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Perrigo Company (NYSE:PRGO)

Q4 2008 Earnings Call

August 18, 2008 10:00 am ET

Executives

Arthur Shannon – VP IR

Joseph Papa – President & CEO

Judy Brown – EVP & CFO

Jeff Needham – Sr. VP Consumer Healthcare

Analysts

Randall Stanicky - Goldman Sachs

Greg Gilbert - Merrill Lynch

Analyst – Sidoti & Company

Derek Leckow - Barrington Research

Linda Bolton Weiser – Caris & Company

Scott Harsh - Credit Suisse

Operator

Good morning. At this time I would like to welcome everyone to the Perrigo’s fiscal 2008 year end earnings result conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Arthur Shannon. Sir, you may begin.

Arthur Shannon

Thank you very much and welcome to Perrigo’s fourth quarter and year end 2008 earnings conference call. I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the release is available on our website at www.perrigo.com.

Before we proceed with the call, I’d like to remind everyone that the Safe Harbor language contained in today’s press release also pertains to this conference call. Certain statements in the call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on Page 1 of the company’s Form 10-K for the year ended June 28, 2008.

I would now like to turn the call over to Perrigo’s Chairman and CEO, Joe Papa.

Joseph Papa

Thank you Art, and welcome everyone to Perrigo’s fiscal 2008 year end earnings conference call. Joining me today on the call is Judy Brown, our Chief Financial Officer and also Jeff Needham, our Senior Vice President of Consumer Healthcare business segment. For our agenda today, first I will provide a brief perspective on the quarter and the year. Next, Judy will walk through the detailed financials and our 2009 EPS guidance, and then I will give you an update our very successful new product launches for Omeprazole and Cetirizine plus an update on FY09 guidance. This will be followed by an opportunity for Q&A with Judy, Jeff and myself.

My overall comment on the quarter is we continue to execute on our plan with a strong focus on quality, customer service, new products and efforts to lower our cost structure. We had record fourth quarter sales of more than $0.50 billion plus record adjusted operating income of more than 46% from last year on a 360 basis point improvement in gross margins.

Our teams continue to deliver on new products and the sell through is on track to meet our expectations. Before turn the call over to Judy for a detailed review of our financial performance, I want to provide a perspective on Q4 market performance and full year achievements and market data.

The overall OTC consumer market was up 5.8% in the fourth quarter versus last year. Our store brands though gained 17% while Perrigo’s sales gained 53% on the strength of new product launches and increased market share.

Within the overall OTC market, cough/cold in the quarter was up nearly 15.5% from last year primarily due to the launch of Cetirizine. Store brands in the cough/cold market gained 22.4% while Perrigo’s sales were up 73%.

My second comment is focused on the full year results. We had a great year with record sales, record earnings and record cash flow. We topped $1.8 billion in sales while improving our margins and our quality. Adjusted gross margins are now more than 31%, up 350 basis points over last year. We continue to realize quality improvement that helped to drive those margins.

Our quality prevention investments are actually up 5% versus last year, so that’s an increase of 5% investment or expense, our quality appraisal investments are up more than 7% versus a year ago. However, our total cost of quality are actually down because we’ve reduced quality variances by more than $15 million versus last year.

The investments in quality over the past two years are paying dividends now. For the full year, the overall OTC consumer market was up 4.2% versus last year based on the IRI data as store brands gained 10.6% while Perrigo gained 42.5% on the strength of our new product launches. We saw this same pattern in each of the categories. In cough/cold the market was up nearly 6.9% from last year primarily due to launch of Cetirizine, store brands though gained 15.4% while Perrigo sales for the year were up 36.7%.

Within gastro and intestinal, the category grew 1.8%, store brands gained 9% and our share grew 103% with the introduction of Omeprazole. I think this shows you the power of Perrigo and the increasing recognition of the store brand value equation.

Also we expect this trend to continue especially if the economy weakens. I’m sure you’ll have plenty of questions about our guidance and our new product pipeline so I will get into the details shortly, but let me turn the call over to Judy now to give you more of the specific financial information.

Judy Brown

Thanks Joseph, as Joseph just noted we ended fiscal 2008 on a high note with record new product launches, working capital management and cash flow all performing inline with our high expectations.

During this review I’d like to walk you through the details of the fiscal fourth quarter which will serve as a baseline for elaborating on fiscal 2009 guidance later, and then I will highlight our full year results as well.

First the fourth quarter, on a GAAP basis we had a record fourth quarter sales and earnings. For the first time fourth quarter consolidated net sales crossed the $0.50 billion mark, an increase of 34% from fourth quarter last year. The consolidated gross profit rose $39 million from 2007 and the gross margin increased by 60 basis points.

Consolidated net income was up $9 million to a fourth quarter record $27 million or $0.29 per share. After reviewing the figures we released this morning, you will see that there were several items this year and last year which we have excluded from our analysis of the quarterly financials on an adjusted operating basis.

Let me summarize. On January 9th, 2008 we completed the acquisition of Galpharm Healthcare Ltd., a leading OTC store brand supplier in the UK. The Galpharm balance sheet and operating results are included in our consolidated results beginning in the third quarter. In the fourth quarter this year we recorded a charge to cost of sales of $2 million after-tax, or $0.02 per share, related to the step-up of inventory acquired from the Galpharm acquisition.

In the fourth quarter we also recorded a charge of $7 million after-tax or $0.07 per share for the impairment of a generic Rx intangible asset. The rest of the assets from that acquisition are performing inline with expectations. And following an evaluation of our footprint in the UK we made a decision to realign our operations there. As a result, we incurred restructuring expenses, termination benefits, of $1 million after-tax, or $0.01 per share.

And finally we closed our distribution facility in California incurring restructuring expenses of $100,000 after-tax. Going back to last year, on March 26th, 2007 we completed the acquisition of nine products and four pipeline products from Glades Pharmaceutical. In the fourth quarter of fiscal 2007 we recorded a charged of $3 million after-tax or $0.03 per share related to the step-up of inventory acquired from the Glades product acquisition, and in the fourth quarter of fiscal 2007 we also recorded a charge of $1 million after-tax or $0.01 per share related to the write-down of a note receivable.

Please note that you can view the reconciliation from the reported GAAP net income and EPS to our adjusted non-GAAP numbers in Table 2 of the Appendix to our press release.

With that behind us, I’ll take you through the financial analysis of our fiscal fourth quarter based on adjusted operating results, that is the reported GAAP figures excluding these charges I just outlined.

Consolidated net sales were a record $500 million, an increase of $126 million or 34% from a year ago. Adjusted gross profit was $158 million up $47 million from a year ago. Adjusted gross margin was 31.6%, up 200 basis points when compared with 29.6% last year.

Adjusted operating income was $57 million, up $28 million or 95% from last year. The fourth quarter adjusted operating margin was 11.4%, up from 7.8% last year. Adjusted consolidated net income was $37 million compared with $23 million last year and adjusted earnings per share were $0.39, up from $0.24 last year.

Now I’ll take you through a review of the business segments, focusing first on consumer healthcare. Consumer healthcare’s net sales increased $117 million or 46% to $375 million. New product sales led by the continued strong performance of our Omeprazole and Cetirizine third quarter launches, contributed $75 million of this increase.

Organic growth on existing products was approximately 8% in the quarter, led my growth in the analgesic, smoking cessation, and vitamin categories. Our UK operations benefited from the acquisition of Galpharm with sales volumes of $19 million.

Adjusted gross profit of $114 million was up $52 million from last year’s $62 million. Adjusted gross margin of 30.4% increased 610 basis points from last year due to the higher margins from new product sales, a favorable sales mix of existing products and the continued impact of production efficiencies in our factories resulting from our investments in quality systems, process improvements, and higher volumes.

Adjusted operating expenses increased $10 million compared with the fourth quarter last year. The dollar increases were driven by higher year-over-year spending on sales and promotion activities for new product launches, incremental spending in the UK related to the Galpharm acquired business, and higher incentive related wages and benefits.

As a percent of sales, adjusted operating expenses were 15.2%, down from 18.2% last year. Consumer healthcare ended the fourth quarter with adjusted operating income of $57 million, or 15.2% of sales, compared with $16 million or 6.1% of sales last year. This also translates into a 50 basis point improvement in the adjusted operating margins sequentially from last quarter.

Looking next at Rx pharmaceuticals, net sales in Rx were $38 million, down $6 million or 213% compared with $44 million last year. New product sales led by Clobetasol Foam were $7 million in the quarter. However, these were offset by a combination of continuous pricing pressure on existing products compared with last year’s fourth quarter as well as a decrease of $3 million in service revenue as one phase of a collaborative R&D project comes to a close.

As noted last quarter and as will be outlined in our 10-K revenues related to this portion of our collaborative R&D agreement will be fully phased out in early fiscal 2009. Adjusted gross profit was $14 million, down $7 million from last year. Adjusted gross margin was 37.3%, a decrease from 47.4% a year ago.

This margin decline is a direct outcome of the pricing pressures and service revenue decrease noted just a moment ago. Adjusted operating income was $5 million compared with $12 million last year.

Now looking at the API segment, net sales of API in the fourth quarter were $38 million, up $5 million or 14% on increased sales volume of existing products. Gross profit was $13 million compared with $14 million a year ago. Gross margin of 35.1% was a 510 basis point decline from fourth quarter last year reflecting product sales mix and higher production unit costs.

Operating expenses were $10 million, up $1 million from last year due to changes in the exchange rate and employee related costs. Operating income was $4 million, flat with last year. In the Other category which represents our Israel based consumer product, pharmaceutical distribution, and diagnostic businesses, net sales were $49 million, up $10 million or 24% due primarily to favorable changes in the foreign exchange rate and a favorable sales mix of products led in part by the expansion of our store brand cosmetic business in the US market.

This is an important synergy that this segment can realize in the future with consumer healthcare business. The gross profit increased $3 million or 19%, again due primarily to changes in the foreign exchange rate. Operating expenses were $14 million, up $2 million from last year due to changes in the foreign exchange rate. Operating income was $2 million compared with $1 million last year.

Unallocated corporate expenses for the quarter were $10 million compared with $3 million in the fourth quarter last year. This $7 million increase from last year is mainly attributable to higher variable incentive based compensation for employees working in the corporate functions compared to last year, and higher one-time legal expenses related to the conclusion of various projects.

Now let’s review the full year results on a GAAP basis. Consolidated full year net sales of $1.822 billion increased $375 million or 26% from a year ago. Approximately 15 percentage points of this improvement was from our record $220 million of new product launches. The existing products in our global portfolio grew 5%, acquisitions contributed 4% year-over-year, and foreign currency had a 2% positive impact on the sales line.

Consolidated gross profit was $551 million up 39% from last year, and the gross margin was 30.2% of net sales compared with 27.3% a year ago. Consolidated operating income was $197 million, up 98% from $100 million last year.

Consolidated GAAP net income was $136 million or $1.43 per share compared with $74 million or $0.79 per share last year. Let me again review the non-GAAP items affecting the analysis of the full year 2008 versus 2007.

First we recorded a charge to cost of sales of $4 million after-tax or $0.04 per share related to the step-up of inventory acquired from the Galpharm acquisition. Second we recorded a charge of $2 million after-tax or $0.02 for the Galpharm acquisition write-off of the in process research and development. Third in the fourth quarter and as noted earlier, we recorded a charge of $7 million after-tax or $0.07 per share for the impairment of a generic Rx intangible asset.

Fourth and as noted earlier, in the fourth quarter we recorded a restructuring charge of $1 million after-tax or $0.01 per share for operational realignment activities in the UK. And finally we closed our distribution facility in California incurring $300,000 after-tax in restructuring expenses.

For the full year and fiscal 2007 we recorded a charge of $5 million after-tax or $0.05 per share for the write-off of IPR&D from the Glades Pharmaceutical product acquisition. A charge of $3 million after-tax or $0.03 per share related to the step-up of inventory acquired from Glades, a charge of $1 million after tax or $0.01 per share related to the write-down of a note receivable, a charge of $1 million after-tax or $0.01 per share related to restructuring charges in Michigan.

Consolidated adjusted gross profit was $567 million, an increase of $167 million or 42% from last year. The adjusted gross margin was 31.1% of sales, up from 27.6% a year ago. Consolidated adjusted operating income was $219 million, up 90% from $115 million last year driven by strong sales increases and a strong margin expansion in consumer healthcare which led to an adjusted operating margin of 12% of sales, up 400 basis points from last year.

Consolidated adjusted net income was $150 million or $1.58 per share, up from $83 million or $0.89 per share in 2007. The GAAP basis reported effective tax rate for the year was 24.8%, up from 17.1% last year. The main driver of this change is the fact that our blended and worldwide tax rate moves relative to the geographic mix of where income is generated.

That said, for fiscal 2008 approximately 43% of pre-tax income was generated outside of the US, down from 75% in 2007. Also the effective tax rate for 2007 included a 280 basis point favorable impact related to the restoration of the R&D tax credit which was not renewed in fiscal 2008. In addition the charge for the Galpharm IPR&D expense is not deductible for tax purposes.

Now let’s look at the balance sheet, our tremendous earnings growth this year has left us with a strong more substantial balance sheet. Part of our growth this year was fueled by new product launches, several of which were still underway at fiscal year end.

Working capital, excluding cash and investments, was $352 million at the end of the year, versus $260 million last year, an increase of $92 million. This increase was due to higher inventory levels and accounts receivable associated with our higher sales volume. Accounts receivable were $350 million compared with $282 million a year ago.

This 24% increase parallels the 26% top line sales growth we enjoyed in fiscal 2008. Inventories were $400 million, up 36% from $295 million at this time last year. A few factors are at work here. First and most importantly we are still managing multiple new product launches, namely Omeprazole, Cetirizine and the recently announced Famotidine Complete.

Such launches contributed approximately a quarter of the increase year-over-year. Second, the double-digit decline of the dollar against the Israeli Shekel increased the API and Other segment inventory balances versus last year contributing another quarter of the year-over-year increase.

Note that the teams have been managing inventory in those units well with inventory turn improvement in local currency year-over-year. The remaining increase in inventory is volume driven as our management team has been activity working to ensure continued customer supply for higher demand and the consequent production volumes versus this time last year.

Accounts payable were $253 million compared with $164 million a year ago, again driven by the materials purchasing activity tied to this year’s volume and a large number of launches. Cash provided by operations was $248 million for the year, compared with $129 million last year.

In the fourth quarter alone, we generated $113 million compared with $55 million in the same period last year. Capital expenditures for both 2008 and 2007 were $45 million. Over the past several years we have managed CapEx spending inline with depreciation expense to remain cash flow neutral overall.

Our total debt position increased significantly in the quarter as we completed the execution of both a $125 million term loan and a $200 million private placement of senior notes. We used proceeds from the term loan to pay down our revolver. Our proportion of debt to total capital has increased to 35.6% from last year’s 26.9% as we have locked in low cost liquidity in a challenging credit market.

However our proportion of net debt to total capital declined 570 basis points from last year’s 19.2% to 13.5% this year. In the fourth quarter we repurchased 526,000 shares for $19 million under our 10B51 stock repurchase plan. For the full year we have repurchased 2.5 million shares for $78 million.

At the end of fiscal 2008 we had approximately $130 million remaining of our $150 million repurchase authorization which expires February, 2010. We paid cash dividends totaling $18 million or $0.19.5 per share for fiscal 2008.

We can now leave fiscal 2008 behind us and look forward to an equally exciting fiscal 2009. With the expansion of our varied new product offerings, our UK acquisition and our focus on servicing our customers across a wide spectrum of products, we are well poised to expand from the position where we left off in the fourth quarter of 2008.

So I’d like you to first begin thinking about fiscal 2009 earnings using our 2008 fourth quarter adjusted gross profit and operating income margins as well as earnings per share as a baseline. That quarter included several of our new product launches, the Galpharm acquisition, the business acquired from our former competitors’ absence from the CHD market, as well as the phase out of the collaborative R&D in the Rx business.

So I believe it can give you a good starting point to begin thinking about your modeling for 2009. Now to begin breaking down the component parts of our P&L and to understand the totality of the Perrigo guidance better, I will try to provide you some color commentary on each of the business units’ 2009 targets, beginning with consumer healthcare.

The last few years have seen record new product introductions. We expect that trend to continue this year in CHC as innovation is a key driver for growth in our future. In fiscal 2009 we will benefit from the August 2008 launch of Famotidine Complete, the continued expansion of our Cetirizine product family, additional new analgesic, antacid and vitamin products, as well as a full year of Omeprazole sales.

In total we expect revenue from new products, which if you remember we define as those which launched in the last 18 months, to total more than $275 million next year. Year-over-year this translates into more than $150 million of incremental new sales.

And it is not just one or two products; there are more than 25 new different products we expect will hit retailer shelves over the course of this year. In addition to new product sales, we are expecting to maintain the business we won during the absence of an OTC player in the marketplace, and we will look for other opportunities to expand our existing portfolio sales as well.

In total we anticipate top line sales growth in excess of 16% in consumer healthcare including the full year benefit of the Galpharm acquisition. Fiscal 2009 gross margins in consumer healthcare should remain inline with fiscal 2008 levels as we benefit from continued new product launches and gain operational leverage through higher volumes, continuous improvement processes, and reduction of waste and scrap.

We are targeting consumer healthcare operating margin expansion from 2008 as we get improved leverage on stable dollar spending in SG&A across a much larger sales base and we anticipate that the operating income in consumer healthcare will be heavier in the second and third quarters of the fiscal year matching our customers’ demands for many product categories in the October to March timeframe.

Our generic Rx business P&L will change in fiscal 2009 as revenue derived from service and royalties will decrease significantly from fiscal 2008 levels. As we’ve mentioned in previous calls, and again as will be outlined in our Form 10-K filed this afternoon, the first phase of our R&D collaboration with [Cephalon] is winding down. Likewise we terminated a license agreement with a third party in fiscal 2008 thereby reducing that royalty source in fiscal 2009.

However, despite the approximately $20 million decrease in these non-product sales from last year and the continuous pricing pressures facing the market for generic prescription products, we expect revenue growth of 7% to 10% in fiscal 2009 from new product introductions, and new licensing arrangements.

Both gross profit and operating margins may be impacted by the decline in non-product revenues year-over-year but are anticipated to remain at or slightly above the adjusted operating level seen in the fourth quarter of fiscal 2008.

Timing of product launches will drive the operating income of the Rx business slightly more to the second half of 2009.

Looking forward in our API business, it is reasonable to use the results of the fourth quarter of fiscal 2008 as a basis for modeling 2009. We expect top line revenues in API to grow between 7% and 10% year-over-year and expect new product introductions in the second half of the year to help mitigate pricing pressures on certain existing products.

We anticipate gross margin to approximate the levels seen in the fourth quarter of 2008 and expect full year operating margins to expand to the low teens. We anticipate that product launch timing in the second half of the year will result in an API business having a linear progression in operating income through the year with a 30/70 split between the first half and second half of the year.

So in summary on a consolidated basis we are expecting total revenue growth of 13% to 18% with consolidated gross margins continuing at levels approximating those seen in 2008. We intend to invest approximately 4% of consolidated sales in research and development. At the same time, while we are making additional dollar investments in product launches and infrastructure in 2009 we expect that operating expenses, excluding R&D, as a percentage of sales should approximate 14%; more than 100 basis points down from 2008 adjusted levels.

We anticipate that this level of revenue growth combined with spending leverage will result in a consolidated operating margin between 12% and 14%. So in summary, on a consolidated basis, our 2009 earnings per share are expected to be in a range of $1.90 to $1.98, up 20% to 25% from 2008 adjusted earnings per share of $1.58.

This assumes an effective worldwide tax rate of 28% and as you know this tax rate may move up or down a few hundred basis points depending on the final mix of income before tax realized during the year.

In addition to our management teams’ goals to grow earnings in 2009 we will also be maintaining our focus on translating bottom line earnings into cash flow from operations. We are estimating fiscal 2009 cash from operating activities of $210 million to $240 million. We plan to use a portion of this cash to fund additional capital investments in 2009 and expect CapEx of between $55 million and $70 million.

This reflects a higher run rate then previous years and is earmarked for the building of additional specific manufacturing capacity, training and development facilities and other IT investments to strengthen our foundation.

However note that looking forward beyond fiscal 2009 we would expect CapEx to return to levels approximating depreciation expense as in prior years.

And with that summary, I’ll be happy to turn it back to Joseph.

Joseph Papa

Thanks Judy, now that Judy has given you a very comprehensive review of our year, I’d like to talk about a few things that happened during the past 12 months and anticipate some of your questions.

First, in fiscal year 2008 we rescued our customers when a competitor shut down their OTC business, we were able to capture $100 million in annual sales, and have maintained that business during the year. This is now our business and we intend to keep it in the future.

Second, we executed several tuck-in acquisitions which broadened our product offering. In the Rx field we executed on the acquisition adding Glades business to our nine marketed products and four pipeline products and this has proven to be a very successful deal exceeding our expectations.

In the [inaudible] transaction in OTC, we added store brand pediculocide products which has also exceeded our expectations. In January, 2008 we acquired Galpharm, a leading OTC store brand supplier in the UK which gives us a larger footprint for future European expansion.

In May we announced a collaborative agreement with Cobrek which will contribute in ANDA filing for a generic equivalent to Luxiq, a $34 million branded pharmaceutical product to this agreement. Perrigo will be the exclusive distributor of this product.

In June we acquired the branded OTC business of Brunel Healthcare from NeutraHealth for $12 million and the related transaction sold its vitamin mineral supplement business along with related production assets in the UK to NeutraHealth allowing us to focus the UK business on the more profitable OTC business segment.

We are now the clear leader in OTC store brand in the UK. All these deals were executed spending less than $180 million while adding more than $100 million to annual sales at very favorable margins.

Third we executed on new products adding a record $220 million in sales this year. Let’s talk about just two of those launches, but there are number of others we can mention. Cetirizine was launched in January ahead of the launch of the national brand Zyrtec. Despite six competitive Cetirizine approvals at market formation, we have been able to capture more than 80% of the store brand Cetirizine.

This is also Perrigo’s first vertically integrated consumer healthcare product. Our data shows that store brands have already captured more than 30% of the Cetirizine market in the first six months, much higher than the traditional 20% to 25% share achieved at peak.

Omeprazole our largest product launch in the 123-year history of Perrigo started the first week of March, 2008. Current indications has store brands capturing more than 30% of the market and we expect Omeprazole to add $150 million to $200 million in annual sales and recent sales data shows that we are on track to meet this goal.

Now let me talk a little bit more about some of our other new products in the pipeline and of a few of our 2009 growth drivers. In April, 2008 we launched over-the-counter Cetirizine Pseudoephedrine Hydrochloride extended-release tablets comparable to the Zyrtec-D extended-release tablets. Brand sales for the original prescription strength of this product were approximately $190 million.

Also in April we began shipping OTC Children’s Cetirizine Oral Solution utilizing our own API as well. In the Rx segment, we launched Clobetasol Foam, the generic version of Olux. This product is a topical steroid. Annual sales for the brand were approximately $85 million. As the first filer, this commenced our 180-days of generic exclusivity.

We’ve launched at risk, which is a first for Perrigo, however I am happy to announce that in the first quarter of fiscal year 2009, Perrigo and Kinetix settled the patent litigation eliminating the at risk nature of this launch while allowing Perrigo to remain on the market.

In total Perrigo launched more than 50 new products over the past 12 months. We are constantly striving to be first to market in Rx and OTC. We have exclusive store brands and generic Rx offerings that represent more than $1 billion of branded sales that we have in the marketplace and that exclusivity may last beyond next year in some cases.

Also, we are investing to keep the pipeline robust. We believe that more than $10 billion in branded prescription sales will switch from prescription to over-the-counter in the next five years and our goal is to be first to market with these products.

Fiscal 2009 is starting on the right foot, just last week we announced the shipment of OTC Famotidine Complete Chewable Tablets which is comparable to the product known as Pepcid Complete, an acid reducer plus antacid medication indicated for the relief of heartburn.

Annual retail sales for Pepcid Complete chewable tablets are estimated to be approximately $100 million. Perrigo was the first applicant to file a completed ANDA with a Paragraph 4 certification. We believe the exclusivity period may last even beyond the 180 days as no one else has filed to our knowledge.

In fiscal 2008 we filed more than 10 ANDAs with more then half of those representing the Paragraph 4 filings. We have increased funding of R&D in all of our business segments to maintain this base.

Finally our operations have been able to meet the demand caused by our tremendous success. Our supply chain has also managed raw material pricing. We have observed significant brand manufacturers raising prices which we believe actually will improve the store brand value equation for consumers and retailers.

We will continue our efforts whenever possible to manage raw material price increases with improvements in operating efficiencies. Overall this year was a step change for Perrigo. We generated more than $245 million in cash, new products continue to drive our growth and we don’t see that changing in 2009 and beyond, our balance sheet is strong, and it has positioned us for really any market condition that will in the marketplace.

Our OTC business is clearly a leader in the category. Major new products are on the verge of switching from OTC in generic Rx over the next few years. My team and I have been focused on improvements in working capital in each of our business units. We continue to meet weekly on the metrics that help us to manage inventories and improve our process.

Looking towards 2009 we will continue to focus on execution. The retail data in the store brand value equation of our new products are encouraging. We are optimistic for the future of Omeprazole and Cetirizine. Perrigo is initiating programs to make consumers more aware of the increased value of the store brand proposition.

Unlike other private label products OTC healthcare products and generic prescription drugs, are FDA approved. We work harder to get that story out to the consumers to help us to grow store brand market share. Rising healthcare cost coupled with aging population makes Perrigo uniquely positioned to meet the world’s growing need for quality, affordable healthcare products.

Now, let’s take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Randall Stanicky - Goldman Sachs

Randall Stanicky - Goldman Sachs

On the guidance, I’m assuming that there’s Paragraph 4s built into the guidance? If you could comment on that and then also specifically around Nasacort AQ, I was wondering if you could give us the latest on that and also if in fact that case was to be settled, could you talk about the implications to Perrigo and the arrangement you currently have with Barr?

Joseph Papa

First let me just talk about the comment about the Paragraph 4 and really all of our new products—I can make a summary comment on that. The way Perrigo approaches our new product is that we put together a new product, what I call a probability factor. And we’re trying to look at all of our new products for whether it be in consumer healthcare or also in the Rx business or in the API business, and put a probability weighting on new products realizing that we’ll either get the approval or we will not. So it’s really a binary affect but we do try to put a probability factor recognizing the fact that at any time in a given year, you can’t really say until you get the final decision whether or not you’ll be able to launch a product.

Specifically on the Nasacort, I think as you know, that’s a case that the case has been heard. There is now a postponement in the final decision for that case. We have a postponement. I believe the date is until September, middle to early September. In terms of implications, obviously it’s a very exciting product. It’s over a $300 million product that really will depend on what happens with the court case and I will add that we do not have final approval at this time.

Specific to the arrangement with our self and Barr, we are working very closely on this product. It is a profit split for both companies is the best way to describe this opportunity. I realize you understand it is a very large product, however until we get more clarity on both the approval status and the court case, there is really not much more I can say at this time.

Randall Stanicky - Goldman Sachs

So a settlement wouldn’t necessarily preclude Perrigo from I guess enjoying some of the benefits of that settlement?

Joseph Papa

We have a relationship with Barr on this occasion and so if there is any settlement, clearly Perrigo would share in that settlement.

Operator

Your next question comes from the line of Greg Gilbert - Merrill Lynch

Greg Gilbert - Merrill Lynch

I wanted to ask about new products, can you break down the 75 for us, the way that you do in your filings, the 75 in the quarter in terms of where that came from, in consumer healthcare specifically?

Judy Brown

That is all of our new product launches so that’s anything that had been launched within the last 18 months so you would have Omeprazole, Cetirizine, the new Fruit Chill Gum in smoking cessation category, as well as smaller products across the bandwidth of cough, cold, allergy, vitamins, etc.

Greg Gilbert - Merrill Lynch

And you’ll break that down in the K for [XUS] and Galpharm like you did last quarter?

Judy Brown

Absolutely.

Greg Gilbert - Merrill Lynch

For the $275 million of new product sales for consumer in fiscal 2009, are you simply pro rating the Omeprazole and Cetirizine that fall within the 18 month window? Can you walk us through what the Omeprazole and Cetirizine effect within the $275 million?

Judy Brown

Because those products both launched since January 1st of 2008, those products are included for a full year run rate. So if we think more than $275 million of new products that would be one full 12 month period of Omeprazole sales included, the Cetirizine family of products, the Famotidine launch, again and other products. Again we have more than 20, 25 products going onto shelves in addition to those products I just already mentioned. So again because of the timing of those launches anything launched since January 1st, 2008 will be included.

Jeff Needham

As you can appreciate and as we’ve talked about in the past, the Omeprazole launch but also Cetirizine were major launches with major retail marketing efforts behind them so one has to be careful about simply extrapolating four months or five months and expanding that on. So while we will have the incremental benefit of having a full year of sales of both Cetirizine 10 mg and Omeprazole you just have to be careful about the pipe fill that both of those products enjoyed with their launches.

Greg Gilbert - Merrill Lynch

It seems to me that any pipe fill would have been worked out this quarter, no and with the expectation of getting closer to a 40% penetration—you’d get there exiting fiscal 2009 or not, it just doesn’t seem that the $275 million of new launches leaves much room for contribution from anything but those two products, plus Complete?

Jeff Needham

Your summary is correct in that the pipe fill, the launch quantities have largely been worked off here in this fiscal year and that we’ll have a more smooth run rate throughout the full year.

Joseph Papa

I remind you that we put a probability factor on all of the new products as I mentioned and that really has an influence on what the numbers actually are. There’s probability weighting on them.

Greg Gilbert - Merrill Lynch

Did I miss the revenue growth goal for consumer for the year?

Judy Brown

The top line growth that I quoted was in excess of 16%.

Greg Gilbert - Merrill Lynch

On cash flow from Ops, with net income guidance going up and cash flow from Ops going down year-over-year can you just comment on some of the beneficial factors for cash flow this past year that we won’t see recur this next year?

Judy Brown

As you look at the cash flow when we exited the year at $248 million, $114 million of which coming from just the fourth quarter alone, obviously we’re very pleased with our cash flow improvements. But as I like to say, cash flow is not linear. While we are projecting of course growth in earnings in 2009, we benefited in 2008 from a very concerted cross functional process with procurement and finance on our procurements to pay process and getting our days’ payables much more aligned to our inventory cycle. And in doing so you’ll notice when you look at the line by line within the press release a substantial improvement in that payables line.

We are always going to be working on our working capital turns initiatives, the management team business unit by business unit as well as on a consolidated basis, is measured in short-term bonus program, on working capital turns year-over-year percentage improvement. But the kind of lock step jump that we saw in that particular cycle again hard to achieve linearly year-over-year. So as we look forward with the earnings guidance we provided, and then looking at percentage improvement in each of the working capital line items that we have within our control, is how we came up to the early in the year balance sheet projections on an operating cash flow of 210 to 240.

So that is not meant to signal that there is a balance sheet issue but rather the opposite of continuing to work on the goals and to your point, is there a one-off, I’d say the payables procurement to pay cycle being the area where we really got the biggest one time jump this year in improvement.

Joseph Papa

I can also assure you that we are working very diligently meeting weekly to talk about working capital and talking about our turns and we’re working very hard to try to continue to generate significant cash.

Operator

Your next question comes from the line of Analyst – Sidoti & Company

Analyst – Sidoti & Company

Just with the increase in the debt and the increase in cash, is there specific designs on this money or anything like that or is it just used for general needs as they come along?

Judy Brown

We wanted to make sure that we were locking in good low cost liquidity when we could all see the issues that were rising in the credit markets near the beginning of the calendar year. With that in mind we also secured our term loan and used that to pay down our revolver. We wanted to make sure that we had our revolver fully flexible for any growth initiatives that we had in front of us and likewise we locked in a private placement looking to go out to the private placement market for the first time for Perrigo in order to also lock in low cost liquidity with a new group of investors, create a new syndicate of investors who could be interested in the long-term cash flow generating story of Perrigo.

With that in mind it is known that we were out looking at a specific opportunity in June of 2008. That cash was well poised to fund that transaction but I will tell you that our guidance includes the maintaining of that cash on the balance sheet at the moment and we are always looking for opportunities to grow the business in a variety of ways. We talked about the CapEx expansion this year.

We are going to use more then our normal run rate in CapEx in fiscal 2009 to fund various expansion opportunities, specifically in manufacturing, training and development to make sure that we have the smoothest process possible and we’ll be looking for other opportunities long-term as well to grow the business in other inorganic ways.

Joseph Papa

We feel very good about our organic growth rate however we always feel it’s prudent for us to be looking at opportunities for tuck-in acquisitions to supplement the organic growth rate and I think having the cash available for us will certainly make that an easier process. Also I think as you know we have very significant stock buyback that’s occurring and dividend program that’s occurring so there’s clearly some need, opportunity for that as well.

Analyst – Sidoti & Company

Where are we with the stock buyback program?

Judy Brown

As of the end of the year, we still have $130 million available on the program which expires in February, 2010. At the time that we renewed the program in February of this year, we still had money left on our old program. We expired that out, and are currently engaged in a 10B51 automated repurchase program.

Operator

Your next question comes from the line of Derek Leckow - Barrington Research

Derek Leckow - Barrington Research

On the new products, you talked about $150 million of incremental new product versus $275 million in total; can you help me understand what that $150 million is comprised of?

Judy Brown

Again, the way we track new products can be confusing in a year when we are having such phenomenal success with great new product launches, so any product that’s been launched since January 1st of 2008 would be included over the course of our planning for fiscal 2009, and that incremental amount again can be incremental Omeprazole, incremental Cetirizine plus then brand new new things like Famotidine and other products that have not yet entered the marketplace.

Derek Leckow - Barrington Research

Can you give us what the brand new new number is expected to be at this point?

Judy Brown

Not to be evasive but in order to make sure that we’re not talking about any specific individual product beyond the broad guidance that we provided for Omeprazole being a full year run rate of $150 million to $200 million, we will not be quoting exact product numbers for each individual product.

Derek Leckow - Barrington Research

It’s helpful to have the Omeprazole number at least, and as we saw there’s a couple of big new products that are expected here. You’ve got the launch of Famotidine Complete going on and then we have Nasacort of course to look forward to in the near-term. So I assume that those two are the ones that are probably most probable at this point?

Joseph Papa

Just to be clear, but Famotidine Complete to be clear that is launched so that is in that essentially 100% probability, just to be clear.

Judy Brown

And that product is $100 million at brand so if you use your classic model to work backwards off the retail brand price and then how much you assume the store brand share, which is at this point for 180 days at least exclusive to Perrigo, you can come up with your estimation then of what the top line Famotidine Complete contribution should be in a 12 month period.

Joseph Papa

And as we announced last week, we began to launch Famotidine Complete and ship that to customers in early August so that’s your start date.

Judy Brown

So you’ll have more or less six weeks run rate in the first quarter of 2009.

Derek Leckow - Barrington Research

And is there a fill in process that goes on so you’ll have a heavier weighting of that in Q1?

Joseph Papa

Similar to other major launches, that is a launch with retail marketing programs behind it so that’ll have its heaviest weight here in this first quarter.

Derek Leckow - Barrington Research

On the cash balance you talk about your long-term growth opportunities, in the past we’ve always thought about the generic pharmaceutical segment as being the probably the fastest growing segment over the long-term, I’m wondering what you’re seeing out there and you didn’t buy that vitamin business back in June, are you still looking at vitamin companies, or are you looking more towards generic Rx businesses out there?

Joseph Papa

First and foremost I’ll go back to our organic growth rate, we feel very good about our organic growth rate being able to continue to growth organically but we do feel that we’ll continue to look at acquisitions that allow us to improve our return on invested capital for our shareholders. So those are the things that we are focused on. Within that construct of the return on invested capital, generic Rx is clearly one area we will look.

We will also look for tuck-in acquisitions that help us to continue to extend our offering in consumer healthcare to our retailers so if there’s products that we do not have in the consumer healthcare offering that are important to our retailers we will continue to go after those and/or any other products that will come into the marketplace, new products that we’ll go after, anything that we believe will help improve the store brand equation, the value equation, for our customers. So generic Rx, also consumer healthcare and if it’s a ROIC opportunity we’ll look at vitamin and nutrition as well.

Derek Leckow - Barrington Research

So as far as probability weightings, which segment will see the most deal activity in the next five years? Is it still your expectation to have most of that activity in the generic Rx business?

Joseph Papa

I think that’s a hard one to answer right now. Generic Rx is a really challenging business. It clearly is a focus point for us but I think more important than anything else is we have the [constant] return on invested capital that is really driving our approach to acquisitions and I think its really going to be ROIC driven within our categories with the primary areas being generic Rx and consumer healthcare.

Operator

Your next question comes from the line of Linda Bolton Weiser – Caris & Company

Linda Bolton Weiser – Caris & Company

I think you said that the gross margin in the consumer healthcare business would be expected to be about flattish in FY09, is that correct?

Judy Brown

It would be expected to be fairly consistent with where you saw it in 2008, adjusted gross margin in 2008, yes.

Linda Bolton Weiser – Caris & Company

I’m curious about that because I’m thinking that with more and more new products making their way into the mix and those products being higher gross margin, and you’re talking about more positive pricing generally in the industry, I’m wondering why the gross margin would be only flat rather than up in FY09?

Judy Brown

Well if I step back and think about the evolution of the gross margin from 2007 to 2008, obviously there were lock step improvements in process there. We are also looking at 2009 from the perspective of managing the material situation as is seen in the marketplace and balancing raw materials pricing with our own pricing out in the marketplace. So if you look at the run rates in the second half of CHC and the second half of 2008 where we had our quality systems up and running, focusing on service but raw materials price increases were there, we were already able to get up to that 30% plus level adjusted gross margin, even with those pressures coming through in the commodity side and Joseph and the team with Jeff are going to be focusing on now also pricing opportunities, thinking about the whole year of 2009 being similar to the way the second half of 2008 was panning out.

Joseph Papa

We do accept your comment as a challenge to us to continue to grow the gross margin however based on the real strength in what consumer healthcare gross margin already has done in fiscal year 2008, I think we felt a little uncomfortable to go much beyond where we are currently. However I don’t want to mislead you, I absolutely am going to strive with Jeff’s help and the whole team’s help, to continue to drive that gross margin as it would relate to both on the pricing side and the operational efficiencies we have.

Linda Bolton Weiser – Caris & Company

On the launch of the generic Olux foam, I believe that launched in the third fiscal quarter were the sales down sequentially because of pipe fill in the third quarter or not?

Joseph Papa

I think just to remind you, the third quarter was a really limited launch in the sense that it was March 26th or something, there was a fill that occurred in the third quarter fiscal year but it’s really very close. It isn’t that much of a difference in the two numbers.

Linda Bolton Weiser – Caris & Company

It would seem like the June quarter sales would be quite a bit higher then.

Joseph Papa

No, because you did have the fill. It wasn’t that much of a difference.

Linda Bolton Weiser – Caris & Company

Just in terms of we’re always looking towards the future and we’re all kind of wondering when the next big new product that would be greater than $50 million of annual sales, significant, would that be in calendar 2010 or even beyond that?

Joseph Papa

We’re really excited about obviously the growth in the current products that we’ve launched, the Cetirizine, the Omeprazole, the Cetirizine D, as all very important growth drivers for us in fiscal year 2009 as we get the full year affect of those products. There are other products that are going to come to the marketplace, I can’t go into each of them from a competitive point of view, but we do believe that one of the successes of Perrigo story has been not so much the home runs but a lot of the singles and the doubles that we’ve gotten and that really just talks to what Judy said about the magnitude of the number of products that we are launching, that diversification is an important contributor to our success.

So I do think there are some significant products in the future certainly as we look at the rest of the [inaudible] inhibitors, [not saying] the antihistamines that will switch, but I do think in the next 12 to 24 months it’ll be more singles and doubles that will help us to grow the business.

Jeff Needham

I think that’s exactly right and I think our challenge and our opportunity and what our whole goal is, is to have that pipeline in consumer healthcare be as robust and as full as possible and we feel real good about our pipeline in looking at the years ahead.

Linda Bolton Weiser – Caris & Company

On those two little restructuring items in the quarter were those in the restructuring line or were either of them in another line item in the income statement?

Judy Brown

They are in the restructuring line item on the P&L.

Linda Bolton Weiser – Caris & Company

So there were no other adjustments other then the adjustments to the gross profit line?

Judy Brown

Again the adjustments that I outlined parallel the adjustments that are outlined in Table 2 of the press release where we break it down by business unit and by line item on the P&L.

Operator

Your final question comes from the line of Scott Harsh - Credit Suisse

Scott Harsh - Credit Suisse

Did I hear you right, you said your probability weighting the approvals for guidance, so does it make sense then to assume that as you get more clarity on these you might update guidance throughout the year as we saw last year?

Joseph Papa

By virtue of the way we do probability weighting on any new products, when it moves from being a probability weighting to a binary, whether it be approved or not approved, that would potentially change guidance. Now I can’t say off hand right now whether any individual one will be significant enough to change guidance, but yes, by definition the way we do it would potentially change guidance when we get a known outcome.

Scott Harsh - Credit Suisse

The new dent in the new acquisitions in growth across both the healthcare and the Rx pharma business should we be assuming these are small products that are accretive early on versus something larger or to the other extent something bigger?

Jeff Needham

Maybe just to remind you the first comment I said was that we feel very good about our organic growth rate. Second comment was that we will continue to look at ROIC driven acquisitions both in generic Rx and in the area of consumer healthcare. Third comment is that by virtue of the ROIC proposition, I would expect them to be accretive certainly in the first couple of years. Maybe not in the first six months, but certainly in the first year or two years.

Scott Harsh - Credit Suisse

With respect to Rx, as we saw it kind of come down here and then mentioned second half of the year, I think you mentioned that we’ll expect new products to launch and that would be heavier weighted towards the second half, so we should assume that there are new products second half that come out of these 10 ANDAs that we should expect?

Jeff Needham

Yes, the new products, obviously we’re never exactly sure about the timing but you should weight it more towards the second half of the year, yes.

Judy Brown

And just to be clear it was slightly heavier, not 10/90; slightly more 40/60, 45/55 so slightly.

Scott Harsh - Credit Suisse

On SG&A we’ve seen it kind of go up here across the quarters and I know last quarter we talked about some of the spending being variable, can you just give some insight how much of spending is now fixed and how much of this is variable going into next year? I know you’ve had more launches here with Famotidine Complete and the like; can you give us a sense of how much of this SG&A here is now fixed?

Judy Brown

Just to give you, SG&A is never fixed. In the universe of operating expenses no costs are ever fixed but to give you an idea of a run rate, a blended average quarterly run rate for this year is something approximating low 70s, is I would say a baseline run rate if you were adding up distribution plus SG&A. Again that’s getting you to a point where as I said in guidance discussions, we would expect that as a percent of sales to come down more than 100 basis points from the adjusted run rate this year.

The [bolus] of new product introductions had an impact on Q3 and resolution of several areas in the legal space were one-time events this quarter that were higher than we expected to wrap up the year, but looking at the projections for the course of 2009, something along the lines of low 70s over the course of the year would be appropriate.

Joseph Papa

Well thank you everyone for your interest in Perrigo and have a great day.

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Source: Perrigo Company F4Q08 (Qtr End 06/28/08) Earnings Call Transcript
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