Perrigo Company PLC (PRGO) 2016 Q4 法說會逐字稿

Good afternoon, my name is Fredrica, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2016 year-end conference call.

(Operator Instructions)

Mr. Bradley Joseph, Vice President of Global Investor Relations. Sir, you may begin your conference.

Thank you very much. Good afternoon, and welcome to Perrigo's calendar year 2016 preliminary unaudited earnings conference call. I hope you all have had a chance to review the press releases we issued earlier this afternoon. Copies of the releases are available on our website, as is the slide presentation for this call.

Leading today's call are John Hendrickson, Perrigo's Chief Executive Officer; and Ron Winowiecki, Perrigo's acting Chief Financial Officer. I'd like to remind everyone that during this call participants will make 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 afternoon.

In addition, in the appendix for today's presentation, we have provided reconciliations for all non-GAAP financial measures presented. Please note that today we will be discussing certain preliminary unaudited calendar year 2016 financial results and initial calendar year 2017 guidance. However, we cannot assure you that our audited 2016 results or initial 2017 guidance will not be materially different. Now I'd like to turn the call over to John Hendrickson.

Thank you, Brad, and welcome, everyone, to Perrigo's calendar year 2016 preliminary earnings call. Before discussing our performance, I wanted to comment on the internal transitions we announced in our press releases earlier today. Effective immediately, Ron Winowiecki, Senior Vice President of Business Finance, will assume the role of acting Chief Financial Officer, following the departure of Judy Brown, Executive Vice President of Business Operations and Chief Financial Officer.

Judy is leaving Perrigo to take a position with another company in the pharmaceutical industry beginning on April 1, 2017. We thank her for her contributions and wish her all the best in her future endeavors. As our acting CFO, Ron brings almost three decades of financial and accounting experience to this position. He has the industry knowledge and technical expertise to successfully lead our finance team.

I worked closely with Ron during much of his tenure at Perrigo and I can attest to his leadership skills, financial expertise, and strategic acumen. I believe that he is the right person to take on his role as we conduct a thorough search for a permanent CFO, which will include Ron as a key candidate. I have full confidence in Ron and look forward to continuing to work with him as our CFO.

As you have likely seen in our press release earlier today, we filed a Form 10b-25 notification of late filing with the SEC regarding our Annual Report on Form 10-K for the period ended December 31, 2016 (sic - see press release, "Form 12b-25"). We currently expect to file our Form 10-K on or before March 16, 2017. Ron will provide you more detail regarding this matter shortly, but I would like to comment up front that while this delay is unfortunate, we remain committed to providing timely, accurate, and transparent communication to all of our stakeholders.

Now I want to talk about our business. I will begin by providing an update on the progress we have made against our strategic and operational action plan that I laid out in my initial 30 days. Next I will provide perspective on our preliminary calendar year 2016 results, as well as my top priorities for 2017. Ron will then provide the detail regarding our delayed 10-K filing, the preliminary calendar year financial results, and provide our initial 2017 guidance. I will then conclude with final comments before taking your questions.

Turning to slide 6. You can see that we continue to make progress on our action plan to create value which is underpinned by our strategic portfolio review. I have a number of updates that I would like to share with you today.

First, corporate governance continues to be a priority for the Perrigo Board of Directors. On February 7, we announced the appointment of three highly qualified and experienced professionals to the Board. I will discuss these individuals in more detail on the next slide as we look forward to leveraging their industry expertise.

Second, as you likely saw in the separate press release we issued this afternoon, Perrigo has announced an arrangement to sell the rights to the Tysabri royalty stream to an affiliate of Royalty Pharma which I will discuss in greater detail in a moment.

Further, after extensive review, Perrigo's Board of Directors has approved a review of strategic alternatives for our active pharmaceutical ingredient business based in Israel. We believe a potential divestiture of this business allows Perrigo to give greater focus to our consumer-facing OTC and Rx businesses.

Third, we have previously stated that we are conducting a review to optimize our cost structure in order to better align expenses with our current and future market dynamics. Today we are announcing a restructuring program that is expected to yield greater than $130 million in savings per annum by mid-2018. This is in addition to the strong contribution that our supply chain organization continues to generate for both our North America and International segments. Again, I will provide details in just a few minutes.

Fourth, our Consumer Healthcare International profitability improvement program, which I will discuss in a moment, includes three components: exiting unprofitable businesses, structural enhancements, and launching new products, all of which remain core to our value proposition. And lastly, we continue to make progress on several other initiatives including the enhanced review of our Rx business.

Turning to slide 7, Perrigo has recently added five new highly qualified and experienced Directors to our Board, reinforcing our commitment to bringing fresh perspectives and new energy to the Board and leadership. I would like to formally welcome Jeff Smith, CEO and CIO of Starboard Value LP; Brad Alford, former Chairman and CEO of Nestle USA; and Jeff Kindler, the CEO of Centrexion and former Chairman and CEO of Pfizer, to our Board.

These appointments along with our recent additions of Geoff Parker and Ted Samuels will be beneficial to Perrigo and its shareholders as these individuals bring a strong mix of healthcare, consumer, and investor experience that align with Perrigo's unique business model. Further, we will continue to seek out fresh perspectives that will contribute to Perrigo's mission of providing quality affordable healthcare products and expect to appoint two additional Board members who will be recommended by Starboard, and ultimately approved the Board.

Within the past few weeks, our new Directors have been working diligently to master the Company's business objectives and current market dynamics. It's clear from our recent discussions that all of our Board members understand the strength of our unique business model including Perrigo's highly valuable portfolio of businesses. The Board continues its strategic portfolio review including an enhanced review of the Rx business. As always, I promise to keep you updated as we make progress.

Turning to slide 8. I'll now discuss the agreement to sell the Tysabri royalty stream to Royalty Pharma for up to $2.85 billion, which consists of $2.2 billion in cash and up to $650 million in royalties earned if global net sales of Tysabri meet specific thresholds in 2018 and 2020. This sale enables Perrigo to continue to focus on our other businesses while delevering the balance sheet, creating more flexibility for growth. We are committed to be a good steward of capital and maintain investment grade status as one of our long-term stated objectives.

Turning to slide 9. Quality continues to be the cornerstone of our organization, and our customers rely on Perrigo to manufacture safe and effective products that provide real value to consumers. We remain focused on maintaining our high standard amid increasing volume demands for our products.

At this time, while I believe Perrigo has maintained a lean cost base, there are always ways to be more efficient. In order to help offset significant industry price challenges, we have initiated a cost optimization strategy across the Company. The core thesis of this initiative is to ensure that the needs of the individual business units are balanced against the benefits of scale, empowering our businesses unit leaders, and better positioning us to deliver on our mission.

As a result, it became clear to us that there were more opportunities to streamline and focus processes, people, and organizational priorities on business critical activities. Specifically, our global cost optimization program includes the following. One, manufacturing cost infrastructure improvements; two, integrating corporate services into business unit functions; and three, improving our go-to-market sales strategy in our Rx and Consumer Healthcare International segments.

The total impact of these global changes, some of which have already occurred, is expected to generate an annual savings of more than $130 million by mid-2018. This will impact approximately 750 employees globally or 14% of our non-production workforce. This is on top of previously announced initiatives which my team continues to execute against. These decisive actions, while difficult decisions for our Board and management, are critical to our ability to drive our business forward.

Turning to slide 10. We are making significant progress in our CHC International business, and I believe we are on a path to capture substantial value by growing our OTC portfolio while enhancing margins over time. With these goals in mind, I would like to highlight some important developments.

First, as we continue to enhance leadership across this business, I'm excited to announce the appointment of Svend Andersen to the position of Executive Vice President and President, Consumer Healthcare International to enhance this business. Over the last 10 years, Svend has been working with consumer and pharma businesses running their European divisions. He has done this for LEO-Pharma, Hospira and Actavis.

As we continue to build and innovate our branded Consumer Healthcare OTC portfolio, Svend will play a critical role, along with our strong international leadership team in driving profitability across Europe. I am confident that he has the skills and expertise to assist in our endeavors and look forward to working closely with Svend to grow this business during the next phase of our transformation.

The Executive Committee and I appreciate Sharon Kochan providing leadership to the branded healthcare team during a critical period. His efforts to enhance the segment's leadership team, instill process discipline, and drive execution have prepared the team to thrive under a new leader such as Svend, who has deep experience in growing branded products and driving a pan-European platform. As Svend transitions into his role, Sharon will continue to be a key executive for our Company and businesses in Australia and Israel.

Second, during the fourth quarter of 2016, we announced a restructuring program in Belgium. Today we are announcing that we have proactively cancelled additional unprofitable distribution contracts in the CHC International segment in order to focus exclusively on the development, marketing, and sales of our own brand OTC product portfolio. The exit of these unprofitable distribution contracts in the segment is now expected to have a year-over-year negative impact to our net sales line of approximately $220 million in calendar year 2017 with no impact on profits.

Third, in addition to these organizational changes, we continue to optimize our supply chain and infrastructure. The team is making great progress on in-sourcing and optimization of our overall supply chain. And, fourth, the new head of our branded innovation and his team are hard at work driving the new product development process in this business. We are focused on expanding our product offerings, launching new line extensions under our well-known brand names, and leveraging our products within our OTC categories.

We believe this strategy will further enhance our brand equity and customer loyalty. Furthermore, this long-term strategy is supported by a substantial increase in R&D for the CHC International segment in 2017 versus 2016. Now I'd like to discuss our preliminary 2016 highlights in more detail on slide 11. 2016 was a transitional year for the organization, our employees, and our shareholders.

Before I move on, I would like to thank Perrigo's thousands of employees around the world who worked diligently to ensure our strong fourth-quarter finish. Today we announced preliminary unaudited calendar year 2016 record net sales of $5.5 billion and more than $1 billion in expected operating cash flow. Within CHC Americas, we achieved record performance in the infant nutrition category, which we expect to be a key long-term driver, in addition to solid performance in the smoking cessation category.

We launched a number of important new products such as store brand versions of Flonase, and certain products within the Mucinex family. We continued to deliver strong operating margins in this segment, enhanced by strong supply chain performance. Within Rx, while pricing erosion for the year was greater than expected, it was in line with our updated forecasts in the second half of the year. We continue to manage this business for long-term profitability with strong R&D investments and our recent announced partnership for our branded women's health business.

I now want to talk about my perspectives on 2017. Our primary objective as an organization in 2017 is to continue to simplify, focus, and execute on the fundamentals of our business. First, focus on operational execution including investing and innovating for growth. Second, align our businesses and structures to better meet the demand of our customers, and, third, complete our strategic portfolio review to ensure that we have the right model in place to drive both top- and bottom-line growth.

Balanced against these priorities are two main headwinds we anticipate in 2017 for our Rx segment. First, calendar 2016 performance benefited from $80 million in operating income from Entocort. This one-time impact is not expected to repeat at this level in 2017. When this asset was purchased in December of 2015, the Company did not anticipate all of the increased market competition the product now faces, resulting in significantly less operating income contribution from Entocort going forward.

Second, in addition to the impact from Entocort, we expect 2017 price erosion in the rest of our Rx segment to be approximately 9% to 11%. We have a strong private label business that leads the industry and we expect to continue to develop this market. As you can see on this slide, over the last 13 weeks market dynamics are favorable and retail brands as a whole are continuing to grow.

Looking at the category components of the data, you can see that store brand infant formula category continues to outpace national brand growth. We are a leading store brand player and on the heals of a record 2016, we expect this category to drive long-term growth.

This year's cough/cold season was more severe than last year's, particularly in January, although the season has slowed recently. In addition, store brand growth in this category outpaced national brand growth. We have long touted Perrigo's unique business model and the data exemplifies the fact that consumers and the healthcare system in general continue to search for more affordable alternatives for their healthcare needs.

Moving to slide 14. We have outlined a framework to continue to drive growth in CHC Americas, which we expect to grow at or above current market OTC growth rates. To be more specific, we believe this business can durably grow 2% to 4% organically over the long term. Despite pricing headwinds, OTC and store brand growth remains strong. Consumer dynamics are favorable and national brands are driving new product innovation. All of these factors give us confidence in this framework.

Moving on to slide 15. The Rx segment continues to be one of the premier topical businesses in the industry. We currently have 24 ANDAs pending FDA approval, 6 of which are first-to-file, representing approximately $3.1 billion in branded sales. Further, we expect to launch more than five products this year with branded sales of greater than $800 million.

Now I want to take a minute to discuss our expectations for ProAir. We are not including contributions from this product in our 2017 guidance. We continue to respond to the FDA's questions on this product. Currently, we are working with our partner on a rigorous set of tests to ensure that our product performance matches that of the reference listed drug. We plan to be in a position to fully respond to the FDA's remaining questions in the second quarter of 2017, and we will work closely with the agency towards approving this first-in-class generic product.

With that, I'd like to turn it over to Ron. Ron, welcome to the call. Appreciate your support.

You bet, thanks, John. Good afternoon, everybody. I look forward to meeting you in the near future. I also look forward to continuing working with John and the rest of the Perrigo leadership team in the coming months as we continue to focus our previously stated action plans.

I'd also like to take a moment and thank Judy Brown for her support, guidance and leadership during our time together at Perrigo. As a friend and a colleague, I certainly wish Judy the best in her new position.

Moving now on to our results, I first want to discuss the notification we filed with the SEC to delay our 10-K filing. The scope of work that is still required to finalize Perrigo's financial statements includes the final impairment calculations related to the announced sale of Tysabri, the undeferred tax assets and other related effects at Omega Pharma NV.

Let me provide some detail. As you saw in our recent press release, the Perrigo business development team finalized an agreement to announce the sale of the Tysabri royalty today. The accounting team has taken this development and updated facts and circumstances that led to this announcement and is running a process to calculate the final impaired value of the milestones associated with the Tysabri asset.

While this may sound easy, the calculations are complicated and we need to have our calculations and procedures reviewed by our auditors. We have provided our current estimated calculations in the unaudited GAAP preliminary financial results reported today. In addition, certain deferred tax assets were identified that existed at the time of the acquisition of Omega. We are quantifying the results of these assets, which will be a non-cash reclassification between goodwill and deferred taxes. Completing our procedures also requires us to evaluate the related effects of this reclassification.

Further, in preparing the accounting treatment for today's announced sale of Tysabri, and in completing the 10-K disclosure language associated with the new revenue recognition standard, ASC606, which goes into effect in 2018. Late Wednesday, February 22, Ernst & Young, our independent auditors, notified us that they are evaluating the historical revenue recognition practices associated with Tysabri. So let's step back and provide some color on this disclosure.

For those of you who have followed the Company since 2013, you will recall that the Tysabri royalty stream was part of the Elan Pharmaceutical acquisition which closed on December 18, 2013. The business operations of Elan included many assets in addition to the Tysabri royalty stream, such as several equity joint ventures, a number of pipeline products, as well as R&D, regulatory affairs and administrative functions. The Tysabri royalty was recognized as revenue in Elan's financial statements filed with the SEC.

Under review of the accounting application at the time of the acquisition, Perrigo also independently concluded that the royalty streams from Biogen are to be recognized as revenue in the financial statements of Perrigo. This accounting treatment was reviewed with E&Y and agreed to under their audit opinions for FY14, FY15, and stub year 2015, as well, three Form 10-Ks with unqualified audit opinions.

In addition, as you know, we have reported the Tysabri royalty stream and related results as a separate segment in our financial statements. As the timing of this review is unfortunately overlapping our earnings release today, we felt it important to provide you with the status update, as well.

There is one critical point I have to underscore for everyone. The final determination, irrespective of how our independent auditors conclude, is expected to have no impact on the historical or future expected net cash flows generated by the Company. Cash is always still cash.

As John stated, we currently expect to file our Form 10-K on or before March 16, 2017, within the 15-calendar-day extension period. We will keep you updated in the event these expectations change. Now let's turn to slide 18. You can see the preliminary unaudited 2016 performance results we provided in our press release.

Net sales for the calendar year were $5.6 billion with adjusted net sales of $5.5 billion. As a result, the adjusted net sales exclude contributions from assets held for sale. Preliminary calendar year 2016 reporting operating loss was in a range of $4.65 billion to $4.68 billion, with an adjusted operating income of $1.42 billion to $1.44 billion.

I would like to discuss the two main fourth-quarter adjustments that impacted our calendar year reported operating income. First, we realized an intangible asset impairment of $2.6 billion and a goodwill impairment charge of approximately $201 million in the Specialty Sciences segment associated with the announced sale of Tysabri.

Second, we identified impairment indicators for the Entocort intangible asset, due to new entrants of new competition for this product, and thus reported an impairment charge of $336 million in the quarter. These non-cash effects combined with our other non-GAAP adjustments recorded in the fourth quarter and for the first nine months of the year resulted in a calendar year 2016 preliminary adjusted earnings per diluted share in the range of $7.10 to $7.25.

Now I'd like to turn to our 2017 guidance on slide 19. There are a number of key assumptions I would like to take a moment to highlight. Within the CHC Americas segment, we expect 2017 net sales of approximately $2.4 billion with an adjusted operating margin percentage in the low 20%s.

We assume a mid-year launch of the store brand version of Nexium and a number of smaller store brand OTC launches during the year. Also included in our guidance are the recent cough/cold season dynamics John mentioned, which saw an increase in instances of cough/cold versus last year, as well as the assumptions for average allergy and flee and tick seasons.

In the CHC International segment, or CHCI, we expect approximately $1.4 billion in 2017 net sales. Segment net sales are impacted by two fundamental shifts in 2017. First, top-line sales in the segment are unfavorably impacted by approximately $90 million, that's 9-0, $90 million due to the translation of foreign currencies.

Second, as John stated earlier, 2017 net sales will exclude $220 million due to the exit of certain distribution agreements in the segment. To help in your modeling, the quarterly net sales effects of excluding these distribution agreements is included in Table 1 of this presentation. I would also like to note that with announced cost savings and the removal of the profitless distribution businesses, we expect operating margin percentage in this segment in the low-teens.

And I would like to note that this includes increased investments in new products, supported by advertising and promotion spending, which is more heavily weighted toward the first half of 2017. Additionally, the timing of cost improvement programs will be phased in over the course of the year. We expect that these combined effects will generate approximately 60% of segment operating income results in the second half of the year.

Now let me take a minute to discuss the Rx net sales guidance of approximately $925 million in 2017. First, as previously discussed, we expect the negative year-over-year headwind to the top line of approximately $70 million related to the increased competition in the Entocort market. In addition, our 2017 modeling assumptions year-over-year price erosion on like-for-like products of approximately 9% to 11%.

Netted against these challenges is the positive contribution from our expected launch of more than five products with brand sales of greater than $800 million. Let me reiterate again John's earlier comment that ProAir is not included in our guidance, there's no contribution from this product in our model.

As you may recall at the JPMorgan Conference earlier this year, we announced a partnership for our branded women's health business, which significantly reduces fixed selling costs in the Rx segment. This action, combined with the market contribution from new product launches and the effect of our cost improvement program, enables us to maintain adjusted operating margins of approximately, approaching 40% in 2017 for this segment.

As a management team, we are committed to long-term growth of our generic prescription business as we continue to invest in R&D investments for new products that fit our growth strategy. Slide 20 aggregates the effects of my segment comments and illustrates the key year-over-year drivers. Let me first start with the headwinds we are facing.

First, Entocort alone is expected to have a $0.42 unfavorable impact to year-over-year adjusted EPS. Second, the impact of FX headwinds related to Brexit and a strong dollar, in addition to jurisdictional composition included in our tax expense, produced an additional headwind. On the operating flip side, we expect positive net sales and profit contributions from our CHC Americas and CHC International businesses, approximately $200 million from new product launches in 2017, and a favorable impact from our cost improvement program John outlined earlier.

These combined factors are expected to offset price erosion in 2017 and support our guidance range for adjusted EPS between $6.30 to $6.65 per diluted share. To be clear, without the pricing dynamics in the Rx business and the effect of Entocort, our consumer-facing business are forecast to achieve higher year-over-year profitability.

The guidance in our press release this afternoon includes Tysabri and our API business. Staying with the Company's historical practices, we do not change guidance until a transaction closes. I would like to provide some modeling information to help you understand the effect of the Tysabri sale on calendar 2017 guidance. As outlined in the release, we expect the sale to close in 20 days.

Assuming then that if Tysabri were to be excluded for the entire year, and that we are to complete our debt pay down strategy by mid-year, the expected impact would be to lower calendar 2017 adjusted earnings in the range of $2.12 to $2.18 per diluted share. Again, to avoid confusion, Tysabri is currently in our guidance. We will update you as the transaction closes and we complete our capital structure action plans.

Now turn to slide 21. I would like to provide a brief update on our balance sheet and share our priorities for 2017. As of December 31, 2016, total cash on the balance sheet was $622 million and total debt was approximately $5.8 billion. Expected cash from operating activities during calendar year 2016 is anticipated to be over $1 billion, exceeding our previously revised guidance.

On the right hand of the slide, you can see our cash flow and balance sheet priorities in 2017. First, we expect operating cash flow in 2017 of greater than $850 million, which includes the cash flow headwind impact of approximately $60 million of payments related to our cost reduction program and higher tax payments on a year-over-year basis. $850 million, this healthy cash flow generation will enable us to drive our capital allocation strategy. Our current operating plan is to use this residual cash flow to pay down debt maturities which are coming due in 2017.

When I was the Corporate Treasurer of Perrigo, I had the pleasure of launching our first investment-grade bond offering in 2013, and the philosophies and principles outlined at that time remain today. We remain committed to our investment-grade ratings, and upon the close of the Tysabri transaction, we expect to move forward with a debt pay down strategy consistent with our financial policies.

I should also like to mention we have good support from our Board for our investment-grade financial policy. I'd like to now turn the call back to John.

Thanks, Ron, I appreciate it. In closing, on slide 23, I would like to reiterate the strength of our unique business model, a pharmaceutical Company, coupled with a fast-moving consumer goods organization, layered on a world-class complex supply chain. We've made significant headway in defining a path to enhance value and strengthen our business going forward.

While 2016 was a year of transition, I anticipate 2017 will be a year of execution as we build upon this foundation and strive toward consolidated growth in 2018. We have the right team, and the action plans in place will enable us to capitalize on our business model and focus on Perrigo's strength in providing quality affordable healthcare products to consumers and patients around the globe. Thank you. Brad?

Thanks, John. As I stated at the outset of this call, we have covered certain preliminary unaudited calendar year 2016 financial results. Given that these are preliminary unaudited results, we ask you limit your questions today to 2017 financial guidance, leadership changes, and our business and strategies.

Specifically, we are not going to take questions regarding the 2016 preliminary unaudited financial results. Operator, we would now like to open the call up for questions, and I ask everyone please limit yourself to one question only. Thank you.

(Operator Instructions)

Your first question comes from the line of Marc Goodman from UBS.

Okay, one question, maybe you can focus on the US consumer business and talk about the pricing pressure that you were talking about that was 2% to 4%. What categories are you seeing that pricing pressure, and just give us a sense of what that pricing was in 2016? Thanks.

In the Consumer Healthcare business, Marc, we've always seen certain pricing pressures, launch new products, number of competitors, so I would say across the categories we compete in we have competitive pricing.

We've done a good job of having costs and cost savings align, driving those, whether it's cost of goods or operating strategies. So when we look at the growth of the business, we expect the 2% to 4% to be after pricing, or we still expect growth. After the pricing challenges, we expect to offset a number of those with our cost initiatives. I would say cough/cold, analgesics, some of those categories tend to be more hit by some of these pricing things as there are a lot of players within those categories.

Is it safe to say the cough/cold and analgesics, the pricing you're expecting to be a little worse in 2017 than 2016 or is it just a continuation of what we've seen?

I would say we continue to experience price challenges, that's not a new phenomenon, but we continue to always have pricing in the consumer space. So we expect it to continue in different segments that pricing we've seen. Again, given the growth and new products and everything, we expect to be able to overcome that pricing challenge.

But like in infant formula and smoking cessation are we seeing pricing pressure there, or is it really just in those other spaces you mentioned?

I would say we see it in all different segments, comes differently across the board, but it certainly hits us. There's not just price compression from competitors, but making sure we are maximizing our promotions in those kinds in the market too. Retailers want to drive these brands, and so we continue to help them try and drive profitability across the portfolio, which can impact some price concessions and things that we give to drive that business.

And I'm sorry just --

Thanks, Marc.

Your next question comes from the line of David Risinger.

Hi, David.

Hi, good evening. So my question relates to CHC Americas. Could you just tell us within your EPS guidance for 2017, are you forecasting CHC Americas operating income flat or down or rising in 2017? Thank you.

Hi, David this is Ron. Thanks for the question. In my prepared remarks, I commented on CHC Americas, we do expect top line growth in the segment as we talked about. We do expect operating margins in the low 20s.

Again, because we have not published 2016 information, it's difficult for me to give you a relative comparative year-over-year margin number, but, again, the modeling we're using for this segment in 2017 is in low 20% margins.

Your next question comes from the line of Gregg Gilbert.

Yes, thanks. John, can you comment on where the Rx review is, what you know, and what you don't know, when you might complete that? And then share your overall philosophy with us about you and the Board's willingness to take an offer versus the right offer? Thanks.

Yes, thanks, Gregg, appreciate the question. So first of all, the new Board assembled, good robust discussions on, I would say, all the business segments, understanding where they're at, profitability, the strategy with them. As you can imagine all of the Board getting engaged, giving the newness of many members, and so not trying to make any ultimate decisions but trying to understand how they all fit together and what they do. So they continued on a path.

We have not clearly set a ultimate date of decision must be made by X in looking at that. I will say the directive to me from the Board is keep driving this business. We like the profitability. The investments in R&D deliver good operating margins, keep driving it for long-term growth and profitability. So we are operating the business for the long term, not for just short-term profitability. So I like their direction and I think as a Board they will continue to evaluate it and see what makes sense.

And your next question comes from the line of Randall Stanicky from RBC Capital.

Great, thanks. I want to follow-up on the last question. John, can you talk about the hurdles, the specific hurdles in separating the Rx business out, both from a tax and cost perspective? And then the attached part of that question would be, would you consider alternative ways of divesting this business? If you could not find a buyer, would you look at spinning it out or other creative structures to pursue that breakup? Thanks.

Yes, you bet, Randall, thank you. So first of all, I have got to step back, and I've said this every time I know and everyone is probably getting tired of it, but this is a good business. It's a good return business, high margin.

Even with the pricing we're talking about, as Ron said, still at a 40% kind of margin level it is still a very good profitable business, good pipeline that we feel good about. So all of those dynamics, very favorable and I think the Board themselves were, liked what that looked like. When you think of all of the potential possibilities from running it, could keep it and drive the profitability and the fit there, to separating. We are certainly not locked into any one option as far as what to do and how to do it.

And, again, including keeping running it, keeping it integrated, keeping it as a core part of the business, and that's what we're looking at. There are, as we look at cost of separation, there are tax issues related to separation. There are operating issues related to separation that all come into play in that strategy. But I would say everyone's in a fact gathering, understanding mode at the Board level to look at all of the potential options.

And there's no timeline in terms of how long this review is going to take? I know there's new Board members who came on who I assume are going to take an active role in that process?

Yes, correct. I'd say all of the Board members are taking a very active role, again, in all of the segments, but certainly in this one. There's no timeline set that we've said we must have a decision by here or else. Again, the Board's directive to me is keep running this business to grow it and drive the profitability of it and that's where we are taking it right now.

Okay, thanks very much.

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

Thank you. I have to say I'm still very confused by this 2017 guidance related to Tysabri. So you're saying that when you close the Tysabri deal in 20 days we have to take out $2.12 to $2.18, so that really assumes no offset, so I guess a couple of questions. Number one, what are you going to do with that $2.2 billion in cash? Is that already incorporated in your debt pay down guidance for the year? And maybe if you could just be more specific, how much debt do you plan to pay down this year?

Yes, hi, Jami this is Ron. Thanks for the question. So, again, our earnings guidance is $6.30 to $6.65 for the year, so you made a comment that our Tysabri effect, the $2.12 per share or the $2.18 does not include an offset. That's actually not true. So, again, what you have to take a look at what is the Tysabri royalty stream, and, again, you have to work with your models and I would certainly --

Well, we have a number that's higher than the $2.12 to $2.18, so maybe that's part of it. How did you get to $2.12 to $2.18?

Again, let me just walk you through this. So you have to take the effect of Tysabri, and, again, we cannot provide our guidance for Tysabri, so you have to take your model and look what you have for the royalty stream. You have to take that on an after-effect basis, so this, as you know, is an Irish held asset, it's in an efficient tax jurisdiction.

And then you have to say, okay, let's step back, look at the debt pay down, again, we're collecting $2.2 million, and we have good support from our Board to continue our investment grade financial policy, so you can assume we're pointed at paying down debt. So you have to go through now, okay, here's the various range of debt, the Senior Notes, what is the average interest rate on those Senior Notes over the curve. We're going to be smart from a P&L from a future liquidity standpoint, and then you calculate that effect, after-tax because tax has a deductibility in various jurisdictions, and that results in the $2.12 and $2.18. So you probably have a higher number. One, I can't guess your model for Tysabri, number two, again, this is a mid-year debt pay down, so it's assuming mid-year. So you may have some other assumption for the debt pay down. I can't interpolate that.

You can't tell me how much debt you're going to pay down this year?

So for this item, again, you say pay down this year, so let's take that in two parts. One part is, I communicated with our operating cash flow. We do expect to pay down debt maturities this year.

Let's keep that in a bucket, set it aside, that's our guidance model. Now let's talk about the $2.12 and $2.18. We received $2.2 million of cash, again you can assume that that cash is focused on debt pay down.

Okay, so at the end of the year, how much cash will you have, at the end of 2017, after you've paid down debt how much cash will you have?

We have not provided guidance on cash on balance sheet, so I'm not going to provide that number right now, Jami, if that's fair.

I'm sorry, can I just ask one more question? Does your guidance include, oh, you did say, OTC Nexium, I think you said middle of the year? Is that right?

Correct.

Okay, all right, thank you.

Thank you.

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

Hi, thanks for taking my question. So just curious if your strategic review ever considered a divestiture of Omega, and why or why not? And then just any update on this Amazon opportunity, is it still something you're interested to pursue? Thanks.

Yes, thanks, Louise. Yes, I would say the strategic review included everything. The good thing, again, is we kind of looked at every business and say why do we love it, what don't we like about it, what things we change, where are we not executing as well as we can? So it was a broad, and is a broad strategic review.

We certainly looked at the performance we've had in the Consumer Healthcare International, but when we looked at the market dynamics, when we looked at the executional plans and what we felt we could drive we're continuing to try and drive that platform for growth, both top and bottom. And we believe that being in Europe with a consumer business that includes brands, value brands, store brands, as well as some specialty products is a great platform to have.

We've got to execute with it and deliver that value. So we continue to look at all of those segments, and not just pick on Rx, but continue to look at all and make sure they are a good fit for us. I'd like to go back to what Ron, I believe, said in his comments, which is when we look at next year we've got a lot of Rx headwinds, and certainly this Tysabri, moving on from it, but when you look at our consumer facing businesses, they have some good strength year-over-year.

The Amazon.

And Amazon, sorry about that. We continue to think Amazon is a good opportunity, certainly the products, especially as they get more and more efficient at realtime delivery. When you have a headache you want your product now, not necessarily tomorrow.

So where it gets much more efficient, I think it starts taking off. We are working with them, working with other players, certainly the retailers have a online aspect to most of their businesses, so we work with those in marketing and driving their online business, as well as Amazon, and we think going forward over the next two, three, four, five years that will continue to be a growth vehicle for us. Thank you.

Your next question comes from the line of David Maris with Wells Fargo Securities.

Hi. One question and one definition, so first on the question. When the teacher says a student is energetic, they usually mean that the student is kind of a troublemaker. So when you said that the Board meeting, the first meeting was, I forgot, invigorating or something --

Engaging.

Yes, engaging. So everyone knows that's code for people had differences and were debating it and there are newer members. Can you just describe where there's agreement and where there may be differences of opinion of the direction of the Company? And then, separately, just as a definition, you had mentioned that you're improving your go-to-market sales strategy. I just wanted to know what that means?

Sure. So first of all, I would not take anything I said with the Board in that way. We have had great Board interactions. The Board members have worked well with each other, trying to challenge management, think with each other, I would say very, again, when I say invigorating I mean very good breadth and depth of discussions.

The new Board members bring different angles at things, which has been very good for the whole Board. So I think that it's been a good interaction, clearly with Geoff Parker and Ted who joined a little bit earlier, but then with Jeff and Jeff Kindler, as well as Brad, just bring good angles to helping us think about things, helping us think about strategies. So it's been a very good productive engagement with the new Board members so far and their cooperation with the existing Board members. So very positive from my standpoint. Can't speak highly enough about those interactions. On the second part of the question --

Go-to-market sales strategy.

Was go-to-market sales strategy, and I believe we are talking about the Rx side of the business as one of those. We basically had a branded portfolio of products that we partner with someone, so we had a whole detailed salesforce out driving those brands. They were good brands, we owned them. We like the products, but we did not have the scale, nor did we want to invest in a number of new branded products in the Rx space.

We partnered with another company to be our go-to-market arm where we still own the products, manufacture them, actually take the orders, et cetera. But they do the detailing and selling, and it was a good way to still leverage the product portfolio, and yet not have the broader complexities, expenses, et cetera, with a salesforce. They had a salesforce that needed more products in their basket, and so it was a very good collaboration to drive, it's showing good results so far.

Thank you very much.

You're welcome.

Thanks.

Your next question comes from the line of Dewey Steadman from Canaccord.

Hi, guys, thanks for taking the question. Just a really quick one on CHCI. Following the strategy changes and sort of the return of revenues there and new good leadership for that division, are there opportunities to synergize between CHCA and CHCI going forward? Thanks.

Yes, great question. So we do have a fair amount of synergies on the, I'll call it the cost of goods and operating side, so I'll start there. We put a team in place early on and said we've got to figure out what we can do. They had a lot of outsourced products, a number of plants, as we do, and our team there, we put people on the ground, headed under our Ron Janish, with our whole Irish operating and supply team, and they have been delivering great synergies between the businesses, doing insourcing across our plants, making sure we deliver high value across the products.

That part has been going well and we continue to try and expand what we can do there to help their cost of goods, as well as their operating costs. The other side is we have a platform in Ireland and we continue to combine our Irish platform there with the platform of the operations in Nazareth, Belgium and continue to get benefits out of doing that. On the sales side, there are some synergies, not as much or as quick as we had originally expected.

We had originally expected to be able to launch more products. We are launching some products that tie into their value chain there. We are launching some products here eventually that we think we can launch as good brands or control brands. But it's not as much early on as we expected. We continue to want to drive more value there.

One of our good wins has been we had developed in the states, with our partner in Denmark, a nicotine gum that was sort of best-in-class and with the purchase of the nicotine products that we did in our international CHC business we were able to bring that innovation to them, and they actually launched that product here over the last month and a half or two months, and are seeing good results. So we feel that franchise as smoking cessation, and those kind of things continue to grow in Europe that can be a good franchise for us there. And as a global player, we have a good supply chain to back that up. So that's a good example where working together has proven to be a beneficial thing.

Thanks.

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

Hi, great, thanks very much. Could I just come back quickly to the US CHC business? I think you used to talk about that as a mid- to high-single-digit growth business, I know it's a different environment now. But when we compare the 2% to 4% versus that prior guidance, is this all price or is there an assumption you're making about new launches in there as well that might have changed? I'd just like a little bit more color on bridging between the old and the new?

And then just a very quick follow-up on this issue of debt pay down from here. Just might be helpful, is there a target leverage ratio you need to get to post the Tysabri divestiture in order to keep investment grade rating? I think this might help us a little bit better understand capital allocation priorities if we just knew where do you need to go on leverage, at least in the near term? Thanks so much.

Thank you. So I'm going to take the first part and then, Ron, I think will toss the second part over to you, if that's fair?

Yes.

So the first part on the business side, I would say when we look at the markets today, the switch products, the categories, all of that, we still are very optimistic on our CHC business and feel good about that. But when we look at all of the components that we tried to lay out with store brand growing, favorable consumer dynamics, new products, you could see pretty strong volume growth across the segment in that close to 5% to 6%, so good volume growth. The plants are running well and those kind of things.

We do expect, and we put in here pricing headwinds, and so we build those into our model, we expect pricing and make sure that we have the cost and other initiatives to do that for net growth of 2% to 4%. So rather than bridging back, we're certainly switching and that was also in those models in the past and big switches, as well as just general growth dynamics depending on the time period that we were in. But as we look forward for the next few years, we're looking to be able to grow this, which I think in general, will be at or above the pace of the normal US consumer business within the pharmaceutical and healthcare arena that we operate.

Yes, I'll take the question on -- I think you phrased it the target kind of leverage metric. So listen, if you've been tracking the Company, again, we have not provided full 2016 information, but if you look at the LTM metrics as of 9/30 you can see the Company is running somewhere, let's call it in the high three to four range relative debt to EBITDA.

So then you step back and say what is the Company's financial policies, what's our priorities, we talked about those. So, again, you look at next year, we're looking at around $560 million, I think the exact number is $557 million in maturities. Again, we've talked about how we are using operating cash flow as our intent to pay that debt down. So to your question, you can take that off the balance sheet.

We just -- we're looking to close Tysabri by $2.2 billion in 20 days, as we mentioned on our remarks. Now, again, it's a tax efficient structure, but you always can still look at the tax effect of the sale. You got to look at what is the cost to pay debt down. You can run the models based on what the debt is trading on today, do your own estimates, plus assume, for sake of discussion, they are somewhere in the $2 billion to $2.1 billion there, so just to give you a kind of range. So what does that mean?

Again, I don't want to say every nickel and dime goes to debt pay down, but let's say we're continuing to commit to investment grade. We're continuing to work with the rating agencies on our credit profile to ensure we continue marching down that path. If you take those numbers, you're talking in the range of $2.6 billion to $2.7 billion of debt that would be paid down over the course of the year. You can run the leverage metrics. I don't think I need to do the math for you, so you can take the guidance, run off an EBITDA model and then start saying what does that metric come out to.

Thank you.

Thanks, Chris.

Your next question comes from the line of Douglas Taso with Barclays.

Hi, good morning, thanks, or good afternoon, thanks for taking the question. Certainly, feels like morning maybe, but just maybe going back to Chris' questions. I guess I think in that sort of mega trends framework that Joe used to put out, he highlights like population demographics, as well as the store brand penetration growth of 2% to 3%, which now seems to be 1%.

Again, just sort of curious in terms of expectations in terms of store brand conversion what has sort of lead to that change? Is it sort of new product introduction or is it just simply a reflection of where we are in the cycle in terms of the economy, and that perhaps as consumers are feeling better they are perhaps looking forward to, or more bias towards purchasing national brands?

Yes, I think, again, I'm trying to not down play 2% to 4%. I realize where you're going on the 5% to 10%, but 2% to 4% means with all of that, volume growing 5% to 6%, store brands gaining, certainly volume share, profitability being offset some with a where does pricing go and what happens there, but still good volume growth, good share growth when you look overall at what we're doing.

There are consumer dynamics, we believe, continue to go that way. Those mega trends you talk about in my mind are still very much at work. We're all getting older, healthcare costs are doing nothing but go up no matter what we want to talk about. Having a value proposition for consumers when they go to get it is a great thing.

We believe all those work in our favor. At this point, when we look at all of those balanced together, and say organically, so, again, organically with the portfolio, with the R & D that we're doing, what do we see. We believe it's in that realm. That does not mean that there aren't other inorganic opportunities there to provide additional growth. What we're talking about here is base organic growth with the portfolio in R&D across the segments that we're operating in.

Okay, and I guess, John, in particular I was focused on just why the OTC store brand growth seems to be a little bit slower than what you had spoken about in the past, or the Company had spoken about in the past?

Yes, so I think, without going back a couple years ago and saying here is what those dynamics were, I feel good in laying out here is the dynamics today and kind of what organic growth I see. And, again, there's still a fair amount of volume share. I just think all the dynamics of growth, products, switches, all of those things lead us as guidance which, again, I feel is a very strong, growing faster than segments, driving share, doing those things performance. If you can add on to that some inorganic pieces, that's a very good strong business.

Okay, great, thank you.

Thanks, John.

Last question, please?

Your final question comes from the line of Elliot Wilbur with Raymond James.

Thanks, good afternoon. Appreciate you squeezing me in. Just want to come back to the Tysabri announcement. Specifically, question for Ron, is there anything you can say about the additional sales levels that would trigger the incremental step-up in sales value there, in terms of what those levels are?

And then just follow-up to that, in thinking about, or trying to model the Company on a go-forward basis, new Company, obviously, without Tysabri is going to have a much higher effective tax rate, and looking at some of the metrics you provided today coming up with an adjusted effective tax rate, excluding the Tysabri royalty stream, somewhere of around 19% to 20%, and just kind of as a rough ballpark number, want to throw that out there and get some feedback on that? Thanks.

Sure, you bet. So first let's start with the effective tax rate. So, listen, you're in a stone's throw. I'm not going to say it's right or wrong, so I think you're within a window of acceptability relative to the tax rate. We aren't providing guidance on that today. We'll certainly update our models and give that more detail once we do close the transaction. So, again, within a stone's throw.

Listen, we've worked with our partner, we are not disclosing the terms and conditions and we are not obligated to until we close. We would like to withhold that comment until we get to that point. I think what you'll find is it's a natural curve relative to Tysabri sales. There's always a bid/ask spread, as you always know, relative to any street model, so I don't want to predispose one street number versus another.

Biogen doesn't provide guidance, so for me to go out there and start providing estimated revenues for the milestones right now, I don't think is appropriate. But, again, we've looked at those, we understand what the metrics are. We worked with our partner in what are appropriate milestones for those sales thresholds, and, again, once the agreements and so forth become public, we'll provide more discussion at that point.

And I know you're referencing this, but it is $250 million in 2018 and $400 million in 2020. So as we discussed, when they're due it's just the terms we will get disclosed once closed.

Thanks, Elliot.

Thank you, everyone. I really appreciate your time and consideration. I appreciate it. Thank you.

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