Perrigo Company PLC (PRGO) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Perrigo fiscal year 2009 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 session. (Operator Instructions). Thank you.

I'd now like to turn the conference over to Mr. Art Shannon, Vice President of Investor Relations. Please go ahead, sir.

Thank you very much. Welcome to Perrigo's fourth quarter 2009 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy is available on our website at Perrigo.com, also we are webcasting this call with a slide presentation. You can either follow along with the Webcast or access the presentation on Perrigo.com in Investor Presentation section. 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 the 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 one of the Company's Form 10-K for the year-ended June 27, 2009.

I'd now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome everyone to Perrigo's year-end Fiscal 2009 earnings conference call. Joining me today on the call is Judy Brown, Executive Vice President and Chief Financial Officer for Perrigo. For our agenda today, I'll provide a brief perspective on the quarter and the year, and then I'll provide an update on strategic development in our API business. Next, Judy will walk through the detailed financials and our fiscal 2010 EPS guidance. Then I'll give you an update on our successful new product launch plans, plus an update on other business units. This will be followed by an opportunity for Q & A.

First, I want to take the time to thank the team of Perrigo and all of our employees for the tremendous effort and ultimately the excellent results we've achieved this year. This is my third year at Perrigo and I've been honored to lead this dedicated team as we've achieved record results over the last three years. Again, I want to start with a thank you to everyone on the team. Now let's discuss those results. My overall comment on the quarter is we continue to execute on our plan, with a strong focus on quality, Customer Service, new product innovation and our cost structure. We had record fourth quarter sales of more than a $0.5 billion plus record adjusted operating income from continuing operations. up more than 26% from last year on a 7% sales growth. In addition, consolidated adjusted operating margin from continuing operation was over 13.8% on both gross margin expansion and SG&A management which generated $157 million in cash from operations in the fourth quarter.

Our RX business unit had a very strong quarter in what has been a highly competitive environment. We grew sales 27% while adjusted gross margin grew 570 basis points without any major product launches. This was a very strong turnaround for our generic Rx business segment. Our consumer healthcare unit had an all-time record fourth quarter sales for the second consecutive year and remember, this is compared to last year's highly successful launches of Omeprazole and Cetirizine. The team continued to deliver on our new products beating even our own expectation.

Beyond the financial numbers, we had a great year of achievements also and we expanded geographically. In June 2008 we acquired Brunell Healthcare to expand our product offering in the United Kingdom. In October, 2008 we acquired Laboratory Diva for $25 million in cash to expand the companies product offering and geographic reach in Mexico. Consistent with our strategy, we also expanded in adjacent categories.

In September 2008 we acquired JB Laboratories for $44 million including debt assumed to gain additional FDA compliant production capacity as well as expand the company's contract manufacturing revenue base. This acquisition is expected to add approximately $70 million of annual sales. In November 2008, we acquired Unica Holdings for $52 million in cash as a Consumer Healthcare store brand, pediatric electrolyte business. This acquisition is expected approximately $50 million of incremental sales.

We also added partnerships. We amended the May 2008 Cobra collaborative agreement with Cobra Pharmaceuticals to include two additional products to develop and bring to the market. In October 2008, we entered into licensing and manufacturing supply agreement with Medi Metrics to develop and sell certain Rx dermatology products. In November 2008, we acknowledged the settlement of patent litigation relating to generic Nasacort AQ, Triamcinolone nasal spray, a product brought by Sanofi-Aventis against Teva, formerly Barr Laboratories, which is a partner for us that will bring this product to the market. Teva subsequently received FDA approval for this product on July 31, 2009. Also in April 2009, we entered into a joint development agreement with Metasys Pharmaceutical Corporation to develop a novel proprietary product for future sales. So as you can see, we are growing organically and inorganically to capitalize on our market position to build our business. Look for us to continue this focused Business Development effort in the future.

I'd like to turn your attention to slide three. This data reinforces the move to private label and the better value equation of store brand over-the-counter products. The overall OTC consumer market was up 4% in the quarter versus last year as national brands were essentially flat, and you could see that store brands gained 13% on the strength of new product launches and increased market share. Most of the other individual categories were up as well. The analgesic and gastrointestinal categories were up more than 4% during the quarter, national brands were relatively flat in those categories, but store brand gained 9% and 20% respectively in those categories.

Now let's talk about the full year results. We had record sales, earnings and cash flow. We topped $2 billion in sales generating $258 million in cash flow from operations while improving our operating margins, service levels, and product quality metrics. Full year, adjusted operating margins were 13.3%, an expansion of 80 basis points versus last year. We continue to realize quality improvement that helps to drive those margins. Our quality investments are up 18% and our quality appraisal investments are up nearly 11% versus a year ago, but our total cost of quality is down as a percentage of sales. Our focus on investments and quality over the past several years is clearly paying dividends now. I've been delighted that this quarter with the team's overall performance and their ability to manage expenses while continuing to meet the increased demand for store brand.

Now it's time to spend a few minutes on our future. Please turn to slide four, as I have mentioned previously, we performed strategic reviews of our consolidated business portfolio and the return on invested capital performance of the individual components of the business units on a regular basis. Last quarter, we announced that we are in the process of selling our Israeli Consumer Products business. This business unit is now being reported as discontinued operation in the financial statements.

This quarter, I am very pleased to share with you the strategic plans for our API business segment, the management team has spent considerable time analyzing the competitive dynamics for active pharmaceutical ingredients, in light of our strategic focus on specialty modules and vertical integration opportunities, we determined we can improve the cost competitiveness of our current manufacturing footprint for our future product portfolio. So, in the fourth quarter of 2009, we began the process of exiting our German facility. On August 6, we also acquired an 85% stake in an API facility in India for $12 million. The state-of-the-art, low cost facility 30 miles outside of Mumbai, will manufacture certain API products currently being produced in Germany and Israel, plus it will manufacture future higher volume APIs and in addition, allow us to vertically integrate more of our Rx products and future Rx to OTC switch candidates. We will then leverage the additional capacity created in our specialty API products. As a result of our exit from Germany we took a charge in the Fourth Quarter which Judy will detail for you in a minute. This next generation of the API business will enable Perrigo to grow our low cost position, expand our own vertical integration focus in the strategic category.

I'm sure we will have plenty of questions about our fiscal 2010 guidance and our market share gains and I'll get to that detail shortly but let me turn the call over now to Judy for additional financial details.

Thank you, Joe. Good morning, everyone. As you just heard our strong fourth quarter performance helped us end our fiscal 2009 year on a very positive note. Even with challenging year-over-year comparables created by the last year's record Omeprazole and Cetirizine introductions we continued to grow the top line while delivering additional leverage on the bottom line as well. The team is now looking forward with similar optimism to fiscal 2010. During the next few minutes, I'd like to provide you a brief review of the fiscal fourth quarter results, recap our accomplishments for the full fiscal year and then I'll spend a bit more time walking you through the details behind our fiscal 2010 earnings guidance.

So first, on to fourth quarter results. I'd like to remind you like last quarter, these numbers are based on continuing operations only and do not include the results of our Israel Consumer Products business, which were moved into a single line item, discontinued operations, on the face of the consolidated statements of income for all years presented. pending a planned sale of that business unit.

Year-over-year we had a strong quarter. As you can see on slide five, consolidated net sales from continuing operations increased 7% to $508 million, while consolidated GAAP gross profit grew 21%. Please note that we were able to translate those solid sales and gross profit improvements to a much higher growth rate on consolidated operating profits, up 38% from last year on better leverage of SG&A spending. After reviewing the figures we released this morning, you'll see there was one item in the fourth fiscal quarter of 2009 and there were four in 2008, which we have excluded from our analysis of the adjusted operating basis of financials.

As you can see on slide six, we incurred a pre-tax impairment charge of $15 million related to the future closing of our German API operation. This charge is comprised of costs related to the writedown of plant assets, contractually obligated demolition costs associated with the future exit of the facility as well as costs related to employee termination benefits. The fiscal 2008 charges we've excluded from our analysis of adjusted earnings totaled approximately $15 million also on a pre-tax basis. Please note that this same reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers is provided in table two of the appendix to our press release. Now I'll take you through the financial analysis of our fiscal fourth quarter based on adjusted results from continuing operations, that is the GAAP reported figures excluding the previously mentioned charges.

Looking to slide seven. Consolidated net sales growth from continuing operations of $34 million or 7% was driven by a combination of the Consumer Healthcare segments incremental new product sales, strong volume and product mix in Rx and API, and the inclusion of sales from the acquisitions of JB Labs, Unico, Diba, and Brunel. This growth was partially offset by $25 million of unfavorable foreign currency impact, $15 million from divestitures and exited products, and by a change in revenue recognition in the other segment which I will explain later. Adjusted consolidated gross profit from continuing operations was up 10% from a year ago, driven by improved volume and product mix in API, revenue contribution from acquisitions, improved efficiencies in most of our manufacturing locations, as well as improvements in raw material procurement. As we had forecasted adjusted, gross margin increased 90 basis points from this time last year.

Cost Management enabled us to translate this 7% top line expansion into a 26% improvement in adjusted consolidated operating profit from last year. As you can see on the bottom left, adjusted operating margin of 13.8% was a 210 basis point increase from last year. Adjusted consolidated income from continuing operations was $47 million, up 11%, despite the fact that this year's 27.6% effective tax rate was a 1220 basis point increase from the fourth quarter last year. Adjusted earnings per share from continuing operations was $0.50 up from $0.44 last year.

Now on to the business segments. As you can see on slide eight, Consumer Healthcare's fourth quarter net sales increased 9% to $407 million. As a reminder, in fiscal 2008 we had a very successful launches of Omeprazole and Cetirizine. That means that this 9% is incremental growth on top of those launches last year. Approximately seven percentage points came from both new and existing product sales growth, and another 9% came inorganically from the acquisitions of JB Labs, Unico, Diba, and Brunel. These increases were partially offset by approximately 4% from unfavorable changes in foreign currency exchange rates and another 4% from divestitures and exited products.

Adjusted gross profit was up $6 million from last year. As you can see though, adjusted gross margin decreased 100 basis points from last year due to lower gross margins associated with the nutritional product category, negative currency impact from international businesses, and raw material inflation. These pressures were partially offset by favorable product sales mix, as well as margin contributions from US acquisition.

Consumer Healthcare adjusted operating margin was down 140 basis points from last year. The decrease was primarily related to the pressures on gross margins and the timing of R&D spend due to the acceleration of clinical trial activity during the fourth quarter of Fiscal 2009. The Consumer Healthcare team did a very good job controlling variable spending in the second half of the fiscal year in order to focus SG&A spend on critical initiatives. Despite the inclusion of four acquisitions this year, SG&A as a percent of sales decreased from last year, helping to compensate for the increased investment in R & D at the end of the year.

Looking next at Rx Pharmaceuticals on slide nine. This was a very strong operational quarter for our Rx business both year-over-year and sequentially, particularly given the fact that there were no major new product launches in the quarter. Fourth quarter net sales in Rx were $49 million, up 27% compared with last year. This increase in sales was driven by increased volume across a number of products, strong base business performance, positive results from a strategic pricing initiative and very strong growth in our new O-Rx business. which includes over-the-counter products sold from behind the counter. This increase was slightly offset by the fact that fiscal 2008 had non-product revenue related to an R&D collaboration agreement that ended in that year's fourth quarter. As an aside, please note that we did not record any revenues related to Triamcinolone milestones in the fiscal fourth quarter.

Adjusted gross profit was up $7 million or 47% from last year. Adjusted gross margin increased 570 basis points from last year and 430 basis points from the reported gross margin last quarter. This tremendous improvement was the result of strong execution on critical pricing initiatives, cost management, and improved sales in numerous key products. Rx adjusted operating profit increased 164% due to strong gross margins, tight SG&A discipline and decreased R&D spending. The decreased R & D spend is related to lower legal spend versus last year, as well as the timing of a few projects. We expect it to return to a more normalized annual run rate of approximately 10 to 11% of Rx net sales for fiscal 2010.

We're very pleased with the performance of our Rx business. The Rx team has done an outstanding job of improving sales mix, executing on their pricing strategies and taking a serious approach to their cost management. We look forward to fiscal 2010 as the team continues these operational improvements and readies its new product pipeline for launch.

Next, looking at the API segment on slide 10. As you can see, the API team was able to translate a 2% net sales increase into a 146% increase in adjusted operating profit through dramatically improved gross margins and cost management. Net sales increased $4 million on favorable product mix; however, this increase was almost entirely offset by unfavorable foreign currency exchange rates. A limited amount of dossiers were sold in the fourth quarter with the timing of several being moved now into fiscal 2010. Gross profit margin increased 890 basis points, driven by sales mix improvement and plant efficiencies. Adjusted operating expenses were down 19% from last year due primarily to lower employee related costs, favorable changes in foreign currency exchange rates, and a decline in research and development costs.

We're also pleased with the fourth quarter performance of our API business. We knew that execution on our plans in the second half of this fiscal year and the fourth quarter in particular were going to be critical to setting this business on the right course for fiscal 2010. Although the API team did not have any major new products to launch this year, they were able to control their spending and get their plants operating more efficiently in order to deliver bottom line results.

Not only did adjusted operating margins improve 1390 basis points versus last year, they improved 970 basis points sequentially from last quarter's reported margin. The team is now very focused on the execution of the massive transformation project ahead of them as they begin the move into India and the closures of their plant in Germany and one area of the facility in Israel. I'll comment more on this in the context of our fiscal 2010 guidance in a few moments.

Turning now to slide 11 in the other category, which this quarter represents only the continuing operations of our Israel based pharmaceutical and diagnostic business, fourth quarter net sales were down 41% from last year. This decrease was driven primarily by a $6 million impact from a change in the relationship with a specific customer. That is, going forward, sales to this particular customer will now reflect a distributer versus supplier relationship with them, and therefore net sales to this large customer will reflect the value of the distribution service being provided rather than the physical sale of product. This has positively impacted the gross and operating margins as you can see, but has a year-over-year negative impact to the top line. In addition, sales were unfavorably impacted by foreign currency exchange rates offset in the sales mix of existing products and the remaining portfolio.

Now some quick comments on our full fiscal year. We met or surpassed all of our original fiscal 2009 goals presented in August 2008 and adjusted for continuing operations. Looking to slide 12, you can see we achieved our consolidated revenue growth goal of 13 to 18% coming in at 16%. This was driven in large part by the impressive full year Consumer Healthcare revenue growth of 22.6%. We were confidently in our guidance range of adjusted consolidated operating margin of between 12 and 14% and within this total, realized a Consumer Healthcare adjusted operating margin of 14.6%, a 110 basis point increase from last year.

Adjusted EPS from continuing operations satisfied its growth target of 13 to 20%, achieving 15%. Working Capital Management on top of these earnings results allowed us to surpass both our operating cash flow and ROIC goals, as you can see. Overall, we are very pleased with our results and the teams work to achieve these goals.

Now some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $304 million at the end of the quarter versus $319 million at this time last year. This represents 15% to net sales, down 300 basis points from 18% last year. Cash provided by operations was $157 million in the fourth quarter compared with $112 million last year. This is a record fiscal fourth quarter. For fiscal 2009. cash provided by operations was $258 million compared to $244 million a year ago, due mainly to strong cash earnings and strong working capital management.

At the end of the fourth quarter. cash and current investment securities were $316 million. consistent with the balance at the same time last year, despite having made $120 million in acquisitions during the course of the fiscal year. Our total current and long term debt on the face of the balance sheet was $892 million, but included a $400 million back to back loan, which was completely offset by the $400 million restricted cash deposit in non-current assets. Net of the back to back loan, our external debt was $492 million and as of June 27, we had an additional $200 million of untapped capacity on our existing bank revolver. At the end of fiscal 2009 our debt to total capital was 34.8% and our net debt to total capital was 12.4%.

And now I'd like to discuss our outlook for fiscal 2010. There were a number of continuous improvement initiatives which benefited fiscal 2009 that will continue into fiscal 2010. During the second half of fiscal 2009, these initiatives drove material improvement in both gross and operating margins. We remain focused on improving our operating expense cost structure while also squeezing out efficiencies in Supply Chain and manufacturing processes. So as a starting point, we expect to maintain the Fiscal 2009 Fourth Quarter adjusted operating margin on a consolidated basis for full year Fiscal 2010.

As we've stated in past calls, our over arching goal is to achieve bottom line growth greater than our top line growth, through continuous improvement and leverage without losing sight of the long term growth horizon. This years planning process was very focused on finding ways to streamline non-core spending to be able to fund critical strategic initiatives around innovation, quality, customer service and our people.

On slide 13, I'd like to walk you through some assumptions and dissect the components that will be impacting those margin expectations. First, we are projecting consolidated incremental new product sales to be greater than $120 million. Now let me briefly define incremental new product sales for purposes here. Historically, we have quoted new product sales as product launched in the last 18 months in Consumer Healthcare, and the last 12 month launches in our other businesses. Due to the accelerating speed of the OTC market, we are now switching to a latest 12 month number for Consumer Healthcare as well. This will make for an easier comparison as you look across our entire business portfolio. With that in mind the greater than $120 million target is comparable to the $214 million of incremental new product sales for fiscal 2009. We estimate consolidated revenue growth from continuing operations to be between 4% and 6% with new products being the primary driver.

Next let me discuss the components of that growth by business segment. Starting with the Consumer Healthcare segment, we are estimating revenue growth of between 6% and 8%. Our plan does factor in competition in the gastrointestinal and smoking cessation category during the year. We're also aware of the FDA reviews related to acetaminophen-containing products and believe the impact to our consumer-healthcare business will be limited during the transition to new product lines.

We will continue our ongoing business of weeding out underperforming SKUs from our base business. We expect the supply chain and cost initiatives discussed earlier and new products will offset pressures on key products, enabling gross and operating margins to expand between 50 and 100 basis points from adjusted fiscal 2009 28.4 and 14.5% respectively.

Our generic Rx business is on track to continue making improvements during fiscal 2010. On July 31, our partner, Teva Pharmaceutical Industries received FDA approval for Triamcinolone nasal spray, which will initiate a series of quarterly payments. Including these payments, we are targeting Rx revenue growth of 5 to 7%, and 75 to 150 basis points of growth and operating margin improvement, driven by cost management, operational improvements and product mix.

Fiscal 2010 will mark the beginning of many positive changes in our API business. First, we will have several new products and dossier sales on deck for the year. While we expect the revenue line to remain relatively unchanged from fiscal 2009, we expect that improved product mix, continuing cost management and operating efficiencies will drive an additional 200 to 400 basis point improvement over 2009's adjusted operating margins. Note that this includes the operating and set up costs to get our new Indian facility up and running as well.

So, as I noted a moment ago, on a consolidated basis, we're expecting total revenue growth of 4 to 6%, consolidated gross margins approximating the 30% adjusted gross margin seen in fiscal 2009. We intend to invest approximately 4% of consolidated net sales in research and development. At the same time, while we're making additional dollar investments in product launches and infrastructure in fiscal 2010, we expect that operating expenses, excluding R & D as a percent of sales, should be consistent to adjusted fiscal 2009 levels. We anticipate this level of revenue growth combined with operating leverage will drive consolidated operating margin between 13 and 14% of net sales.

With the combination of our improvement initiatives, new products and improved product mix, we expect earnings per share from continuing operations to be between $2 and $2.12, which is an increase of 7 to 13% from adjusted fiscal 2009 earnings per share from continuing operations of $1.87. This assumes that effective worldwide tax rate from continuing operations of approximately 28% which as you know, may move up or down a few hundred basis points depending on the final mix of income before tax realized during the year. Looking at capital expenditures, we expect to invest between $55 million and $70 million including those expenditures related to our new API facility, the completion of our plant expansion activities in Michigan and the integration of our fiscal 2009 acquisition.

Finally, looking at cash flow. We expect the performance of our businesses during fiscal 2010 to translate into cash flow from operations of between $220 million and $260 million. All in all, the team is proud of our accomplishments during fiscal 2009 and we are looking forward to executing on this plan during fiscal 2010. And now, let me turn it back to Joe.

Thanks, Judy. Now Judy has given you all of the details from the quarter and the year. I'd like to talk a little bit about our guidance and the goals I've set for the team.

First let me start with 2010 guidance, for what we are saying is Perrigo's gross earnings per share from continuing operations 7 to 13% this year. We clearly (don't) [background noise] need to execute on our strategy. Looking at slide 14, I've directed the team to focus on four goals this year. First, we need to execute on our operating plan. We will continue to focus on what we call our five pillars of quality, customer service, innovation, low cost, and people development.

We plan to bring more than 20 new products to the market this fiscal year adding more than $120 million in new product sales, just to be clear, as Judy explained, this number reflects all new product launch in the last 12 months on a year-over-year basis. Just two years ago, this is a record new product sales worth $77 million. Our new product pipeline for the year includes generic private label store brand form of Miralax, brand sales for this product are approximately $200 million and growing 20% per year. We expect to bring the store brand version to the market during our fiscal second quarter. We also expect the store brand version of Mucinex will potentially come to market during this fiscal year as well. Brand sales for this product are approximately $150 million.

The store brand version of Monastat 1 is also expected to come to the market during the fiscal year. That product currently has $80 million in annual branded sales. These are just some of the new products coming to the market this year. The Rx and API business segments also have strong new products coming to the market this fiscal year with branded sales of over $80 million. While I've stated many times, there aren't any Omeprazole size products coming to the market this year. There are some really strong products that will drive our growth, in order to continue that growth in the future we continue to invest in research and development.

We have 31 ANDAs in our product pipeline and we'll add to that number this year. I also want to congratulate the team for receiving final approval from the FDA to market Triamcinolone nasal spray. This product was developed at Perrigo and under the terms of a previously disclosed settlement, Teva will be able to market the ANDA product, which is manufactured by Perrigo under license from Sanofi commencing on June 15, 2011. Second, we need to execute the API low cost strategy and vertical integration of our Rx product and future Rx OTC switch candidate. We've already talked about our initial plans for this business segment and the process is well under way.

Third, we need to continue to execute the nutritional turnaround strategy. This strategy began earlier this calendar year as we began certification of additional suppliers. We are working to improve the entire Supply Chain in our operations. We are able to raise prices in some of our product lines and are working on a significant SKU rationalization. This is a good business for Perrigo. The overall category is growing in a weak economy.

The FDA oversight is increasing which is forcing weaker competitors to improve their processes or exit the business. Our nutritional customers are the same as our over-the-counter customers, and therefore we believe the vitamin and nutrition category reminds us of the OTC healthcare business a few years ago with two major competitors who were in the business for the long haul working to improve the store brand category and making quality products with a lower cost for consumers. I look forward to a much better year from this business.

Fourth and finally, we plan to develop our international strategy further. We are looking to leverage our unique business model, to expand globally. The team has been assembled, and we are in the process of defining the areas where we need to be. Obviously our presence in the UK makes European expansion a leading candidate. They do not have exactly the same retailers with a presence in most of the country so we're developing a business plan that capitalizes on our strength while working with a diversified marketplace. South America is another area of focus, whether different issues there, we believe we can leverage our Mexican operations to expand our model further south. I'll give you more updates as we move further in the process.

Now let's talk about some of the challenges we face this year. On slide 15 you can see the recent data our store brand version of Prilosec OTC. When we launched Omeprazole 18 months ago, we targeted a 40% market share. As you can see, on slide 15, we have achieved 40% store brand share for Omeprazole. We will have competition in this product this year. Today our competitors product is not yet on customer shelves but we expect it to be shortly. Omeprazole will continue to be a very strong product for Perrigo this fiscal year. Market penetration should continue to improve. Additionally, there will be new products that are switching from Rx to OTC this year with Previacid OTC and Zegerid OTC coming to the market in the next six months. Their impact on our sales and margins is reflected in our fiscal 2010 guidance. The switch products will impact sales of a national brand but should have a lesser effect on the store brand market. Even with numerous competitors, Cetirizine, the store brand comparable to Zyrtec, continues to perform well.

Our data on slide 16 currently shows that store brands are selling more than the national brand with a 50 plus percent market share and as I mentioned previously maintain our more than 80% market share of the store brand market. The cough/cold season was very weak this past year. In fact it was very similar to the past few years and this was factored into our fiscal 2010 guidance but that could change this year.

The H1N1 influenza outbreak is a cause for concern for all of us. The World Health Organization has to clear the pandemic a Phase Six level. We take this outbreak very seriously and our retailers are preparing for the flu season right now. Obviously, it's too early to talk about the impact to our sales, but we will keep you apprized of any developments with this issue. The category represents approximately 12% of our revenues. As you know, we're continually striving to be first to market in Rx and OTC. We expect to have an exclusive offering of more than $1 billion over the next year and possibly even longer. And we are investing to keep the pipeline robust. We believe more than $10 billion in branded prescription sales will switch from Rx to OTC in the next five years and our goal is to be first to market with those products.

Our operations have been able to meet the demand caused by the current interest in store brand private label. We are nearing completion of an addition to our tableting facilities here in Michigan that should be online by the end of the calendar year. We made more tablets this year than at any time in our history. We are continuing to meet the record demand in our OTC business while adding additional new products. Judy told you that our capital expenditures in Fiscal 2010 will be between $55 million and $70 million, similar to last year. This expansion is the reason the higher expenditure of this year and last year.

New products will continue to drive our growth in Fiscal 2010 and beyond. We believe our balance sheet is strong and positions Perrigo to stay the course for any market conditions. Our OTC business is a clear leader in the category and we have major new products on the verge of switching from Rx to OTC and from branded Rx to generic over the next few years. This year we will continue to focus on execution in a challenging economy we are working together with our customers and they are more aware of the store brand proposition. Unlike other private label products, OTC healthcare products and generic prescription drugs are FDA approved. The data is showing that consumers are making that value judgment as the store brand share continues to grow. Also, rising healthcare costs coupled with an aging population make Perrigo uniquely positioned to meet the world's growing need for quality affordable healthcare.

Now let's take your questions. Operator? If you can open up the line for questions please?

Thank you. (Operator Instructions). Your first question comes from David Buck with Buckingham Research.

Yes, thanks for taking the questions. Just a couple of quick ones. First on consumer health, can you talk about the level that you assumed in your guidance of price degradation if any, and specifically on Omeprazole, your competitor may comment that pricing may not go down very much and expected the long term free player market so would just be interested your comments there, and then also in the guidance, what is the assumption for foreign currency and did the Rx number for the fourth quarter have any milestones included? Thanks.

Just a clarification David before I answer the question, were you asking specifically about the Omeprazole pricing or the overall pricing question?

Both.

Okay, I'll start first and Judy you can talk about the foreign exchange portion of the question. First of all, on the CHC pricing, we expect CHC pricing to be flat to up slightly, as we've looked at the overall CHC pricing, it was previously coming down. We now expect to be able to flatten out that pricing so that essentially the pricing will be a flat environment, potentially up slightly, but flat is our expectation for where we will be on pricing for CHC.

Specific to Omeprazole, it is clear we do expect to face pricing competition and incremental competition for Omeprazole from the competition; however, as we look at it, we also want to be clear we think that we will gain incremental market penetration of the store brand private label Omeprazole products, so some pricing, but also incremental gains in market share penetration, and as we netted those out we felt as we look at Omeprazole and specifically our pricing environment, we felt that it would be reasonably flat during the course of fiscal year 2010. Now, that is clearly your point simply is that we expect we do expect pricing erosion on Omeprazole is absolutely correct.

The second part of the question Judy was a foreign exchange portion of the question.

In terms of our assumption for the 2010 plan David, when we look at our planning process, what we typically do is utilize an exchange rate assumption for the upcoming fiscal year in line with the current rates, and as you know, rates have stabilized versus the volatility that was going on in the September through February period, so right now, we're utilizing rates and expectations of translation rates, and transaction rates in our plan as today's rates, so if you go out and look at the UK, Mexican. shekel rates. the only rate where we've seen any movement in the last two months during that planning process is the Israeli shekel, and its movement against both the European and dollar currencies and the Israeli government is in the process of trying to stabilize those rates, and if that stabilization process does go through, we would be right in line with the planning that we have in our numbers today, so normally we do have a good natural hedge throughout all of our financial statements on exchange rates, so if the rates stay fairly stable, I would not expect to see a material change to our numbers through the course of the year because of ForEx.

The last part of the question David I think was a question about the Rx business and what was in there from a milestone point of view, and it was approximately $2 million of milestones that were recognized in that Rx business, approximately $2 million.

Okay, thank you.

Your next question comes from Greg Gilbert with Banc of America/Merrill Lynch.

Thanks, sticking with the Rx theme for a moment can you get a little bit more into detail as to what boosted the sales in the quarter and why should we not see this as a new run rate such that if we multiply that by four even without Nasacort milestones, you should be growing that business at a much higher race in fiscal 10 than you're suggesting, even without launches.

Yes, I'll start and then Judy you may want to comment. As we looked at the business the fourth quarter was very strong, no question about that and as we look at the run rate, it really is reflecting some of the success we've had as some of our competitors have had some difficulties in the market. I can not predict those competitors will continue to have those problems throughout the entire course of the year. If indeed, they do have problems, clearly I agree with your assumption but at this point we really tried to reflect what we felt were some of the challenges that our competitors were having in the marketplace, which allowed us to continue to have good momentum, a good tail wind behind us but I can't really predict the longevity of that time period based on issues that competition may or may not have during the entire fiscal year but that really is the basis for it.

That summarizes nicely where I was going to add color but you did that for me. Thank you Joe.

What about the quarterly payments going forward Judy? Can you quantify how many there are and the timing and how much we layer on top of what our assumption is for the base business there?

We're not really at liberty to get into the very specific dollar amounts, suffice it to say they are quarterly and therefore are recorded once a quarter and you can approximate low single digits but again, we are not giving specifics, but you saw what the quarterly milestone payment had been near the end of fiscal 2009 if you wanted to use that as an approximation, that would be reasonable.

And then a higher level question on consumer overall. I'm assuming Omeprazole and the nicotine products are higher than average margin products. Assuming those lines will be down or flattish, depending on your thoughts on that in the next fiscal year, how can you grow operating margin for that segment?

First of all, I agree with your comment. Nicotine and Omeprazole are higher margin products, I agree with that. On the comment as to where we are going with those products and specifically, I think there's a couple things that are happening, Greg. Number one, as we looked at our forecast both on revenue side as well as the operating margin side, we clearly recognized upsides and downside, but the first point I wanted to make is that we felt we have very strong momentum in our fiscal year exiting fiscal year 2009 going into fiscal year 2010 based on what's happening in terms of store brand penetration and we are already at 40% for example, with Omeprazole and we're seeing that continue to go up, certainly with some of the larger chains, that number is even higher than 40%, we're expecting to see that continue to go up.

The second comment I want to make is that Judy mentioned the $120 million of new product launches. Those will be very important margin generators for us, having that $120 million of incremental new products will be very helpful to us on improving the operating margins of the business. The addition of the Triamcinolone opportunity that you just referenced before, also is going to be a good driver for us on our overall margin, albeit that's not in the Consumer Healthcare side of the business, but those are certainly some of the things I would say, and the last one I do want to include because it's an important of the previous year, is our plans for the nutritional turnaround. That was a major issue for us this past fiscal year as we've stated previously as we turnaround that business, it will be a contributor albeit off a low base, admittedly, but it will help on the margins for our overall business.

Judy, anything else?

I was just going to highlight the nutrition piece again as well as some of the capital improvements that we were making at the end of fiscal 2009 as they will continue at the beginning of fiscal 2010, are also going to continue to help efficiency and as I made the comment about squeezing operational efficiencies, one of the critical drivers for the Consumer Healthcare team and the Global Supply Chain teams together is not only continuing to produce high quality products, but working very closely within the confines of the mix of products they have in front of them, and making sure they can create those products ever more efficiently.

Thanks and one last high level one. Are you considering on the M & A front, the bolt on types of deals you've been doing or anything more transformational at this point? Thanks.

Thank you for the question. I think right now, we're considering different types of arrangements for us, clearly, our past history has been the bolt on accretive ROIC positive acquisition, that's still our milestone. We do not feel that we need to do any acquisitions this year to grow, we think our organic growth rate is okay; however we will continue to evaluate that, especially given the strong cash position that we have as a result of our current operating execution.

So we're open for both the bolt ons as well as other opportunities. They will be ROIC positive and I probably should mention that we're being very specific in the types of opportunities we're going after. We're going to go after adjacent product categories in the CHC business, we're going after geographic expansion in CHC business, and we're going after in the Rx business those products that fall under the category of what I would call extended topicals or niche-type of generic products that will allow us to play in markets where there's less competition. Those are the three areas that strategically we are pursuing in our business model for acquisitions.

Thank you.

Thank you. Your next question comes from Randall Stanicky with Goldman Sachs.

Thanks, just a couple. First a follow-up. Is there anything built in, in terms of acquisitions into your revenue growth for the year?

No.

Okay, and then just looking at your slide 12, sorry, your previous slide on your guidance, yes, slide 12, one of the other components of guidance you gave us was Omeprazole revenue, I think you said $150 million to $200 million. Can you just maybe give us a sense of how you ultimately did against that goal and then perhaps any color you can give us on how you're thinking about that dollar figure in fiscal 2010 for that product?

Sure. Let me back up just a little bit on the fact just to remind everyone of the question or the facts behind it. When we originally planned to launch Omeprazole, approximately 18 months ago, we stated that we felt that it would do $150 million to $200 million. We felt we achieved the first 18 months somewhere close to 40% market share, and indeed as we presented the data we did achieve over 40% market share the first 18 months so that part we check off that box. In the $150 million to $200 million forecast we actually exceeded that forecast; however, given the issue we faced in our fiscal 2010, we're not going to give out a specific number but we do feel that we will see two things happen. Number one, we will gain increased market penetration of store brand private label Omeprazole so we will move from that 40% to some number higher and at the same time we will lose some market share to our competition and we will clearly face some pricing competition, so as we factored that together, we came up with a number that we think some of the ups, some of the downs and the opportunity for Omeprazole but we're not going to give out a specific number for this year just based on the competitive threats we face.

Okay. Fair enough, and Joe, can I just ask you to clarify, the 120 million you said you talked about in terms of new products, are those new products for this fiscal year or does that include recently launched new products as well?

The $120 million reflects the new products for this current fiscal year. Anything else you want to add to that comment?

It's a mixture and that $120 million is across all of our business units, but just given the size and scope of Consumer Healthcare as you can well imagine the bulk right now is coming from the Consumer Healthcare group but it is a mixture of as Joe has frequently noted, a lot of singles and doubles and so there are dozens of smaller products that are a part of that makeup but then obviously some larger products of which you are well aware.

Okay, so if we take that number, that implies roughly 6% growth, so effectively are you just saying the rest of the businesses ultimately flat to down or are you being conservative at this point in the year in terms of how you're thinking about the rest of the base business?

Yes, it's a good question, and we anticipated that question. I think the issue that we have with it is that what happens in our business is that those new products will replace and/or take away share of some of the older products in our business, so there is some substitution that goes on. These are clearly new products but imagine that we're coming out, for example, with a fact dissolve of acetaminophen as an example. That will take away some volume from the regular acetaminophen as an example and there for this cannibalization that goes on, so you can't really do an apples-to-apples comparison like you're suggesting because there's really some switching off and cannibalization that goes on with the older portfolio.

Okay, fair enough. Just last question, Judy you and I talked about this before on the margins and specifically on the raw material front the 29.4% margin in the consumer business. Can you maybe give us a sense of where we're at with the improvement in some of those costs relative to just overall cost removal and how to think about that margin? I think there's a previous question that was trying to get a sense of where we go from here in terms of what you put up this quarter?

Sure. Good question, and also referencing Greg's question as well then, because obviously, the point being if we are looking at the dynamic pressures in pricing or share with Omeprazole for example, how does it translate into margin potential for improvement in the real operational side? We have total cost improvement initiatives and targets that are set annually, finding 5% net cost productivity is the target that's put out in front of the team each year. You are all well aware of the dynamic that we as well as many other companies were facing last Summer with violent raw material inflation that was going on. While that has dissipated to some extent it's still a pretty dynamic commodities market so we're in a better position as we start off the beginning of this year, but that is part of this cost productivity goal that is in front of the team, so if it's not coming through raw materials improvements then the team is out looking for labor or overhead or other efficiencies that they can find to try to get to that 5% cost number so again, it's about a supply chain productivity factor that we build into these numbers.

But the low hanging fruit and the recovery on that raw material pricing is largely reflected in this quarters number. Is that fair to say?

You'd see for the places where there was a lot of volatility, you'd see that starting to come through. Now we've talked in some detail also in nutrition business. We were sitting on some larger buying positions that had come through at the beginning of fiscal 2009 and will still be working down the remainder of that inventory in the first half of fiscal 2010.

Thanks, guys.

Thank you.

Your next question comes from Linda Bolton-Weiser with Caris.

Hi, how are you?

Good morning Linda.

Listen, can you just address the Consumer Healthcare operating profit margin and why it declined so much sequentially? I think it went from 14.9 to 13.8 or something like that. It was a little lower than I had expected and specifically did the nutritional operating margin actually improve versus the third quarter?

Judy, do you want to talk about the operating margin?

I'll be happy to do that. Great question. As I commented, operating margin wise quarter-over-quarter for Consumer Healthcare, we did have a higher dollar spend in R & D in Consumer Healthcare, which caused a bit of the operating margin, as well as just a moment, just looking in terms of quarter-over-quarter, a few dollars more in SG&A with specific initiatives that are happening there but the biggest component, if you have a little bit more R & D and a little bit more SG&A quarter-over-quarter, with a flat gross margin, that was ultimately what drove the basis point decline sequentially. When I talked about the guidance for 2010, just looking at a blend of gross margin projections for next year, that was off a base for the full year 2009, to expand gross margins 50 to 100 basis points from the blended rate of the full year of 28.4.

Okay, great. And then can you just talk a little bit more about the new products, because unless I missed it I hadn't heard about the FDA approvals that you received for the Miralax and the Monistat, so do you have expectation about the timing, and can you maybe talk about the revenue growth for the Consumer Healthcare business, like by quarter? Are we going to see a lower growth rate in the first part of the year and bigger in the second part?

So let me start at the beginning part of the question Linda. You are correct, I do not have an approval for the store brand private label Miralax, nor for the Monistat; however we are working very closely with the FDA to gain approve and and on Miralax, that will but a second quarter fiscal year 2010 event and we believe we will be in position at that point to launch that product in the second quarter fiscal year 2010 based on our interactions with the FDA, on the Monistat, we are not approved but the other part of the hurdle was getting through the legal pathway on Monistat, and we have indeed gotten through the legal pathway and are free to come to the market as soon as we get the FDA approval so we will proceed that way. I don't know I really want to make too many comments specifically on the Consumer Healthcare quarterly sales guidance because I think what we always try to do in this economy based on what's happening and we don't know when cough/cold/flu season will really hit, we find it to be turbulent, including relative to the utilization of store brands but certainly the economy that has ups and downs and we really don't want to make any comments relative to quarterly projections. Judy, anything you want to add?

Last year I provided specific guidance about how to think about modeling the year and if we look forward though to 2010, it's a relatively balanced portfolio for the full year not talking top line only, just thinking in terms of bottom line expectations is a relatively balanced year.

Okay, and just can I ask about the Rx? I think you had alluded to some behind the counter product initiatives in the Rx segment that helped sales growth. What are you specifically referring to there?

You're talking about the fourth quarter, is that what you're asking about?

Yes. You talked about sales growth was robust partly because of some behind the counter initiatives.

Yes. What we have done and I think this reflects the overall strategy of Perrigo being in both the over-the-counter business as well as in the generic Rx business. We have found that there is still considerable demand for many of the products that have switched from prescription to over-the-counter and now we are selling products clearly as a store brand private label offering but also we are selling them to the pharmacist because the pharmacist still need product to dispense even though the product switched from over-the-counter to I'm sorry from Rx to over-the-counter so the pharmacists are still actually dispensing many products that are now over-the-counter, and as long as there is an NDC number, pharmacists will continue to dispense those products. That meant there was a need for good supply of quality, affordable Rx products, and that's how we are utilizing our generic Rx team to also capture the value of the asset that we have, which is the product approval and the ability to make the product and selling that not just simply as a store brand private label, but also selling it to the the pharmacist because he or she needs the ability to have some of these products for dispensing, and that really is what we've worked hard on with our team, and that includes products that are both behind the counter which are in the case of like Loratazin-D as an example because of the Pseudo-ephedrine as well as products like our Omeprazole as an example.

Great. Thank you very much.

Thanks for your question.

Thank you.

Thank you your next question comes from Scott Hirsch with Credit Suisse.

Hi there. Could you let us know how much of the current portfolio sources API from yourselves and how much is outsourced and then what could that ratio get to in time with the India acquisition?

Yes. It's a single, as a number of products it's a single percentage, a single digit percentage as the largest course being the Cetirizine product, which we are sourcing directly from Perrigo Israel but as an overall comment, it's a single percentage offer our API acquisition.

How far can it get to?

We believe many of the products that the proton pump inhibitor is another product of that sort, can be products that we can source from our facility, both starting at Israel but ultimately getting to Perrigo India over time, so that will be one we look at vertical integration of the Rx to OTC switch products we expect in the next five years.

All right, I don't know if you know but can you give us what the market share break down is now in the nicotine cessation between you and Watson? Has it become sort of a shared market or do you still have the vast majority of it?

We have a majority of the market share of the nicotine products. My knowledge of the coated gum market is that Watson has shipped at this time to I believe it's one player at this time. I do know they have an additional player lined up but at this time I believe they shipped to just one player.

All right and then in that light, with obviously Watson and Nicorette, and saying they filed Mucinex and Plan B and with readiness for Omeprazole, is it your scale that will continue to provide the barrier to some of these other competitors?

Well I think that scale is important in that we do 35 billion tablets, but the other important ingredient we have is what we refer to as mass customization, the ability to make sure that we have the right product, and the right bottle with the right label going in the right carton to the right customer and I know it sounds relatively simple to do that over 10,000 times every day and insure that we have that correct, is an enormous systems requirement for us, and I think that we've developed that over 100 plus years that we've been in this business.

I don't think other people cannot develop it, but I clearly knowing what I know about other pharmaceutical companies know that no one is close to us in those capacities, especially in the packaging capacity so I clearly think critical mass is part of it but I also think that our focus on mass customization and the fact that we have good quality affordable healthcare products and we get to market first is really what's going to drive our success going into the future.

Okay, and then just real quickly on gross margin. You mentioned in the press release there was $140 million from the acquired companies, the Galpharms, JP Labs, Unico, and Diba. Obviously you got four full quarters of them next year. Curious what the aggregate gross margin is for the acquired businesses?

Yes, we don't really give out any gross margin on acquired businesses. What we have chosen to do is really talk about their accretion and also that as we look at those acquisitions that they are ROIC positive and that really is the way we reflect on it because for example, it's hard to use them as a standalone because once we acquired JB Labs for example, we did not leave it as it's currently configured. We shifted some of our products that were made in our Michigan operation to that facility to allow us greater flexibility to make more of ibuprofen and other products we need to keep here in the Michigan site so it's hard to hold them as a standalone business once acquired. We integrate them very quickly and that is part of the success factor we have as a Company as the ability to quickly integrate them into our business model.

Which would be the same story for the international acquisitions that happened in Mexico and the UK as well.

We have time for one more question Operator.

Our final question comes from Derek Leckow from Barrington Research.

Good morning and congratulations on a great year.

Welcome Derek.

Just on the international expansion announcement you said you had teams assembled. I wanted to know what state are we in in terms of that expansion process. Are those teams on the ground, in various countries already signing deals, or are they still kind of in the planning stages here?

Well I didn't mean to say team, if I said teams I apologize. We have a team that is evaluating the opportunities and really trying to give us some direction as to which specific countries obviously as I mentioned Europe and South America are the leading candidates for us, but there are other countries that we're also looking at to really take our concept of store brand private label and move it around the globe, and really it reflects what we said in the past. We feel we've got great innovation technology, other companies are taking products and making them global such as the Mucinex product, and we want to make sure that we follow the success of those products around the world and find a way to successfully commercialize our store brand equivalent of a product like Mucinex around the world, and that requires us to have additional infrastructure around the world. We are evaluating that to look at the opportunities but we're early in that stage. I do want to make it clear. We don't have teams on the ground in all the countries at this time.

And Derek just to add to the question of whether we're on the ground signing deals yet, you can be certain that at such time there is something to announce we will.

Absolutely.

Thank you.

Thank you, everyone, for your interest in Perrigo. I'd like to thank you for taking the time and appreciate your questions. If you have any other questions please call Art or Dan and they will be happy to assist you with your questions. I want to also let everyone know we will be hosting an Analyst conference on the morning of September 29th in New York City at the NASDAQ market site. We will be sending out invitations shortly and we look forward to seeing you there and I hope everyone enjoys the rest of the summer. Thank you very much for your interest in Perrigo. Have a great day.

Thank you.

Thank you, this concludes today's conference call. You may now disconnect.