Perrigo Company plc (PRGO) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Lindsay and I will be your conference operator today. At this time, I would like to welcome everyone to Perrigo's Fiscal 2014 Fourth Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Art Shannon, you may begin your conference.

Thank you very much, Lindsay. Welcome to Perrigo's fourth quarter 2014 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. Also on our website is the slide presentation for this call. Before we proceed with the call from our headquarters here in Dublin, I would like to remind everyone that during the process of this call, management will be making certain forward-looking statements. Please refer to the important information for investors and shareholders and Safe Harbor language regarding these statements in our press release issued this morning. Following management's review of the presentation, we will open the call for questions. I'd like to now turn the call over to Perrigo's Chairman and CEO, Joe Papa.

Thank you, Art, and welcome everyone to Perrigo's fourth quarter fiscal 2014 earnings conference call. Joining me today is Judy Brown, Perrigo's Executive Vice President and Chief Financial Officer. Now let's go through the agenda for today's call. I will begin with a brief overview of the quarter and the year. Next, Judy will go through the details for the fiscal fourth quarter and walk through our fiscal year 2015 guidance. Then I will provide an update on each business areas as well as an overview of our expectations for the fiscal year. We will conclude by providing an opportunity for question-and-answers. Now let's look at Perrigo's fourth quarter. On Slide 4, you can see that this was another great quarter for Perrigo, finishing our fiscal year on a very strong note. Our quarterly performance is highlighted by all time record net sales of $1.14 billion, with an 18% net sales growth, leading to continued record adjusted gross profit and operating margin expansion, which was up 510 basis points. Moving on to Slide 5, it was an historic year for Perrigo with a record top and bottom-line results. We recorded a 15% year-over-year improvement in net sales for fiscal 2014, reaching $4.06 billion, which included 7% organic growth. New product sales added $231 million far surpassing our goal of $190 million. Fiscal 2014 adjusted net income increased 40% to $740 million or $6.39 per diluted share. The strong sales results correlate with impressive improvements in adjusted gross margins and operating margins, which saw 340 basis point and 250 basis point improvement respectively. This strong performance was driven by great executions especially within our Rx business segment and the acquisition of Elan. Looking at Slide 6, we achieved over a $1 billion in sales for the second straight quarter. Rx business grew 30% 30% in the quarter, while CHC achieved an 8% growth rate, and Specialty Science has been very pleased with the performance of Tysabri, it is a great asset that is generating significant cash flow. And as I stated when we acquired it, we loved the Tysabri asset and the optionality that it gives us. We look forward to a full year contribution of fiscal year 2015 at the higher royalty rate for Tysabri. The Nutritional segment was relatively flat compared to last year's comparatively strong performance with the launch of the smart tub in infant formula. As you could see on Slide 7, the overall OTC category was up, while store brand were slightly down. The reason for this was the return of two main national brand companies. Excluding that dynamics, we continue to gain market share in store brands across most categories. Compared with 7% organic growth in quarter and for the full year and a flat-to-down store brand market illustrates the strength of the Perrigo business model that focuses on quality affordable healthcare. Now let me turn the call over to Judy.

Thanks, Joe. Good morning everyone. As you just heard, we closed fiscal 2014 on a high note, delivering record financial results, despite the various challenges the organization confronted. On a consolidated basis the team continued its strong performance, posting record quarterly revenue, adjusted margins, and adjusted earnings. As usual I will provide a brief overview of the adjusted results to the fiscal fourth quarter by business segments. Then I will walk you through the consolidated and segment earnings guidance for fiscal 2015. So let's begin with the fiscal fourth quarter highlights in the individual business segments starting on Slide 8 with Consumer Healthcare. The 8% net sales growth was driven by an increase in sales of existing products for $52 million primarily in the antacids and smoking cessation category. New product sales of approximately $15 million and $6 million attributable to the recent acquisition of OTC products acquired from Aspen. These combined increases were offset by a decline of $29 million in sales of existing products, due primarily to relatively lower sales in third-party contract manufacturing and a delayed start to the flea and tick in the U.S. The animal health revenue realized in the quarter was in fact softer than we had hoped as the slow start to the season we noted last quarter continued. Despite these impacts, I'm pleased to note that sales within all major categories of OTC were up year-over-year. Specifically the smoking cessation category performed above our expectations due to two factors. One, continued robust sales of the store brand version of Nicorette mini lozenges; and two, our teams ability to efficiently supply our customers needed products as national branded competitor is not shipping specific skews at this time. Within the GI category, sales of Lansoprazole were higher year-over-year, due to increased customer utilization of the store brand products, as well as manufacturing issues at a competitive store brand supplier. The adjusted gross margin decline of 210 basis points was due to a combination of relatively weaker sales within the higher margin animal health category, relatively weaker products mix, and an under absorption of fixed production costs. Remember, as we have previously stated, we have begun to make investments to an increased plant capacity to support our long-term growth initiatives. These forces were partially offset by greater sales in specific higher margin products within the categories I just mentioned. The difference between the adjusted growth and adjusted operating margin leverage year-over-year was due primarily to lower DSG&A expenses as a percent of sales, as we further integrated the animal health and diabetes category, thereby decreasing redundant costs. This lower DSG&A spend was partially offset by increased R&D investments as we continue to build our long-term pipeline. On Slide 9, you can see that net sales in nutritionals were $145 million as new product sales of $6 million were more than offset by the combination of lower year-over-year sales in infant toddler foods and $4 million in discontinued products. Despite not achieving our sales guidance range for the segment in total, within the infant formula category revenue was driven by strong growth in our organic formula product line as consumer interest in these types of high quality offerings continues to grow. Additionally, our infant formula sales to China relaunched in fiscal Q3 continued this quarter consistent with our expectations. Adjusted gross margin for the segment decreased 140 basis points year-over-year to 27.5%, due to scheduled maintenance effort at our manufacturing facilities in June. Adjusted operating margin was impacted by increased promotional investments to support the launch of our branded probiotic insync. On Slide 10, you can see that our Rx business continues its robust performance as net sales growth was driven by new products sales of $35 million and sales related to products acquired from the acquisition of Fera of $20 million. Adjusted gross and operating margin expansion continued increasing 440 basis points and 550 basis points respectively. The adjusted operating margin expanded even despite higher dollar investments in research and development clinical studies, as well as continued investments to grow our specialty Rx sales force. Turning to Slide 11. Net sales in the API segment declined to $33 million, due to a decrease in existing product sales of $70 million, as a result of increased competition on certain products, partially offset by $8 million in new product sales. Growth and operating margins expanded due primarily to product mix and decrease of G&A expenses. Given our continued focus on vertical integration we may start in rightsizing API's cost structure to mere this focus, evidenced by an expansion in margin. The majority of this impact is expected to materialize next quarter. Turning to Slide 12, Specialty Sciences revenues were $86 million for the quarter comprised of one month of Tysabri royalties at 12%, two months at 18%, and approximately $10 million attributable to the royalty recognized from Biogen's deferred revenue in Italy. Adjusted operating margin incorporated ongoing administrative operating cost for the quarter. The consolidated adjusted effective tax rate for this quarter was 21% and 20.7% for the fiscal year in line with our expectations. I will end my fiscal year 2014 comments with my favorite topic, cash. We concluded the year with cash flow from operations of $694 million, even after the inclusion of $186 million of one-time costs related to our Elan acquisition this year, a very strong finish to the year. So within Consumer Healthcare, we anticipate that store brands will continue to be important contributors for the growth of our retail customers, and therefore our plan assumes that excluding those categories impacted by national brand market return, store brand share of the OTC pharmaceutical market will continue to grow. Likewise we have assumed that our store brands, our share of store brands will continue to increase. Also I would like to remind you that our annual planning follows the same assumptions we have used in the past regarding each of the cough, cold, flu and allergy seasons. That is we estimate the demand for the upcoming season choosing the average of the previous 10 seasons. Now let's walk through a few specific products in detail. Included in our guidance on a risk adjusted basis are the launches of the store brand versions of specific nasal corticosteroid products in time for the spring 2015 allergy season. Our guidance also includes the expected launch of store and value brand versions of flea and tick line extension products in time for next season. Not included in our guidance at this time are either the 600 milligram extended release guaifenesin product or the broader family of Mucinex D, DM, Max et cetera equivalent products. Joe will discuss these items in further detail in a few minutes. And repeating a comment from a moment ago, CHD's year-over-year revenue growth range also reflects the impact of a continuing return to market of a large branded analgesic competitor's product lineup. In our Nutritional segment, our revenue guidance includes the assumption that by the end of fiscal 2015, we will grow infant formula store brand market share, increase our international presence, and launch the store brand version of Ensure adult nutrition drink. This revenue guidance also includes growth greater than 5% in our BMS category as we continue to expand distribution and sales of insync probiotic. For Rx, we anticipate top-line growth driven by new products and recent acquisitions. Adjusted margins are expected to remain strong. Within the Specialty Sciences segment, we expect to receive an 18% royalty on in-market sales of Tysabri up to $2 billion and a 25% royalty on any sales above this level. Now looking to our consolidated projections, for fiscal 2015 we anticipate adjusted diluted earnings per share to be between $7.20 and $7.50, an increase of 13% to 17% compared to fiscal 2014's $6.39. Summing everything back up at the consolidated Perrigo P&L, we estimate that net growth will be between 7% and 11% compared to fiscal 2014 and assume new product sales of greater than $235 million, with approximately 70% of these sales expected in the second half of the fiscal year, as well as continued growth in our base business. After you roll up the individual business units, you should include in your model corporate unallocated expenses of approximately $80 million and interest expense of approximately $100 million. Additionally, we are estimating an adjusted worldwide effective tax rate of approximately 16% for fiscal 2015, excluding any impacts from the resolution of ongoing tax examination and other statute expiration. So that is the full year view. As I noted a few minutes, we also spend considerable amount to time debating the need to provide our investors some additional color around upcoming quarters. While we are not moving to a quarterly guidance model, given the many complexities of our varied business units, we would like to provide an overview of our first fiscal quarter to help further refine your FY 2015 model. As you may recall, earnings in our first fiscal quarter of 2014 were strong. We exclusively launched the U.S. generic of Temodar, we shipped a large amount of OTC product as retailers pushed for an early buy into the season, and we recorded a large amount of contract sales in Consumer Healthcare. As you model fiscal 2015 please note that while we expect to execute well on our core businesses, these same specific dynamics experienced last year at this time are not expected to repeat. The totality of these relative quarterly dynamics including additional investments to further our strategic plan, are expected to produce first quarter FY 2015 year-over-year adjusted net income growth at the lower end of the full fiscal year 31% to 37% guidance range you see here. Taking the incremental 39 million shares outstanding in the first quarter FY 2015, adjusted EPS are expected to be lower versus this time in fiscal 2014. So thinking about the remainder of the fiscal year, due to the dynamics I just highlighted, we expect the weighting of net sales and EPS to be lowest in our first fiscal quarter to notch up in the second and third fiscal quarters and to be at their highest in the fourth quarter due to seasonality as we plan to launch further line extension flea and tick products and a more heavily weighted second half for anticipated new product launches which I mentioned earlier. Operating cash flow is expected to continue to be robust in fiscal 2015 growing to over $1 billion furthered by a full year of Tysabri revenues and a strong base business cash generation. In summary, we've concluded another record year where we crossed $4 billion in annual sales, grew organic top-line sales 7% in a difficult environment, and furthered our operational excellence. The acquisition of Elan provided us with a significant platform to continue growing and we continue to invest in R&D and plant capacity for the long-term. Fiscal 2015 looks to be another productive year as we expect to launch over $235 million in new products and advance many strategic initiatives through both organic and inorganic growth. Now let me turn it back to Joe.

Thank you, Judy. It was a great year but it did have some challenges. Think about the growth in our consumer healthcare business. It grew 8% despite not having the store brand version of U6 600 milligrams for much of the year and we also had to overcome the loss of $100 million in contract revenue based on the reentry of major national brand and lower contract manufacturing sales. That shows the strength of our Consumer Healthcare core business. Now let's talk about fiscal year 2015. First, we have to bring the store brand version of Mucinex 600 milligrams back to the market. We have a pathway to get this product to the market. I have a dedicate team meeting weekly to make this happen. I feel strongly that we will get this product done but I'm not going to give you a specific date until I have product headed to the retailer shell. As Judy just told you, Mucinex 600 milligrams is not included in our fiscal 2015 guidance. It is a critical R&D imperative for us to bring this product back to the market in our fiscal 2015. Second, we are continuing to invest in future growth. We continue to invest and import new products and anticipate reaping the benefits from those products in the future. As you saw just last month, as a result of the hard work by our team, we received an AB therapeutic equivalent rating from the FDA for Testosterone Gel 1%. We were also the first to receive final approval from the FDA for the store brand version of Advil congestion relief tablets. These are examples of why we are continuing to invest in research and development with the goal being first to the market in Rx OTC switches, new products, and innovation, plus we have new product offerings in our animal health, in infant formula business that we expect to launch during the fiscal year. These investments give us every reason to believe in the strength and long-term viability of our business model. That belief is further supported by three mega trends that we've been discussing since I joined Perrigo years ago. First, the continued movement of consumers from national brands to store brand products. Second, the continued movement of prescription products switching to over-the-counter status, just a few weeks ago, Flonase received FDA approval to switch from prescription to OTC. Third, the rise in healthcare cost combined with an ageing population will continue to drive the global need for quality affordable healthcare products. This is why we are continuing to invest in our research and development, and in fact, in fiscal year 2015, we are investing an incremental $19 million in research and development. Now as you can see on Slide 14, our team is poised to launch a number of products in fiscal 2015 highlighted by launches of nasal sprays and product line extensions in flea and tick products for pets. For the year, we expect to launch over 100 new products across all of our segments, resulting in more than $235 million in new products sales, which will exceed last year's strong new product sales level. Moving on to our growth opportunities Rx segment on Slide 15, we have a very robust pipeline of 31 ANDAs pending FDA approval representing over $4 billion in branded sales. This includes five confirmed to first-to-file ANDAs, including the generic version of Androgel 1.62%. The positive momentum in this segment should continue with the best new product pipeline in our history. I just had a pleasure of sharing my objectives for fiscal 2015 with the board of directors of Perrigo here in Dublin, Ireland, and what we're focused on is number one, execution across our five pillars; number two, continued focus on quality and service; and number three, the realization of the best new product pipeline in our history. We plan to grow adjusted net income from 31% to 37%. In summary, on Slide 15, the strength of our enhanced platform for growth, combined with the mega trends I just discussed, positions Perrigo for further growth as we continue to execute on our mission in making quality healthcare more affordable for consumers. Operator, let's now open up the call for any questions.

Thank you. (Operator Instructions). Your first question comes from the line of David Risinger from Morgan Stanley.

Yes. Thanks very much. So congrats on the great results.

Good morning, David.

Good morning. I have a couple of questions. Did you say that you wanted to limit the number of questions each person ask, I forget?

We would like to limit it to one question please.

Pick your best one, David.

Okay. Well, they are all great. But I guess I'll just pick number one. So just wanted to better understand the net income growth guidance for fiscal 2015. So it's 31% to 37%. But when one backs out the likely step up in Tysabri net income of about $200 million the implied net income growth for the core seems to be up in the high-single-digits. And so I just wanted to get a little bit more color on why that's below the company's long-term earnings growth targets when there is an easy cough, cold, flu comp versus fiscal 2014?

I'll just start with a couple of highlights but then Judy I'll turn it to you for some of the more specifics. I mean, as we thought about 2014 and 2015 one of the things that we would have to do in terms of looking at this is look at some of the things that have happened relative to share counts I mean, specifically in how that would affect our EPS. The other area is some significant investments we're making in a couple of areas. One is research and development going up to $19 million; and the other one is some investments in our sales efforts especially in the Rx business as we look to launch some additional products that we think are going to be very good margin products in the Specialty Science area -- I'm sorry our Specialty Pharmaceutical product area. But those are couple of the highlights of things that are driving some of the questions that you have. Judy you want to give him anymore specifics for David.

Sure, Joe. We gave a lot of thought on how to explain the fact that I'm sure many of you have already done the math. Trying to roll forward EPS is complicated because there is a lot of noise when you roll last year to this year. So let me just roll EPS for a split second and I'll talk about adjusted net income as well on this because you take separate FY 2014 on an adjusted basis we end the year at $6.39 of EPS. On a year-over-year basis with the change in the tax rate I just commented on and this is all very round numbers you pick up about $0.50 of EPS. But then of course we have the bad guy of a higher share comp over the course of the year. So that's a bad guy of about $0.90 just on a year-over-year basis. And we have full year while the interest rates that we're going to pay for the full year goes down by just having the same debt outstanding for the full year, full, full year versus what we have in fourth quarter it's a bad guy about $0.05. So just on a really clean normalized basis you would say we're kind of starting with $6 a share on a clean basis this year. So now what are we going to do, we're going to roll forward midpoint of that range $7.20 to $7.50. If you pick the midpoint it's about $7.35. So there is the spread of what you're growing into next year just on a business basis. David you keyed up an amount of contribution coming from our Specialty Science business of 200-ish million dollars of income. Don't forget we do have running costs that come with that. So we have give or take, I'd say about $29 million of operating costs that come with that business think about we've acquired not just a royalty stream but we have incremental activities as well so you have to take that into consideration. We're not commenting specifically on what we put into our forecast the Specialty Science revenue but suffice to say the remainder as you're backing into that still implied a growth rate of our overall business in that five-year CAGR range or a three-year CAGR range. Remember our three-year CAGRs we've said of between 5% and 10% top-line revenue growth. Joe made the comment about the investments that we've been making incrementally in our base business and R&D and other selling and related expenses to further our strategic initiative. So I come back to actually when you back out that math like I just said, the remaining growth on the non-specialty science related business is firmly in that three-year CAGR overall growth guidance that we provided in the past.

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

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

I'm starting to sit and look at your excel model, which I'm sure I need my glasses for but --

Just looking at the guidance for this year the 7% to 11%?

Sure, the top total company 7% to 11% you're spot on. And like I said we feel that our non-spec science growth is in -- got the ranges on a business unit by business unit and as we look at it and look at the sensitivity around those various segment guidance ranges we still feel like the non-spec science business is growing in our 5% to 10% longer-term CAGR. So again I don't know how much weight you've placed within the Tysabri number but suffice to say as we look at our model and add up the different segments, we are at that CAGR that we've provided in the past.

Yes. I would just maybe I go with what Judy said and just may be a little more specific as we said Consumer Healthcare we think 3% to 7%; Nutritional 7% to 11%; Rx Pharmaceuticals in that 5% to 9%; and API admittedly is going down. We do think there's going to be a decline in that business. But those give you some sense of Jami what we're thinking about for the individual business units.

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

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

Yes, thanks, Gregg. Gregg I think first comment may be just a reflection on where we've been. I've been in pharmaceuticals for 31 years. This is a most dynamic M&A market I've ever seen in the 31 years of being in the pharmaceutical business. I think from our point of view everything that we said a year ago is going very well relative to our plans to delever. I would specifically say though relative to our targets and the size of the targets -- well, there are certainly adjacent category that I think would fit very much along the lines of what we have done historically in terms of being bolt-on product categories, things like pet care, ophthalmics, diabetes, adult nutrition. Those are all clearly things that we are very excited about to bolt-on some additional sell more products to our existing customers. The other thing I'd say that is a little bit of an expansion as we continue to think about geographic expansion, where can we go geographically to continue to take our version of quality for the healthcare around the world. And the other comment, which we haven't talked about as much is we're interested in platforms, platforms where as we think about the future, what areas that we don't have our current capabilities from a technology point of view. Ophthalmics is an easy example for that in terms of platforms where we would be able to make our own ophthalmic products as example. So in conclusion, I think lots of targets, there are some competencies that we are seeking to bring into the business, as well as to these adjacent categories from geographic expansion.

Thanks. Hold back from asking 10 more. Thanks for that, Joe.

Thank you.

Thanks, Gregg.

Your next question comes from line of Elliot Wilbur with Needham & Company. Elliot Wilbur - Needham & Company: Good afternoon. I wanted to ask a very deep philosophical question directed toward Joe. And has to relate -- relates to the Consumer Healthcare business and I guess some of the -- I don't want to say may be challenges business is facing but may be in light of anticipation and some of the tailwinds that you've benefited in the last couple of years and just the growth outlook going forward. If you were to compare and contrast that business with your Rx business, there is many, many similarities but there seems to be sort of one critical differential and that's sort of in the value proposition of the two businesses once the product actually leaves the factory. And what I'm getting at is that on the consumer side store brand market Perrigo seems to capture significantly smaller portion of the overall value of the product that you would on the Rx side long and short of it, just putting in terms of numbers. I mean, it looks like products are sold at retailers at 65%, 70% discounts so the brand retailers enjoy enormous margins on that business. Obviously, on the Rx side distribution channel doesn't enjoy anything close to that. And I guess the observation would be kind of given some of the challenges that you're facing isn't it sort of time to sort of rethink that fundamental value proposition, seems like a lot of money is being left on the table? Thanks.

That was a very philosophical question, Elliot. Let me step back and try to really just talk about what I think is really the fundamental vision we have for the business. And I start with this concept the word we want to focus, its quality affordable healthcare that's the area that we think that we can really make a difference whether that is within our Consumer Healthcare business or within the Rx business. What we continue to try to strive to is, try to figure out how can we get one more product that adds value for our retailers. If we get that one more product that goes in our truck from Perrigo going to one of the large retailers, we think that's important to them and important obviously and good for Perrigo shareholders. So I do accept that they're just looking at -- I can't disagree with your basic premise in terms of just looking at the operating margins of the business. There are differences. No question about it. But at the same point, we do have a very significant market share in our Consumer Healthcare business. We do think that's a long-term very significant opportunity for us to continue to expand the product offering, especially as we -- as what we think about the newer products that we get in Consumer Healthcare tend to have better margins than our existing business. So we're always trying to add those next new product categories. That's why the -- our comment today about having new product is so important for our future, because within those new products the actual new products aren't that different from what we have in the Rx or Consumer Healthcare. They tend to be close to each other. But I don't discount your commentary about there are just some difference in operating leverage. It deals somewhat with competition, it deals with somewhat -- with how we approach our retailers but that's going to happen. It's really us trying to drive our overall operating margin for our business, which I don't want to be repetitive but when we -- when I started the business it was in the single-digits and delighted to say that we had the latest quarter was in that 28% range. So we made great progress. Operator, next question.

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

Hi. In the Nutritional category, I mean you explained how you expect to grow through adult nutrition in BMS. But does that imply that you expect infant formula sales to be down? And if you could just elaborate on that business and how you're feeling about it? I mean, I kind of wonder Joe if maybe that's one acquisition you regret. And then, secondly, on the smoking cessation, branded competitor that has gone out of the market temporarily, can you describe more specifics about that and how long you expect them to be out of the market and what your -- including in your guidance for that going forward in FY 2015? I guess those are my questions. Thanks.

Sure. So you had a couple of parts to this question. On Nutritional business, as we stated we think that that's actually given a very good growth opportunity from 7% to 11% growth for the business. Infant formula is going to be up significantly. We do think that business is going to be up more than the respective average of the combined business of nutritionals. But the large part of that is both here in the U.S. but also some of the things that we're going to be doing internationally with infant formula. The other area of importance for us is what we're looking at for adult nutrition. As you stated that is good, a good part for us that we -- as we launch these new products that area is very exciting. Relative to your statement do I regret the acquisition of our infant formula business, the answer is absolutely no. I think it's a great business. There is only four manufacturers in the United States that can make infant formula. We are -- the other three are the branded companies and then there is Perrigo. Anytime I can find myself in that kind of position over the long-term with what I believe are significant barriers to entry for additional players I believe that that offers tremendous long-term growth opportunities. Have we had some challenges bringing out the plastic container and other things? Yes, we have. But that things that we've worked on, we've worked hard, we continue to see great growth opportunities. On the smoking cessation portion of your question, Linda, there is really one major manufacturer of branded product out there that's run into some difficulty specifically in some of the lozenges product. I probably don't want to make any specific comments about how long I expect them to be out but we have found some opportunities in the lozenges category as retailers come to us for additional products for their shelves.

Yes, Linda its Judy I just want to apologize if there was any confusion. I just highlighted a couple of things that we're new to point to on a -- into the fiscal 2015 year as opposed to implying that because I didn't comment on infant formula that in some way it was (inaudible).

Operator, next question.

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

Great. Thanks guys. Can you hear me?

Yes, Randall, hi.

Great. Hey, Judy a question for you on the consumer business. If we were thinking about some of the swing factors we look at seasonality at may be about 200 basis points should we think about the offset there being, the contract manufacturing customer just one more quarter to go, J&J and then Mucinex kind of offsetting each other, is that the right way and then any other swing factors that I may be missing?

You hit the nail on the head. I have my answer all set you're basically answered yourself so that you're spot on. In terms of there is a seasonality factor that I mentioned to think about over the year but if you're talking about the full year-over-year you hit the critical point in terms of the headwind and then you got the good guys obviously with new product launches coming on in the year including with animal health.

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

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

Well year-over-year cough, cold, flu and allergies we think about a normal year next year versus, I think we had a late seasonality here on all three of them this year?

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

Correct.

Probably a little bit lower somewhere between 1 and 2 I guess I'm ballparking it here. I don't -- I haven't done that exact science trying to drive through the season because again the seasonal impact is trying to extract how much a season versus how much is with volumes driven because of the return of national brand as well. So that is a directionally you're probably fairly accurate.

Okay. And you said Mucinex is not in the Nasacort is risk adjusted with that right?

I said Mucinex and the family thereof are out.

And I did say that we have nasal corticosteroid sprays in the number we have risk adjusted them but they; we do have a opportunity for those products.

Got it that would be upside then. Okay, great. Thanks, Joe.

Thank you.

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

Thanks very much. Had a question on your Rx Pharma business. You've had very healthy growth over the past couple of years I think growing at 25% this past fiscal year. But in your guidance you're looking for 5% to 9% which is pretty sharp deceleration just curious what might be going on there is the pricing dynamics as more competition expected anything else going on why you forecast so much, substantially a lower growth rate going forward? Thanks

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

And don't forget David this year we had an acquisition. So you have the impact of the Fera acquisition in fiscal 2014 that contributed significantly and we talked throughout the year about how much that contribution drove top-line and adjusted operating income dollars. So the organic business, if you will, continues to grow well and then those acquisitions get calendared in because the Fera acquisition was effective essentially July 1 of last year. So it's fully calendared in at this stage.

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

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

Well animal health did have a challenge in the quarter. As Judy said and I said, one of the issues was the leaner flea and tick season or a shorter flea and tick season during the first couple of months because the weather was colder. We really didn't see the start of the flea and tick season, for instance, in the southeast until March/April timeframe versus an earlier timeframe. So it was a delayed start to the season to be clear. As we think though about the future of what we're doing with flea and tick we do think there is some significant upside as we launch some new products into the category. That was really one of the commentaries we talked about in terms of the growth opportunity with new products in the animal health and specifically in the flea and tick area as we bring out some additional line expenses. So that that continues to make it very promising for us. I think longer-term the issue simply for us is that we've got some good new products that we expect to launch but we do think that this category of animal health will be a category that would be even greater opportunities as the entire animal health business looks to -- a discontinuity on how the current prescribing, dispensing functions occur in the area versus what happening and what's got human health and we think some of that discontinue will change over the next five years. I don't want to get into long-term of that but that that's really why we're excited about it, why we think it's important and why we think the retailers the Wal-Marts, the Walgreens, the CVS, the Targets, all large club stores are all part of it has a significant interest in getting more involved in animal health and we want to make sure that we offer them the products to help them be more involved for the future opportunities there.

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

Well we -- just let me state we do not have a final agreement with our partner but we continue to work very closely with our partner. We believe it's in the best interest of Perrigo and in the best interest of our partner to come to a resolution to get the -- to launch a store brand private label of Nasacort into the marketplace. The only thing I would say that it has changes that Sanofi has done very well with the product relative to its launch of the branded Nasacort product. So that's good news because once we do get to the marketplace, we think obviously there's going to be a very significant store brand private label opportunity for our product to get to the marketplace. So we are making some progress but as I said earlier today we do not have a signed agreement at this time. Operator, next question?

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

Thanks for taking the question. Could you talk about your outlook for the segment gross margins on an adjusted basis and could you provide us any sensitivities on tax rate in case there are any measures implemented by U.S. lawmakers that may affect already in tax inverted entity?

Sumant may be I will just grab your first question. We as you can see on I believe its page 13 of the material are no longer providing gross margin guidance and we're trying to streamline all that. So we've given you operating margin, a targeted operating, adjusted operating margin by segment and for the company. So we are no longer going to be commenting on gross margins specifically apologies.

And the second part was really concerning the tax and some of the questions around inversions I guess Sumant that was your --

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

Well may be just -- I'll just offer a couple of facts and may be just leave with that. Number one, our transaction has been completed as evidenced by we're here in Dublin today talking to you. I think most of the focus right now is determining future inversions impending transactions. Specific to our transaction, we worked with a lot of advisors, lot of time resources dollars allocated towards making sure that our transaction met all the laws and requirements that are out there to simply to be sure. I guess relative to any changes I ever don't want to speculate on anything specifically relative to potential changes but may be Judy you want to add something to give some color.

Honestly, there may have been so many things that have been going around in the media, so many proposals, so many ideas being generated that frankly I would be imprudent to make any comment on potential impact rate not knowing what the change could be, if it all that would be implemented. That being said, we've always been keen on comprehensive tax reforms just in terms of supporting the global competitiveness in the United States and driving obviously all multi-national businesses to better results. So although it's flowed up right. So at that point you say you're not to make comment on what happens to our effective tax rate with a variety of moving parts that Joe just mentioned. Our transactions closed and we believe a solid position going forward, and we'll just continue to monitor very closely what if any changes ever come through.

Operator, next question

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

Great, thanks. Primary question was on the Rx market and some of the price assumptions you're making for your base business in 2015. I guess you see some positive price trends and so what product offerings across the space. Can you just a little bit about just do you see more opportunity for price and just also gives us a flavor of what's in that guidance? And if I could just a second quick follow-up just turning back to last question. I know there has been a lot of attention for whatever reason paid specifically kind of interest rate deductibility and earnings stripping. Is that something that Perrigo -- would affect Perrigo if there was a change to how that's treated or just on that issue in particular can you just give us a little bit more color? Thanks very much.

Well I'll take the first part of the question here in the Rx market. I think probably the best way to answer this question is do I think there are some opportunities on pricing in the Rx category, the answers is yes. But I think the overall comment I would make is that our strategy on pricing hasn't really changed in the past six, seven years, when I've been at Perrigo, is to try to keep our pricing flat to up slightly across our total book of business, in other words across all of our portfolio keep pricing flat to up slightly. Our logic being that in any given year, in any given quarter we may raise prices on product A but then we make take a concession on Product B and C but try to keep that pricing flat to up slightly. If we do that and we're successful at that then which we've been then it allows to then layer on new product one, new product two, new product three which is why in our mind we're really excited about this year because of the magnitude of the new product that we have to bring to the marketplace. So I think in general pricing is -- there are some opportunities but we're seeking to keep that pricing flat to up slightly across the total book of business that we have for all of our portfolio. Judy, do you want to take the other part of the question?

Sure. So it's another case of negotiating against yourself right. There have been, we understand some things that have been floated around in some draft possible legislation talking about limiting interest deductions specifically on some intercompany debts. Obviously any discussion around intercompany debt and deductibility thereof is going to have an impact to really every multinational that has cash and capital movement between jurisdiction. So it's less about specifically companies that have redomiciled or really about how you view the entire international network for multinational company. So would it affect us to some extent? It's hard to know at what point that might change and what in the meantime we have done proactively through organic and inorganic growth to change our international footprint. We can move our international footprint and become -- have a better jurisdictional mix as we continue to grow ex-U.S. as well. We keep growing in the U.S. that's good. We keep investing in the U.S. I'm telling U.S. tax great. And to the extent that there is some comprehensive tax reform, super. Yes, there are some discussions out there. But again, I'm not going to -- we're not going to negotiate against ourselves. We're going to wait and see what the proposals are and obviously act accordingly.

Thank you. Operator, next question.

Your next question comes from line of Annabel Samimy with Stifel.

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

Yes. Let me -- may be just I'll comment -- I'll make a comment about specific part of your question then I'll get to just more of a general comment. I just remind you that when we give out a three-year CAGR, we do attempt to look at a compound annual growth rate over years, over three years. So if you add the 30% plus this current rate, we'll still be well within the range of what we have said for our guidance, first comment. On the other question though do I think -- as we look at our portfolio, there is -- we have some significant new products that we are planning to launch, as I said over a 100 new products? What we are viewing that it will -- our competitive position and how many people launch products with us or we launch it alone and what our relative timing is could make a very big difference in that growth rate. I think what was important for is to make sure that we could put numbers out that we felt comfortable with, knowing that if we have good timing or better timing or we have a less competitive environment there could be some upside. But as we look at our guidance across all of our business, we wanted to be very cognizant of the fact that we're in competitive situation with some products and want to make sure we know where the upside is for us, depending on when we want to keep new product and timing and competitive landscape. So that was really predominantly the reason we looked at what we did relative to our Rx guide but really for that matter across our total book of business.

Okay. Thank you.

Operator, next question.

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

Hi. Thanks for taking my question. So first question I had was on the fiscal 2015 guidance, just a little more color. Wondering how we should think about upside if you do launch Mucinex. Sounds like you are still very committed to that product. And then, is there is any risk adjustment for Flonase at all? And then, if you assume any sort of a prolongation I guess of the smoking cessation opportunity? I know you won't talk about the exact timing but just wondering what you think about it qualitatively in your guidance. And then, second question I had was just back to your thoughts on consolidation of the industry and how Perrigo fits in there? And what kind of companies you view as buyers and sellers of businesses in this kind of market? Thank you.

. : On the question on Flonase, flonase is -- let me say it differently. Nasal Corticosteroid are in our forecast that is correct. What we have done though is risk adjust them. We think we have got the Nasacort opportunity, a Flonase opportunity. What we are simply trying to say here is that we believe there is a nasal corticosteroid opportunity reflecting these two products. We though want to make sure there is a risk adjustment to ensure that we don't get too far ahead of ourselves relative to getting the product to the marketplace. I personally think that this whole area of Rx OTC is a very important area for us as evidenced by the fact, just in the last several months to year; we've seen the Flonase and Nasacort go over-the-counter. We've seen the overactive bladder market with the first product Oxytrol go over-the-counter. We obviously saw the very successful Nexium product go over-the-counter. We think there's a lot of opportunities in these Rx to OTC switches not just for the products I mentioned, but for the other members of the category that are in nasal corticosteroid sprays, overactive bladder, proton-pump inhibitors. On the smoking cessation question, we don't have a good answer as to the exact time that that competitor will be out of the market. So therefore, we were really going to limit it to just take it on a -- we know the opportunity is today but I can't say whether that's a one month opportunity, another six months. So we try to be conservative in our guidance as to what we expect relative to when they will return to the market. I think I hit all the questions. I'm sorry M&A. She has an M&A question. Sorry. Part four, M&A very robust or really active looking at things. What I would simply say to that is there is a lot of things on the table from other companies who have placed themselves up for sale. We continue to be very active. We think there are some great opportunities to build on the platform that we already have. As I said it's either adjacent categories, geographic expansion, or the technology competencies that we're seeking to add to the business. So we're going to continue to be very active there. Operator we have time for one more question -- two more questions.

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

Hi, Joe. Could you pull out a little bit more color on Androgel? I know there is two strengths. I mean and you've got what the only AB rated generic version of the 1% and your litigation on the 1.6. Is that something that you think you could be in on the market on both strengths next year?

Let me make a comment on, but I can't further make any specific comment on timing. Number one, yes, I'm very -- we will say the team has probably done a absolutely great job research and development regulatory team to get the Androgel 1% products -- generic equivalent to that products approved and indeed to get the AB rating. So congratulations to the team that have accomplished that. On the 1.62 that's a product that is in -- we are still in litigation for that product that's an area that's going to be a longer duration in terms of trying to resolve that. But I really can't make any specific comment about timing for that product at this point as I sit here today.

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

Yes, I probably would say, number one, we have the capabilities and capacity to make this product because we do make it for the prescription pharmaceutical market. So we do have the components or materials to make the product, yes. And we have obviously the experience of being out of the market place for several years in the Rx category with Nasacort. So we know to make it. We made a number of -- significant number of batteries over the last several years with the product so we are well prepared to do that. As to the specific comment, I have to go back to what I said previously, we do not have a final agreement with our partner, we are working on that with our partner but I do believe it's in the best interest of our partner and Perrigo to get a store brand and private label product to the market as soon as possible and we will continue to move along that pathway.

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

Thank you for taking my question. Just one clarification the -- on the CHC guidance are you assuming that store brand share is higher in aggregate across the portfolio in fiscal 2015. And I think you mentioned you are expecting Perrigo's share of store brand to be higher and just wondering if that second piece is a continuation of a recent trend or is something new that's happening on the year ahead? Thanks.

Well I'll take that, repeat a couple of the comments that I had in the prepared remarks, which is we assume that our share at store brand, if you take -- remember it's a big slice to the pie. The share is store brand we can well continue to grow within that size. We said that we think that store brands will continue to grow potentially except for the market that are going to be impacted by the return of the national brand to market. So what does that mean? Think analgesics will be a challenging category as the national brand returns to market in terms of overall share mix but we will as a company continue to grow. And then in the other categories we believe that we will continue to grow share overall in store brands. So it's hard to view it all holistically because of the impact in the mix of the different categories but in general store brand share continues to grow.

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

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