarter sales of more than $0.5 billion, plus record adjusted operating income of more than 46% from last year on a 360 basis point improvement. Our teams continue to deliver on new products and the sell-through is on track to meet our expectations.

Before I turn the call over to Judy for a detailed review of our financial performance, I want to provide a perspective on Q4 market performance and full-year achievements in market data. The overall OTC consumer market was up 5.8% in the fourth quarter, versus last year. As store brands, though gained 17% while Perrigo's sales gained 53% on the strength of new product launches in increased market share. Within the overall OTC market, cough/cold in the quarter was up nearly 15.5% from last year primarily due to the launch of Cetirizine, store brands in the cough/cold market gained 22.4% while Perrigo sales were up 73%.

My second comment is focused on the full year results. We had a great year with record sales, record earnings and record cash flow. We topped $1.8 billion in sales while improving our margins and our quality. Adjusted gross margins are now more than 31% of 350 basis points over last year. We continue to realize quality improvements that help to drive those margins. Our quality prevention investments are actually up 5% versus last year, so the increase of 5% investment or expense. Our quality appraisal investments are up more than 7% versus a year ago. However, however, our total cost of quality are actually down because we have reduced quality variances by more than $15 million versus last year.

The investments in quality in the past two years are paying dividends now. For the full year, the overall OTC consumer market was up 4.2% versus last year based on IRI data, as store brands gained 10.6% while Perrigo gained 42.5% on the strength of our new product launches. We saw the same pattern in each of the categories. In cough/cold, the market was up nearly 6.9% from last year, primarily due to the launch of Cetirizine, store brands gained 15.4%, while Perrigo sales for the year were up 36.7%. Within gastrointestinal, the category grew 1.8%, store brands gained 9%, and our share grew 103% with the introduction of Omeprazole. I think this shows you the power of Perrigo and the increasing recognition of store brand value equation. Also we expect this trend to continue especially in the economy weakens. I'm sure you have plenty of questions about our guidance and new product pipeline, so I will get into the details shortly.

Let me turn the call over to Judy now to give you more of the specific financial information.

Thanks, Joe. As Joe just noted, we ended fiscal 2008 on a high note, with record new product launches, working capital management and cash flow all performing in line with our high expectations. During this review, I'd like to walk you through the details of the fiscal fourth quarter, which will serve as a baseline for elaborating on fiscal 2009 guidance later, and then I will our full year results as well.

First the fourth quarter, on a GAAP basis we had a record fourth quarter sales and earnings. For the first time, fourth quarter consolidated net sales crossed the $0.5 billion mark, an increase of 34% from fourth quarter last year. The consolidated gross profit rose $39 million from 2007 and the gross margin increased by 60 basis points. Consolidated net income was up $9 million to a fourth quarter record $27 million, or $0.29 per share. After reviewing the figures we released this morning, you will see there were several items this year and last year which we have excluded from our analysis of the quarterly financials on an adjusted operated adjusted basis.

Let me summarize. On January 9th, 2008, we completed the acquisition of Galpharm Healthcare Limited, a leading OTC store brand supplier in the UK. The Galpharm balance sheet and operating results are included in our consolidated results beginning in the third quarter. In the fourth quarter this year, we recorded a charge to cost of sales of $2 million after tax or $0.02 per share related to the step up of inventory acquired from the Galpharm acquisition. In the fourth quarter, we also recorded a charge of $7 million after tax or $0.07 per share for the impairment of a generic Rx intangible asset. The rest of the assets from that acquisition are performing in line with expectations. And following the valuation of our footprint in the UK, we made a decision to realign our operations there. As a result, we incurred restructuring expenses, termination benefits, of $1 million after tax, or $0.01 per share. Finally, we closed our distribution facility in California, incurring restructuring expenses of $100,000 after tax.

Going back to last year, on March 26, 2007, we completed the acquisition of nine products and four pipeline products from Glades Pharmaceutical, in the fourth quarter of fiscal 2007, we recorded a charge of $3 million after tax or $0.03 per share related to the step up of inventory acquired from the Glades product acquisition, and in the fourth quarter of fiscal 2007, we also recorded a charge of $1 million dollars after tax or $0.01 per share related to the write down of a note receivable. Please note that you can view the reconciliation from the reported GAAP, net income and EPS, to our adjusted non-GAAP numbers in table two of the appendix to our press release.

With that behind us I will take you through the financial analysis of our fiscal fourth quarter based on adjusted operating results, that is the reported GAAP figures excluding these charges I just outlined. Consolidated net sales were a record $500 million, an increase of $126 million or 34% from a year ago. Adjusted gross profit was $158 million, up $47 million from a year ago. Adjusted gross margin was 31.6%, up 200 basis points when compared with 29.6% last year. Adjusted operating income was $57 million, up $28 million or 95% from last year. The fourth quarter adjusted operating margin was 11.4%, up from 7.8% last year. Adjusted consolidated net income was $37 million compared with $23 million last year. And adjusted earnings per share were $0.39, up from $0.24 last year.

Now I will take you through a review of the business segments, focusing first on consumer health care. Consumer health care net sales increased $117 million or 46% to $375 million. New product sales, led by the continued strong performance of our Omeprazole and Cetirizine third quarter launches contribute $75 million of this increase. Organic growth on existing products was approximately 8% in the quarter, led by growth in the analgesics, smoking cessation and vitamin categories. Our UK operations benefited from the acquisition of Galpharm with sales volumes of $19 million. Adjusted gross profit of $114 million was up $52 million from last year's $62 million. Adjusted gross margin of 30.4% increased 610 basis points from last year, due to the higher margins from new product sales, a favorable sales mix of existing products, and the continued impact of production efficiencies in our factories, resulting from our investments in quality systems, process improvements and higher volumes.

Adjusted operating expenses increased $10 million compared with the fourth quarter last year. The dollar increases were driven by higher year-over-year spending on sales and promotion activities for new product launches, incremental spending in the UK related to the Galpharm-0acquired business, and higher incentive-related wages and benefits. As a percent of sales, adjusted operating expenses were 15.2%, down from 18.2% last year. Consumer health care ended with adjusted operating income of $57 million or 15.2% of sales compared with $16 million or 6.1% of sales last year. This also translates into a 50 basis point improvement in the adjusted operating margin sequentially from last quarter.

Looking next at Rx pharmaceuticals. Net sales in Rx were $38 million, down $6 million or 13% compared with $44 million last year. New product sales led by Clobetasol foam were $7 million in the quarter. However, these were offset by a combination of continuous pricing pressure on existing products compared with last year's fourth quarter, as well as a decrease of $3 million in service revenue as one phase of the collaborative R&D project comes to a close. As noted last quarter, and as will be outlined in our 10-K, revenues related to this portion of our collaborative R&D agreement will be fully phased out in early fiscal 2009. Adjusted gross profit was $14 million, down $7 million from last year. Adjusted gross margin was 37.3%, a decrease from 47.4% a year ago. This margin decline is a direct outcome of the pricing pressures and service revenue decrease noted just a moment ago. Adjusted operating income was $5 million compared with $12 million last year.

Now looking at the API segment, net sales of API in the fourth quarter were $38 million, up $5 million or 14%, on increased sales volume of existing products. Gross profit was $13 million dollars compared to $14 million a year ago. Gross margin was 35.1%, with a 510 basis point decline from fourth quarter last year, reflecting product sales mix and higher production unit costs. Operating expenses were $10 million, up $1 million from last year, due to changes in the exchange rate and employee related costs. Operating income was $4 million, flat with last year.

In the other category, which represents our Israel based consumer products, pharmaceutical distribution and diagnostic businesses, net sales were $49 million, up $10 million or 24%, due primarily to favorable changes in the foreign exchange rate, and a favorable sales mix of products, led in part by the expansion of our store brand cosmetics business in the US market. This is an important synergy that this segment can realize in the future with consumer health care business. The gross profit increased 3 million had dollars or 19% again due primarily to changes in the foreign exchange rate. Operating expenses were up $2 million from last year due to changes in the foreign exchange rate. Operating income was $2 million compared with $1 million last year. Unallocated corporate expenses were $10 million compared with $3 million in the fourth quarter last year. This $7 million increase from last year is mainly attributable to higher variable incentive based compensation for employees working in the corporate functions compared to last year and higher one time legal expenses related to the conclusion of various projects.

Now let's review the full year results on a GAAP basis. Consolidated full year net sales of $1.822 billion increased $375 million or 26% from a year ago. Approximately 15 percentage points of this improvement was from our record $220 million of new product launches. The existing products in our global portfolio grew 5%, acquisitions contributed 4% year-over-year, and foreign currency had a 2% positive impact on the sales line. Consolidated gross profit was $551 million, up 39% from last year. And the gross margin was 30.2% of net sales, compared with 27.3% a year ago. Consolidated operating income was $197 million, up 98% from $100 million last year. Consolidated GAAP net income was $136 million, or $1.43 per share, compared with $74 million $0.79 per share last year.

Let me again review the non-GAAP items affecting the analysis of the full year 2008 versus 2007. First we recorded a change to cost of sales of $4 million after tax or $0.04 per share related to the step-up of inventory acquired from the Galpharm acquisition. Second we recorded a charge of $2 million after tax or $0.02 per share for the Galpharm acquisition write off of the in process research and development. Third, in the fourth quarter, and as noted earlier, we recorded a charge of $7 million after tax or $0.07 per share for the impairment of a generic Rx intangible asset. Fourth and as noted earlier, in the fourth quarter, we recorded a restructuring charge of $1 million after tax or $0.01 per share for operational realignment activities in the UK. Finally, we closed our distribution facility in California, incurring $300,000 after tax in restructuring expense. For the full year in fiscal 2007, we recorded a charge of $5 million after tax, or $0.05 per share for the write-off IP R&D from the Glades Pharmaceutical product acquisition. A charge of $3 million after tax or $0.03 per share related to the step up of inventory acquired from Glade. A charge of $1 million after tax or $0.01 per share related to the write down of a note receivable.

A charge of $1 million after tax or $0.01 per share related to restructuring charges in Michigan. Consolidated adjusted gross profit was $567 million, an increase of $167 million, or 42% from last year. The adjusted gross margin was 31.1% of sales, up from 27.6% a year ago. Consolidated operating income was $219 million, up 90% from $115 million last year, driven by strong sales increases and a strong margin expansion in consumer health care, which led to an adjusted margin of 12% of sales, up 400 basis points from last year. Consolidated adjusted net income was $150 million or $1.58 per share, up from $83 million or $0.89 per share in 2007. The GAAP basis reported effective tax rate for the year was 24.8%, up from 17.1% last year.

The main driver of this change is the fact that our blended world wide tax rate moves relative to the geographic mix of where income is generated. That said, for fiscal 2008, approximately 43% of pretax income was generated outside of the US, down from 75% in 2007. Also, the effective tax rate for 2007 included a 280 basis point favorable impact related to the restoration of the R&D tax credit, which was not renewed in fiscal 2008. In addition, the charge for the Galpharm IP R&D expense is not deductible for tax purposes.

Now let's look at the balance sheet. Our tremendous earnings growth this year has left us with a strong, more substantial balance sheet. Part of our growth this year was fueled by new product launches, several of which were still under way at fiscal year end. Working capital, excluding cash investments was $352 million at the end of the year, versus $260 million last year, an increase of $92 million. This increase was due to higher inventory levels in accounts receivable associated with our higher sales volume. Accounts receivable were $350 million compared with $282 million a year ago. This 24% increase parallels the 26% top line sales growth we enjoyed in fiscal 2008.

Inventories were $400 million, up 36% from $295 million at this time last year. A few factors are at work year. First and most importantly, we are still managing multiple new product launches, namely Omeprazole, Cetirizine and the recently announced Famotidine Complete. Such launches contributed approximately a quarter of the increase year-over-year. Second, the double digit decline in the dollar against the Israel shekel increased the API and other segment inventory balances versus last year, contributing another quarter of the year-over-year increase. Note that the teams have been managing inventory in those units well, with inventory in local currency year-over-year. The remaining increase in inventory is volume driven as our management team has been actively working to ensure continued customer supply for higher demand in the consequent production volumes versus this time last year.

Accounts payable were $253 million, compared with $164 million a year ago, again driven by the materials purchasing activity tied to this year's volume and a large number of launches. Cash provided by operations was $248 million for the year, compared with $129 million last year. In the fourth quarter alone, we generated $113 million compared with $55 million in the same period last year. Capital expenditures for both 2008 and 2007 were $45 million. Over the past several years, we have managed CapEx spending in line with depreciation expense to remain cash flow neutral overall.

Our total debt position increased significantly in the quarter, as we completed the execution of both a $125 million term loan and a $200 million private placement of senior notes. We used proceeds from the term loan to pay down our revolver. Our proportion of debt to total capital has increased to 35.6% from last year's 26.9% as we have locked in low cost liquidity in a challenging credit market. However, our proportion of net debt to total capital declined 570 basis points from last year's 19.2% to 13.5% this year. In the fourth quarter, we repurchased 526,000 shares for $19 million under our 10 B 5 1 stock repurchase plan. For full year we have repurchased 2.5 million shares, for $78 million. At the end of fiscal 2008, we had approximately $130 million remaining of our $150 million repurchase authorization, which expires February 2010.

We paid cash dividends totaling $18 million, or $0.195 per share for fiscal 2008. We can now leave fiscal 2008 behind us and look forward to an equally exciting fiscal 2009. With the expansion of our varied new product offerings, our UK acquisition, and our focus on servicing our customers across a wide spectrum of products, we are well poised to expand from the position where we left off in the fourth quarter of 2008.

I'd like to to first begin thinking about fiscal 2009 earnings, using our 2008 fourth quarter adjusted gross profit and operating income margins, as well as earnings per share as a baseline. That quarter included several new product launches, the Galpharm acquisition, the business acquired from our former competitors absent from the CHD market, as well as the phase out of the collaborative R&D in the Rx business. So I believe it can give you a good starting point to think about your modeling for 2009.

Now, to begin breaking down the component parts of our P&L, and to understand the totality of the Perrigo guidance better, I will try to provide you some color commentary on each of the business units' 2009 targets beginning with consumer health care. The last few years have seen record new product introductions. We expect that trend to continue this year in CHC as innovation is a key driver for growth in our future. In fiscal 2009, we will benefit from the August 2008 launch of Famotodine Complete, the continued expansion of our Cetirizine product family, additional new analgesic, antacid, and vitamin products as well as a full year of Omeprazole sales. In total, we expect revenue from new products, which, if you remember, we define as those which have launched in the last 18 months, to total more than $275 million next year.

Year-over-year, this translates into more than $150 million of incremental new sales. It is not just one or two products, there are more than 25 new different products we expect will hit retailer shelves over the course of this year. In addition to new product sales we are expecting to maintain the business we won during the absence of an OTC player in the marketplace and we will look for other opportunities to expand our existing portfolio sales as well. In total, we anticipate top line sales growth in excess of 16% in consumer health care, including the full year benefit of the Galpharm acquisition.

Fiscal 2009 gross margins in consumer healthcare should remain in line with fiscal 2008 levels as we benefit from continued new product launches and gain operational leverage through higher volumes, continuous improvement processes and reduction of waste and scrap. We are targeting consumer health care operating margin expansion from 2008 as we get improved leverage on stable dollar spending and SG&A across a much larger sales base. And we anticipate that the operating income in consumer health care will be heavier in the second and third quarters of the fiscal year, matching our customer's demands for many product categories in the October to March time frame.

Our generic Rx business P&L will change in 2009 as revenue derived from service and royalties will decrease significantly from fiscal 2008 levels. As we have mentioned in previous calls and again as will be outlined in our Form 10-K filed this afternoon, the first phase of our R&D collaboration with Cephalon is winding down. Likewise, we terminated a license agreement with a third party in fiscal 2008, thereby reducing that royalty source in fiscal 2009. However, despite the approximately $20 million decrease in these nonproduct sales from last year, and the continuous pricing pressures facing the market for generic prescription products, we expect revenue growth of 7 to 10% in fiscal 2009, from new product introductions and new licensing arrangements. Both gross profit and operating margins may be impacted by the decline in nonproduct revenues year-over-year, but are anticipated to remain at or slightly above the adjusted operating levels seen in the fourth quarter of fiscal 2008. Timing of product launches will drive the operating income of the Rx business slightly more to the second half of 2009.

Looking forward in our API business, it is reasonable to use the results of the fourth quarter of fiscal 2008 as a basis for modeling 2009. We expect top line revenues in API to grow between 7 and 10% year-over-year. And expect new product introductions in the second half of the year to help mitigate pricing pressures on certain existing products. We anticipate gross margins to approximate the levels seen in the fourth quarter 2008. And expect full year operating margins to expand to the low teens. We anticipate that product launch timing in the second half of the year will result in an API business having a linear progression in operating income through the year, with a 30/70 split between the first half and second half of the year.

So in summary, on a consolidated basis, we are expecting total revenue growth of 13 to 18%, with consolidated gross margins continuing at levels approximating those seen in 2008. We intend to invest approximately 4% of consolidated sales in research and development. At the same time, while we are making additional dollar investments in product launches and infrastructure in 2009, we expect that operating expenses, excluding R&D, as a percentage of sales, should approximate 14%, more than 100 basis points down from 2008 adjusted levels. We anticipate that this level of revenue growth, combined with spending leverage, will result in a consolidated operating margin between 12% and 14%.

So in summary, on a consolidated basis, our 2009 are expected to be in a range of $1.90 to $1.98 up to 20 to 25% from 2008 adjusted earnings per share of $1.58. This assumes an effective worldwide tax rate of 28% and as you know, this tax rate may move up or down a few hundred basis points, depending on the final mix of income before tax realized during the year. In addition to our management team's goals to grow earnings in 2009, we will also be maintaining our focus on translating bottom line earnings into cash flow from operations. We are estimating fiscal 2009 cash from operating activities of 210 to $240 million, we plan to use a portion of this cash to fund additional capital investments in 2009, and expect CapEx of between 55 and $70 million. This reflects a higher run rate than previous years, and is earmarked for building additional manufacturing capacity, training and development facilities and other IT investments to strengthen our foundation. However, note that looking forward beyond 2009 we would expect CapEx to return to levels approximating depreciation expense as in prior years.

With that summary, I will be happy to turn it back to Joe.

Thanks, Judy. Now that Judy has given you a very comprehensive review of our year, I'd like to talk about a few things that happened during the past 12 months and anticipate some of your questions.

First, in fiscal year '08 we rescued our customers when a competitor shut down their OTC business. we were able to capture $100 million annual sales and have maintained that business during the year. This is now our business, and we intend to keep it in the future. Second, we executed several tuck-in acquisitions which broadened our product offering. In the Rx field we executed on the acquisition adding Glade's business to our nine marketed products and four pipeline products, and this has proven to be very successful deal, exceeding our expectations. In the Qualex transaction in OTC, we added store brand pedicular-side products, which has also exceeded expectations. In January 2008, we acquired Galpharm, a leading OTC store-brand supplier in the UK, which gives us a larger footprint for future European expansion.

In May we announced a collaborative agreement with Cobrek, which will contribute in ANDA filing for a generic equivalent to Luxiq, a $34 million branded pharmaceutical product to this agreement. Perrigo will be the exclusive distributor of this product. In June, we acquired the branded OTC business of Brunel Health Care from Nutra Health for $12 million, and the related transaction Perrigo sold its vitamin, mineral supplement business, along with related production assets in the UK to Nutra Health allowing us to focus the UK business on the more profitable OTC business segment. We are now the clear leader in OTC store brand in the UK. All of these deals were executed spending less than $180 million while adding more than $100 million in annual sales at very favorable margins.

Third, we executed on new product, adding a record $220 million in sale this is year. Let's talk about just two of those launches but there are a number of others we can mention. Cetirizine was launched in January, ahead of the launch of the national brand Zyrtec. Despite six competitive Cetirizine approvals at market formation, we have been able to capture more than 80% of the store brand for Cetirizine. This is also Perrigo's first vertically integrated consumer health care product. Our data shows that store brands have already captured more than 30% of the Cetirizine market in the first six months, much higher than the traditional 20 to 25% share achieved at peak. Omeprazole, our largest product launch in the 120-year history of Perrigo, started the first week of March 2008, current indications have store brands capturing more than 30% of the market and we expect Omeprazole to add 150 to $200 million in annual sales. Recent sales data shows that we are on track to meet this goal.

Let me talk about our other products in the pipeline and a few of our 2009 growth drivers.In April, 2008 we launched over the counter Cetirizine pseudoephedrine hydrochloride, extended release tablets, comparable to the Zyrtec-D extended release tablets. Brand sales for the original prescription strength of this product were approximately $190 million, also in April we began shipping OTC children Cetirizine oral solution utilizing our own API as well.

In the Rx segment, we launched Clobetasol foam, the generic version of Olux, this product is a topical steroid. Annual sales for the brand were approximately $85 million, as the first filer, this commenced our 180 days of a generic exclusivity. We launched at risk, which is a first for Perrigo. However, I'm happy to announce that in the first quarter of fiscal year 2009, Perrigo and Kinetix settled the patent litigation, eliminating the at-risk nature of this launch while allowing Perrigo to remain on the market. In total, Perrigo launched more than 50 new products over the past 12 months, we are constantly driving to be first to market in Rx and OTC. We have exclusive store brands and generic Rx offerings that represent more than $1 billion of branded sales that we have in the marketplace and that exclusivity may last beyond next year in some cases. Also, we are investing to keep the pipeline robust. We believe that more than $10 billion in branded prescription sales will switch from prescription to over the counter in the next five years, and our goal is to be first to market with these products.

Fiscal 2009 is starting on the right foot. Last week we announced the shipment of OTC Famotidine complete chewable tablets. which is comparable to the product known as Pepcid Complete, an acid reducer plus antacid medications, indicated for the relief of heart burn. Annual retail sales of Pepcid Complete chewable tablets are estimated to be approximately $100 million. Perrigo was the first applicant to file a complete ANDA with Paragraph IV certification. We believe the exclusivity period may last even beyond the 180 days, as no one else has filed to our knowledge. In fiscal 2008, we filed more than 10 ANDAs, with more than half of those representing Paragraph IV filings. We have increased funding of R&D in all of our business segments to maintain this space.

Finally our operations has been able to meet the demand caused by our tremendous success. Our supply chain has also managed raw material pricing. We have observed significant brand manufacturers raising prices, which we believe actually will improve the store brand value equation for consumers and retailers. We will continue our efforts whenever possible to manage raw material price increases with improvements in operating efficiencies. Overall, this year was a step change for Perrigo. We generated more than $245 million in cash, new products continue to drive our growth, and we don't see that changing in 2009 and beyond. Our balance sheet is strong and it positions us for really any market condition that will be in the marketplace. Our OTC business is clearly a leader in the category.

Major new products are on the verge of switching from OTC in generic Rx over the next few years. My team and I have been focused on improvements in working capital in each of our business units. We continue to meet weekly on the metrics that help us to manage inventories and improve our process. Looking toward 2009, we will continue to focus on execution, the retail data and the store brand value equation of our new products are encouraging. We are optimistic for the future of Omeprazole and Cetirizine. Perrigo is initiating programs to make consumers more aware of the increased value of the store brand proposition. Unlike other private label products, OTC healthcare products and generic prescription drugs are FDA approved. We work harder to get that story out to the consumers, to help us to grow store-brand market share. Righting health care costs, coupled with an aging population makes Perrigo uniquely positioned to meet the world's growing need for quality, affordable health care products.

Now, let's take your questions. Operator, if you'd open it up for questions?

Thank you. (OPERATOR INSTRUCTIONS). We will pause for just a moment to compile the Q&A roster. Your first question is coming from Randall Stanicky of Goldman Sachs. Please go ahead.

Hi, guys. It is actually Bob Jones on for Randall this morning. On the guidance, I'm assuming there's no Paragraphs IVs built into the guidance, if you could maybe comment on that, and also specifically around Nasocort AQ, I was wondering if you could you maybe just give us the latest on that, and also, if in that fact that case was to be settled, I was wondering if you could talk about the implications to Perrigo, and the arrangement you currently have with Barr. Thanks.

Hi, Bob, this is Joe Papa. First of all let me talk about the Paragraph IV and really all of our new products. I think it is just a summary comment on it. The way Perrigo approaches our new products is that we put together in new product what I call a probability factor, and we're trying to look at all of our new products, whether it be in consumer healthcare, or also in the Rx business or in the API business and put a profitability weighting on new products realizing that we will either get the approval or will not, so it's really a binary effect, but we will try the probability factor recognizing the fact that at any time in a given year, you can't say until you get the final decision, whether or not you'd be able to launch a product. Specifically on the Nasocort, as you know, that's a case that, the case has been heard. There is now a postponement in the final decision from, for that case, we have a postponement, I believe the date is until September. I don't know the exact date in September, but it is a date in middle, middle to early September.

In terms of implications, it is obviously a very exciting product, it is over a $300 million product to really depend on what happens with the court case and I will add we do not have approval, final approval at this time, with would both be two important considerations. Specific to the arrangement of ourself and Barr, we are working very closely on this product. It is a profit split for both companies is the best way to describe the, this opportunity. I hope I answered most of the question. I realize that you understand it is a very large product, however, until we get more clarity on above the approval status and the court case, there really is not much more I can say at this time.

That's helpful. Just to be clear then, a settlement wouldn't preclude Perrigo from enjoying some of the benefits of that settlement?

We have a, a relationship, a, with Barr on this occasion, and so if there is any settlement, clearly Perrigo would share in that settlement.

Very good. Thanks.

Thank you. Your next question is coming from Gregg Gilbert of Merrill Lynch. Please go ahead.

Thanks, good morning. I wanted to talk about new products. Can you break down the 75 for us Judy, the way you do in your filings, the $75.25 in terms of where that came from.

The 75 in consumer health care specifically?

Yes.

That is all of the new product launches, so anything that has been launched within the last 18 months you would have Omeprazole, Cetirizine, the new Fruit Chill Gum in smoking cessation category as well as smaller products across the bandwidth of cough, cold, allergy, vitamins et cetera.

Then you will break that down in the K for ex-US and Galpharm like you did last quarter?

Absolutely. Should be filed by probably about noon today.

Great. For the 275 of new product sales for consumer in fiscal 2009, are you simply prorating the Omeprazole and Cetirizine that falls within the 18 month window? Can you walk us through what the Omeprazole and Cetirizine effect within the 275?

Certainly. Because those products both launched since January 1st of 2008,

Yes.

Those products are included for a full year run rate. So if we say more than $275 million of new products, that would be one full 12 month period of Omeprazole sales fully included, the Cetirizine family of products, the Famotidine launch, and again, and other products. Again we have more than 25 products going on to shelves in addition to those products I already mentioned. Again because of the timing of the launches, anything launched since January 1, 2008 will be included.

Right. Maybe Jeff would like to make additional comments on the new products, specifically to Judy's comments to build on them.

Gregg, this is Jeff. As you can appreciate and as we have talked about in the past, the Omeprazole launch, but also Cetirizine, were major launches with major retail marketing efforts behind them. One has to be careful about simply extrapolating four months or five months and expanding that on. So while we do, will have the incremental benefit of having a full year of sales of both Cetirizine 10-milligram and Omeprazole, you have to be careful about the pipe fill that both of those products enjoyed with their launches.

it seems to me any pipe fill would have been worked out this quarter, no? And with the expectation of getting closer to a 40% penetration, not sure you get there exiting fiscal 2009 or not, but it doesn't seem that the $275 million of new launches leaves much room for contribution from anything but those two products. Of course maybe my math is off there.

Your statement, your summary, is correct in that the pipefill, the launch quantities have largely been worked off here in this fiscal year and we will have a more smooth run rate throughout the full year.

Great. I remind you though once again we put a probability factor on all of the new products as I mentioned and that really has an influence on what the actual numbers are.

Sure. Did I miss the revenue growth goal for consumer for the year, Judy?

The top line growth I quoted was in excess of 16%.

Okay. Then one more Judy on cash flow from ops with net income guidance going up, and cash flow from ops going down year-over-year, can you just put a little more meat on the bones on sort of some of the beneficial factors for cash flow this past year that we won't see recur this next year? Thanks.

Outstanding question, Gregg. As you look at a cash flow, when we exited the year at $248 million, $113 million of which coming, 114 coming from the fourth quarter alone, obviously, we were pleased with our cash flow improvements but as I like to say, cash flow is not linear. While we are projecting of course growth in earnings in 2009, we benefited in 2008 from a very concerted cross functional process with procurement and finance on our procurement to pay process and getting our days payable much more aligned to our inventory cycle, and in doing so, you will notice when you look at the line by lines in the press release, a substantial improvement in that payables line. We are always going to be working on our working capital turns initiatives, the management team, business unit by business unit as well as on a consolidated basis is measured in short term, working capital turns, year-over-year percentage improvement, but the kind of lock step we saw in that particular cycle again hard to achieve linearly year-over-year.

So as we look forward with the earnings guidance we have provided and then looking at percentage improvement in each of the working cap tap line items we have within our control is how we came up to the early in the year balance sheet projections on an operating cash flow of 210 to 240. That's not meant to signal that there is a balance sheet issue,, but rather the opposite of continuing to work on the goals and to your point is there a one off, I would say the payables procurement to pay cycle being the area we really got the biggest one time jump this year in improvement.

But I can also assure you, Gregg, that we are working diligently, meeting weekly to talk about working capital, and talking about our turns and we are working really hard to try to continue generate significant cash. Next.

Thank you. Your next question is coming from Daniel Rizzo of Sidoti and Company.

Hey, guys. Just with the increase in debt and increasing cash, is there a specific design on this money or is it used for general needs as they come along?

Great question also, good focus on cash. We wanted to make sure that we were locking in good low cost liquidity when we could see the issues arising in the credit market near the beginning of calendar year, we secured our term loan and used that to pay down our revolver. We wanted to make sure that we had a revolver fully flexible for any growth initiatives that we had in front of us, and like wise, we locked in a private placement looking to go out to the private placement market for the first time for Perrigo, in order to also lock in low cost liquidity with a new group of investors, create a new syndicate of investors who could be interested in the long term cash flow generating story of Perrigo. With that in mind, it is known that we were out looking for a specific opportunity in June of 2008, that cash was well poised to fund that transaction, but I will tell you that our guidance includes the maintaining of that cash on the balance sheet at the moment, and we are always looking for opportunities to grow the business in a variety of ways. We talked about the CapEx expansion this year. We are going to use more than the normal run rate in fiscal 2009 to fund various expansion opportunities, specifically in manufacturing, training and development, to make sure we have the smoothest process possible and we will be looking for other opportunities long term as well to grow the business in other inorganic ways.

Again if I can supplement the answer, I would add we feel good about our organic growth rate, however we always feel it is prudent to look at opportunities for acquisitions, tuck in acquisitions, so supplement the organic growth rate and I think having the cash available for us will certainly make that an easier process, also I think as you know we have a very significant stock buy back that's occurring and dividend program that's occurring. So there's some need opportunity for that as well.

I'm sorry. Can you just refresh my memory. Where were you with the stock buy back program?

As of the end of the year we still have $130 million available on the program which expires in February 2010. At the time that we renewed the program in February of this year, we still had money left on our old program. We expired that out, and are currently engaged in a 10 B 5 1 automated repurchase program.

Okay. All right. Thank you, guys.

Thank you. Your next question is coming from Derek Leckow of Barrington Research. Please go ahead.

Thank you. Good morning, and congratulations on a great year.

Thank you, Derek.

Just a couple of follow ups here, on the new products you talked about $150 million of incremental new product versus 275 in total. Can you help me understand what that 150 is comprised of?

Again, this is, I know this, the way we track new products can be confusing in a year when we are having such phenomenal success with great new product launches. Any product that has been launched since January 1st of 2008 would be included over the course of our planning for fiscal 2009, and that that incremental amount, again can mean incremental Omeprazole, incremental Cetirizine, plus brand new things, brand new new, like Famotidine and other products that have not yet entered the marketplace.

Okay. Can you give us the brand new new number is expected to be at this point?

Not to be evasive but in or to make sure that we are not talking about any specific, individual product beyond the broad guidance that we provided for omeprazole being a full year run rate of 150 to $200 million, I won't, we will not quote exact product numbers for each individual product.

It is helpful to have the Omeprazole number at least. As we saw, there's a couple of big new products products expected here. You've got the launch of Famotodine Complete going on, and then we have Nasocort of course to look forward to in the near term. In the next term. I assume those two are most probable at this point or?

Just to be clear, and Jeff you may make more comments, but Famotidine Complete, to be clear, that is launched so that is in a essentially 100% probability to be clear.

That's right. That's right.

That product is $100 million at brand. If you use your classic model to work backwards off of retail brand price, and then how much you assume the store brand share, which is at this point for 180 days at least, exclusive to Perrigo, you can come up with your estimation of the top line Famotidine Complete contribution should be in a 12 month period.

As we announced last week we began to launch Famotodine Complete and ship that to customers in early August. That's your start date.

Okay.

You will have more on less six weeks run rate in the first quarter 2009.

Is there a fill-in process that goes on so you will have a heavier weighting of that in Q1?

Other major launches, that is a launch with retail marketing program behind it. So that will have its heaviest weight here in this first quarter.

As a final follow up on the cash balance here, you guys talk about your long term growth opportunities, in the past we've always thought about the generic pharmaceuticals segment as being the fastest growing segment over the long term. I am wondering what you guys are seeing out there and you didn't buy that vitamin business back in June, are you still looking at vitamin companies or more toward generic Rx businesses out there?

Yeah, it is a great question, Derek. The way I'd answer is that I'd go back to the organic growth rate. We feel good about our organic growth rate being able to continue to grow organically but we do feel we will continue to look at acquisitions that allow us to improve our return on invested capital for our shareholders. Those are the things we are focused on. Within that construct of the return on invested capital, generic Rx is clearly one area we will look, we will also look for tuck in acquisitions that help us to continue to extend our offering in consumer health care to our retailers. So if there's products that we do not have in the consumer health care offering that are important to our retailers we will continue to go after those and/or any other products that will come into the marketplace, new products we will go after anything that we believe will help improve the store brand equation, the value equation for our customers. So generic Rx,also consumer health care, and if it is an ROIC opportunity we will look at vitamin nutritionals as well.

As far as probability weightings on which segment will see the most deal active in the next five years, is it still your expectation to have most of the active any the generic Rx business?

You know, I think it is a hard one to answer right now, generic Rx is a challenging business, it clearly is a focal point for us, but more important than anything else is we have the cost of return on invested capital that is driving our approach to acquisitions and I think it is really going to be ROIC driven within our categories, with the primary areas being generic Rx and consumer health care.

Okay. Thank you very much.

Thank you. Your next question is coming from Linda Bolton Weiser of Caris. Please go ahead.

Thank you. I was just curious about, I think you said Judy that gross margin in the consumer healthcare business would be expected to be about flattish in FY '09; is that correct.

I'm sorry. The gross margin?

Yeah.

Did you say growth or gross?

Gross margin.

Would be expected to be consistent with 2008, adjusted gross margin 2008.

So I am just curious about that. I am thinking that with more and more new products making their way into the mix and those being gross margin, I am, and you are talking about more positive generally in the industry, rather than up.

Well, if I step back and think about the evolution of the gross margin over from '07 to '08, obviously there was improvements in step process there. We are also looking at 2009 from the perspective of managing the the material situation as we have seen Mr. the marketplace and balancing raw materials in the pricing out in the marketplace. If you look at the run rate in the second half of CHD and second half of 2008, when we had systems up and running focusing on service but raw materials were there we were able to get up to that 30% level, adjusted gross margin even with those pressures coming through in the commodity side and Joe's team, Joe and the team with Jeff are going be focusing on almost pricing opportunities, thinking about the whole year of 2009 being similar to the way the second half of 2008 was panning out.

And I really had to what Judy said, we do accept your comment as a challenge to the gross margin already has done in our current fiscal or sorry fiscal year 2008, we felt uncomfortable beyond where we are currently. However, I don't want to mislead you, I absolutely am going to strive with Jeff's help and the whole team's help to continue to drive that gross margin as we are drilling to both on the pricing side and the operations.

Okay. And I was just curious on the launch of the generic Olux foam, I believe that launched in the third fiscal quarter, were the sales down sequentially because of pipe fail in the third quarter or not?

I think the just to remind you na the third quarter was a really, a limited launch in the sun set it was I think March 26th, and it occurred, there was a full that occurred in the third quarter fiscal year is really very close. It isn't that much of a difference.

Oh, it would seem like the June-quarter sales would be quite a bit higher then --

Because you did have the sale. It wasn't that much of a difference.

Finally, just in terms of we are always looking toward the future as investors and analysts, and we are all wondering where the next big new product that would be greater than $50 million of annual sales, would that be in calendar 2010 or even beyond that?

We are really excited about obviously the growth in the current products that we've launched, the Cetirizine, the Omeprazole, the Cetirizine-D are all very important growth drivers for us in fiscal year '09 as we get the full year effect of those products. There are other products that are going to come to the marketplace. I probably can't go into each of them from a competitive point of view but we do believe that one of the successes of Perrigo's story has been not so much the home runs but a lot of the singles and the doubles we have got, if I can use a baseball analogy. That talks to what Judy said about the magnitude of the number of products that we are launching are an important, that diversification is an important contributor to our success. So I do think there are some significant products in the future certainly as we look at the rest of the proton pump inhibitors, I will say antihistamines that will switch but I think in the next 12 to 24 months, there will be more singles than doubles that will help us to grow the business. Jeff, I don't know that you want to make anymore comments on consumer health care.

That's right. Our challenge and our opportunity and our whole goal is to have that pipeline in consumer health care be as robust and as full as possible, and we feel really good about our pipeline and looking at the years ahead.

Great. And then, Judy just one last housekeeping question, on those two little restructuring items in the quarter, were those in the restructuring line, or were either of them in another line item in the income statement?

Let me take a quick glance to be fully cross referenced to the P&L that we filed this morning. They are in the restructuring line item on the P&L.

So there were no other adjustments other than the adjustments to the gross profit line?

Again, the adjustments that I outlined on the call, parallel the adjustment that are outlined in table two of the press release, where we break it down by business unit and line item on the P&L.

Great. Thanks.

We have time for one last question, please, operator.

Thank you. Your final question is coming from Scott Hirsch of Credit Suisse. Please go ahead.

Just a quick few follow ups, did I hear you say your probability was improving for guidance. Does it make sense to assume as you get more clarity on these, you might update guidance throughout the year as we saw last year?

Scott this is Joe. By virtue of the way we do probability weighting on any new products when it moves from being a probability to a binary, whether it be approved or not approved, that would potentially change guidance. I can't say offhand right now whether any individual one will be significant enough to change guidance but yes, that by definition, the way we do it would potentially change guidance, when we get a known outcome.

Okay. And then, I think you know, Jeff you had mentioned a little bit the sort of new debt and the new acquisitions in growth across both the health care and the Rx pharma business. Should we be assuming these are small products that are accretive early on versus being larger or to the other extent of being bigger?

Well, maybe just to remind you, the first comment I said was that we feel very good about our organic growth rate, second comment was that we will continue to look at ROIC-driven acquisitions both generic Rx and in consumer health care. Third comment is that by virtue of the ROIC proposition I would expect them to approximate accretive certainly the first couple of years maybe not the first six months but in the first year or two years. And I am sorry, did I miss anything else on your question?

No. That's, just with respect to Rx you guys sort of as we saw come down here, and then mentioned second half of the year, Judy you mentioned that we will expect new products to launch and that would be heavier toward the second half. Should we assume that there are new products second half that come out of the ANDAs that we should expect?

Yeah I think the answer is yes to that, yes the answer, new products obviously we are never exactly sure about the timing but you should weight it toward the second half of the year.

Just to be clear it was slightly heavier, not 10-90, slightly more 40-60, 45-55.

Okay. Just one last comment I think, on SG&A, we have seen it kind of go up here across the quarters and I know last quarter we talked about some of the spending being variable. Can you just give us some insight how much of spending is sort of now fixed and how much of this is variable kind of going into next year I know you have had more launches here with Famotodine Complete in the like, so can you give us a sense of how much of this SG&A here is now fixed?

Certainly. I will comment on that. Just to give you -- SG&A is never fixed, in the universe of operating expense, no costs are ever fixed, but to give you an idea of a run rate, a blended average quarterly run rate for the year, something approximating low 70s is a, I would say a baseline run rate. If you were adding up distribution plus SG&A, again, that is getting you to a point where as I said, in guidance discussions, we would expect that to come down more than 100 basis points from the adjusted run rate this year. The bolus of new product introductions had an impact on Q3, and resolution of several areas in the legal space were one time events this quarter, that were higher than we expected to wrap up the year but looking at the projections for the course of 2009, something along the lines of 70, low 70s over the course of the year would be appropriate.

Great. Thanks very much.

Thank you.

Well, thank you everyone for your interest in Perrigo and have a great day.

Thank you, this concludes today's Perrigo fiscal 2008 year end earnings results conference call. You may now disconnect.