Perrigo Company PLC (PRGO) 2014 Q4 法說會逐字稿

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to Perrigo's FY14 fourth-quarter earnings results conference call.

(Operator Instructions)

Thank you. Art Shannon, you may begin your conference.

Thank you very much, Lindsey. Welcome to Perrigo's fourth-quarter 2014 earnings conference call. I hope you all had a chance to review our press release, we which we issued earlier this morning. A copy of the release is available on our website. Also on our website is the slide presentation for this call.

Before we proceed with the call from our headquarters here in Dublin, I'd like to remind everyone that during the process of this call, management will be making certain forward-looking statements. Please refer to the important information for investors and shareholders and Safe Harbor language regarding these statements in our press release issued this morning.

Following management's review of the presentation, we'll open the call for questions. I'd like to now turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome everyone to Perrigo's fourth-quarter FY14 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer.

Now, let's go through the agenda for today's call. I will begin with a brief overview of the quarter and the year. Next, Judy will go through the details from the fiscal fourth quarter and walk through our FY15 guidance. Then I'll provide an update on each business area, as well as an overview of our expectations for the fiscal year. We will conclude by providing an opportunity for question and answers.

Now, let's look at Perrigo's fourth quarter. On slide 4, you can see that this was another great quarter for Perrigo, finishing our fiscal year on a very strong note. Our quarterly performance is highlighted by all-time record net sales of $1.14 billion, with an 18% net sales growth, leading to continued record adjusted gross profit and operating margin expansion, which was up 510 basis points.

Moving on to slide 5. It was an historic year for Perrigo with record top and bottom line results. We recorded a 15% year-over-year improvement in net sales for FY14, reaching $4.06 billion, which included 7% organic growth. New product sales added $231 million, far surpassing our goal of $190 million.

FY14 adjusted net income increased 40% to $740 million, or $6.39 per diluted share. The strong sales results correlated with impressive improvements in adjusted gross margins and operating margins, which saw 340 and 250 basis point improvement respectively. This strong performance was driven by great execution, especially within our Rx business segment, and the acquisition of Elan.

Looking at slide 6, we achieved over $1 billion in sales for the second straight quarter. Rx business grew 30% in the quarter, while CHC achieved an 8% growth rate.

In specialty sciences, we've been very pleased with the performance of Tysabri. It is a great asset, that is generating significant cash flow. As I stated when we acquired it, we love the Tysabri asset, and the optionality that it gives us. We look forward to a full year of contribution of FY15 at the higher royalty rate for Tysabri.

The nutritional segment was relatively flat compared to last year's comparatively strong performance, with the launch of the SmarTub in infant formula. As you can see on slide 7, the overall OTC category was up, while store brands were slightly down. The reason for this was the return of two [main] national brand companies. Excluding that dynamic, we continued to gain market share in store brands across most categories.

Perrigo's 7% organic growth in the quarter and for the full year, in a flat-to-down store brand market, illustrates the strength of the Perrigo business model that focuses on quality, affordable healthcare. Now, let me turn the call over to Judy.

Thanks, Joe. Good morning everyone. As you just heard, we closed FY14 on a high note, delivering record financial results despite the various challenges the organization confronted. On a consolidated basis, the team continued its strong performance, posting record quarterly revenue, adjusted margins, and adjusted earnings.

As usual, I'll provide a brief overview of the adjusted results for the fiscal fourth quarter by business segment. Then I'll walk you through the consolidated and segment earnings guidance for FY15.

So, let's begin with the fiscal fourth-quarter highlights in the individual business segments, starting on slide 8 with consumer healthcare. The 8% net sales growth was driven by an increase in sales of existing products to $52 million, primarily in the antacid and smoking cessation categories, new product sales of approximately $15 million, and $6 million attributable to the recent acquisition of OTC products acquired from Aspen. These combined increases were offset by a decline of $29 million in sales of existing products, due primarily to relatively lower sales in third-party contract manufacturing, and a delayed start to the flea and tick season in the US.

The animal health revenue realized in the quarter was, in fact, softer than we had hoped as the slow start to the season we noted last quarter continued. Despite these impacts, I'm pleased to note that sales within all major categories of OTC were up year over year.

Specifically, the smoking cessation category performed above our expectations due to two factors: one, continued robust sales of the store-brand version of Nicorette mini lozenges, and two, our team's ability to efficiently supply our customers needed product, as national branded competitor is not shipping specific SKUs at this time.

Within the GI category, sales of Lansoprazole were higher year over year, due to increased customer utilization of the store brand products, as well as manufacturing issues at a competitive store brand supplier. The adjusted gross margin decline of 210 basis points was due to a combination of relatively weaker sales within the higher-margin animal health category, relatively weaker product mix, and an under-absorption of fixed production costs.

Remember, as we have previously stated, we have begun to make investments to increase plant capacity, to support our long-term growth initiatives. These forces were partially offset by greater sales in specific higher margin products, within the categories I just mentioned. The difference between the adjusted gross and adjusted operating margin leverage year over year was due primarily to lower DSG&A expenses as a percent of sales, as we further integrated the animal health and diabetes categories, thereby decreasing redundant costs. This lower DSG&A spend was partially offset by increased R&D investments, as we continue to build our long-term pipeline.

On slide 9, you can see that net sales in nutritionals were $145 million, as new product sales of $6 million were more than offset by the combination of lower year-over-year sales in infant-toddler foods, and $4 million in discontinued products. Despite not achieving our sales guidance range for the segment in total, within the infant formula category, revenue was driven by strong growth in our organic formula product line, as consumer interest in these types of high quality offerings continues to grow.

Additionally, our infant formula sales to China relaunched in fiscal Q3, continued this quarter, consistent with our expectations. Adjusted gross margin for the segment decreased 140 basis points year over year to 27.5%, due to scheduled maintenance efforts at our manufacturing facilities in June. Adjusted operating margin was impacted by increased promotional investments to support the launch of our branded.

On slide 10, you can see that our Rx business continues its robust performance, as net sales growth was driven by new product sales of $35 million, and sales related to products acquired from the acquisition of Fera, of $20 million. Adjusted gross and operating margin expansion continues, increasing 440 and 560 basis points respectively. The adjusted operating margin expanded, even despite higher dollar investments in research and development clinical studies, as well as continued investments to grow our specialty Rx sales force.

Turning to slide 11, net sales in the API segment declined to $33 million, due to a decrease in existing product sales of $17 million, as a result of increased competition on certain products, partially offset by $8 million in new product sales. Growth in operating margins expanded, due primarily to product mix and decreased SG&A expenses. Given our continued focus on vertical integration, we've made strides in right-sizing API's cost structure to mirror this focus, evidenced by an expansion in margin. The majority of this impact is expected to materialize next quarter.

Turning to slide 12. Specialty sciences revenues were $86 million for the quarter, comprised of one month of Tysabri royalties at 12%, two months at 18%, and approximately $10 million attributable to the royalty recognized from Biogen's deferred revenue in Italy. Adjusted operating margin incorporated ongoing administrative operating costs for the quarter. The consolidated adjusted effective tax rate for this quarter was 21%, and 20.7% for the fiscal year, in line with our expectations.

I'll end my FY14 comments with my favorite topic, cash. We concluded the year with cash flow from operations of $694 million, even after the inclusion of $186 million of one-time costs related to our Elan acquisition this year, a very strong finish to the year.

Now, I'd like to discuss FY15 guidance for the Company and by individual segments, starting on slide 13. Since our third fiscal quarter earnings announcement, we met with a large number of investors and analysts, and received comprehensive feedback on the number and type of guidance metrics we provide the street.

After a period of self reflection, we made the decision to put forward today's revised guidance framework, which we believe will enable you to properly model the Company in sufficient detail, while also keeping focus on the overall value-creation imperatives. Importantly, we're opting to guide to an expected adjusted operating margin percentage for the Company as well as the segments, rather than the previously provided ranges. Anticipating actual full-year performance to be within approximately 200 basis points in either direction of the stated targets.

So within consumer healthcare, we anticipate that store brands will continue to be important contributors to the growth of our retail customers, and therefore, our plan assumes that excluding those categories impacted by national brand market returns, store brand share of the OTC pharmaceutical market will continue to grow. Likewise, we have assumed that our share of store brands will continue to increase. Also, I'd like to remind you that our annual planning follows the same assumptions we have used in the past regarding each of the cough, cold, flu, and allergy seasons. That is, we estimate the demand for the upcoming seasons using the average of the previous 10 seasons.

Now, let's walk through a few specific products in detail. Included in our guidance on a risk-adjusted basis are the launches of the store brand versions of specific nasal corticosteroid products, in time for the spring 2015 allergy season. Our guidance also includes the expected launch of store and value brand versions of flea and tick line extension products, in time for next season.

Not included in our guidance at this time are either the 600-milligram extended release guaifenesin product, or the broader family of Mucinex D, DM, Max, et cetera, equivalent products. Joe will discuss these items in further detail in a few minutes. Repeating a comment from a moment ago, CHC's year-over-year revenue growth range also reflects the impact of a continuing return to market of a large branded analgesic competitor's product line-up.

In our nutritional segment, our revenue guidance includes the assumption that by the end of FY15, we will grow infant formula store brand market share, increase our international presence, and launch the store brand version of Ensure adult nutrition drinks. This revenue guidance also includes growth greater than 5% in our VMS category, as we continue to expand distribution and sales of insync probiotic.

For Rx, we anticipate top line growth driven by new products, and recent acquisitions. Adjusted margins are expected to remain strong. Within the specialty sciences segment, we expect to receive an 18% royalty on in-market sales of Tysabri, up to $2 billion, and a 25% royalty on any sales above this level. Now, looking to our consolidated projections, for FY15, we anticipate adjusted diluted earnings per share to be between $7.20 and $7.50, an increase of 13% to 17%, compared to FY14's $6.39.

Summing everything back up at the consolidated Perrigo P&L. We estimate that net growth will with between 7% and 11% compared to FY14, and assume new product sales of greater than $235 million, with approximately 70% of these sales expected in the second half of the fiscal year, as well as continued growth in our base business.

After you roll up the individual business units, you should also include in your model corporate unallocated expenses of approximately $80 million, and interest expense of approximately $100 million. Additionally, we are estimating an adjusted worldwide effective tax rate of approximately 16% for FY15, excluding any impacts from the resolution of ongoing tax examinations, and other statute expirations.

So, that is the full-year view. As I noted a few minutes ago, we also spent considerable amount of time debating the need to provide our investors some additional color around upcoming quarters. While we are not moving to a quarterly guidance model, given the many complexities of our varied business units, we would like to provide an overview of our first fiscal quarter to help further refine your FY15 models.

As you may recall, earnings in our first fiscal quarter of 2014 were strong. We exclusively launched the US generic of Temodar. We shipped a large amount of OTC product, as retailers pushed for an early buy into the season, and we recorded a large amount of contract sales in consumer healthcare.

As you model FY15, please note that while we expect to execute well on our core businesses, these same specific dynamics experienced last year at this time are not expected to repeat. The totality of these relative quarterly dynamics, including additional investments to further our strategic plan, are expected to produce first-quarter FY15 year-over-year adjusted net income growth at the lower end of the full fiscal year 31% to 37% guidance range you see here. Taking the incremental 39 million shares outstanding in the first quarter FY15, adjusted EPS are expected to be lower versus this time in FY14.

So, thinking about the remainder of the fiscal year, due to the dynamics I just highlighted, we expect the weighting of net sales and EPS to be lowest in our first fiscal quarter, to notch up in the second and third fiscal quarters, and to be at their highest in the fourth quarter, due to seasonality, as we plan to launch further line extension flea and tick products, and a more heavily-weighted second half for anticipated new product launches, which I mentioned earlier. Operating cash flow is expected to continue to be robust in FY15, growing to over $1 billion, furthered by a full year of Tysabri revenue, and a strong base business cash generation.

In summary, we've concluded another record year, where we crossed $4 billion in annual sales, grew organic top line sales 7% in a difficult environment, and furthered our operational excellence. The acquisition of Elan provided us with a significant platform to continue growing, and we continue to invest in R&D and plant capacity for the long-term. FY15 looks to be another productive year, as we expect to launch over $235 million in new products, and advance many strategic initiatives, through both organic and inorganic growth. Now, let me turn it back to Joe.

Thank you, Judy. It was a great year, but it did have some challenges. Think about the growth in our consumer healthcare business.

It grew 8%, despite not having the store brand version of Mucinex 600 milligrams for much of the year, and we also had to overcome the loss of $100 million in contract revenue, based on the reentry of a major national brand and lower contract manufacturing sales. That shows the strength of our consumer healthcare core business.

Now let's talk about FY15. First, we have to bring the store brand version of Mucinex 600 milligrams back to the market. We have a pathway to get this product to the market. I have a dedicated team meeting weekly to make this happen.

I feel strongly that we will get this product done, but I'm not going to give you a specific date, until I have product headed to the retailer shelves. As Judy just told you, Mucinex 600 milligrams is not included in our FY15 guidance. It is a critical R&D imperative for us to bring this product back to the market in our FY15.

Second, we are continuing to invest in future growth. We continued to invest in important new products, and anticipate reaping the benefits from those products in the future. As you saw just last month, as a result of the hard work by our team, we received an AB therapeutic equivalent rating from the FDA for testosterone gel 1%. We were also the first to receive final approval from the FDA for the store-brand version of Advil congestion relief tablets. These are examples of why we are continuing to invest in research and development, with the goal of being first to market in Rx OTC switches, new products, and innovation.

Plus, we have new product offerings in our animal health and infant formula business, that we expect to launch during the fiscal year. These investments give us every reason to believe in the strength and long-term viability of our business model. That belief is further supported by the three mega trends that we've been discussing since I joined Perrigo eight years ago:

First, the continued movement of consumers from national brands to store brand products. Second, the continued movement of prescription products switching to over-the-counter status. Just a few weeks ago, Flonase received FDA approval to switch from prescription to OTC. Third, the rising healthcare costs, combined with an aging population, will continue to drive the global need for quality, affordable healthcare products. This is why we are continuing to invest in our research and development, and in fact, in FY15, we are investing in incremental $19 million in research and development.

Now as you can see on slide 14, our team is poised to launch a number of products in FY15, highlighted by launches of nasal sprays and product line extensions in flea and tick products for pets. For the year, we expect to launch over 100 new products across all of our segments, resulting in more than $235 million in new product sales, which will exceed last year's strong new product sales level. Moving on to our growth opportunities in the Rx segment.

On slide 15, we have a very robust pipeline of 31 ANDAs pending FDA approval, representing over $4 billion in branded sales. This includes five confirmed to first to file ANDAs, including the generic version of AndroGel 1.62%. The positive momentum in this segment should continue, with the best new product pipeline in our history.

I just had the pleasure of sharing my objectives for FY15 with the Board of Directors for Perrigo, here in Dublin, Ireland. What we are focused on is number one, execution across our five pillars, number two, continued focus on quality and service, and number three, the realization of the best new product pipeline in our history. We plan to grow adjusted net income from 31% to 37%.

In summary, on slide 16, the strength of our enhanced platform for growth, combined with the mega trends I just discussed, positions Perrigo for further growth, as we continue to execute on our mission of making quality healthcare more affordable for consumers. Operator, now let's open up the call for any questions.

(Operator Instructions)

Your first question comes from the line of David Risinger from Morgan Stanley.

Yes. Thanks very much.

So, congrats on the great results. I have a couple questions. Did you say that you wanted to limit the number of questions each person asks? I forget.

We would like to limit it to one question, please.

Pick your best one, David.

Okay. Well, they're all great. But I guess I'll just pick number one.

So -- just wanted to better understand the net income growth guidance for FY15. It's 31% to 37%, but when one backs out the likely step-up in Tysabri -- net income of about $200 million -- the implied net income growth for the core seems to be up in the high single digits. So I just wanted to get a little bit more color on why that's below the Company's long-term earnings growth targets, when there's an easy cough, cold, flu comp versus FY14.

I'll just start, hit a couple highlights. Then I'm going to turn it to you for some of the more specifics.

As we thought about 2014 to 2015, one of the things that one would have to do in terms of looking at this is, look at some of the things that are happening relative to share counts, specifically, and how that would affect our EPS. The other area is some significant investments we're making in a couple of areas. One is research and development, going up to $19 million. The other one is some investments in our sales efforts, especially in the Rx business, as we look to launch some additional products that we think are going to be very good margin products as far as our specialty pharmaceutical product area. Those are a couple of the highlights, of things that are driving some of the questions that you have.

Judy, do you want to give him any more specifics for David?

Sure. We gave a lot of thought to how to explain the fact that -- I'm sure many of you have already done the math -- trying to roll forward EPS is complicated, because there's a lot of noise when you roll last year to this year. Let me just roll EPS forward for a second, and I'll talk about adjusted net income as well on this.

Because you take -- start with FY14 on an adjusted basis; we end the year at $6.39 of EPS. On a year-over-year basis, with the change in the tax rate I just commented on -- and this is all very round numbers -- you pick up about $0.50 of EPS. But then, of course, we have the bad guy of a higher share count over the course of the year. So that's a bad guy of about $0.90, just on a year-over-year basis. And we have full year, while the interest rates that we're going to pay for the full year goes down by just having the same debt outstanding for the full year -- whole full year, versus what we had in fourth quarter -- is a bad guy of about $0.05.

But just on a really clean, normalized basis, you'd say, we're starting with $6 a share on a clean basis this year. Now what are we going to do? We're going to roll forward midpoint of that range to $7.20 to $7.50; if you pick the midpoint, it's about $7.35. So there's the spread of what you're growing into next year, just on a business basis.

David, you teed up an amount of contribution coming from our specialty science business of $200 million-ish of income. Don't forget that we do have running costs that come with that, so we have, give or take, I'd say about $20 million of operating costs that come with that business. Think about, we have acquired not just a royalty stream, but we have incremental activities as well. So you have to take that into consideration. We're not commenting specifically on what we put into our forecast for specialty science revenue, but suffice it to say, the remainder, as you're backing into that, still implies a growth rate of our overall business in that five-year CAGR range, or three-year CAGR range. Remember, our three-year CAGRs, we've said, are between 5% and 10% top-line revenue growth.

Joe made the comment about the investments that we've been making incrementally in our base business, in R&D, and other selling and related expenses, to further our strategic initiatives. So I'd come back to, actually when you back out that math, like I just said, the remaining growth on the non-specialty science-related business is firmly in that three-year CAGR overall growth guidance that we provided in the past.

Great. Thanks very much.

Your next question comes from the line of Jami Rubin with Goldman Sachs.

I guess this is sort of a follow-up from Dave's question, but just in looking at your consolidated revenue growth outlook for 2015, 7% to 11% -- Judy, if I adjust for Tysabri -- just the revenue contribution that we are anticipating for Tysabri -- we're getting about 2% growth, if we assume the high end of that revenue growth outlook of 11%. And if we then adjust last year for the contribution from Tysabri, we're getting -- again, using the high end -- about 5% growth to the base business. Can you confirm that we're looking at that correctly?

Sorry, need to sit and look at your [Excel] model, which I'm sure I need my glasses for, but certainly --

Looking at the guidance for this year, the 7% to 11%.

Sure. The total Company of 7% to 11%, you're spot on. And like I said, we feel that our non-spec science growth is in -- we've got the ranges on the business unit by business unit; and as we look at it, and look at the sensitivity around those various segment guidance ranges, we still feel like the non-spec science business is growing in our 5% to 10% longer-term CAGR.

So again, I don't know how much weight you've placed within the Tysabri number, but suffice it to say, as we look at our model and add up the different segments we are at that CAGR that we provided in the past.

I would just maybe echo what Judy said, maybe a little more specific.

As we've said, consumer healthcare we think 3% to 7%, nutritional 7% to 11%, Rx pharmaceuticals in that 5% to 9%. API admittedly is going down. We do think that's going to be a decline in that business. Those give you some sense of, Jami, what we're thinking about for the individual business units.

Thank you.

Your next question comes from the line of Gregg Gilbert with Deutsche Bank.

Joe, the acquisitions you made before the Elan deal were, I would say, in the small to medium category. Is it fair to say the deals you're considering now are similar to those you've done in the past, pre-Elan, in terms of the flavor and size? Or would you add any other context, to set expectations for folks? Thanks.

First comment, maybe just a reflection on where we've been. I've been in pharmaceuticals for 31 years. This is if most dynamic M&A market I've ever seen in 31 years of being in the pharmaceutical business. I think, from our point of view, everything that we said a year ago is going very well, relative to our plans to delever.

I would specifically say, though, relative to our targets and the size of the targets, while there are certainly adjacent categories that I think would fit very much along the lines of what we've done historically, in terms of being bolt-on product categories -- things like pet care, ophthalmics, diabetes, adult nutrition -- those are all clearly things that we are very excited about, to bolt on some additional -- sell more products to our existing customers.

The other thing I'd say that is a little bit of an expansion is, we continue to think about geographic expansion, where can we go geographically, to continue to take our version of quality, affordable healthcare around the world. And the other comment, which we haven't talked about as much, is we're interested in platforms. Platforms where, as we think about the future, what areas that we don't have our current capabilities from a technology point of view. Ophthalmics is an easy example for that, in terms of platforms where we'd be able to make our own ophthalmic products, as examples.

In conclusion, I think lots of targets. There's some competencies that we are seeking to bring into the business as well as these adjacent categories, from geographic expansion.

Thanks. I'll hold back from asking 10 more. Thanks for that, Joe.

Your next question comes from the line of Elliot Wilbur with Needham & Company.

Wanted to ask a very deep philosophical question, directed toward Joe. And relates to the consumer healthcare business, and I guess some of the -- I don't want to say maybe, challenges, the business is facing, but maybe in light of anticipation of some of the tailwinds that you've been facing the last couple of years, and just the growth outlook going forward.

If you were to compare and contrast that business with your Rx business, there's many similarities. But there seems to be sort of one critical differential, and that's in the value proposition of the two businesses, once the product actually leaves the factory.

And what I'm getting at is that, on the consumer side, the store brand market, Perrigo seems to capture significantly smaller portion of the overall value of the product that you would on the Rx side. Long and short of it, just putting it in terms of numbers, it looks like products are sold to the retailers at 65%, 70% discounts to the brand. Retailers enjoy enormous margins on that business. Obviously on the Rx side, the distribution channel doesn't enjoy anything close to that.

And I guess the observation would be, given some of the challenges that you're facing, isn't it time to rethink that fundamental value proposition? Seems like a lot of money's being left on the table. Thanks.

That was a very philosophical question, Elliott.

Let me step back and try to really just talk about what I think is really the fundamental vision we have for the business, and it starts with this concept of where do we want to focus: it's quality, affordable healthcare. That's the area that we think that we can really make a difference. Whether that is within our consumer healthcare business or within the Rx business, what we continue to try to strive to, is try to figure out how can we get one more product that adds value for our retailers. If we get that one more product goes on our truck from Perrigo, going to one of the large retailers, we think that's important to them, and important, obviously, and good for Perrigo shareholders.

I can't disagree with your basic premise, in terms of just looking at the operating margins of the business. There are differences, no question about it. But at the same point, we do have a very significant market share in our consumer healthcare business. We do think that's a long-term very significant opportunity for us to continue to expand the product offering, especially as what we think about the newer products that we get in consumer healthcare tend to have better margins than our existing business. So we're always trying to add those next new product categories.

That's why our comment today about having new products is so important for our future. Because within those new products, the actual new products aren't that different from what we have in the Rx or consumer healthcare. They tend to be close to each other, but I don't discount your commentary about there are just some differences in operating leverage.

It deals somewhat with competition, it deals somewhat with how we approach our retailers. That's going to happen. It's really us trying to drive our overall operating margin for our business, which -- I don't want to be repetitive, but when I started the business it was in the single digits, and delighted to say, we had the latest quarter was in that 28% range. So we've made great progress.

Your next question comes from the line of Linda Bolton Weiser with B. Riley.

In the nutritionals category, you explained how you expect to grow through adult nutrition and VMS. But does that imply that you expect infant formula sales to be down? And if you could just elaborate on that business, and how you're feeling about it. I wonder, Joe, if maybe that's one acquisition you regret.

Secondly, on the smoking cessation branded competitor that has gone out of the market temporarily, can you describe more specifics about that? And how long you expect them to be out of the market, and what you're including in your guidance for that going forward in FY15? I guess those are my questions. Thanks.

Sure. So you had a couple parts to this question.

On the nutritional business, as we stated, we think that, that's actually going to be a very good growth opportunity, from 7% to 11% growth for the business. Infant formula is going to be up significantly. We do think that business is going to be up more than the respective average of the combined business of nutritional. But a large part of that is both here in the US, but also some of the things that we're going to be doing internationally with infant formula. The other area of importance for us is what we're looking at for adult nutrition. As you stated, that is a good part for us, that as we launch these new products, that's an area very exciting.

Relative to your statement, do I regret the acquisition of our infant formula business? The answer is absolutely no. I think it's a great business. There's only four manufacturers in the United States that can make infant formula. The other three are the branded companies, and then there's Perrigo. Any time I can find myself in that kind of position over the long term, with what I believe are significant barriers to entry for additional players, I believe that offers tremendous long-term growth opportunities.

Have we had some challenges bringing out the plastic container and other things? Yes, we have. That's things that we've worked on. We've worked hard. We continue to see great growth opportunities.

On the smoking cessation portion of your question, Linda -- really is only one major manufacturer of branded product out there that's run into some difficulties, specifically in some of the lozenge products. I probably don't want to make any specific comments about how long I expect them to be out, but we have found some opportunities the lozenge category as retailers come to us for additional products for their shelves.

Linda, it's Judy.

I just want to apologize if there was any confusion. I just highlighted a couple things that were new to point to, into the FY15 year, as opposed to implying that, because I didn't comment on infant formula, that in some way it was a negative.

Okay. Thanks a lot.

Your next question comes from the line of Randall Stanicky with RBC Capital.

Judy, just a question for you on the consumer business.

If we're thinking about some of the swing factors -- we look at seasonality, at maybe about 200 basis points -- should we think about the offset there being the contract manufacturing customer? I think it has one more quarter to go, J&J and then Mucinex offsetting each other, is that the right way? Any other swing factors that I may be missing?

You hit the nail on the head. I have my answer all set. You basically answered it yourself, so that you are spot on.

In terms of there's the seasonality factor that I mentioned to think about over the year, but if you're talking about the full year over year, you've hit the critical points in terms of the headwinds; and then you've got the good guys, obviously, with new product launches coming on in the year, including with animal health.

And 200 basis points -- is that the right way to think about the seasonality aspect of it?

You talk about in the quarter-over-quarter? Or the impact -- ?

Year over year -- cough, cold, flea and tick, and allergy -- if we think about a normal year next year versus, I think we had a light seasonality year in all three of them this year.

So for the entire segment, do those things have about a 200 basis point drag on growth, is the question?

Correct.

Probably a little bit lower, somewhere between 1 and 2, I guess. I'm ballparking it here. I haven't done that exact science, trying to drive through the season, because, again, the seasonal impact is trying to extract how much is season versus how much was volume-driven because of the return of the national brand as well.

Got it.

Directionally, you're probably fairly accurate.

And you said Mucinex is not in, but Nasacort is risk-adjusted. Was that right?

I said Mucinex and the family thereof are out.

But I did say that we had nasal corticosteroid sprays in the number. We have risk-adjusted them, but we do have an opportunity for those products.

Got it. That would be upside then. Okay. Great. Thanks, Joe.

Your next question comes from the line of David Steinberg with Jefferies.

I had a question on your Rx pharma business. You've had very healthy growth over the past couple years; I think around 25% this past fiscal year. But in your guidance, you are looking for 5% to 9%, which is a pretty sharp deceleration. Just curious what might be going on there. Are there pricing dynamics? Is more competition expected? Anything else going on, why you'd forecast a substantially lower growth rate going forward? Thanks.

I think, David, you're right. Actually, the growth rate for the full year was actually a little higher than that: 31%. So we did have a very strong year. Having said that, we're excited about the future. We think we've got some great new products. One of the questions, really -- there's some competitive challenges that we expect for some of the new products. If that does not manifest itself, and we find ourselves without some of those competitive challenges, there may be some upside in the growth. But much of what we're doing in the Rx business, in terms of having an upside, would be really manifest itself in the new product category, depending on what happens in new products.

Don't forget, David, that this year, we had an acquisition. So you have the impact of the Fera acquisition in FY14, that contributed significantly. We talked throughout the year about how much that contribution drove top line and operating income dollars -- adjusted operating income dollars. So the organic business, if you will, continues to grow well, and then those acquisitions get calendared in, because the Fera acquisition was effective essentially July 1 of last year, so it's fully calendared in at this stage.

Okay. Thanks.

Your next question comes from the line of Marc Goodman with UBS.

I was hoping you could give us more color on the animal health -- what happened in the quarter, and how you're thinking about this growth in the future? Joe, this has been one of these areas you talk about as a big opportunity. So how is that changing, and what are you looking for? Thanks.

Sure. Well, animal health did have a challenge in the quarter, as Judy said and I said. One of the issues was the later flea and tick season, or a shorter flea and tick season, during the first couple months, because the weather was colder. Really didn't see a start of the flea and tick season, for instance, in the Southeast until the March/April time frame, versus an earlier time frame. So it was a delayed start to the season, to be clear.

As we think, though, about the future of what we're doing with flea and tick, we do think there's some significant upside as we launch some new products into the category. That was really one of the commentaries we talked about, in terms of the growth opportunity with new products in the animal health, and specifically in the flea and tick area, as we bring out some additional line extensions. That continues to make it very promising for us.

I think longer term, the issue simply for us is that we've got some good new products that we expect to launch, but we do think that this category of animal health will be a category that will be even greater opportunities, as the entire animal health business looks to a discontinuity in how the current prescribing/dispensing functions occur in the area, versus what's happening in, let's call it, human health. We think some of that discontinuity will change over the next five years.

I don't want to get into the long term of that. But that's really why we're excited about it, why we think it's important, and why we think the retailers -- the Walmarts, the Walgreens, the CVS, the Targets, all the large club stores -- are all part of, and have a significant interest in getting more involved in animal health. And we want to make sure that we offer them the products to help them be more involved for the future opportunities there.

And Joe, just quickly on Nasacort -- so you've risk-adjusted it in the numbers. Can you give us a sense of, has anything changed in the of past two or three months?

Well, just let me state, we do not have a final agreement with our partner, but we continue to work very closely with our partner. We believe it's in the best interest of Perrigo, and the best interest of our partner to come to a resolution to launch a store brand private label of Nasacort into the marketplace.

The only thing I would say that has changed is that Sanofi has done very well with the product, relative to its launch of the branded Nasacort product. So that's good news. Because once we do get to the marketplace, we think obviously there's going to be a very significant store brand private label opportunity for our product to get to the marketplace. So we are making some progress, but as I sit here today, we do not have a signed agreement at this time.

Your next question comes from the line of Sumant Kulkarni with Bank of America-Merrill Lynch.

Thanks for taking the question.

Could you talk about your outlook for the segment gross margins on an adjusted basis? And could you provide us any sensitivities on tax rate, in case there are any measures implemented by US lawmakers that may affect already tax-inverted entities?

Sumant, maybe I'll just grab your first question. We, as you can see on, I believe it's page 13 of the materials, are no longer providing gross margin guidance. We're trying to streamline a little bit. So we've given you operating margin, a targeted adjusted operating margin by segment, and for the Company. We're no longer going to be commenting on gross margins specifically. Apologies.

The second part was really concerning the tax and some of the questions around inversions, I guess, Sumant? Is that what you're --?

Yes, any sensitivities on your tax rate, in case there are measures implemented here by lawmakers that could affect already inverted entities like yourself?

I'll just offer a couple facts, and maybe just leave it at that. Number one, our transaction has been completed, as evidenced by, we're here in Dublin today, talking to you. I think most of the focus right now is deterring future inversions and pending transactions.

Specific to our transaction, we worked with a lot of the advisors, a lot of time, resources, dollars allocated towards making sure that our transaction met all the laws and requirements that are out there, to be sure. I guess, relative to any changes -- I really don't want to speculate on anything specifically relative to potential changes -- but maybe, Judy, you want to add some additional color.

Honestly, there have been so many things that have been flowing around the media, so many proposals, so many ideas being generated, that frankly, it would be imprudent to make any comment on potential impact to rate, not knowing what the change could be, if at all, that would be implemented. That being said, we've always been keen on comprehensive tax reform, just in terms of supporting the global competitiveness of the United States, and driving, obviously, all multinational businesses to a better result, so all boats float up, right?

So at that point, you think you're not going to make a comment on what happens to our effective tax rate, with a variety of moving parts. But as Joe just mentioned, our transaction is closed; and we are in, we believe, a solid position going forward, and we'll just continue to monitor very closely what if any changes ever come through.

Thanks.

Your next question comes from the line of Chris Schott with JPMorgan.

Primary question here was on the Rx market, and some of the price assumptions you're making for your base businesses in 2015? I guess we've seen some positive price trends in select product offerings across the space. Can you just talk a little about, do you see more opportunity for price? And just also give us a flavor of what's in that guidance?

And if I could just have a second quick follow-up, just going back to the last question. I know there's been a lot of attention, for whatever reason, paid to specifically interest rate deductibility and earnings stripping. Is that something that would affect Perrigo, if there was a change to how that's treated? Or just on that issue in particular, can you just give us a little bit more color? Thanks very much.

I'll take the first part of the question here on the Rx market. I think probably the best way to answer this question is, do I think there are some opportunities on pricing in the Rx category? The answer is yes. The overall comment I would make that is our strategy on pricing hasn't really changed in the past six, seven years that I've been at Perrigo. It is to try to keep our pricing flat to up slightly, across our total book of business. In other words, across all of our portfolios, keep pricing flat to up slightly. Our logic being that in any given year, any given quarter, we may raise prices on product A, but we may take a concession on product B and C, but try to keep that pricing flat to up slightly.

If we do that, and we're successful with that, which we have been, then it allows us to then layer on new product one, new product two, new product three, which is why, in our minds, we're really excited about this year because of the magnitude of the new products that we have to bring to the marketplace. So I think in general, there are some opportunities, but we're seeking to keep that pricing flat to up slightly across the total book of business that we have, all of our portfolio.

Judy, you want to take the other part of the question?

Sure. So it's another case of negotiating against yourself, right? There have been, we understand, some things that have been floating around in some drafts of possible legislation, talking about limiting interest deductions, specifically on some intercompany debt. Obviously, any discussion around intercompany debt and deductibility thereof is going to have an impact to, really, every multinational that has cash and capital movement between jurisdictions. So it's less about specifically companies that have redomiciled, but really about how you view the entire international network for multinational companies.

Would it affect us? To some extent it's hard to know at what point that might change, and what in the meantime we have done proactively through organic growth and inorganic growth to change our international footprint. We can move our international footprint and have a better jurisdictional mix, as we continue to grow ex-US as well.

We keep growing in the US; that's good. We keep investing in the US, and paying US taxes; great. And to the extent that there is some comprehensive tax reform; super. Yes, there are some discussions out there, but again, we're not going to negotiate against ourselves. We're going to wait to see what the proposals are, and obviously act accordingly.

Thank you.

Next question comes from the line of Annabel Samimy with Stifel.

I wanted to just go back to the generics growth rate. I know year over year, obviously, the growth rate has come down, but it's also lower than your 10% to 20% three-year CAGR -- historical three year CAGR. So maybe you can help us with the granularity on some of the competitive business that's coming in, because it looks like you've got a lot of products coming out with 31 ANDAs and about $1.2 billion in new products expected for this year. Maybe some help there? Thank you.

Maybe just a comment. I'll make a comment about a specific part of your question then I'll get to just more of a general comment.

I'd just remind you when we give a three-year CAGR, we do attempt to look at a compound annual growth rate over years, over three years. If you add the 30% plus this current rate, we'll still be well within the range of what we have said for our guidance. First comment.

On the question, though -- do I think, as we look at our portfolio, we have some significant new products that we are planning to launch. As I said, over 100 new products. What we are viewing that -- our competitive position and how many people launch products with us, or if we launch it alone, and what our relative timing is, could make a very big difference in that growth rate.

I think what was important for us is to make sure that we could put numbers out that we felt comfortable with, knowing that if we have good timing or better timing, or if we have a less competitive environment, there could be some upside. But as we looked at our guidance across all of our businesses, we wanted to be very cognizant of the fact that we're in a competitive situation with some products, and we want to make sure we know where the upside is for us, depending on when we launch these new products, and timing, and competitive landscape. That was really predominantly the reason we looked at what we did, relative to our Rx category. But really for that matter, across our total book of business.

Okay. Thank you.

Your next question comes from the line of Louise Chen with Guggenheim Securities.

So, first question I had was on the FY15 guidance, just a little more color? Wondering how we should think about upside; if you do launch Mucinex, sounds like you are still very committed to that product? And then, if there's any risk adjustment for Flonase at all? And then if you assume any sort of prolongation, I guess, of the smoking cessation opportunity. I know you won't talk about the exact timing, but just wondering what you think about it qualitatively in your guidance.

Second question I had was, just back to your thoughts on consolidation in the industry? And how Perrigo fits in there and what kind of companies you view as buyers and sellers of businesses in this kind of market? Thank you.

Well, quite a few comments there. Relative to Mucinex, are we absolutely trying very hard to get that product back to the market as soon as possible? The answer is absolutely yes. As I mentioned, I've got a team of individuals working on that on a weekly meeting, to ensure we get that product back to market as soon as possible. We do think there's a very specific pathway back, but I learned from hard lessons of just -- I'm not saying another specific date on that, until I know the product's on its way to our customers.

It's just, things are fluid. But are we committed? Is it one of our highest critical imperatives within our R&D organization? The answer is absolutely yes.

On the question on Flonase. Flonase is -- let me say it differently. Nasal corticosteroids are in our forecast. That is correct. What we've done, though, is risk-adjust them. We think we've got the Nasacort opportunity, the Flonase opportunity. What we're simply trying to say here is that we believe there is a nasal corticosteroid opportunity reflecting these two products. We want to make sure there's a risk adjustment to ensure that we don't get too far ahead of ourselves, relative to getting the product to the marketplace.

I personally think that this whole area of Rx OTC is a very important area for us, as evidenced by the fact, just in the last several months to year, we've seen the Flonase, the Nasacort go over the counter. We've seen the overactive bladder market with the first product, Oxytrol, go over the counter. We obviously saw the very successful Nexium product go over the counter. We think there's a lot of opportunities in these Rx to OTC switches, not just in the products I mentioned, but for the other members of the category that are in nasal corticosteroid sprays, overactive bladder, and proton pump inhibitors.

On the smoking cessation question, we don't have a good answer as to the exact time that, that competitor will be out of the market. So therefore, we're really going to limit it to just taking on -- we know what the opportunity is today. But I can't say whether that's a one-month opportunity, or another six months. So we've tried to be conservative in our guidance, as to what we expect, relative to when they will return to the market. I think I hit all the questions.

Oh, M&A. She had an M&A question. Sorry. Part four: M&A. Very robust. We're really active, looking at things. What I would simply say to that is, there's a lot of things, a lot of things on the table from a lot of companies who have placed themselves up for sale. We continue to be very active. We think there are some great opportunities to build on the platform that we already have, as I said, in either adjacent categories, geographic expansion, or the technology competencies that we're seeking to add to the business. We're going to continue to be very active there.

Operator, we have time for one more question, two more questions.

Your next question comes from the line of Tim Chiang with CRT Capital.

Joe, could you provide a little more color on AndroGel? I know there's two strengths. You've got -- what? The only AB-rated generic version of the 1%, and you're in litigation on the 1.6%. Is that something that you think you could be in on the market on both strengths next year?

Well, let me make comments on it, but I can't probably make any specific comments on timing. Number one: yes, I will say the team at Perrigo has done an absolutely great job -- research and development, the regulatory team -- to get the AndroGel 1% products -- generic equivalent to that product -- approved; and indeed to get the AB rating. So congratulations to the team that has accomplished that.

On the 1.62% -- that's a product that is in, we're still in litigation for that product. That's an area that's going to be a longer duration, in terms of trying to resolve that. But I really can't make any specific comments about timing for that product, at this point, as I sit here today.

Joe, maybe just one follow-up on Nasacort. I know it's a high-unit product. Are you already starting to build pre-launch quantities of that product?

I probably would say, number one, we have the capabilities and capacities to make this product, because we do make it for the prescription pharmaceutical market. So we do have the components, all the materials to make the product -- yes. And we have obviously the experience of being out in the marketplace for several years in the Rx category, with Nasacort. So we know how to make it. We've made a number -- significant number -- of batches over the last several years with the product, so we are well prepared to do that.

As to the specific comment, I have to go back to what I said previously: we do not have a final agreement with our partner. We are working on that with our partner. But I do believe it's in the best interests of our partner and Perrigo to get a store brand private label product to the market as soon as possible, and we will continue to move along that pathway.

Thanks, Joe.

Your final question comes from the line of John Andersen with William Blair.

Just one clarification: on the CHC guidance, are you assuming that store brand share is higher in aggregate across the portfolio in FY15? And I think you mentioned, you are expecting Perrigo's share of store brand to be higher. Just wondering if that second piece is a continuation of a recent trend? Or if there's something new that's happening in the year ahead? Thanks.

I'll just repeat a couple other comments that I had in the prepared remarks, which is: we assume that our share of store brands, if you take -- remember, its a big slice of the pie -- the share that is store brands we think will continue to grow within that slice. We said that we think that store brands will continue to grow, potentially, except for the markets that are going to be impacted by the return of the national brand to market.

So what does that mean? Think analgesics will be a challenging category, as the national brand returns to market, in terms of overall share mix. But we will, as a Company, continue to grow. And then in the other categories, we believe that we will continue to grow share overall in store brands. So it's hard to view it all holistically, because of the impact and the mix of the different categories, but in general, store brand share continues to grow.

Thanks, Judy.

Operator, that concludes our call for today. Thank you, everyone, for your interest in Perrigo. Have a great day.

This concludes today's conference call. You may now disconnect.