Perrigo Company PLC (PRGO) 2011 Q4 法說會逐字稿

Good morning. My name is Tamika and I will be your conference operator today. At this time, I would like to welcome everyone to Perrigo's fiscal 2011 fourth quarter earnings release conference call.

(Operator Instructions)

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to Mr. Art Shannon, Vice President of Investor Relations. You may begin, sir.

Thank you very much. Welcome to Perrigo's fourth quarter 2011 earnings conference call. I hope you all had a chance to review our press releases, which we issued earlier this morning. A copy of those releases are available on our website at perrigo.com. Also on our website is the slide presentation for this call.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 26, 2010. I would like to now 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 year 2011 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. For our agenda today, I will provide a brief perspective on the year and the continued strength in our business and overall store brand growth. Next, Judy will walk through the detailed financials for the fiscal fourth quarter. Then, I will give you an overview of our expectations for the coming year, including our new product launches. Finally, Judy will go through the details of our fiscal 2012 earnings guidance. All of this will be followed by an opportunity for Q&A.

First, I want to thank the entire Perrigo team and all of our employees for their tremendous effort and the excellent results we have achieved this year. This is my fifth year at Perrigo and I've been honored to lead this dedicated team, as we once again achieved record results. I also want to welcome the newest employees to the Perrigo team from Paddock Laboratories. We are proud to have them as colleagues and I look forward to positive contributions this year from them.

Now, let's discuss Perrigo's results. My overall comment on the year is it was a great year. We continue to execute on our plan, while expanding the breadth and reach of our product portfolio. 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.

Looking to slides 3 and 4, you can see that we grew revenue 21.5% from last year, reaching sales of $2.755 billion. This was driven in large part by the impressive full year Rx revenue growth of 44.7%. Our August 2010 guidance range for adjusted consolidated operating margin was between 17% and 19%, and we exceeded that guidance range by achieving a consolidated adjusted operating margin of 19.6%, a 160 basis point increase versus fiscal year '10. Adjusted EPS from continuing operations far surpassed our growth target of 12% to 18%, and we achieved 32%. Our strong earnings allowed us to meet our operating cash flow goal, as you can see.

Overall, we are very pleased with these results and the progress the team has made to achieve their goals. We achieved these record results while improving our quality and production processes, including successfully responding to the FDA warning letter we received on April 30th of 2010. To give you some perspective on our successful response to the warning letter, the FDA has issued 70 CGMP warning letters since the date we received our letter. Only six have been closed out. We are very proud that we are one of those six. Quality is our highest priority at Perrigo. The FDA is appropriately continuing raising quality standards globally to ensure the highest product safety for patients. We believe going through the process of the warning letter resolution, while difficult, has made Perrigo even stronger than we were before.

Moving to the market demand for our products, on slide 5, you can see the continued trend for market share gains by store brands. In every category except vitamins, store brands outperformed both the brand and the overall category's growth, with the analgesic category leading the way. As you can also see store brand analgesic products gained more than 20%. Consumers continue to realize the value of store brand proposition. Now, let me turn the call over to Judy to go through our fourth quarter results. Judy.

Thanks, Joe. Good morning, everyone. As you just heard, we had another strong quarter to close out another great year. On a consolidated basis, the team delivered fourth quarter results which outperformed even our own high expectations. I would like to remind you that my comments today are focused exclusively on results from continuing operations and do not include the Paddock Labs acquisition, which we closed on July 26, 2011, four weeks into the first quarter of fiscal 2012.

As you can see on slide 6, we generated strong year-over-year revenue growth this quarter on a consolidated basis. This growth was driven by consolidated new product sales of $36 million, and the addition of a full quarter of infant formula sales, which incrementally added approximately $41 million. That growth was partially offset by decreases in sales of certain existing products, which I will explain in more detail in a few minutes. On slide 8, you'll see that we have excluded three items from our analysis of the adjusted operating basis financials for the fourth quarter of fiscal 2011 and five items from the fourth quarter of fiscal 2010. You may view the reconciliation from the reported GAAP numbers to our adjusted non-GAAP numbers in the appendixes to 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 9, you can see we had solid year-over-year growth in adjusted consolidated gross profit, as our CHC and Rx businesses continue their steady performance, as well as from the contribution from the acquisition of PBM. This overall growth was partially offset by lower volume in our API business year-over-year. Bottom line, our performance this quarter translated into $1.02 adjusted diluted earnings per share from continuing operations, an increase of 32% over fiscal 2010.

Now, let's move on to highlights in the individual business segments, starting on slide 10 with our Consumer Healthcare segment. The 9% net sales growth was driven by $18 million in new product sales, including our April launch of fexofenadine, along with an approximate $12 million increase in existing product sales, primarily in cough/cold, and a $5 million favorable impact from changes in foreign currency exchange rates. Every major product category in our Consumer Healthcare segment increased its sales from fiscal fourth quarter 2010, as store brand acceptance continues to be strong. Also, we experienced fairly stable pricing throughout the quarter. As expected, there was some pricing pressure in the API category, but it was slightly less than we had anticipated.

While adjusted gross profit was up from last year, the adjusted gross margin declined 220 basis points, given increased investments in quality systems and lower manufacturing efficiencies year-over-year, due to production process redesigns. These influences were offset partially by improvements in materials pricing and other procurement initiatives. The decline in year-over-year adjusted operating expenses was related to the timing versus last year of R&D project costs, combined with lower administrative spending, and was offset partially by higher sales and promotional spending. Therefore, although we experienced a decline in adjusted gross margin, we were able to maintain an adjusted operating margin in Consumer Healthcare, consistent with last year.

On slide 11, you can see that Nutritionals grew year-over-year with the inclusion of three full months of the PBM infant nutrition business, versus only two last year, incrementally adding $41 million to this segment in the quarter. This increase was partially offset by a slight year-over-year decrease in net sales of the legacy vitamin, mineral and supplement products, as we continue our focus on rebalancing this category towards those products where we feel we can offer our customers a high quality value proposition, while still improving overall margins. The adjusted gross margin improvement Nutritionals was driven by increased profitability in oral electrolytes, as well as the incremental volume of infant nutrition, which typically runs at a higher overall adjusted gross margin than our legacy nutrition category.

On slide 12, you can see that our Rx business continues along the strong growth trajectory we have seen over the last several quarters, validating Joe's initiative to grow the segment. Net sales growth was driven primarily by $10 million in new product sales and less pricing pressure, resulting from changes in the competitive landscape. Adjusted gross profit for the quarter also benefited from these factors, adjusted gross margin posting a record for any Perrigo fourth quarter. Next, looking at the API segment on slide 13. Net sales decreased $2 million due primarily to lower dossier sales in this quarter versus the prior year, which impacted the results. Strong sales of temozolomide in Europe helped offset headwinds resulting from a combination of the dossier sales decrease and a slightly reduced sales from existing products. We expect sales of temozolomide in Europe to potentially come under pressure if and when another generic supplier for this product comes back online.

Now, some quick highlights on our balance sheet. Excluding cash and current investments, working capital from continuing operations was $463 million at the end of the quarter, up from $368 million at this time last year. However, average GAAP working capital, that is average current assets less average current liabilities as a percent of sales, improved from 26.9% in 2010 to 21.4% in 2011, reflecting our continued focus on the balance sheet as well as on growth. Cash flow from operations for the fourth quarter and full fiscal year were $145 million and $374 million, respectively. As of June 25, 2011, total current and long-term debt on the face of the balance sheet was approximately $893 million, down from $1.3 billion at the end of fiscal 2010, primarily as a result of the closeout of the $400 million back-to-back loan, which had been in place since 2005.

Excluding cash and cash equivalents of $310 million on hand at June 25, our net debt to total capital at the end of the fourth quarter fiscal 2011 was 27.6%, down from 43.2% last year. This quarter, we also paid $6.5 million in dividends, or $0.07 per share. Subsequent to year-end, on July 26, we closed on the Paddock acquisition, funding the purchase using a new $250 million, five-year term loan, $212 million of cash on hand, and $85 million from our accounts receivable securitization program. And now I would like to turn the call back over to Joe to discuss our expectations for fiscal year 2012 and beyond. Joe.

Thank you, Judy. As Judy just outlined for you, we had a great year. Now I want to focus on the future. This year, we are planning on launching more than 45 new products that we expect will translate into approximately $190 million to annual Perrigo sales, as you can see on slide 14. In our Consumer Healthcare business, we are very excited about our new product launches. We plan to launch Lansoprazole, the generic version of Prevacid with annual branded sales of approximately $225 million for the OTC product. We expect to launch Guaifenesin ER, the generic version of Mucinex, with annual branded sales of approximately $145 million.

In our Nutrition business, we expect to launch the store brand version of Align, a digestive supplement, which has annual brand sales of approximately $85 million. In infant formula, we are working on several new products and new markets, as we look to grow in China with more distribution channels in the near future. The generic Rx business is growing as we integrate Paddock Laboratories into the Perrigo family. We expect the deal will be at least $0.25 accretive to adjusted earnings in fiscal year '12. Paddock brings more than 25 ANDAs and expects to add $200 million to annual sales with over 35 products in a strong product pipeline. We are poised for a very strong new product year highlighted by the full year effect of our recently launched generic for Nasacort and the generic versions of Duac, Xyzal and Cenestin and Clobex Lotion, which have combined brand sales of more than $230 million.

Add to this, the continued growth in our ORx products in our Rx base business, which continues to grow as competitors work through their manufacturing issues, and we expect to have a terrific year ahead for our Rx team. In our API business unit, we plan to begin supplying the active ingredient, atracurium, which we expect to contribute strong new product sales for the business during the year. Finally, we remain focused on the future and will continue to invest in research and development, increasing the actual dollar spend year-over-year. We are 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 effort in the future. Now, let me turn the call back to Judy to give our fiscal 2012 guidance. Judy.

Thanks again, Joe. And now I would like to discuss our updated earnings outlook for fiscal 2012 in more detail. As a reminder, our earnings outlook is based on adjusted financials from continuing operations, which excludes deal-related amortization as well as certain acquisition-related charges. First, looking to our consolidated projections on slide 15. For fiscal 2012, we are estimating adjusted diluted earnings per share from continuing operations to be between $4.50 and $4.65, an increase of 12% to 16% compared to fiscal 2011's $4.01. And as you know, while we don't provide quarterly guidance, the weight is expected to be slightly heavier to the second half of the year.

Looking to our segments, on slide 16, we continue to anticipate strong demand for our products in the Consumer Healthcare segment. For the fiscal 2012 year, we expect year-over-year revenue growth in the segment to be in the range of 12% to 14%. This range assumes that the competitive dynamics created by challenges faced by a large branded competitor continue through our fiscal second quarter. That said, we expect full year fiscal 2012 adjusted gross margin in Consumer Healthcare to be between 32% and 33%, and adjusted operating margin to be between 18% and 19%. In our Nutritional segment, we expect revenue to grow 5% to 7% over fiscal 2011, and anticipate fiscal 2012 adjusted gross margin of between 33% and 35%, with adjusted operating margin of between 17% and 19%.

For Rx, we anticipate top line growth of 55% to 57% compared to fiscal 2011, driven by new products and the contribution of 11 months of revenue, following the July 26th closing of the Paddocks Lab acquisition. We are anticipating Rx adjusted gross margin to be in a range of between 53% and 55%, and adjusted operating margin to be in a range of 38% to 40%. In API, we expect an increase in top line sales compared to fiscal 2011 of 9% to 11%. We continue to expect API adjusted gross margin of between 45% and 48%, and adjusted operating margin in a range of 25% to 27%. This assumes that competition on the European temozolomide product returns in the second quarter of fiscal 2012.

Summing everything up, back at the consolidated P&L level on Slide 17, we estimate that consolidated net sales growth will be in a range of 15% to 18% over fiscal 2011, driven by organic new product sales of approximately $190 million, growth in our base business, and the inclusion of the Paddock acquisition. Business unit dynamics noted a moment ago translate into our estimates of consolidated adjusted margins seen here. Please note that as you roll up the individual business units to arrive at the consolidated figures I just noted, we also include in our model corporate unallocated expenses, which we approximate at $30 million. Also, please note that we are estimating an operating basis effective worldwide tax rate of approximately 29% to 31% for fiscal 2012.

This reflects an increase from the rate we had in fiscal '11 due mainly to two points. The fact that certain one-time events related to tax planning and the Israel law change will not repeat in fiscal 2012, and our expectation that the relative share of earnings before tax anticipated to come from higher tax jurisdictions, like the US, will increase in 2012. I would also like to point out that this rate excludes the impact of any additional discreet items which may arise during the course of the year. Lastly, noted on slide 16, cash flow from operations is anticipated to be between $470 million and $500 million for the full fiscal year, in line with our stated goal of generating cash flow from operations in excess of net income.

Finally, as you likely have seen in the press release issued this morning, we announced that we expect to issue $350 million of private placement notes in the first half of the new fiscal year. We expect the notes will have maturities between 10 years and 15 years, with approximately one half, or $175 million of the notes being issued on September 30, and the remaining $175 million being issued on December 15. I should note that while we have received initial commitments from the expected purchasers of the note, the issuance of the notes still remain subject to final execution of the definitive documentation. This past spring, as we looked at what was and still is a very dynamic geopolitical landscape, the changing banking regulatory expectations, developing economic uncertainty, and the continued low interest rate environment, we concluded that a proactive capital markets financing aligned with our long-term strategic plan and capital structure objectives would be prudent.

As you know, we have always maintained a philosophy of having a very strong balance sheet. As such, we believe this expected financing will fit very nicely into our stated capital structure objectives of sustaining a strong liquidity position and a competitive average cost of capital, while maintaining an investment grade credit profile. As announced, we expect the interest rates on the notes to be between 4.27% for the 10-year note, and 4.67% for the 15-year note. Subject to the completion of the private placement notes, the weighted average interest costs of our total debt outstanding is expected to be slightly below 4.5%, which we believe benchmarks very competitively against our peer group. With the delayed drawdown of the funding, approximately $10 million of incremental interest expense has been built into our guidance. Together with our new term loan for Paddock, our model for fiscal 2012 assumes total interest expense of approximately $67 million.

In summary, as our team has wrapped up the fiscal 2012 planning, we couldn't help but reflect on the strong fiscal 2011. But, as is our nature, we do not want to rest on our laurels. We enter our new year with a strong business model, a value proposition that is very evident to both our customers and their consumers, and processes which are much more robust given the investments in continuous improvement that have been ongoing throughout the last 18 months. Given all of these factors, now it is the focus of the team to execute the plan I laid out for you and to seize opportunities to expand the promise of quality affordable healthcare. And let me turn it back to Joe.

Thank you, Judy. Before we proceed to Q&A, I would like to add one more thank you to one of our Board members, Mori Arkin. As we announced earlier today, Mori has advised the Company that on August 11, that he intends to retire from the Company's Board of Directors when his current term expires at the annual meeting of the shareholders. While Mori will continue to serve as a director until October 26, I want to take this opportunity to thank Mori Arkin for his years of dedicated service to Perrigo.

Mori joined the Perrigo Board of Directors in March 2005 with Perrigo's acquisition of Agis Industries. He has been a trusted advisor to me since I joined Perrigo and I've certainly valued the wisdom and knowledge that he has shared with me the last several years. While he may be retiring from the active participation on Perrigo's Board, I am pleased that Mori will remain a director until October 26 and after that, will be available to provide me and the Board with his valuable insights from time to time relative to the pharmaceutical industry. On behalf of all of the Perrigo employees, I want to thank Mori for his leadership and contributions to Perrigo, and wish him the very best in his future after he retires from our Board. Operator, let's now open up the call for questions.

(Operator Instructions)

And Tamika, can I also ask that they only ask one question at a time. We have quite a few people online to ask some questions. Thank you.

David Buck, Buckingham Research.

Yes. Thanks for taking the question. First is on the overall guidance, either for Joe or Judy. If I look back to 2011's initial guidance, you ended up beating the high end of that by about $0.41. So can you give us a sense of what you're worried about, perhaps what some of the risks are, and what the upside potential might be? And then, yes, that was it. Thanks.

Let me start, Judy. Then you may want to add some. First of all, David as you're correct. Last year we originally looked at our fiscal year '11 adjusted EPS growth of 12% to 18%. In actuality, we did achieve 32%. So we did have a chance to exceed our expectations from earlier in the year. As we look at what's happening in our current year, we are very excited about a lot of the things in the guidance that I talked about, certainly the new products. We expect to launch the 45-plus new products representing somewhere in that range of $190 million of sales. That for us is a very exciting proposition.

We also want to make sure we're integrating Paddock appropriately. We feel very comfortable with the Paddock opportunity and what it means for us in terms of growth in the Paddock and total Rx business. So that's another very positive one for us. But also we've got a number of products we launched last year that are still ramping up in terms of what's happening. What we also did, though, is when we were building our model, I don't know exactly when one of the large branded competitors returned to the market with their products.

We built in currently that this large competitor on the branded side would re-enter in Q2 on the liquid products and, our Q2, our fiscal Q2, and then our fiscal Q3, they would re-enter on the oral solid products. That was our best intuition. Some could say that's conservative, but we felt that was probably the best way to factor that in to the assumptions. Also, in the temozolomide opportunity EU, we expect to have competition in Europe, some time starting in our Q2. So we wanted to make sure we reflected those in our numbers. Judy, anything else you would want to add to that?

Just very briefly, not specific to any of the points Joe raised, which were spot-on. But philosophically, as you know, we tell you what we're building into our model in terms of those external factors. And over the course of this fiscal year, while to your point we were ahead of our original August guidance, there were very specific reasons with the combination of both the team's performance, but also exogenous factors as the competitive landscape changed for all of our business units. We had good growth opportunities with some competitors in all of the segments going offline. So, we do not plan in our numbers in any fiscal year that that would happen. We would never wish that upon anyone, but certainly over the course of the year, if and when that does happen, we would be talking about it of course.

Just a quick follow-up. It doesn't seem like there's a lot built in for any type of China developments for Nutrition. Is that correct? Or how should I look at the Nutrition revenue guidance?

We are clearly working very diligently since we acquired the PBM business to build our asset base in Asia and build our business, really what I would call more of a distribution base in Asia. But we have not built in a significant change; although, we do expect some certain increase in the China business. But I wouldn't call it a significant change.

Okay. Thank you.

And maybe one other point I would just make mention of, David. On the PBM infant formula business, I remind you that in the fiscal year '11 that to Judy's point, there was a recall by one of our large competitors there that we obviously don't, don't expect at this time expect another recall there from a competitive point of view.

Great. Thank you.

Elliot Wilbur, Needham.

Thank you. Good morning.

Good morning, Elliot.

Just big picture question looking at the guidance parameters in terms of specific revenue growth target and then working down to the margin range. I know historically you've talked about, delivering something along the lines of 5% to 8% organic growth and then picking, you know, 1.5 to 2 times that in terms of multiplier on the operating margin line. But in just looking at the numbers, the guidance in issue today, and trying to back out Paddock to the extent possible and account for some of the other factors, it doesn't seem like you're coming anywhere close to that sort of multiplier, or inherent operating leverage. I'm wondering if there's something I'm not accounting for or if there's something else just in terms of the expense structure that's maybe increased that is restraining that growth.

Yes. Let me start, and Judy you'll probably want to add as well. Clearly the numbers that you've talked about are exactly the numbers that we talked about through over any three-year period, looking for 5% to 8% top line growth and then looking to something close to doubling that on the bottom line. The way I would say is that as we've looked at putting it together, our organic plan, we feel yes, we will get in that above, or slightly above that 5% to 8% top line growth for the business. That's clearly part of what we're looking at. So we think we can be above that for the organic growth rate.

The only thing that may be impacting your numbers to some degree is remember the tax rate is going to be higher this year. Now, that doesn't affect operating income, but certainly does affect the net income versus the changes versus last year. But we are continuing to look to that model of certainly growing the top line by 5% to 8% over any three-year period annually, and then try to essentially double the bottom line operating income, net income type line. So that is still our goal and our trajectory of what we're trying to accomplish. Judy, anything else you want to add?

No, just reiterating Joe's point. Obviously we lose some of that leverage because of an increasing tax rate, which I've talked about we were expecting as we got into the detailed planning for FY12, just given what we knew was coming in terms of mix and the non-repetitive nature of items in the FY11 rate. But also we are expecting, again back out 11 months of expected Paddock revenue. We gave you a trajectory to shoot for of approximately $200 million annualized and we are still expecting that same annualized rate for 11 months. Back out that amount and if you're in that framework that we've provided, you'll still see that top line growth is healthily in the range that we have provided for a long-term three-year CAGR and with leverage throughout the P&L except on the tax line.

Gregg Gilbert, Bank of America Merrill Lynch.

Thanks. Good morning. Couple I'll ask upfront. Joe, could you update us on your programs to extend into diabetes and ophthalmology in the OTC space? Specifically, could you comment on whether and when you filed ANDAs on Benzaclin and Retin A. Thanks.

Okay. Let's just, let's back up on that. First of all, from an M&A point of view, the adjacent product category that we've talked about in the past, we've made great progress on many of them. One of them, as you appropriately point out, Gregg, is the ophthalmics area. At this point, ophthalmics and diabetes both are very promising to us. We have launched one ophthalmic product to date and we've -- that's through a partnership. We are seeking though additional ophthalmic products in that they fit within what we believe is an important expansion opportunity to Consumer Healthcare, as well as well it has application to our generic Rx business.

So ophthalmics continues to be important to us. We've launched one product. We do think there's opportunities to do additional products in adjacent categories in ophthalmics. In the diabetes area, we also have specifically looked at the blood glucose monitoring business. It's a $2 billion business. We've done our first joint venture in that area. We do think, though, diabetes continues to be a very significant opportunity, which unfortunately, is growing very quickly because of the increasing incidence of diabetes in the United States and around the world. So we are looking at diabetes as well.

And that also reflects into things like wound care for the diabetic patients is all part of what unfortunately is a very significant public health challenge for the United States and around the world. So ophthalmics and diabetes are clearly the specific areas that we're looking for adjacent categories. Geographic expansion, I probably need to mention just simply for inclusiveness, that that's another area that we are looking for geographic expansion opportunities in the EU. We've got products already submitted in the EU. We obviously need a commercial go-to-market strategy and are also looking at Asia and what could we do to increase the distribution, especially of the infant formula business in Asia, for inclusiveness for our total M&A. On the second part of the question, we are in the business of Retin A today. We are in the business through a partnership, and I can't remember -- I don't think I'm really going to comment on the other comment on the specific product.

Would you comment on Benzaclin and whether there are any in general, whether there are any technical hurdles that are hard to surmount for the generic industry because that expires next August? Thanks.

I don't think I want to comment on anything specifically on that particular product, Gregg, from a competitive point of view.

Thanks anyway, Joe.

Jon Andersen, William Blair.

I just have two quick ones. One is on the guidance for 2012, are you including in the $190 million in new product sales, are you including fexofenadine in that number? And then secondly, Judy, you kind of mentioned, I know you don't give quarterly guidance, but that in thinking about '12, earnings might be slightly weighted to the back half of the year and same time it sounds like you've got competition returning to the market in the back half of the year, whether it be temozolomide in Europe, or potentially in the CHC business here in the US. I'm just trying to understand the thinking there a little bit more, that second half would be stronger, yet competition might also be back in the market. Thank you.

Sure. On the fexofenadine question, the question is are we including that in our numbers of the new products? The answer is yes. We have a definition that includes the first 12 months of product sales being in new products. So in that we just launched it at the end of April, it clearly is there. In addition to that, just to be clear on fexofenadine, we are also launching fexofenadine 60 mg and fexofenadine D-12. That's two additional opportunities within fexofenadine, but those are new opportunities to be specific. Judy, why don't you take the second part of that question.

Sure. So, very good question, because as we look at the track record of the last five, six years, even with ups and downs that happen with seasonality of cough/cold, with product launches, et cetera, the balance of our earnings per share has ended up being fairly evenly balanced 50/50 first half/second half. So when I say it's slightly more in the second half, I mean slightly. But the key question that you raised of it sounds like you're indicating some competition in the second half, we are, but we're also including expectations of new product launches being able to contribute healthily to operating income and thereby contributing overall to the earnings per share balance, as I said being slightly heavier in the second half of the year.

Thank you, Judy.

Frank Pinkerton, SunTrust.

Great. Joe, could you can me your updated thoughts on Pfizer's ability to launch Lipitor over the counter? And then just follow up that with is it possible then for Perrigo to follow on shortly? Do you need a partner? Will there be any exclusivity and is there any reason to think of this whole category as differently from the large categories that are already out there, that you compete in over the counter? Thank you.

Sure. I would say first and foremost, Lipitor is a phenomenal opportunity that I ultimately think could find its way into the OTC space. However, a couple of comments have to go with that. First and foremost, to be clear, companies have tried three times previously to switch a statin from prescription to OTC and the FDA has declined to move those products in the United States from prescription to OTC. Now, they have had success in moving products outside of the United States that are statins from prescription OTC, actually more what I would call behind the counter, overseas.

Now, where does that bring us? I do think that there is good data on the statins that really talk about the treatment of patients based on risk factor analysis. So for example, if you're a male, that's a risk factor. If you are over a certain age, that could be a risk factor. There is ways to get -- that more data has come out now that allows people to more thoroughly understand the risk factors for treatment of hypercholesterolemia and therefore, I think Pfizer has a very good case of talking about moving the product from prescription to OTC. I will say, I don't think that is a, an event that will occur this year or next year. I think it will take several years to ultimately see that happen, but if it does happen, certainly Perrigo, it will be very interested and will be available to go into that marketplace.

We have a program ourselves to look at Atorvastatin, or Lipitor, in terms of moving it over the counter. And we believe that that's something that could be a very significant opportunity for Perrigo, if indeed it does happen. I want to be very clear. At this time, we are not building that into our guidance. That is not something at this time that we include in our portfolio of products that we expect to move from prescription to OTC. We do have over $10 billion of products we do expect to move from prescription to OTC. Lipitor though, or Atorvastatin, is not one of those products at this time.

Ami Fadia, UBS.

Hi. Good morning. Wanted to ask you some questions on the Nutritionals business. If I look at the guidance for gross margin and operating margin, the midpoints of the ranges are generally in line with what you did in fiscal 2011. And so if you can't give us some color on how you see these margins progress over the course of next year? Do you see them sort of stabilize at this level or do you see upline from here? And also, for the top line, the PBM business, if you could give us some color on where you think this business can grow longer term, that would be helpful. And then I have a follow-up.

Okay. You had a lot of good questions. First, on the PBM business, the Nutritional business, we feel very good about what we have achieved this year. When we first acquired the business, we said it would be a $300 million business for us, and we have exceeded that number. Admittedly, that also included a recall from one of our branded competitors, but we did certainly exceed the $300 million by a fair amount. So the continued strength of the business, we believe, is there. If you look at the data I provided in the deck, you can see that the store brand infant formula business is up dramatically. It is up approximately 11% versus the year ago, based on the 52-week IRI data.

So strong growth, strong market demand in the United States. Outside of the United States, the rate of births in countries in Asia as an example, is, I mean, it's just staggering how quickly the population is growing outside the United States. That for us is a major opportunity. We believe we've got a quality product that is very important to people in Asia because it's made in USA and we believe that Made in USA is an important quality advantage versus some of the concerns that have occurred in Asia with another infant formula. So we are continuing to look to grow that business. We are looking towards the end of the current calendar year to be able to say more about our opportunities to increase our distribution channels in Asia. And I don't know -- gross margin.

Yes.

Gross margin. I think gross margin, we have had a chance to look at our pricing environment within infant formula and we've had a chance to adjust some of the pricing to reflect what we had stated from the acquisition time period. That is just happening now as we speak. So there is some opportunity on pricing. However, I would also be clear, there is some cost increase in the actual infant formula input costs has gone up. So therefore there's an attempt to try to offset some of that input cost increase with some of the pricing that we've taken.

Thanks. And just as a follow-up to the Asia opportunity, could you elaborates around how you are thinking about that opportunity? Would it be potentially through some type of a partner, a distribution partner in Asia, or has that changed? That's what you said previously. Has this changed since then?

No. The most likely -- first off, we have not announced anything, but the most likely plan is to seek a partner to improve and increase our distribution. We already -- I remind you we already have a brand approved in China. That brand is called Bright Beginnings. We're seeking additional distribution of that Bright Beginnings brand and we think that that's most likely going to be achieved through a partnership arrangement in China. As I said, stay tuned. We look to be able to say more about that sometime in the -- by the end of the current calendar year, is really our plans at this point. We also are shipping it into other countries in Asia and we are seeking additional partnerships for distribution outside the, outside of what I mentioned in China.

Thanks.

Louise Chen, Collins Stewart.

Hi. Thanks for taking my question. The question I had is what we should expect to hear at your upcoming investor day in September and do you think you could possibly have a closing on the Chinese JV by your investor day?

Well, I think -- thank you for the question. I would say first and foremost, you'll hear more of what we, Judy and I have just said today, a lot more details. You'll hear directly from the business unit leaders, so Jeff Needham on the Consumer Healthcare side, Sharon on the Rx, generic Rx side, Rafi on the API and Scott on the Nutrition side, all talking about their respective business opportunities in more detail. Do I believe that we'll target a September date for the -- saying more on infant formula, I would stick with my comments and say right now, we'll shoot for the end of the current calendar year as before that time period. I think I'll add your comment though to Scott for an additional challenge to him, but I don't think I want to commit to that right now, please.

Okay. Maybe just one quick follow-up on Paddock, now that the deal is closed, could you comment on some of the product opportunities, such as Cenestin and Clobex, OFIRMEV, and maybe AndroGel as well?

Yes. I mean, I could say a little bit more. I think stay tuned for the end of September to hear more beyond this. But, yes, there's some great products and some great opportunity, as you already mentioned. Cenestin is clearly a very interesting opportunity, one that we have prevailed on the litigation side of this. So we're excited about that. We still are waiting approval. But, maybe if I just try to stay to the higher level, Louise, what we have now is 20-plus ANDAs, of which about half of them are slated to launch during our fiscal '11.

So, that gives us some real hope and promise that we can really get some incremental growth out of the Paddock business. The Paddock team has done a great job in building that pipeline. We've looked at the pipeline and we think there's some good product that we can launch over our fiscal year '11, almost half of the portfolio that's currently sitting at the FDA. Now, as with all new products, we always put a probability factor on those products, so don't -- I don't want to get into any individual product sales, questions, but certainly Cenestin is an exciting one for us. There's a couple of others that are Paragraph 4s. Some of them will be in our fiscal year '11. We think could be very exciting and give us a chance to grow the numbers that Judy previously mentioned in our Rx team.

Thank you.

(Operator Instructions)

Linda Bolton-Weiser, Caris.

Hi.

Hi, Linda.

Hi. Can you give an estimate as to what pricing overall, like let's say in your over-the-counter, maybe Nutritionals and over-the-counter business would be, for what do you expect for pricing for FY12? And then do you have an estimate for what it might have been in FY11?

Yes. I would say, probably the way I would answer your question is across our entire book of business, our pricing has been flat, possibly up slightly. But, I would use from a modeling point of view, flat. And that's looking across our total book of business. And we think that's a good place to be. If we can hold the pricing relatively flat. Some products we clearly are taking price increases. Other products we are clearly reducing prices. But if we can hold it flat, then as we add the incremental new products to our portfolio, that gives us just a tremendous trajectory for growth and it really enhances the slope and line, if you're not constantly trying to make up for price decreases. So right now from a modeling point of view, I would use flat as a place to go for pricing across the Perrigo book of business.

Great. And can I just ask you, when you had mentioned some competitive or margin pressure in the over the counter, I guess you said in Omeprazole, but it wasn't as bad as you had thought. Are there any other key areas where there's some pressure, and how is Cetirizine looking?

Yes, Judy made specific comment on Omeprazole. We expected pricing adjustments with Omeprazole and proton-pump inhibitors, and indeed those did happen. They were expected, although they were not as bad as we had potentially anticipated, so it actually turned out to be, versus our plan, to be favorable to our plan. I would say that there is a lot of different areas where we get pricing pressures. But on balance, as I said, we're able to offset those with some places where we are able to get price increases, and on balance, continue to use that flat pricing as a percentage is probably the best way to model Perrigo for last year and for this year.

Okay. Thanks a lot.

Ami Fadia, UBS.

I dropped off the queue. My questions have been answered. Thanks.

David Buck, Buckingham Research.

Yes. Thanks. Follow-up on Paddock. If I look at the $200 million annualized guidance, can you talk about -- that's obviously unchanged, but the gross margin I had thought for Paddock was a little bit higher than the core business, but you're actually guiding 53% to 55% as gross margin for fiscal '12 and you did 57.6% in the fourth quarter. So what's the reason for the drawdown in gross margin expected and were there any surprises that you can point to, positive or negative from Paddock? Thanks.

Yes. David, no surprises really in Paddock. Everything we've seen in Paddock has been very favorable. I think we're just trying to make sure as we understand the generic business, there's going to be places where you're going to face some challenges from a competitive point of view. We certainly wanted to reflect that in our assumptions. We always feel it's better to under promise and over deliver than the counter to that. So really our concepts of where we've gone with our guidance, it really just reflected some expectations for some pricing questions we may have to deal with, some other areas within the total book of business from competitive challenges, but really, no major shift from other issues. You may want to add a little to that as well.

A little color. I know you're looking, Dave, at taking the fourth quarter rate and just applying it over the course of the next year and then wondering why it's coming down. If I look at the gross margin evolution over the course of the fiscal year, in any one particular quarter with timing of product shipments, timing of launches, any specific pricing dynamics in a quarter or production dynamics in a quarter, you'll look and see that the fourth quarter was our strongest single quarter and we're very proud of that, but we've had very strong mid-50s GMs in fiscal '11. So as we had commented, we're adding on business that has similar construct in terms of margins and hence guiding towards that mid-50s range we believed would allow to us acclimate the business into ours, integrate the two and still continue to grow the bottom line overall.

Right. And was there anything unsustainable, like milestone payments or anything else, in the fourth quarter or fiscal '11 I should be aware of?

No, the fourth quarter was strong entirely on its own accord, for the reasons we talked about over the course of this last hour, with strong product shipments, good market dynamics.

Okay. So it sounds like you might be being conservative in case bad things happen in fiscal '12, but you're not aware of anything offhand. Is that a fair way to characterize it?

I would say that's a fair characterization.

Okay. Thank you.

Gregg Gilbert, Bank of America Merrill Lynch.

Hi. Joe, I don't know if you're going to answer this, but my question on Retin A was about the Micro version. I apologize for that. And then regarding Mr. Arkin's retirement, has he already been free to sell any of his shares he owns, or does something change when he retires? And if so, do you have any sense of his intention? Thanks.

Sure. I think on the Retin A Micro, you're right, I'm not going to make any additional comments on that, Gregg. I just don't, on our pipeline, like to make any specific comments about products that may or may not be in our pipeline. On the question of Mori Arkin, Mori Arkin has been free to sell his stock and has sold some stock since he has joined the Board, so he clearly has been free to sell that. I do not have any additional information on what he will do after.

I know he's been very pleased with the Company and the performance of the Company. And he has said to me, it's been one of the best performing stocks within his portfolio to be clear. So without making any specific comments, I really don't know where he -- what will happen after he leaves the Board. I will comment, though, that he has been a trusted advisor to me and someone who has been very helpful to me in helping to drive and to direct the success of Perrigo, and I look to him for that in the future as well. So although he's leaving the day-to-day part of being on the Board, he still will be available as an advisor to me.

Great. Thanks.

Thank you. This concludes the question-and-answer session. I will now turn the call back to management for any closing remarks.

Before I give the closing comments, Judy, I want to just ask, is there anything else further you want to make comment to on the interest expense and some of the questions on the private placement?

Just to reiterate for everyone, again, the private placement press release that was issued separately from the earnings release, we want to provide all of you color, that that was in the works. It has not closed yet, but we anticipate closing shortly, hence the numbers are not yet in the year-end balance sheet. We anticipate to be closing on that shortly and as I noted earlier, anticipate to be drawing down half the funds in September and then the remaining half in December. We have, however, included the incremental interest expense of that as of yet unclosed transaction in these numbers and as I noted, $10 million of incremental interest built into the guidance I just provided. So just wanted to reiterate that so when the follow-on closing 8-K and related documentation come through, there is no confusion. It will be the same transaction.

Thank you, Judy. Thank you for that additional information. I would say to everyone thank you on behalf of the Board of Directors of Perrigo. I want to say thank you to the entire Perrigo team around the world for another great year and look forward to having a great fiscal year 2012. Thank you. Have a great day.

Thank you all for participating in today's conference call. You may now disconnect.