Perrigo Company PLC (PRGO) 2012 Q4 法說會逐字稿

Good morning. My name is Brooke and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo fiscal 2012 fourth quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thank you very much, Brooke. Welcome to Perrigo's fourth-quarter and fiscal year-end 2012 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of press release is available on our website at Perrigo.com. Also on our website is the slide presentation for this call.

Before we proceed with call I'd like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934 as amended and are subject to the safe harbor created thereby. Please see the cautionary note regarding forward-looking statements on Page 1 of the Company's Form 10-K for the year ended June 25, 2011. I would now like to turn on our call over to Perrigo's Chairman and CEO, Joe Papa. Joe?

Thank you, Art, and welcome, everyone, to Perrigo's year-end fiscal 2012 earnings conference call. Joining me today is also 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 store brand growth. Next, Judy will walk through the detailed financials for the fiscal fourth quarter and through the details of our fiscal 2013 earnings guidance. Then I'll give you an update on our new product pipeline plus an overview of our expectations for the coming year. Finally, all of this will be followed by an opportunity for Q&A.

First, I want to thank the entire Perrigo team for their tremendous efforts and the excellent results we've achieved this year, our 125th year as a Company. I also would like to say a special congratulations to Judy Brown, for being named as a Top 25 CFO by the Wall Street Journal. It's quite an honor and I must say, very well deserved. Now, let's discuss Perrigo's results. My overall comment on the year is we continue to execute on our long-term plan while continuing to expand the breadth and reach of our product portfolio. In fiscal 2012, we met or surpassed all of the consolidated continuing operations basis financials goals we set last August.

Looking to Slide 3, you can see that we grew revenue 15% from last year to $3.2 billion. This was driven in large part by the impressive full-year Rx revenue growth of 80%. Our August 2012 guidance range for adjusted consolidated operating margin was between 20% and 22% and we met that goal by achieving a consolidated adjusted operating margin of 21.6%, a 200 basis point increase from just last year. Adjusted EPS from continuing operations far surpassed our original fiscal year growth target of $4.50 to $4.65, achieving $4.99. Our strong net earnings allowed us to also beat our original operating cash flow goal with $513 million for the full-year. We achieved these record results while improving our quality and production processes and continuing to invest in research and development.

Every time we speak about Perrigo we say that quality is our highest priority. We don't take it lightly. The FDA is continuing to raise the quality standards globally to ensure the highest product safety for consumers. Here at Perrigo we invest necessary resources and make sizable additional investments in quality in a continuous efforts to meet the FDA's expectations. On Slide 5, you can see the consolidated results for the fiscal fourth quarter. Judy will give you the business unit details but I want to point out a couple of items. First, this was a great quarter. We grew consolidated net sales 18%. Adjusted gross margin grew by 130 basis points and adjusted operating margin by 240 basis points to 21.9%. If you turn to Slide 6, you'll see a net sales breakdown by business segment for the fiscal fourth quarter. Consumer Healthcare and Nutritionals both grew double digits. CHC was aided by a strong allergy season. In the nutritional segment, approximately half of the sales growth in the infant formula category came from new sales through our Chinese supply agreements.

After Judy comments I'll go into more depth about where we see these markets for fiscal 2013 but in my opinion, both Consumer Healthcare and Nutritionals were able to achieve a strong finish to a challenging year. The Rx group had another great quarter as adjusted operating income grew 54%. Now turning to Slide 7, you can see the continued market share gains for store brands. In every OTC category store brands outperformed both the brand and the overall category's growth with the gastrointestinal category leading the way at over 11% growth. As you can also see, stored brands analgesic product gained nearly 7%. Now, let me turn the call over to Judy to go through the fourth-quarter results. Judy?

Thanks, Joe. Good morning, everyone. As you just heard we once again delivered strong results for the quarter and concluded another great year. On a consolidated basis the team delivered results which performed in accordance with our own high expectations. I'll provide a brief overview of the adjusted results from continuing operations for the fiscal fourth quarter by business segment and then I'll walk you through the consolidated and segment earnings guidance for fiscal 2013.

So let's begin with the fiscal fourth quarter highlights in individual business segments, starting on Slide 8 with Consumer Healthcare. The 12% net sales growth was driven by an increase of $30 million of existing product sales, primarily in the cough, cold, allergy, analgesic and smoking cessation categories. $26 million of new product sales, primarily in the gastrointestinal and dermatological categories, and $10 million attributable to sales from the CanAm Care acquisition. These increases were partially offset by a $12 million decline in existing products, primarily within the GI and contract categories, as well as a $4 million decline due to unfavorable changes in foreign currency exchange rates. As store brand penetration continued to increase and new products like lansoprazole and Loratadine-D launched, every major new product category in our consumer healthcare segment grew versus fiscal fourth quarter 2011. Pricing in omeprazole was stable over the last three quarters and we currently anticipate this stability to carry into fiscal 2013. Year-over-year however, fourth-quarter pricing on omeprazole is down as expected.

Adjusted gross profit was 12% higher than last year, while adjusted gross margin increased 20 basis points as the positive impact of base business growth and strong new product launches was partially offset by a managed reduction in our plant production volumes in response to the mild cough, cold flu season. As a result we experienced fixed production cost under absorption versus this time last year as volume produced and packaged on certain lines was relatively lower. However, on a positive note, this has led to lower inventory levels compared to last quarter and thus, lower inventory carrying costs sequentially. The year-over-year decline in CHC adjusted operating margin was related to higher adjusted DSG&A expense of approximately $13 million, due to the inclusion of CanAm care expenses, the continuation of marketing and promotional investments to support the new OTC product launches, and incremental systems and infrastructure spend. R&D expenditures were essentially flat on a dollar basis year-over-year as we continue to devote vital resources to build the long-term pipeline.

On Slide 9 you can see that net sales in the Nutritionals segment grew 10% year-over-year due to several factors. First, planned price increases in infant formula took hold this quarter. Second, we made retail shipments in June in advance of our planned July 1 shutdown of our Vermont plant where we did both an SAP conversion as well as an installation of a new packaging line over a several day period. This new line will allow our infant formula products to look and feel like the national brand and SAP conversion was the final step of the PBM integration plan. The remainder of the net sales increase was attributable to increased sales in China. These positives were able to completely mitigate competitive pressure within the VMS category, which saw a year-over-year net sales decline in the quarter. Adjusted gross margin for the segment decreased 230 basis points year-over-year to 30.6% due to many of the same factors that affected the segment over the last two quarters. Relatively higher year-over-year costs of raw materials for infant formula, such as lactose, nonfat dairy milk, and whey protein, weaker product mix between our higher-margin infant formula and relatively lower margin toddler foods, and an under absorption of fixed costs as a result of the short Vermont plant shutdown I just mentioned. I'm pleased to note that steps outlined over the past three quarters to increase margins have made a substantial impact as the adjusted gross and adjusted operating margins increased 530 and 610 basis points, respectively, since the second fiscal quarter this year.

On Slide 10 you can see that our Rx business continues along its strong upward trajectory as we have seen over the last several quarters as net sales growth was driven by $58 million attributable to sales from the Paddock Labs acquisition and new product sales of $11 million. Adjusted gross margin decreased 510 basis points primarily due to certain prelaunch production costs, relative product mix, and production variances. The adjusted operating margin decreased by a lesser amount than the adjusted gross margin as we continue to expand DSG&A expense leverage throughout the Rx business as the top line has continued to grow. I'd also like to note that our integration of Paddock is essentially complete with all major infrastructure investment projects finalized.

Now I'd like to focus on the operating results for the API segment as noted on Slide 11 and explain the changes in adjusted gross profit, adjusted operating income, and adjusted margins. We have had a long-standing commercial agreement with a specific customer to supply API for a generic product, which was launched in our fiscal fourth quarter. Due to unexpected favorable developments in the formation of that market, our customer was able to launch the product with 180-day exclusivity status. As a result, adjusted gross profit and adjusted operating income were positively impacted by approximately $11 million. While we expect to continue to recognize favorable contributions related to this agreement, the magnitude of this contribution will significantly decrease after the 180-day exclusivity which will end during our second quarter of fiscal 2013.

The adjusted operating margin increased 310 basis points more than the adjusted gross margin on the heels of slightly reduced DSG&A, offset by continued R&D investments. The adjusted effective tax rate this quarter was 26.8%, in line with our expectations for the quarter, mainly due to a favorable jurisdictional mix of earnings before tax. Therefore, the full-year fiscal 2012 adjusted tax rate was 25.4%. I'd like to reiterate my comment from last quarter regarding the effective tax rate as it still applies. If we remove the tax benefits earned in the fiscal first and third quarters as a result of the conclusions of tax audits and various statute expirations, then our fiscal 2012 adjusted tax rate would have been within our initial guidance range of 29% to 31%.

Now, some quick highlights on our balance sheet. Excluding cash and cash equivalents working capital from continuing operations was $541 million at the end of the quarter up from $463 million at this time last year. The increase was primarily due to the additional working capital from the Paddock and CanAm Care acquisitions. However, please note that at fiscal year-end excluding cash and cash equivalents, working capital as a percent of net sales remained relatively unchanged from last year at approximately 17%, even after integrating the acquisitions. Cash flow from operations for the fourth quarter was a quarterly record, $202 million, bringing us up to $513 million for the fiscal year. As of June 30, 2012, total current and long-term debt on the face of the balance sheet was approximately $1.4 billion down from $1.5 billion sequentially from last quarter. With record cash flow from operations this year, strong liquidity with over $600 million of cash on hand, and $585 million of undrawn revolving facilities, near the end of June we decided to proactively pay down the $125 million term loan which was due April 30, 2013. Excluding cash and cash equivalents our net-debt-to total-capital on June 30 was 29.3%.

Now, I'd like to turn our attention to the fiscal 2013 plan. Before I get into details of our guidance for the coming year however, I'd like to note that our annual planning process consisted of the usual deep dive into product SKUs and product categories to evaluate where any rationalizations might be needed, and to global functional activities to prioritize major investments for the coming year and also into global cost allocations to be sure costs are being charged to the business unit where the benefit is being received. As our business continues to expand, this exercise continues to be a focus throughout 2013.

So that being said, let's move on to the segment guidance on Slide 12. We continue to anticipate strong demand for our products in the Consumer Healthcare segment. This year-over-year revenue growth range assumes that the competitive dynamic created following challenges faced by two large branded competitors continue into our fiscal second quarter in line with what both companies have recently stated publicly. Also, I'd like to remind you that our annual planning this year follows the same assumption we have used in the past regarding the cough, cold, flu season. That is, we estimate the demand for the upcoming season using the average of the previous 10 seasons. And finally, as is also our practice our plan is built on the assumption that store brand market share will grow 100 basis points year-over-year.

In our Nutritionals segment, our revenue guidance includes the assumption that our sales of infant formula to our new distribution partners in China will double from their fiscal 2012 levels. This revenue guidance also includes growth in our VMS category as we will expand distribution to two major retail customers in the fiscal first quarter. For Rx we anticipate topline growth driven by new products combined with net price stability in the overall business. In API we're assuming a continuing competitive environment on the European temazolomide product. As a reminder, our launch of temazolomide in the US is not expected until August 2013, which will fall into our fiscal 2014. Additionally, we are expecting a contribution from our customer's 180-day exclusivity period until the end of our second-quarter fiscal 2013, which I mentioned earlier.

So turning to our consolidated projections on Slide 13. For fiscal 2013 we estimate adjusted diluted earnings per share to be between $5.30 and $5.50, an increase of 6% to 10% compared to fiscal 2012's $4.99. The improvement reflected in the continuing operations earnings guidance includes the $0.28 benefit of the discrete tax audit resolutions in fiscal 2012. Were you to remove these $0.28 of tax benefits earned in fiscal 2012, then the 2013 adjusted diluted earnings per share from continuing operations will be projected to increase 13% to 17% year-over-year.

So summing everything back up at the consolidated P&L level, we estimate that consolidated net sales growth will be in a range of 10% to 14% over fiscal 2012 driven by new product sales of greater than $190 million and continued growth in our base business. Business unit dynamics noted a moment ago translate into our estimates of consolidated adjusted margins seen here. Note that after you roll up the individual business units, you should also included your model corporate unallocated expenses of approximately $45 million, and interest and other expenses of approximately $65 million. Also, please note that we are estimating an operating basis worldwide effective tax rate of approximately 29% to 31% for fiscal 2013, excluding any impacts from the resolution of current tax examinations underway at the moment and any other statute expirations.

Lastly, cash flow from operations is anticipated to be between $550 million and $575 million for the full fiscal year, in line with our stated goal of generating cash flow from operations in excess of GAAP net income. In summary, we've concluded another record year highlighted by notable product launches, sound operational execution and continuous investments in our future. We are well-positioned to expand and look forward to more new product launches and the continuous flow of consumers switching from national to store brands. Now, let me turn the call back to Joe.

Thank you, Judy. I know there will be many questions, but in general we had a great quarter. Now, however I want to turn our focus to the future. In fiscal 2013, we are planning on launching more than 60 new products that we expect will translate into greater than $190 million in annual Perrigo sales as you can see on Slide 14. In our consumer healthcare business, we are very excited about our new product launches. This year we plan to launch store brand versions of several of the Guaifenesin family of products which have annual branded sales of over $300 million. We will also have the full-year impact of products that were launched in late fiscal 2012 such as lansoprazole, Loratadine-D, and minoxidil foam. In infant formula, we have already announced supply agreements to expand into new markets as we look to grow in China with more distribution channels. And as Judy noted earlier, we have completed the final phase of the PBM integration and also plan to launch new plastic containers to give our store brand product the same look and feel as the national brands.

On Slide 15, you can see that we expect our generic prescription business will continue to grow as we are poised for a strong new product year highlighted by the generic versions for Clobex Shampoo, which was approved last week, Cutivate Lotion, Olux-E Foam which was just approved Tuesday of this week, and Luxiq Foam, which have combined branded sales of more than $180 million. I'm especially excited about our foam technology as this marks our fifth product approval in the area of foam products. In the pipeline we have 37 ANDAs in our generic Rx business representing approximately $4 billion in branded sales with nine confirmed first-to-file ANDAs. Add to this continued growth in our Rx business in the Rx-based businesses, we expect to have another terrific year for our Rx team.

Finally, I want to make you aware of the fact that we are making adjustments to our organizational structure to support an increased international focus while still supporting growth of our core business segments. We have added the position of Executive Vice President and General Manager International. Sharon Kochan, who has been our Executive Vice President and General Manager of Pharmaceuticals, has accepted this role. Sharon is now responsible for leading the expansion of the Perrigo's international footprint through superb execution, operational excellence, and new business development, capitalizing on the wide portfolio and pipeline of our products across the entire Perrigo segment. Sharon has done an outstanding job leading the success of our Rx business and we look for him to grow our business internationally just as successfully.

In the interim I will lead the Rx group until a new leader is announced. Fiscal 2013 will be another year of focus on execution for Perrigo. Our base business will continue to grow as store brand market share penetration expands. The new product pipeline is strong, in fact, the strongest ever for our generic Rx business and the business development opportunities in adjacent categories and international geographies are significant. The team is focused and our investments in quality have positioned us continued to grow. I look forward to another great year as we celebrate 125 years of Perrigo bringing quality affordable healthcare to consumers. Operator, now let's open up the call for questions.

(Operator Instructions)

Gregg Gilbert, Merrill Lynch.

I have several but I'll stick with one and it will be a high-level question. Can you talk about the EPS growth goal relative to the revenue growth goal? Other than the tax rate drag, what makes it tough for you to double that rate on the bottom line that you're going to see on the top line? Thanks.

Well, I think you mentioned the tax. The tax is the biggest part of that question, Gregg. As Judy outlined -- and Judy may want to make a few more comments on it -- but tax is the biggest change on that.

Clearly, we are excited about the new products that we're going to launch; we're excited about the Rx business; and clearly, as Judy mentioned we are only at this time forecasting the 100 basis point improvement in store brand share. Historically -- at least last year -- in our fiscal year 2012 we gained 200 basis points, but we are being a little bit conservative on that 100 basis point assumption. Judy, do you want to make any more comments on the other factors from that?

Just building on the guidance information that we provided on Slide 13, we are planning for some operating margin expansion. We've provided a range there that you can see, we are coming off a year of just shy of 22%. We're looking forward to being able to increase that, but as we look at the timing and mix of products, we're not building directly into the guidance dramatic change in operating margin. And that would be where you'd see the translation of the sales growth going straight through into the operating income and then dropping down to EPS.

We have increased interest year-over-year and obviously, we already mentioned the effective tax rate being the biggest headwind that we face and being able to drop the growth in sales and operating income all the way down through the bottom line.

And is it impossible to quantify the potential impact of discrete tax items in fiscal '13, Judy?

We'll have a long detailed footnote in the 10-K that talks about the potential range of tax audit results. We're undergoing audits right now in both the US and in Israel. And there's a pretty big range that's put into the 10-K; it's very hard to know how the audits will come out in both jurisdictions on very complicated multiple topics that are under audit right now. I believe the range goes anywhere between $0 million and $40 million. You can see when the K comes out later today.

Thanks.

Linda Bolton, Caris.

Can you talk a little bit about the SAP-related pre-buy in the infant formula business? I believe you explained -- I don't remember you telling us about that.

And can you also comment, then -- does that shift your sales and earnings away from the first fiscal quarter, so we should be careful with modeling that? And also related on infant formula business, can you just say what you're assuming for underlying core US growth in that, excluding China and excluding the additional distribution? I would imagine modest decline because of the birth rate factor.

And then, if I could sneak in a second one on the Rx business -- the thing that jumped out at me a little bit was that the operating margin in the Rx business declined quite a bit sequentially. And it was down modestly year-over-year. But the big sequential decline -- I'm wondering what that was all about. And related to that, was a lot of -- I think it was the Duac that was supposed to ship in the quarter. Can you quantify if very much shipped at all? Or if most of that is going to be pushed into next fiscal year? And that's it.

That was a four-part question. (laughter)

You asked a lot. Let me start with the last one because I think it's the easiest one. As you know we've been waiting for Duac for quite a long time. We had expectations of it earlier in the year. However, it did not get approved until the last two days of the June quarter, ending, I think it was June 26, if I'm not mistaken. So we shipped a modest amount -- certainly less than $5 million amount of Duac. It's a great product for us. The branded product is in the $140 million range. So -- great opportunity for us, but very minimal amount shipped in our fourth quarter.

On the question on the Rx operating margin, I'll work backwards. This is something that we had expected. There would be some ups and downs in the Rx operating margin depending on which new products were launched and when they were launched. Because of what happened with Duac, there were some late changes that we needed to make in labeling, and as a result of that labeling change, required some reworks that were done; this had to happen in order to get the product to the market in a very efficient way. And obviously, it required some expedited shipping relative to how we're going to get labels and other things amended. But that really was just a one-time event that needed to occur during the end of the quarter.

On the first part of your question, SAP-related pre-buy -- we just needed to shut down the facility for a very short time, less than a week's time period, to make the changes in the SAP system to get the system up and running. And then, of course, to get ourselves prepared for the plastic containers that we are planning to launch later this year. That, we think, is a big opportunity for us because it will give the store brand the same look and feel as the national brand and that's what we're really excited about getting that into the marketplace.

You also had a comment or question, I think specifically about the infant formula birth rate. We do expect that right now as the recession continues, or at least the economy is certainly challenged, there will be some depression in the birth rate of approximately about 2% in the US birth rate at this time. However, however, importantly, we believe there is still significant opportunity for us in China and Asia to grow the business. As I mentioned, Linda, that's where we saw a large part of our growth rate -- in China.

Judy, anything you want to add to the SAP comment?

Perhaps I'll elaborate just briefly. You made the comment this is the first you've heard about it. Originally, the SAP conversion was going to be a few months earlier. And as we got into the final fourth quarter, decided that the most conservative approach would be to finalize that cut over on July 1 for a clean year-over-year starting point from systems conversion and fiscal year end and everything else. In doing so, we move right into the Fourth of July week. So there was in fact some pickup. We wanted to make sure that retailers had sufficient product for the whole Fourth of July week.

But again, the closure was only for a few days. End-to-end, there was a week's worth of activity but the plant was reopened after a few days. So the key point here is, there was some early buy-in the last 7 to 10 days of June. We're not talking about a full month's load of buy-in. There may be a slight blip quarter over quarter sequentially, but if purchasing rates continue in their normal rhythm, you probably should not see a dramatic shift on the quarter-over-quarter front because the shutdown was not that long.

Thank you.

Annabel Samimy, Stifel Nicolaus.

Going back on Gregg Gilbert's question -- you had a broader goal of 100-basis point increase in operating margin. And it doesn't seem like you have confidence that it's going to be expanding like that over fiscal 2013. So, has anything changed in your operating margin outlook? And what are the variables there that's driving that flattish outlook for the year?

I don't know if I would characterize the way you did. I think as we look at our opportunity for the operating margin, we are looking at trying to continue to grow our operating margin in the business. As to exactly how much it will grow, I think we're always continuing to move forward on the operating margin and continuing to launch the new products. The new product launches, as always, will be very important to us on how we look to operating margin and what we expect for it. But just to be clear -- when you're launching 60 new products and over $190 million of revenue, we're pretty excited about what we're trying to do from an operating margin.

Is there a large range for our operating margin? The answer to that is yes. It is, on balance, the midpoint of that range is up, certainly, versus what we're talking about. So I accept the large range. Part of that question always is, what we're trying to do from the point of view of launching these new products, getting success in new products, spending behind some of these new products to get the store brand share.

I can give you one example if I may -- we spent some significant dollars on promotion for our lansoprazole new product launch, but the lansoprazole new product volume share is already over 40% in the second month of the product launch. Did it cost us something upfront to spend to do that? The answer is yes, but over the long term do we think it makes a lot of sense for us? The answer to that is also yes because it cost us something upfront, but were always already at a 45%-plus lansoprazole volume share in the marketplace, which we think those kind of movements are really critical to show the success of our store brand growth.

Okay. Great. That's very helpful. Thank you very much.

David Risinger, Morgan Stanley.

I will ask one question as instructed.

Thank you, David. (laughter)

I know Judy runs a tight ship, and I don't want to rock the boat at all. So with respect to the margin guidance ranges -- could you provide some color on the wider margin guidance ranges this year versus the guidance that you had provided a year ago?

Yes. I think, David, it's a fair comment. There's absolutely a fair comment.

We're all about really, getting to the bottom line in terms of -- is the revenue guidance a little bit broader? The answer is yes. But the Company's gotten bigger. We're launching more new products.

You have to step back for a second. We're launching over 60 new products. That means that there's -- last year we were over 45. There's going to be more than one new product every single week. That by itself just creates incredible critical mass requirements in terms of our entire supply chain, working through the supply chain.

So I think what we're trying to simply say is, we think about where we're going, there's going to be a little bit more variability as we get bigger. But clearly a large part of it once again for us, is always going to be about what we are doing with the new product side of our business. Second part is, we're always about trying to have -- being very transparent with what we're trying to do with new products, very transparent what we're trying to do for the international side of our business. And I think we've tried to make sure that we've characterized that in our comments today.

Judy, do you want to make any further comments about the --

Philosophically, Dave -- just stepping back, we are very passionate at Perrigo, for better or for worse, about transparency. And try to provide a lot of detail into all of our assumptions, all of the segments, how we expect margins and revenues to develop, and line by line on a consolidated P&L. That being said, we don't want to get ourselves hung up in being too finite, and believe that it was important to still provide the clarity of our detail but make sure that there's not so much ins and outs each quarter on the consolidated basis so you have to move the range around. And with a wider range it allows us, we believe, to envelop the whole year on a more even keel, consistent basis.

And I think as we go forward with the year, the only other thing we probably have to say is that we would continue to narrow ranges as we go forward in the year, as we have a better sense of when these new product launches occur. I think, as you know, some of the new product timing from the FDA -- if I just look at our Duac problem last year, we had expected it much earlier in the year didn't get it until the last two days of the year. So those kind of questions, just from a new product approval timing, are important.

I'd add just another example -- I think you know this -- but our partner, we're still waiting to get some products that our partners are getting approvals for, the Fexofenadine D12, as an example, we're still working on getting the Delsym product to market. Those are examples where things take a little bit longer, and we want to make sure that we're understanding where the positives and also the negatives -- but we'll narrow that range as we go forward.

Great. Thanks very much.

Sure.

Elliot Wilbur, Needham and Company.

Joe, can you just remind us, numerically speaking, in terms of how you've previously quantified the McNeil and Novartis opportunities? And how that played out in the fourth quarter and how you're expecting it to play out next year?

And then here's my real question that hits on a similar thematic I think we're hearing from some other folks, as well -- if you look at the consumer healthcare business, arguably you're benefiting from a near perfect storm -- combination strong new product cycle and also competitive disruptions at the main players in this space. You've put up high single-digit sales growth of last couple of years but operating income is essentially flat to down. So something is happening there and not necessarily sure what it is, given some of these positive dynamics and you're not getting the leverage out of that segment that we would ordinarily expect. So I'm just wondering if you guys can comment -- what is taking place either at the expense level, or why we are not getting the upside leverage that we should be getting out of the business? Thanks.

Okay. A lot of good comments there. Maybe just deal with the quantification ones really quickly. As you know, we've stated that the opportunity for the Novartis, we believe is somewhere between $15 million to $25 million a quarter, for store brand. Store brand opportunity, $15 million to $25 million a quarter. We are not going to get all of that, to be clear. But that is the kind of opportunity we see with Novartis. Our expectation today is that we expect to see Novartis come back into the market during our second quarter, which is what Judy was saying. So if they are delayed, there's obviously an upside, but we do not want to get ahead of ourselves relative to when they'd come back into the marketplace for Novartis.

For J&J, we know that they are coming back in the product. They've started to come back in the product categories with some products. Exactly when they will come back in with the full range of them at this point is -- we're just going to take a quarter at a time for J&J. I think as a reminder, the major opportunity for us with J&J was in the area of what we call pediatric suspension products. And that represented we believe somewhere close to $100 million store brand opportunity.

For the first year that happened we were initially constrained to be able to ship about $50 million. Those constraints have now been removed. We can ship much more product than the $50 million; we're probably in the range of $75 million. Obviously it will depend on whether or not -- what the cough, cold, flu season looks like. And therefore, we are in that range to be able to ship somewhere up to that $75 million if indeed it's a normal cough, cold, flu season. But were going to take that one quarter as a time as we go through the J&J numbers.

On the question of the -- I think it's really just you're asking specifically about the CHC and where we are with our CHC operating margins, in terms of the business. We do expect to see the CHC operating margins go up this year, our fiscal '13 year. Really that's going to be behind the strength of our new products. And do I accept that there has been some flattening of that number, the CHC operating margin? The answer to that is yes, but we've been investing significantly in growing the store brand share, and I think that's one of the things that we're very excited about. We only built in 100 basis points of store brand share; historically we have 200 basis point increase over last year's store brand share. So there's more upside there, but we only built in part of that upside at this time.

If indeed we are successful in gaining higher store brand share, there will be an opportunity to gain higher operating margins as a Company. But importantly, what we've done, Elliot, is we've invested in the promotions, the displays, and other activities to help us to drive store brand share of products like lansoprazole, which as I said we're already at 45%-plus and we're only in really the second month of store brand share. So those are the kind of investments we make up front. Very similar to what happened with omeprazole when we first launched it. We make the investment up front, build to the future, get significant store brand share, and then reap the rewards down the road.

Frank Pinkerton, SunTrust.

Can you speak to the new International position, and specifically talk about, is there a specific focus on markets? Is this the entry into continental Europe that we've all been waiting for? And last part -- does this speak to any of the existing long-term growth potential currently that's in North America? Thank you.

Yes. Thank you, Frank, for the question.

I think we've been talking about International for some time. We've been doing a lot of things behind the scenes for International. The whole team has done -- as we stated before, we have probably somewhere in the range of 10 to 15 products that we have submitted for continental Europe. We expect those products to be approved in the next 12 to 24 months, so we're very excited about the opportunities.

However, as we have stated before, we need to develop a full commercialization strategy for those products. And we believe that Sharon will help us to do that and put specific resources behind what we're trying to do in the rest of the world. It is clearly, we believe, a big opportunity to take our current international business -- it's north of $600 million, and basically double that business over the next years. So that's really the opportunity we see is really essentially the opportunity to double International. We think Sharon's a person that can bring the resources, the business development experience that he has to bear on this opportunity and make it successful just like he's done with our generic Rx business.

I think you made a comment there about the US business, North American business. We feel very strong about the North American business for a couple reasons. Number 1, obviously it's a can you move the store brands here that we're seeing. Number 2, it's the new products that we're launching, over 60 products, and well over $190 million of products.

And then number 3 -- I know some of you have seen this in the press recently -- it is the strong conviction we're seeing by some national brand companies, for example, Pfizer, just made a very significant statement that they're going to move into a stronger Rx to OTC switch category with the acquisition of the opportunity for Nexium. This is one that we've had on our radar before, but obviously this just confirms their commitment to not only Nexium, but obviously some of the nasal opportunities and potentially other opportunities that are within the Pfizer portfolio. One could quickly think about the Cox-2 product, Celebrex; one could think about the statins as other places they can go with this Rx to OTC. So we believe the US is going to continue to be very strong, but there is big opportunities internationally.

Thank you.

David Buck, Buckingham Research.

Just a question on the growth rates for Nutritional and OTC consumer health -- can you talk about whether you've included a new customer win on the infant formula side? And can you talk about whether there was any benefit from generic Mucinex in the fourth quarter? And what the assumptions are there for that as a major new product? It seems like for the full year there is, but was just curious about the lumpiness of some of the growth in consumer health -- or how lumpy do you expect it to be?

And just a quick one for Judy -- if I got the numbers correctly on the range of outcomes from audits, $0 million to $60 million, I think $60 million implies roughly 600 basis points in tax rate. Is that actually the range of outcomes? Thanks.

I'll talk start with the tax question. I don't think I said $0 million to $60 million. I said $0 million to $40 million and I refined my number when I pulled up the K while I've been sitting here. The K reads $8 million to $25 million is the range. So that's what we've disclosed for US GAAP in our 10-K filing today. And so it's not $60 million. And it's just the outcome, which can go -- it's a multivariable equation of different factors that can fall as the audit is completed.

Okay.

On the question of our Nutritional growth, we have a guidance of 8% to 12%. That's predominantly behind a couple of things. Number 1, new products. We expect to launch some new products. Number 2, it's our new packaging, especially in infant formula. That's an important part of what we think will offer our product the same look and feel as the national brand products, so therefore we think that's in an important part of it. And we are also always going after new customers for new products in our numbers.

We always put, what I would call a probability weighting on getting any new product or any new customer. But those are all part of it. The other part of our Nutritional growth is, as I stated before, we do think there's opportunities in Asia to continue to expand the new products opportunities for launching with new customers, new distribution into Asia.

On the question of generic Mucinex, I think as you may recall, David, we launched the product to a limited number of customers, but we do expect the Guaifenesin product to have a full OTC product in time for the cough, cold season in that October-November timeframe. So we'll be in full launch mode at that time period.

And just finally, Joe, on the lumpiness by quarter of the CHC revenue growth?

Quarter two, quarter three for us will be the stronger quarters. Nothing that different from other past years. Our expectation is quarter two, quarter three will be slightly higher -- not big numbers, David, just slightly better.

Okay. Thanks.

For the whole Company as well, it's the usual, quarter one is our slowest quarter. It really kicks in two and three. Normally there's a slowdown for the overall business, more relative to two and three. But obviously as timing and new products were, between three and four you might have some uptick in Q4 relative. So while we don't give quarterly guidance it follows the same overall kind of arc of the year as well.

Chris Schott, JPMorgan.

Just had two actually really quick ones -- coming back to the Nexium opportunity. With the 20 mg initially launching with Prevacid and Prilosec obviously already in the market and Nexium volumes declining pretty significantly on the prescription side, can you talk about how large of an opportunity you see for store brand Nexium as we think about that opportunity a few years out?

And the second question was on the Rx business. Gross margins in the 50s, operating margins close to the mid-40s -- really above any generic company we've seen in recent memory. Can you talk about how sustainable those margin levels are as we look out beyond '13? Do you think you can keep in that range over time? Any color on that would be appreciated. Thanks.

Let me deal with Nexium first. We are very excited about Nexium. We think just the magnitude of what Pfizer spent to acquire the rights of it tells you that it's a big opportunity. We certainly think it is. I think one of the most important telling comments about the size of an opportunity is when a prescription product is advertised direct to the consumer, they build up a tremendous direct to consumer knowledge base. That's a big driver as to whether or not a product will be successful moving from prescription to OTC.

I think you can't turn the TV on without sometime during the day seeing a Nexium direct-to-consumer advertising. So I do think it would be a very important product opportunity. It is obviously a very effective product, to be clear, too. That's the obvious point on the very good product, very effective. My expectation is it will do very well.

Just to give you some order of magnitude on that, the Prilosec product was approximately -- call it about half of what the Nexium product is. And it did about $700 million branded OTC product. My belief is Nexium will be a bigger product, but obviously that will be up to what Pfizer does, and what Pfizer does to try to make this product a success; and I could not predict that, but I think it will be a very large product, Nexium. And there's no doubt -- the last point I would make on Nexium -- there's no doubt more and more people are moving to the proton pump inhibitors and away from older therapies like antacid tablets, like H2 antagonists. Proton pump inhibitors are clearly the way to go in the market for the area of heartburn.

On the question of what we are doing in the Rx business -- I want to point out something that I think is obvious, but I want to state it -- we look at the Rx opportunity as significantly different than what I would call the other generic players. We are not going after and trying to be the tenth player in to get the product for a generic of Amlodipine or Norvasc. That's not our model. We're going after what we think are the more difficult products that are extended topicals -- which I think, as you know, Chris, is really where were focused. And by doing that -- take the example of the foam product we will be launching. We've had five foam products approved, and right to date, I think we are the only company that has even challenged the patent on foam, never mind launched five of these products.

That gives you a much more stable position, when you can launch a foam product, be one of yourself plus an authorized generic out there in the market place in a two-player market, versus when you are one of 10 players launching a generic Amlodipine, as an example. That we think gives us the stability in our pricing in the market for Rx as well as the opportunity to continue to build share. And as we get bigger as a Company we just think that we can do more and more of these opportunities; and right now, we are sitting on the best pipeline we ever had in the generic Rx business.

So that's why we believe, as we look to the future for our Rx both on the gross margin and the operating margin, we see continuing able to get into those same levels and obviously grow the top line of the business.

Jami Rubin, Goldman Sachs.

Judy, congratulations. I for one was not at all surprised to see you on that list.

So just to follow-up on the last question -- the New York Times recently highlighted an article about price inflation with old derm products in which you compete. Can you talk about what you are seeing in the pricing environment there? And would you expect that, as competitors come back to the market and as other players start to target this market, will that reverse the price hikes we have seen? And what impact would that have on gross margins in that business? Thanks.

Sure. Yes, I did have a chance to read the article, Jami. I think it does a fair job of characterizing what's happening in the dynamics of the dermatology business. But I want to be clear about one important point. Perrigo -- when we say extended topicals, we do not focus only on dermatology. Is dermatology important to me? Yes. Are foam products part of that dermatology? The answer to that is, yes.

But as extended topicals, I remind you that we also have the nasal product like a Nasacort; we are also looking at metered dose inhalers; also, looking at other ways -- ophthalmic products, otic products for the ear -- other ways of delivering what I would call topical products. And that, we really think, is what really separates us from other players. Do I think some will come back into dermatology? The answer is, absolutely yes. I can't predict what will happen there; but importantly, as we look at it, we're not stopping just at dermatology. We are bringing this franchise into other places where topical products such as nasal, respiratory, ophthalmic, can really make a difference in trying to lower the total cost of healthcare. And that's really what we're excited about.

Relative to the final part of your question about the pricing -- pricing for us, as I've said before, across our total book of business -- and I think the Rx is as important just as represented in this category -- is flat to up slightly. If you can keep pricing flat to up slightly, as you add on new product A, new product B, new product C, it really allows you to dramatically improve the revenue side; but importantly, also your operating margin and the gross margin will go up with these new products. And that's really been our formula for success in the generic Rx space.

A final comment, I would say, is that while I don't doubt others may come back at it, we're not sitting still. We're going after these new products, like foam products -- and to date I don't think anyone's even challenged the foam patent other than Perrigo. So we've got at least a three-year head start on any other player.

Can I ask a quick follow-up? The guidance for gross margins in fiscal year 2013 for Rx -- 54% to 57% -- does the bottom end of that contemplate a tougher pricing environment for the derm products? Or is it other factors that would drive that?

Let me just be clear. It's 54% to 59%, first of all, for the gross margin, Jamie.

Okay.

Just want to make sure I clarified that point. Do I think that we -- our expectation is pricing will be flat to up slightly across our total portfolio products, including the Rx products. There may be several products that go up, there may be some that will go down. But on total book of business, our expedition is pricing will be flat to up slightly.

Okay. Thank you very much.

Thank you.

Ami Fadia, UBS.

I wanted to go back to the wide range of your guidance for operating margin and gross margin, and it's across all of the segments. Could you identify some specific products where the timing of the launch could really matter in terms of how that impacts the margin range? Also, just separately -- on Mucinex, that you highlighted as one of the new launches in fiscal 2013 -- could you give us an update on the timing and where you are at with this product and how you plan to get it launched? Thanks.

Sure. Why don't I take the Mucinex first, Judy, and then you can comment on range?

I don't know if I can say much more on Mucinex. We have launched the product, just to a limited number of customers; we launched it in bottles to a limited number of customers. We do have our full OTC launch, we expect in time for the cough, cold, flu season which will happen at the end of October, November timing for the full launch of our OTC to all of our OTC customers. In addition to that, though, to be clear, we do expect to launch other products from the Mucinex family during our fiscal year 2013. So it's both the single entity and then the other products that we expect to launch during our fiscal year 2013.

Judy, do you want to make more comments on the launch and wide range?

Sure. Ami, I would just say that, kudos to you for having so sophisticated a model that you could time out new products and try and link them to specific gross margins, because if I think about the things that are going to impact both gross and operating margins over the course of the year, new products -- their existence, critically important; the timing of them, important, but also one has to consider the relevance of things that we talked about over the course, for example, of this year and the previous fiscal year, like seasonality, timing of production, ramp ups for cough, cold, flu season, carrying costs and inventory, were a big factor this year. We talked about those because those can really drive margins up and down over the course of the year as well.

So that's why, frankly, coming back to why the slightly wider range -- we took each range out one additional point on segments, and on a consolidated basis, I think two points. But here it's also to encompass the course of the year, because you've got the new product movements, but you also have the very important component of, we make money by managing a supply chain. And the supply chain factor can play a role in the gross margin movement.

So slightly wider range to encompass the band of the year. And as Joe stated earlier, over the course of the year, as we get closer, better information on timing of launches and development of a cough, cold, flu season, we will be able to narrow those brands over the course of the year rather than move them around in our expectation.

Got it. Joe, just as a follow-up -- on the other family of products, Mucinex, is there any color you can give us on the timing?

I don't want to make more comments on the other members of the family. Just is our expectation is that we'll have a chance to launch additional members of the family during our fiscal year 2013.

I think the issue for us, of course, is always just getting approval for products through the Food and Drug Administration. They've got a lot products that they're working on. And they've got a lot of opportunities to get products approved. And we don't want to say anything more about the specific timing or products at this time other than we think there are other Mucinex opportunities that will be forthcoming.

Thank you.

Thanks.

David Steinberg, Deutsche Bank.

I had a question about the mergers and acquisitions landscape. Over the last few years you posted very dramatic EPS growth, largely due to organic growth, but a significant part has been acquisitions. And so I know you haven't been totally standing idle; you bought CanAm. But it's been over a year now since you made a sizable transaction. So I was curious, have the prices of assets changed? Has your appetite changed? Are you still as active as you have been? And any particular regions of the world where you're focused on or therapeutic areas you're focused on? Thanks.

David, it's a great comment, great question.

I still believe there are significant M&A opportunities for us. We like our organic growth rate, as we stated before. When you can show an organic growth rate, as we've stated, between 10% to 14%, we think that's very strong for any business. And so, therefore, we like the organic growth rate.

However, there are some significant adjacent categories that we are very interested in, as well as geographic expansion. When you talk about the adjacent categories, there's no new news here. This is all the same ones. We like the opportunity in diabetes as evidenced by what we've done with CanAm. We like the opportunity in ophthalmics. We are very interested in pet care -- think of that being dogs and cats; that's not to go into large animals, but dogs and cats. And we like the area of adult nutrition as another area for us.

In addition to that, we are very interested in geographic expansion where we can bring additional Perrigo expertise in this concept of store brand private-label into other markets around the world and take our full portfolio and bring those products globally. We get very excited about it. Obvious ones that come to mind is the Asia opportunity for infant formula nutrition, where the births are. That, we stated, is more right now partnership opportunities; but we do think there's opportunities there for partnership in what were trying to accomplish.

And obviously, already talked about the EU opportunity. I think it is hard to put a lot of money or risk capital in the market right now in the EU, but we do think there are partnerships in the EU for us.

So no major changes. We still have the same interest in adjacent categories and geographic expansions for us.

I'd just like to add that our process of looking at opportunities takes time -- mentioned in the past some of our larger transactions in the last few years had courtships that were 1.5, two years long. Just like cash flow, M&A is not linear and therefore we apply the same rigor. We have our categories. We are out there talking to a lot of folks, but you cannot just time it. As elegant as it would be to be able to time it with a regular cadence, that is realistically impossible when you apply the rigor of ROIC that we try to do with our deals.

I think we have time for maybe one more question.

Jon Andersen, William Blair.

I have a two-parter. First, bigger picture -- Joe, where is store brand market share today, broadly speaking, in your OTC categories? And as you look at the opportunity and talk with your major retail customers, where do you think that can go, or retailers think or want it to go, over the next few years? And then secondly, I know it's not until fiscal '14, but I was wondering if you could talk a little bit about the Temodar opportunity in the US and perhaps help quantify that opportunity? Thanks.

Sure. So, the first part of the question -- where is store brand today? It's in that range of 33% share of the market. Where do I think it's going to go? Candidly, I think it's going to go certainly into the mid-40%s, potentially 50%. Why do I say that? Every new product that we launch today, our store brand share, usually within the first 12 months gets into the range of 45% to 50%.

As I look out over the next several years, those new products we launch today will become the old products, three, four, five years from now. As those old products get to somewhere like a 45% to 50% share, it's going to be very natural that the total market's going to get something very similar to that. So we think there's a significant upward trend in trajectory towards store brand. Obviously you see it in the data. We were a little conservative in our guidance this year of only showing 100 basis point movement from national brand to store brand, but we do think the opportunity will continue to grow, and potentially there's some upside in that beyond the 100 basis points a year movement from the national brand to store brand even this year.

Relative to the second opportunity, we'll have more to say about Temodar next year, of course. This is an August 2013 opportunity. At this time, though, ourselves and our partner will have at least 180-day exclusivity for this product. I don't remember the exact US numbers, somewhere in the $375 million range for US sales opportunity. So we do think that it will be a very significant 180-day opportunity, potentially longer depending on what happens in the competitive landscape.

I will say, though, just on this question right now, to date we are in very good shape with Temodar in Europe. We have that product in the marketplace and we have the majority share of the Temodar generic in Europe, and we're very excited about that continuing forth. So it's a good opportunity in this year for the European opportunity. Certainly next year for what we're expecting in the US.

Thank you, everyone, for your questions today. I'm very delighted for your interest in Perrigo, and we look forward to having further conversations at upcoming conferences to talk about the opportunities we see in terms of growth of store brand and certainly the new product opportunities we have during the year.

Thank you very much for your interest today. Have a great day.

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