Perrigo Company PLC (PRGO) 2010 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Perrigo Fiscal 2010 year-end earnings results 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 would now like to turn the conference over to Mr. Art Shannon, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you very much, Paula. Welcome to Perrigo's Fourth Quarter 2010 earnings Conference Call. I hope you all had a chance to review our Press Release which we issued earlier this morning. A copy of the press release is available on our website at Perrigo.com Also, on our website is a slide presentation for this call. Before we proceed with the call I'd like to remind everyone 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 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 would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art and welcome everyone to Perrigo's year-end Fiscal 2010 Earnings Conference Call. Joining me today is also Judy Brown, Executive Vice President and Chief Financial Officer. For our agenda today I'm going to provide a brief perspective on the year, and the continued strength in store brand growth. Then I will give you an update regarding the progress to resolve the warning letter at our Allegan, Michigan site. Next Judy will walk through the detailed financials for the Fourth Quarter and our Fiscal 2011 EPS guidance. Then I'll give you an update on our very successful new product launches plus an update on other business units. This will be followed by an opportunity for question and answer.

First, I want to thank my team and all of our employees for the tremendous effort and ultimately the excellent results we have achieved this year. This is my fourth year at Perrigo and I've been honored to lead this dedicated team as we have achieved record results. Again thank you to Perrigo's 7,000 plus employees around the world for the great results this year. I'd also like to take the opportunity to welcome the newest employees to the Perrigo team, PBM Holdings and Orion Laboratories. I look forward to their many positive contributions from those teams in the future. Now let's discuss the results.

My overall comment on the year is we had a great year in Fiscal 2010 and we continue to execute on our plan while expanding the breadth and reach of our product portfolio. During our Analyst conference this past September, the team and I outlined our goal for the businesses. First, expand into adjacent product categories. Second, take our store brand OTC Healthcare business model into new geographic markets. And third, enter into strategic partnerships to broaden our product portfolio. This year, we accomplished all three.

In the fourth quarter we closed our acquisition of PBM Holdings, the largest store brand manufacturer of infant formula. In March we acquired Orion Laboratories and are now marketing store brand over-the-counter healthcare products in Australia. Just last month, we received certification from the therapeutic goods association for our US manufactured product that is comparable to MiraLax Polyethylene Glycol 3350 for sale in the Australian market. This is another important step for Perrigo marketing its US portfolio of products across the globe.

During the year, through acquisitions or partnerships, we added more than ten products whose national brand equivalence had sales totaling $3 billion. Last September, we also discussed entering the ophthalmic category, and I'm happy to say we launched our very first ophthalmic product in Fiscal 2010. As a result, we met or surpassed all of our originally stated adjusted financial goals for the Fiscal Year that were set last August on a continuing operations basis. Please refer to our Press Release for the adjustments, and looking at Slides three and four, you can see we grew revenue 13%. This was driven in large part by the impressive full year Rx revenue growth of 44.8%.

We exceeded our August 2009 guidance range for consolidated operating margin of between 13% and 14% and achieved a Consumer Healthcare adjusted operating margin of 17.2%, a 260 basis point increase. Adjusted EPS from continuing operations far surpassed its growth target of 7% to 13% achieving 51%. Working Capital Management combined with Cost Management allowed us to surpass our operating cash flow goal as you can see. Overall, we're very pleased with these results and the progress the team has made to achieve their goals.

On Slide five, you can see the continued market share gains for store brand. In every category, store brands outperformed the brand and the overall category growth, with Analgesics leading the way. As you can see store brand Analgesic products gained more than 18%, although the category was slightly down. If you look at the latest quarterly Analgesics store brand growth, it's up over 35% versus a year ago. Consumers continue to realize the value of the store brand proposition. Now, let's talk about the FDA.

By now you're all familiar with the history of the warning letter so let's discuss what's happened since we last spoke. Overall, we are on track for our warning letter remediation plan. We have completed our diagnostic assessment phase, and have personally met with the FDA Detroit District four times since early May 2010, including a meeting earlier this week. We expect to complete our plans for remediation and be ready for an FDA reinspection later this calendar year, or October or November of 2010.

The FDA has recently visited our Allegan site to inspect our acetaminophen suspension production process. It was an extensive review conducted in June 2010 and I'm happy to report that our manufacturing process review concluded with no 483 FDA observations. Also, we receive final approval from the FDA to manufacture and market over-the-counter Cetirizine Cherry Syrup in our Allegan facility. Shipments are expected to begin during the First Quarter of Fiscal 2011.

Quality is our highest priority at Perrigo. The FDA is appropriately continually raising quality standards globally, to insure the highest product safety for patients. We will invest the necessary resources and make the incremental investments in quality to meet the FDA's expectations. We will implement the necessary changes to our standard operating procedures to further increase the reliability of our processes. We will get this resolved and Perrigo will be even a stronger Company than it is today.

Right now we are making good progress and our dedicated teams are working overtime to get our Quality Controls to the new standards set by the FDA. I'm sure we will have plenty of questions about our fiscal 2011 guidance and our market share gains, but first let me turn it to Judy and talk through the rest of the information.

Thanks, Joe. Good morning, everyone. As you just heard from Joe we had a strong finish to a record year, but we also experienced challenges some of which will carry into fiscal 2011. So during the next few minutes I'll provide you a brief review of the fiscal fourth quarter results, and then we'll go on to reviewing the expectations for 2011. I'd like to remind you that my comments today are focused exclusively on results from continuing operations.

We had strong growth year-over-year this quarter. As you can see on slide number six, consolidated net sales from continuing operations increased 22% to a Fourth Quarter record of $619 million. Consolidated GAAP gross profit also grew at the same 22%, or a constant 32.2% gross margin. This gross profit dollar expansion, combined with operating expense leverage, enabled us to grow consolidated GAAP operating income 40%.

On slide seven, you see that we have excluded four items from our analysis of the adjusted operating basis financials for the Fourth Quarter of Fiscal 2010, and one item from Fiscal Fourth Quarter 2009. You may view the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in the appendix of this slide presentation, as well as our Press Release. Now, I'll take you through the rest of the financial analysis based on adjusted results from continuing operations.

On slide eight, you can see again that we had solid Fourth Quarter revenue growth year-over-year, driven by strong performance in Consumer Healthcare and Rx segments. New product sales of approximately $60 million were the largest driver of the increase in net sales, half of which came from the launches of the Imiquimod cream, the generic version of Aldara, and Clindamycin foam, the generic version of Evoclin. The acquisitions of PBM and Orion were the other main drivers of net sales growth adding $46 million in the quarter.

We had strong growth in adjusted consolidated gross profit from continuing operations, up 28% over last year. This gross profit growth was driven primarily by new product sales and contribution from acquisitions in Consumer Healthcare. We have continued our efforts to expand margins, and this quarter drove a 160 basis point increase in adjusted consolidated gross margin over last year. This is despite the margin pressure related to the structure of our partnership for the authorized generic of Aldara, in which we recognize all of the sales, but keep only a percentage of the profit.

Although adjusted operating expenses were up in dollar terms, we were able to improve our expense leverage and return a very strong adjusted operating margin of 16.1%, up 230 basis points from last year. Our performance this quarter translated into a 42% increase in adjusted diluted earnings per share from continuing operations of $0.71 up from $0.50 last year. Now let's move on to the business segments.

As you can see on slide nine, Consumer Healthcares Fourth Quarter net sales increased 18%. The growth can be broken down into a few main categories. First, the acquisitions of PBM and Orion accounted for approximately 11 percentage points of growth. Second, new product sales primarily in the gastrointestinal, nutrition and Analgesic categories accounted for approximately five percentage points of growth.

Third, increased sales of existing products, primarily in Analgesics and related to supply issues at a competitor, accounted for four percentage points of growth. And fourth, favorable foreign currency exchange rates accounted for approximately one percentage point of growth. These were partially offset by a two percentage point decrease in sales of certain existing products in the gastrointestinal, VMS, and oral electrolyte categories.

Adjusted gross profit growth was driven by a combination of acquisitions and new product sales. We did have some gross margin pressure coming from pricing and competition in certain products, but despite that pressure, we were able to increase adjusted gross margins to a very strong 32.1%. Although increased variable incentive compensation expenses partially offset a small portion of the adjusted gross margin improvement, we were able to leverage strong Fourth Quarter adjusted gross margins and good operating expense control into an adjusted operating margin in Consumer Healthcare of 15.9%, a record for any Fourth Quarter.

On slide ten, you can see that the Rx business had a very strong quarter as well. Net sales growth was driven by new product sales, specifically Imiquimod cream and Clindamycin foam. Gross profit for the quarter rose substantially compared to last year with the success of new product sales as well as improvements in pricing. You will notice, however that we lost 360 basis points in gross margins, attributable mainly to the financial structure of our authorized generic partnership with Graceway Pharmaceuticals for Aldara.

Adjusted operating income for the Fourth Quarter increased 79% compared to last year. Despite an increase in R&D spending and gross margin pressure from the Imiquimod cream, we were still able to increase adjusted operating margin 90 basis points. Next, looking at the API segment on slide 11.

In API, we are focused on our transformational strategy as we continue our exit from the recently sold German plant, and get our Indian API facility up and running. In the Fourth Quarter net sales were relatively flat versus last year. While we had new product sales and increased dossier sales, they were offset by lower sales of existing products. Looking forward, however the pipeline looks strong for this segment. Executional focus continues to remain critical in API, and the team is focused on improving operating efficiency, and bringing new pipeline products to market.

Now, some quick highlights on our Balance Sheet. Excluding cash and current investments, working capital from continuing operations was $375 million at the end of the quarter, up from $304 million at this time last year. Approximately $43 million or 61% of this increase came from the acquisitions of PBM and Orion. The organic increase in working capital from continuing operations of $28 million, allowed for the 13% year-over-year growth of the business.

Our key operational metrics of inventory turns and DSO improved year-over-year. We had strong cash flow from operations for the Fourth Quarter of $98 million, bringing our full year total to a record $314 million. Total current and long term debt on the face of the Balance Sheet was $1.34 billion, but included the $400 million back-to-back loan which was completely offset by the $400 million restricted cash deposit in current assets.

As of June 26, 2010, net of the back-to- back loan, external debt was $944 million or 46.4% of total capital. Excluding cash, cash equivalents, and current investment securities, net external debt to total capital was 41.6%. You'll notice on the face of the Balance Sheet that the $400 million back-to-back arrangement has been reclassified from non-current to current in both assets and liabilities. This is due to the fact that on July 19th, the back-to-back loan was closed. As a result the $400 million in restricted cash and debt will not be on our First Quarter Fiscal 2011 Balance Sheet.

When we spoke to you after the announcement of PBM acquisition, we stated that our goal was to bring the debt leverage, that is debt divided by EBITDA, from the transaction date level of 2.35 times to below two times by the end of Fiscal 2011. I'm happy to report we are well on our way to achieving that target as we were already at 2.1 times debt to adjusted EBITDA as of June 26, 2010, and even lower than that when using adjusted EBITDA as defined under our Credit Facility. That is debt as shown on our Balance Sheet excluding the back-to-back loan divided by EBITDA calculated on an adjusted operating basis. This quarter we also paid approximately $6 million in dividends or $0.0625 per share.

Now, I'd like to discuss our earnings outlook for Fiscal 2011. Consistent with Fiscal 2010, our earnings outlook will be based on adjusted financials from continuing operations. However, we are making a change in the way we calculate adjusted financials that is important to note.

Beginning with Fiscal 2011, we will exclude deal related amortization costs from our adjusted financials. Why is this? Well we've been consistently making acquisitions over the last five years, and as a result, have quickly increased the amount of amortization expense in our business. However we believe these large non-cash charges distort the true underlying operational performance of our business and we believe reduce the transparency for our Management team as well as for our investors in analyzing quarterly activity. As you can see on slide 12, for this review of earnings guidance we have adjusted our 2010 financials to be on a consistent basis with our Fiscal 2011 estimates. Also, for ease of your analysis, we have broken out deal related amortization within each segment as well as by line item for guidance and will continue to do so each quarter throughout the year.

So looking to our consolidated projections on Slide 13. For Fiscal 2011 we are estimating adjusted earnings per share from continuing operations to be between $3.40 and $3.60, an increase of 12% to 18% compared to Fiscal 2010's $3.04 presented on a comparable adjusted basis. Jumping to Slide 14, you'll see our expectations for Consumer Healthcare and the Rx segment. Please note that for purposes of this guidance, our recently acquired infant nutrition business is included in the Consumer Healthcare segment. We anticipate Consumer Healthcare revenue growth of 21% to 23% driven by the acquisitions of Orion and PBM, new product sales and increased sales in Analgesics and children's suspension products related to challenges at a competitor. We expect this to translate into a Fiscal 2011 adjusted gross margin of between 32% and 33%, and an adjusted operating margin of between 18% and 19%.

In Rx, we expect top line growth of 23% to 27% compared to Fiscal 2010, driven primarily by new products. We expect adjusted gross margin to be in a range of 44% and 46%, and adjusted operating margin to be in a range of 29.5% to 31.5%. I want to remind you again that there are some downward pressure year-over-year on adjusted gross margin related to our partnership on the authorized generic of Aldara, however sales of this product will provide a healthy contribution to net sales, to adjusted gross profit, and to adjusted operating income for the year.

On Slide 15 you'll see that for our API segment we expect top line net sales to be flat or up slightly compared to Fiscal 2010. Please note that our assumptions here do not include any sales related to the potential launch of a US generic of Temodar. As this product launch and all related litigation processes are being controlled by Teva, it would in our opinion be presumptive of us to apply our usual probability weighting to this product as we look forward to Fiscal 2011. Instead as this situation unfolds, and Teva communicates their launch plans, we will come back to you and adjust our guidance expectations as appropriate.

So, that being said we expect both the adjusted gross and operating margins in the API segment to remain relatively flat when compared to Fiscal 2010. Our API transformation continues, and we are working on getting our new facility in India operational, as well as on increasing our product portfolio. Summing everything up, back at the consolidated P&L level on Slide 16. We are estimating consolidated net sales growth to be in a range of 20% to 23% over Fiscal 2010, driven by acquisitions, new product sales over $180 million, and growth in our base business.

We estimate adjusted gross margin to be between 34% and 35%, which includes an assumption of incremental costs related to our resolution of the FDA warning letter. We expect adjusted distribution, selling, general, and administrative expenses to be up slightly from Fiscal 2010 adjusted 12.5% of net sales, and R&D expense to approximate 4% of net sales. This then translates into an adjusted operating margin range of between 17% and 19%.

Also, as you know, there has been an increase in indebtedness following the closing of our acquisitions in Fiscal 2010. Given this change, we estimate interest in other net to be approximately $45 million in Fiscal 2011. And lastly, for our planning purposes, we are assuming an effective worldwide tax rate from continuing operations of approximately 29%. While we were preliminarily expecting an effective tax rate in excess of 30%, based on jurisdictional and product mix, we believe we will now be able to realize more of the benefit from certain of our tax planning strategies than had been previously anticipated in Fiscal 2011.

In total, this brings us to an estimate of consolidated adjusted earnings per share from continuing operations of between $3.40 and $3.50. Now, as you know, we do not provide quarterly guidance, however, we are always asked the question and would like to be proactive and let you know that we expect the year to follow a similar arc as seen in previous years, with the first fiscal quarter being the lightest, followed by the classically heaviest second and third quarter, and then a softening sequentially in the fourth quarter.

Finally we expect cash flow from operations to be between $350 and $380 million for the full year, compared to $314 million for Fiscal 2010. Our expectation is that Capital Expenditures will increase above our previous equal to depreciation expense target this year and should be between $75 million and $95 million. This target reflects expected spend at our Indian and Israeli plants related to our transformation strategy in API, to investments in the new infant formula locations, and to manufacturing and technology enhancements at our Michigan facilities.

Fiscal 2010 was without a doubt a great year for Perrigo. We expect the year with record cash flow from operations, we exit the year with record cash flow from operations, and still have a very strong Balance Sheet, even after recently completing a major acquisition. We are now very focused and ready for both the challenges and opportunities that Fiscal 2011 will bring. And now let me turn it back to Joe.

Thank you, Judy. As Judy outlined for you, we have another busy year ahead. This year we are planning on launching more than 50 new products that we expect will translate into more than $180 million in annual Perrigo sales. We are positioned to bring the store brand version of Allegra to market once it switches to OTC, but to be clear it is not included in our current Fiscal Year 2011 guidance.

Our infant nutrition business is off to a good start, outperforming our expectations for the first two months following the close of the acquisition. And we'll contribute to the full year with new products and expansion into new Markets. The generic Rx business is poised for a strong new product year highlighted by the generic versions of Aldara, Evoclin, and Xyzal, which has combined brand sales of more than $600 million. Add to this the continued growth in our Rx products and our Rx base business, which continue to grow as competitors work through their own manufacturing issues, and you have a terrific year ahead for our Rx team.

In our API business unit, we will supply the active ingredient and share in the profits with Teva for the generic version of Temodar in the United States, once we are able to launch the product. Just as a reminder though as Judy mentioned in her comments, no US sales of the Temozolomide product are included in our Fiscal 2011 adjusted earnings guidance. By now I'm sure you all know Perrigo is the leading manufacturer of store brand over the counter healthcare products in the United States, England, Mexico and soon to be in Australia. But you may not know that we are now offering products in more than 75 countries around the globe.

We remain focused on the future and will continue to invest in Research and Development, increasing the actual dollar spend year-over-year. We're growing both organically, and by acquisitions, to capitalize on our market position to build our businesses. Look for us to continue this focused Business Development in the future. Now, let's open the line up for questions. Operator? I'd like to open up the line for any questions.

(Operator Instructions) Your first question comes from Louise Chen of Collins Stewart.

Hi, just a few questions here. First question I wanted to ask you was what accounts for the swing factor of about $0.20 in your Fiscal 2011 guidance?

First of all Louise, thank you for the question. Really what we try to do in looking at any of our forecasts for the year is put probability weighting on new products as we always look at probability factors on new products and there's some things we just cannot completely estimate so there's always an effect on probability weighting of new products.

Obviously we've made some acquisitions in the past year and the performance of the acquisitions is something that gives us, we put a little bit more probability weighting on those simply because they're new businesses for us. So new products, new businesses are really some part of the guidance range. Judy anything else you'd like to add-on that?

Conceptually, Louise, what we've tried to do in the past from just how we approach guidance is to shoot for an original percentage of the total years planned and have a guidance range that's around that. Our numbers have just gotten bigger over the last five years so the number in absolute terms is in cents. It's just a bigger number than it would have been three or four years ago, so as I look at it as a range of $0.20 size range given the size of our earnings now is in line with our approach to how we've given annual guidance at the beginning of any Fiscal Year in the past.

Okay and of course as the year goes on depending on what we learn, we may be able to tighten up the range.

Thanks and the second question I had was just on the Michigan warning letter. Would you give us any sense of how much it may cost to remediate this and then what are you spending on if you can't say exactly what the cost is?

Well probably the best way to start is we feel we're making great progress in going through the remediation program with the FDA. I've been delighted to have a chance to meet very closely and talk very closely with the FDA Detroit District. We've had a chance to meet with them now four times since early May so its been a great cooperative discussion with the FDA in terms of resolving and remediating the facility.

Relative to the facility, what we've looked at is how we will need to add some additional people resources and/or capital resources. We believe the number is ballpark number in the $10 million range relative to adding people resources that will allow us to insure that we are meeting the current FDA requirements, but most importantly going into the future as the FDA continues to raise the bar in quality we'll be prepared for that.

And then just last question is just on the benefit from, I know you've got this question many times but just the benefit you got from H1N1 last year and how you think that would impact your year-over-year comparisons in Fiscal 2011?

Sure. Well the first comment is last year was a little bit unusual in that the impact of the H1N1 occurred earlier than what we call the normal cough/cold/flu season. I remind everyone that cough/cold/flu season -- that cough/cold is approximately 10% of our sales just to give you a relative value. The season occurred much earlier last year, however I want to make it very clear that overall last year's H1N1 plus cough/cold flu was approximately equal to the previous year, so there really was no major influence of H1N1 on the total year, it was very similar to the previous year only difference last year was the earlier start of the season.

My expectation though is based on what happened last year, we will see some early pre-orders from our customers relative to what I would call cough/cold products in the September/October time frame. So I don't expect a major change in our overall cough/cold flu sales for 2011 versus 2010 versus 2009. I don't expect them to be very comparable. Not outside of any new products I should probably say.

Okay, thank you.

Next question comes from Frank Pinkerton of SunTrust.

Hi, great. Thank you for taking the question. Can you just start on the PBM side and speak to maybe any future plans for changing some of the labels you have to make them more similar to some of the store brands out there and just reaffirm for us the strategy on potentially including or not including in the WIC program or to do some sampling going forward?

Sure, Frank. Thanks for the question. What we are doing with the PBM, the PBM did a great job in building the business. They have great products, they have a great manufacturing process. They have done a lot of great things. What we looked at when we acquired the business, though, is there an opportunity to go in and try to bring some of the things that Perrigo does very well with the business. So, for example, as you spoke one of the things we look at is labeling.

I'm delighted to say we're coming out with some new labels very, very soon, for some of our large customers, we're coming out with some new product sizes for some of our larger customers. Those will be larger cans -- size cans. And, also, we are working very hard on the merchandising of the product portfolio from PBM with the larger customers and we think all three of those things will help us to increase our share in the United States market. But, also, we're looking at global opportunities for growth in the infant formula business which I also want to be clear on, we think the opportunity for growth in Asia and Latin America is another big growth factor for us or an opportunity for us in Fiscal Year 2011 and beyond.

Okay, great and then just shifting over, can you break out the growth in the generic business between ORx and your two launches, and can you give us any flavor on the size for those two launches what may have been stocking into the channel versus actual sales or how you account for the actual sales? Thank you.

Sure. So let me start with the ORx question just to give you some history and others who may not be as familiar. ORx, and we really started this process in 2008, was essentially a zero business. We had very little business. We had some single digits millions of dollars. We moved it up to approximately 2009 about a $25 million business so it moved up rather quickly and in Fiscal Year 2010, it approached somewhere close to a little under $40 million for the business for ORx, so it has made some very significant growth.

We expect to see additional growth for this, especially as we launch new products into the marketplace. That gives us even more opportunities to go in with ORx where there are OTC or Rx to OTC switches so we're going to continue to look at that. We don't give out individual sales on the larger products like the Aldara product or the Xyzal product or the Evoclin product, so we don't give out individual ones, but I will say Aldara -- clearly generic for Aldara we're doing very well. We have what we think have actually exceeded our expectations in terms of our market share gains.

We're very pleased with that performance. But I remind you the Aldara is at the lower gross margin as Judy pointed out, so it does have although it's a great top line growth for us it's not going to contribute to that gross margin percentage growth that we saw prior to the launch of Aldara. But on the other hand, Evoclin, while not a large product, significantly adds to our gross margin structure relative to where we are as a Company.

Great. Thanks for taking questions.

The next question comes from Randall Stanicky of Goldman Sachs.

Great guys. Thanks for the questions. Just a couple. First, can you be a little more specific on the J & J benefit? It sounded, I think you said a 4% benefit which Joe, would that imply around $20 million or so that you picked up from that market share opportunity in the quarter?

Let me just start and then I'll turn it over to Judy. Just on the balance, let me just start without talking about a specific quarterly influence, we believe that the store brand opportunity for some of the analgesic products that have been recalled or withdrawn from the market at this time represents approximately $100 million store brand opportunity on an annualized basis. I'm not suggesting we're going to get all that business but that just gives you the framework for what we think on an annual basis that is. Judy do you want to make any specific comments about the quarter and the specifics for the analgesic pediatric business?

Randall was spot on. I made the comment about sales of existing products which included the analgesics and supply issues at a competitor on specific products was 4%. So if you take out probably a percentage point of other ongoing existing product growth, a 3% ish range to be utilized for the compensation of our product in the marketplace during their absence would be appropriate.

And that's on the overall revenue number or is that the consumer?

That's on the consumer roll forward.

That's helpful. So how do we think about that going forward? How much -- how sticky do you think that business is? How much have you built into the guidance in terms of retaining some of that business that you are building on that further?

Sure, great question, Randall. How we look at this business is always on a quarterly basis. At the current time as we have looked at this business, our expectation is that we will retain the majority of that through the first six months of our Fiscal Year or through the end of calendar year 2010. Beyond that point, we are not, we are expecting J & J to potentially return to the market. We don't know exactly when the return is. Obviously we're just really taking it a quarter at a time for right now, how we look at it.

We find that by being somewhat conservative and only reflecting a quarter at a time it really suits us best relative to where the potential market opportunity goes. We really can't be more specific as to when they will return to the market and right now, that really is our best concept. We know historically one other factor, and I'll ask Judy to make any additional comments, is that historically when consumers move from the national brand to store brand, and make that choice proactively, that we retain approximately 90% of the consumers once they make the move from national brand to store brand. However, in a case where there's just simply no national brand, we think that number probably is more like half that, that we would retain once the national brand comes back to the marketplace. Judy anything else you want to add?

Great question, Randall. I'm glad you asked it because it is important for everyone to understand how we went through the process of thinking about our guidance range and what we would include going on public statements as well as our understanding from talking to retailers in the market. We went with the best available data of a potential return for J & J at the beginning of calendar 2011. Similar to what happened when another competitor went off line a few years ago, we will update you on our information and assumptions over the course of the year, if those assumptions change. And our guidance also includes the presumption that we are shipping what we can ship given our current capacity and our current manufacturing framework.

As you know and as we've said publicly in previous meetings, that we did not ever have the capacity or the Corporation to absorb the entire US demand for all of these products for brand and store brand. And we're ramping up to be able to serve as the tremendous capacity or sorry, the tremendous demand that obviously has come across in the last few months because of that competitor going off line. So we'll continue to keep you abreast of our developments there, as we try to ramp up additional volume capacity in our plants and be able to try to service the tremendous demand that is being seen in the marketplace right now.

Okay, and then just two really quick follow-ups. Joe, is the $300 million for PBM and better than $0.10 in terms of accretion target still intact? And then finally, to a previous question on remediation costs. I know you said $10 million in terms of additional people. Does that number include consulting costs and other expenditures that you'll need to get through to solve the warning letter issue?

Let me answer the second question first. Yes is the answer. That was approximately $10 million estimation of both the people side of the equation as well as what we're spending in the consulting side to go through the remediation process. On the first point of the question, I would only say we don't give out the specific numbers of PBM, we're really delighted of what -- how PBM has performed since our acquisition.

If anything they have outperformed our expectations. It's very early in the process obviously but we're really pleased with the performance of PBM both in growing US business, but also picking up the incremental business outside the United States geographically has been very strong and we're looking to see - - I would say at this point we are very, very optimistic relative to their performance versus what we had originally performed in the plan. Judy anything else you'd add on PBM?

Confirm we are solidly ahead of our greater than $0.10 EPS projection that had been put out on March 23rd, the day that we announced the acquisition which at that time included the incremental interest as well as the incremental amortization expense.

And the $300 million target is that still intact as well?

That is absolutely still intact.

Great. Thanks very much guys.

Next question comes from David Buck of Buckingham Research.

Yes, thanks. Just to follow-up on PBM and the consumer health segment. I guess first question is why did you decide to include that in consumer health and not give the visibility in that business? Secondly, just for gross margin, can you talk a little bit about why you're only expecting to go from 31.4% to 32% -- to 33% when you bought a business that's got gross margins in the call it 47% to 48% range? and then just for Joe, you talked a little bit about pricing competition. Can you just clarify whether that's just pricing on some of the competitive products or are you seeing a change in consumer health where pricing is actually starting to go down a bit on base business products? Thanks.

Sure. Well so you've asked a lot of important questions. Let me just start with the PBM and putting it in the Consumer Healthcare business. As we look -- as we looked at what we were doing with the business, we are continuing to evaluate how best to put forward and look at our PBM business. It's a great business model and we really do feel that it is a strong business that we could potentially look at other alternatives. But once again we're very early in this process, we're working through our integration plans all that is going on track and candidly, it's really been the major focus for what we're trying to do right now is work through the integration plan, work through making sure that the business continues to be very strong business and that really has been our primary focus, David, since the acquisition closed at the end of April.

Do I believe there's still some opportunities to revisit some of this and use greater clarity on that, the answer is yes but we're just not quite ready yet. We'll put some additional work into that and perhaps have other things to say about it at some point in the future relative to that strength of the business and the clarity we can provide to you. On the question of the gross margin, it is another good question. There's some things that are going on relative to the mix in the category on the gross margin. There is clearly some positives from PBM. There is some incremental spend we've put in for the warning letter that we previously talked about.

All of those are some pluses and minuses that we have evaluated and felt that for the current estimation of the gross margin, we're best saying with this percentage that we outlined in terms of the 32% to 33%. We obviously believe that new products could be very helpful to that but remember there's no Fexofenadine or Allegra in our numbers right now, so obviously if that occurs that could have a positive.

Obviously if there are some increases in the amount of time that we're able to keep the analgesic business beyond the six months, that could have a favorable impact so there's some pluses and minuses we assessed and at this point we felt being at the 32% to 33% was probably the right place to start -- start the year. Finally, I think you asked about pricing, was that the other question?

Yes, it was. Yes.

On a year-over-year basis, there is a little bit more pricing pressure right now in some products that we have seen, certainly some of our products have seen some incremental pricing. However we do feel that there is some areas in our overall Consumer Healthcare business that we feel there's some pricing upsides in. Clearly, in products where there's less competition that we do believe there's some upside. And on balance, I think we can get an appropriate balance there of some upsides and downsides in our overall pricing environment. There will be some pressure though, I want to be clear but we think we can strike a balance there relative to pricing in our Fiscal Year 2011.

Great, one final follow-up. On PBM, is the contribution from that margin still in the ballpark of 48% for gross margin?

That's a little high, David.

Okay, thanks.

The next question comes from Derek Leckow of Barrington Research.

Thank you and congratulations on a great year.

Thank you, Derek.

Just want to touch on your outlook for your Balance Sheet. You're spending around $45 million in interest expense. I think next year and that represents about $0.30 to $0.35 of earnings power. Just wondering with the cash flow you're generating is there a chance to maybe realize some of that?

Such as pay down debt?

Exactly and reduce your interest expense.

Absolutely. As we look at uses of cash in Fiscal 2011, you've heard me comment that we are going to be spending more money than our normal run rate in terms of reinvesting in the business, Capital Expenditures for our API business, for our Michigan facilities, investing additionally into our newly acquired entity. That said, normally we would run around the last year we were at about $55 million and ramping that up to $75 million to $95 million projected for this coming Fiscal Year.

We are as you know right now, we are not in a share buyback program, and we would be looking at ways to pay down debt we're in the process right now of paying down the revolver, as you can see on the comments I made earlier of already getting our debt to EBITDA ratios lower, so paying down the debt that we can pay down, we have several fixed maturities in our capital and debt structure that would preclude us from paying those down, but looking at ways to get down the debt as quickly as possible is absolutely in our priority structure and then beyond that, looking for other opportunities to reinvest in the business, look externally and potentially at some point again re-engage in a 10 B5-1 as we've done in the past.

I don't think many people are shedding any tears for the back-to-back loan being gone, but is there an incremental cost to that initially here? Is there an incremental cost that will be going away in 2012?

The incremental net interest cost as a back-to-back as I said in previous years was about a $0.5 million because we paid interest but we also received interest income, so there is a diminimus reduction in the interest net line but that is not a tremendous difference in the change in interest expense, the biggest piece is obviously the occurrence of new debt related to the acquisitions, nor was there a take out fee per se in closing down the back-to-back in July.

Okay, thanks so then just one final one on your guidance, I noticed that you've got zero in there for Allegra, zero for Temodar, and nothing for Mucinex. I think these three products there's probabilities these products might be available in the Fiscal Year, so as far as we're concerned, do you think it's helpful to help us frame the size of each of these opportunities? I know Temodar, I'm coming up with roughly $0.60 a share I guess on an annualized basis so I'm just wondering does it make sense for you to try to help us frame these opportunities?

Yes, well let me just make a couple comments. Obviously you picked up on no [Tema] US. We have Tema in Europe, but no Tema US, is in our forecast, we have no Allegra, because we don't control the launch date on that Allegra product so those two are correct. On Mucinex, we do like with all new products, we risk adjust by Perrigo our percentage and given the recent news we have a significantly downward risk adjustment or very low probability in Fiscal Year 2011 for Mucinex, but nothing expected from Mucinex before the quarter four in our numbers, so let me just correct slightly your words on Mucinex, but having said what you said, the US opportunity obviously on an annualized basis is a very significant one for us.

I don't know if I'd go as high as the $0.60 number that you suggested but it is a very significant one. At this point we simply a wait the outcome of the trial that occurred on August 4th and our expectation is we'll learn something on the US issue with Temozol some time by the current end of calendar 2010, so next three to four months is our expectation. And as I said Allegra, we really can't comment on that although I will say at the current time from what I've heard from a competitive point of view, we expect the brand to launch an Allegra over-the-counter brand some time in March of 2011 is approximately the time, so I guess that's the best way I can say it.

I will speak on Allegra specifically it is a great product. As a pharmacist I know Allegra is a great product. It has a great balance of the efficacy of Zyrtec and also the side effect profile of Claritin, it's a nice product right in the middle of both efficacy and side effects that I think is a very good product. From a branded prescription product its been more successful than Zyrtec was so we look to it to do great things in the marketplace and obviously we look forward to introducing our store brand version of the Fexofenadine or Allegra as soon as possible.

Do you think Allegra will then take some volume away from the other existing products?

We've actually looked at that because it's a great question. Historically what we did when Claritin was in the market, we looked at what happened in the introduction of Zyrtec and the influence or cannibalization I think is what you're really referring to of new products, and we find that the cannibalization rate is less than 10%, so for example, the store brand Loratadine or Claritin went down less than 10% during the time period of the Zyrtec launch so and obviously the Zyrtec launch, Zyrtec and store brand Cetirizine was very strong, so we believe there could be some cannibalization but it's less than 10% on the existing product.

The real big advantage for launching these products over-the-counter is they take away from products that have been older antihistamines that are available over-the-counter and that's where you see the majority of the cannibalization. Most of the newer products like Claritin, like Zyrtec, like Allegra, and then our version of the store brand versions of them continue to do very strongly in the marketplace.

Got it. Thank you.

(Operator Instructions) Your next question comes from Elliott Wilbur of Needham & Company.

Thanks. Joe, maybe just following up on some of your earlier comments around Mucinex, the expectation of a launch in Q4 and you also sort of alluded to maybe diminished overall expectation, guess I'm just trying to get a sense of how much of that is related to the recent court decision vis-a-vis just a pushback in timing and then thinking about other potential new product launches that you have embedded in your top line guidance for Consumer Healthcare, trying to get a sense for sort of the degree of conservatism there kind of around the expected timing in light of the FDA reinspection. How significant some of these new products may be.

Well it's a good question. So what we do when we do any probability or waiting for any of our products is really try to assess all factors into the probability factor and try to come forward with our best estimation. Obviously the recent news in the court case on Mucinex was something that we built into our understanding and knowledge and have had a lot of discussions with my team relative to what does that mean. Relative though to the second part of the question on new products as Judy pointed out we're really excited. We have $180 million of new products, more than $180 million.

We have more than 50 new products we expect to launch, the majority of that relative to the total of $180 million much of that is going to be in our Consumer Healthcare product category, some of them are through partnerships, some will be products that we launch ANDA's monograph products so we're really excited about it and we've looked through and believe there's a great opportunity for us even before the products like Fexofenadine or the product like Temozolomide US, so we've excluded those from the business and still come up with over $180 million and 50 specific products that we will launch and I remind you one other statistic I'd mention briefly, but just to remind you is that during the past year, we have added products that have branded sales of over $3 billion through Business Development activities. Those are branded sales for Business Development activities that we've added.

Products like Duac, HalfLytely, Aldara, Dextromethorphan ER, or the Delsym equivalent, many of those products are all going to be additional opportunities as we look towards how we will look at the future of new product portfolio we have. We feel very good about what we've done both organically and what we've added through Business Development opportunities.

Okay, and then just maybe trying to dive a little bit deeper into this. With respect to Consumer Healthcare and sort of the dependence on FDA resolution in terms of new product launches, you did get approval for Cetirizine syrup sort of post these events and maybe you can shed a little bit of light on sort of why that specific product I guess was approved from that facility and whether or not there's anything like that sort of embedded in new product guidance that may not be as at risk from a shifting FDA timeline.

Sure. Well let me be clear. When we get our new product forecast, we absolutely considered the FDA timing as part of the analysis for how much we would expect to launch in new products during the course of the year, so that was something that we clearly evaluated. Relative to the Cetirizine Cherry Syrup we're delighted to get that approval.

I can't speak to specifics about it but we believe the FDA as I said looked at our facility, looked at our liquids facility and they were into inspect the liquids facility just during the month of June and as I mentioned earlier in the call, the inspection with no 483 observation so I do feel very good. That was of course our Allegan, Michigan site so we think that was a great achievement. Obviously we've still got a lot of work to do with remediation of the warning letter in Allegan, Michigan and we're working very diligently to get that resolved as soon as possible but we feel very optimistic relative to where we are in the process to resolve that warning letter.

And then a question on Temozolomide as well. If you could just maybe give some sort of sense for the relative contribution of that product based on current sales, the European sales and what I'm really trying to get at is sort of given a competitive disruption there, how was that reflected in what seems to be your relatively conservative top line guidance of 0% to 2% growth?

Yes, just to summarize, Temozolomide, has two components, the US component which as we stated before is not in our guidance. There is no amount of revenue included in the US in our guidance. There is guidance or an inclusion in our guidance for the outside US or European Union opportunity. As you mentioned, we had one competitor in Europe, at least one manufacturing competitor in Europe. That competitor now has recalled their product in Europe. I can't speak to exactly when they will be back in the market.

Our current sales have been very strong. We've been delighted with the outcome in Europe to date and in terms of both the sales level and the gross margin and at this point what we're doing is just taking it on a quarter by quarter basis. I can't say whether my competitor in Europe is going to be back in next quarter or six months or nine months. I really don't have the expectation or ability to say that. It's up to them to make their judgments but currently, right now we are the only supplier of the Temozolomide in European Union and obviously we think that's a great spot to be.

Okay, one last question, promise. J & J has on several occasions talked about lining up contract manufacturing to kind of fill the void of some of the products that have been recalled. Have you seen any evidence of that in terms of their ability to get a little bit more product out on the shelf?

I'm aware that J & J has stated that from a competitive point of view. I am not aware of when they potentially can or will be able to line up the appropriate contract manufacturing resources to come to the market but what we felt the right way to deal with this question is that we have been very successful in picking up volume for the pediatric suspensions and the analgesic products and what we've done is basically for the suspension for example, left it at a quarter by quarter basis so we've got six months in and we'll continue to update you as we go forward relative to whether or not we can move that to a nine month time period or beyond that, so I've heard contract manufacturing assets to reintroduce the product but I'm not at this point aware of any specific assets that they have that would meet their requirements.

All right, thank you.

We have time for one last question. Operator? Any other questions, Operator? Operator, I'm sorry, you're breaking up. Could you repeat?

Your final question comes from Jon Andersen.

Good morning, thanks for taking my question. Actually I have two quick ones. One, can you just give us some color on the dynamics in the nutritional business at present and your kind of plans for that business going forward and second related to the pricing pressure that you referenced, Joe, is that pressure coming from stronger price promotion from the branded players or is it other private label players? Thank you.

Sure, just a question on clarity. By the attrition are you talking about our vitamin nutritional business or are you talking about our infant formula?

Vitamin nutritional business.

Yes, okay. The vitamin and nutrition business has been under some pressure. Fortunately for Perrigo it has been, we are coming back from what I would call albeit a very low base of margin structure in our Fiscal Year 2009 so we've had an ability to increase our performance from a gross margin basis in Fiscal Year 2010. I do though expect some challenges in that business based on some new competition and from some new players in the business and as such we have tried to look at that business relative to expectations and modifying, that was some of my comments earlier before on pricing. We expect some of the incremental pricing competition in our vitamin business.

Just as a reminder that's about 10% of our total Perrigo, less than 10% of our total Perrigo business, but that is one of the areas that when I mentioned pricing I expect to see some pricing challenges from the nutritional business. And from a general point of view, I think I stated it before. I do see some areas where we will face some pricing challenges but I clearly see some as well where I think there's some pricing upside and I think what we've tried to do and characterize as we looked at our gross margins and some of the things we talked about is try to put that balance of some areas where there's upside and some areas where there will be challenges for us in the Fiscal Year and that is how we built our plan.

Thanks, congratulations on a great year.

Thank you very much. Operator, that concludes our call. Thank you everyone for your interest in Perrigo and we look forward to talking to you in another three months. Have a great day.

Thank you. This concludes your conference. You may now disconnect.

Thank you.