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Perrigo Co. (NYSE:PRGO)

F1Q01 (Qtr End 9/29/07) Earnings Call

November 1, 2007 10:00 am ET

Executives

Art Shannon - VP, IR

Joe Papa - Chairman and CEO

Judy Brown - EVP and CFO

Analysts

Greg Gilbert - Merrill Lynch

Daniel Russell - Sidoti & Company

Derek Leckow - Barrington

Linda Bolton Weiser - Oppenheimer

Operator

Good morning. My name is Shauna, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Perrigo 2008 First 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 period. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Mr. Art Shannon, Vice President of Investor Relations. Sir, you may begin your conference.

Art Shannon

Thank you very much, Shauna. Welcome to Perrigo's first quarter 2008 Earnings Call. I hope you all had a chance to review our press releases, which we issued earlier this morning. And copies of the press releases are 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 releases also pertains to this conference call. Certain statements in this call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page 1 of the Company's Form 10-K for the year ended June 30, 2007.

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

Joe Papa

Thank you, Art, and welcome, everyone, to Perrigo's first quarter fiscal 2008 earnings conference call. Joining me today is Judy Brown, EVP and Chief Financial Officer. Our call agenda today is as follows. First, I will provide a brief perspective on the quarter, reviewing several of the highlights for the quarter. Next, Judy will walk you through the detailed financial and talk about our outlook for the year. Then, I will discuss our opportunity for Omeprazole and an update on our OTC business, and some other priorities for our business. This will be followed by an opportunity for Q&A.

Obviously, the first quarter was a very strong quarter for Perrigo. We had record sales, record operating income and all our new products are on-track to meet our goals for this year before we launch Omeprazole.

We had strong positive cash flow from the operations in the first quarter, where we normally are users of cash. This is another very strong sign on the strength of our business.

Our Consumer Healthcare unit has $20 million in new business sales, which were a driver for this quarter as our team continues to rescue our customers, from our competitor's quality problems. This opportunity is worthening as our competitor has extended its time frame for returning to the OTC market.

As we told you at our Analyst Conference in September, we are looking at these sales from rescuing our customer from the competitors quality problem as part of our business and are working to keep these sales in the future no matter who is in the market place.

Customer service levels remained higher than FY'07, but with the increase in sales we will continue to strive to improve our customer service levels. Lot of development during the quarter, we also began shipping in July our pediculicide products, acquired in the Qualis acquisition, which we closed at the beginning of the quarter. As a reminder, these products extend our offering of high quality, affordable store brand products without adding infrastructure.

Our international businesses in Mexico and the UK also reported strong increases, with Mexican sales up more than 35%, and the UK growing at 18%. The Rx business continues to benefit from the Glades acquisition. Sales were up 11% in the quarter. The API business experienced strong growth, with sales up 30% in the quarter.

I am sure we'll have plenty of questions surrounding the Omeprazole opportunity, and we certainly want to talk about this exciting opportunity, so I'll get into detail on that shortly, but first let me turn the call over to Judy for more detailed financial review of the quarter.

Judy Brown

Thank you, Joe. Good morning everyone. Well, it was a great quarter for Perigo. Our solid earnings performance for the quarter demonstrates the team's ability to seize revenue growth opportunities, even in the face of pricing pressures in certain businesses. To manage cost and improve margins to a concerted operational focus, all the while continuing to increase our investments in the future.

We are very pleased with our financial results for this first quarter of fiscal 2008. So much so, that we are even more optimistic about the rest of the year. And I will comment on our updated financial guidance in a few moments.

Consolidated first quarter sales were a record $383 million, an increase of $43 million or 12% from a year ago, with sales up significantly in all four operating segments. Consolidated gross profit of $117 million was an increase of $24 million from last year, while the gross margin percentage was 30.5% of net sales, up 320 basis points from last year’s 27.3%. On top of this, we increased our investment in R&D by 25% from last year, spending $16 million or 4.3% of sales, a record for any first quarter.

Consolidated net income, including the positive impact of the Glades and Qualis acquisitions was a record $34 million this year compared with $17 million in fiscal 2007. There were no non-GAAP adjustments in the quarter, this year or last year, which thankfully will make the rest of the financial analysis very straight forward.

Earnings per share were $0.36 this year, double last years $0.18. And please remember, that last year subsequent to our earnings announcement we initiated a recall of certain lots of Acetaminophen Caplets. The total cost of that recall in the full year 2007 was approximately $4 million after-tax of which $700,000 or $0.01 per share was reflected in the first quarter fiscal 2007 10-Q which was filed on November 9th, 2006.

Now, let's go through a discussion of our business segments; starting first with Consumer Healthcare. Sales increased $26 million or 11% to $268 million, driven by several positive factors.

Organic growth of 9% was driven by new product sales of $10 million, including our introduction of coated fruit flavor nicotine gum. A few smaller cough cold items, and launches in Mexico and the UK. We also enjoy sales of just over $20 million in incremental new business as a result of the absence in the OTC marketplace of a key competitor during the quarter.

As Joe already noted, that team is intensely focused on retaining this business as Perrigo's into the future. Our international Consumer Healthcare operations also performed very well in the quarter posting a $7 million or 22% improvement in sales, with favorable currency contributing 7 percentage points of this growth. Inorganic growth also added to the top-line, as we closed the Qualis acquisition early July. And as Joe noted began shipping our first store brand pediculicide products in September.

These growth factors were partially tempered by the year-over-year impact of our exit from the fiber laxative business, which has contributed approximately $7 million to fiscal first quarter 2007 sales.

Leveraging this strong sales growth, Consumer Healthcare gross profit increased to $72 million, a $16 million, 28% improvement from last year. We achieved 26.8% of sales gross margin or a 360 basis point improvement over last years 23.2%.

This is the third consecutive quarter where gross margins have expanded, and the best gross margin quarter since Q3 fiscal 2005. This was driven by the favorable mix of products sold, as well as the positive impact of production efficiencies, focused inventory management, and lower obsolescence cost. Also, gross profit margins a year go were negatively impact by the product recall costs.

Operating expenses in total increased $3 million or 8% in the wake of a 42% increase in research and development spending. Our spending pattern in R&D has been more back-end loaded in the last years. This year, we are continuing our project activity pace from Q4. As a percent of sales, Consumer Healthcare operating expenses in the quarter were down to 15.8%, compared with 16.2% a year ago.

In all, Consumer Healthcare ended with a record first quarter operating income of $30 million, which was 11% of sales compared with $17 million or 7% of sales last year. The higher sales volume and improved operating efficiencies contributed to a very strong side of the year for the Consumer Healthcare Group.

The Rx Pharmaceuticals segment also had a great start to the year led by the contribution of the products acquired in the Glades acquisition last year. Net sales increased 11% to $35 million from $31 million a year ago, and included $7 million from the products acquired from Glades Pharmaceuticals, as well as $6 million of service and royalty revenue.

Gross profit increased 10% to $15 million or 43.2% of sales due to favorable margins on the Glades product acquired, offset by pricing pressures and the existing portfolio items.

Operating expenses were relatively flat on a dollar basis, but were down 350 basis points as a percent of sales due to the leverage from higher sales volumes. Operating income was $7 million up 29% from last year.

On to API. By all measures, the API segment had an excellent quarter with results surpassing our expectations across the Board. We posted 30% year-over-year sales growth, all of which was organic and which was a record for the segment.

Sales increased to $39 million, up $9 million from first quarter last year. Strong sales of key products and timing of customer purchases in light of their respective product launches drove this growth.

Gross profit was $15 million, up $5 million from last year. Gross margin was 39.5% of sales, up 570 basis points from 33.8% a year ago on the favorable mix of product sold. Operating expenses were $8 million, up from $5 million a year ago, due to both increased R&D costs and higher employee related cost relative to last year.

In total, operating income in API was $7 million or 18.7% of sales, up from $5 million or 15.6% of sales last year.

The other category, representing our Israeli based Consumer Products and Pharmaceutical and Diagnostic businesses. Sales were up $4 million or 9% to $41 million. While all this growth was impact organic, the positive effect of currency exchange rates contributed 5.2 percentage points of this improvement.

Gross profit increased $2 million or 13%, due to the higher sales volume, favorable product mix and favorable currency, while gross margin increased 100 basis points. Operating expenses were $12 million, up $2 million from last year, due to higher selling and administrative expenses related to higher sales volumes and currency. Operating income was down less than $200,000 to $2.5 million.

And wrapping up our business segment discussion, unallocated corporate expenses for the quarter were $1 million, down from $4 million last year. This was due to a combination of two factors. First; we benefited from the settlement of a pre-acquisition legal claim related to August, which reduced this quarter's admin expenses by approximately $2 million. And second, the fact that last year's admin expenses were negatively impacted by approximately $1 million for one-time employee related cost.

With respect to taxes, you know that the effective tax rate for the quarter was 20.1%. Although this rate is basically unchanged from last year's 20.3%, there are two important inverse dynamics that work in this quarter's rate, which are important to gaining and understanding of our assumptions for the full year rate estimates.

As I have noted in previous calls, our tax rate fluctuates each quarter depending on the geographic mix of income before tax. In this year's first quarter, 54% of income before tax was generated by foreign operations with tax rates lower than the U.S. statutory rates. This is down 14 percentage points from 68% of income last year.

This variance raised the relative rate from the last year. Concurrently, as I discussed at our Analyst Day presentation in September, we received a favorable tax ruling in Israel in the first quarter.

In accordance with U.S. GAAP, we fully recognized this impact all at once. This resulted in a one-time benefit of $4 million or a 10 percentage point favorable impact on the first quarter effective tax rate.

The effective rate for the year is expected to be higher than the first quarter or for the balance of the year, is expected to be higher than the first quarter. As the U.S. operations are likely to represent an even higher percentage of total worldwide income before tax than in the first quarter.

Based on our expectations of worldwide pre-tax income mix in our updated guidance, we are still confirming an annualized tax rate for fiscal 2008, between 25% and 28%. As always, we will continue to pursue opportunities in this area to further improve upon this rate as the year progresses and as we continue to see benefits of our tax planning activities.

Now, some comments on the balance sheet, working capital, excluding cash, and investments were $324 million at quarter end compared with $297 million last year, an increase of $27 million. As a percentage of sales, this represents 21.2% down 60 basis points from this point in the year last year and in line with our seasonal selling and inventory both.

Debt to total capital was 25.9% at the end of the quarter down from 30% last year. We achieved this improvement while completing two acquisitions throughout the year plus this increased focus on working capital.

Accounts receivable were $283 million compared with $230 million a year ago, reflecting the 12% sales increase in last year. Inventories were $315 million, a decrease of 4% or $12 million from a year ago despite volume growth and the seasonal build in Consumer Healthcare.

Our inventory management programs have helped to bring down finished good levels, which have also allowed us to lower necessary reserves both in dollar terms and as a percent of gross inventory.

Accounts payable were $171 million compared with $173 million a year ago. This dynamic matches the relative decrease in inventory just noted. Cash from operating activities was $28 million in the quarter, compared with a use of cash for operations of $6 million last year. We are generally a user of cash in our first quarter, as we prepare for the peak demand of the cough/cold/flu season.

The story of this quarter, however, was different with several components of cash flow showing good results. Strong sales and improved margins drove net income, inventories were brought down and an operational focus on improvements in our procure to pay cycle enable cash generation from payables.

Capital expenditures during the quarter were $4 million. For our various project plans the first quarter was relatively slow in terms of capital spend, but we still anticipate spending between $40 million and $50 million for the full year.

And lastly, we repurchased 202,000 shares in the quarter for $4 million to 10b5-1 stock repurchase plan. Bottom line, it was clearly a great start to the year. Generally inline with our expectations, but even more positive on the bottom line, due to the early benefit from the Israeli tax ruling. We continue to be well positioned to take advantage of our investments in quality, customer service and R&D as well as the launch of new products.

We believe we will also continue to see the positive impact of new Consumer Healthcare volumes, resulting from a competitor's current absences from the market. When we issued our guidance for fiscal 2008 in August, we expected to be positively impacted by that new business awarded to us. And made reasonable assumptions, based on market share and average product margins of the business, we would be able service and maintain for the full year. It now appears that this competitor's return to market will be later in the year then previously anticipated.

With this changing scenario in Consumer Healthcare, and considering our strong start to the year in the remaining business units, we are updating our 2008 guidance. We now expect our full year 2008 earnings to be in a range of $1.12 to $1.22 per share, up between 26% and 37% from adjusted EPS of $0.89 last year.

I am please to note that this improved guidance reflects the Management team's commitment to build on the momentum we have to-date, while maintaining the proper balance of investments in the future, in R&D, in quality and in technology.

Let me be clear, this guidance does not include any estimate or expectation for Omeprazole. When our partner receives final FDA approval and launch dates are finalized, we will revisit our earnings guidance at that time, including those estimates.

That said, as you revise your models based on this new information, you may wish to consider a few points. We expect year-over-year sales growth to remain strong throughout the year. We currently expect that the second quarter will be the strongest in terms of operating income improvement based on seasonality, the timing of new product launches and our beliefs regarding the competitive dynamics in the marketplaces in which we operate.

The second half of the year will also see the decrease of the bottom line profitability of the Rx segment, as the service revenues from collaborative R&D activities are expected to possibly decline. As noted earlier, as we expect the full year effective tax to remain in the 25% to 28% range, the rates for the remaining quarters should be higher as the relative domestic income before tax is anticipated to be higher than this quarter and last year.

With this improved bottom line guidance, we also anticipate cash flow from operations to now be in a range, more closely to $150 million to $170 million for the full year.

And with that, let me turn it back to Joe.

Joe Papa

Thanks, Judy. Thus Judy has given you all the details of our first quarter, I would like to go back to a year ago, when I started Perrigo, and discuss my priorities for the Company and how it will impact 2008 and beyond. As a reminder, my five priorities are; quality, number one. It is our number one priority. Number two; is customer service, ensuring we have the appropriate customer service levels. Number three; it's about new product, customer driven innovation. Number four; it's about lower our cost base, so that we can compete globally. And number five, people developments.

First, we have and we will continue to make investments in quality. Our team is focused on meeting quality goals, while continuing to challenge our cost structure. Quality will always be our primary goal. As we have seen in the market a company cannot afford to cut corners on quality.

A year ago, I discussed our investments in quality. This important action proved to be very timely, and today we are positioned to rescue our customers with high-quality, affordable products.

Second, customer service, it is essential to our sustained growth. We have consistently improved our service levels since the middle of last year. We still have room for improvement, but we are remaining very vigilant in this area, and will continue to try to improve our customer service levels.

Third, new products sales and innovation will be a key driver for Perrigo. Omeprazole is the latest new product we are bringing to the market. It is indeed though the largest opportunity in our 120-year history of Perrigo.

Our partner Dexcel, settled a lawsuit with AstraZeneca on September the 27th. Perrigo will commercialize this product exclusively, offering a high-quality affordable product, that can save consumers up to a $150 million per year.

Brand sales of Prilosec OTC are estimated to be $750 million and growing. Our partner has not yet received final approval, but we expect to launch by the end of Q1 calendar year 2008 or just a few months from now. We have just begun working with our customers to start commercialization efforts for this important product.

In other areas of new products, the smoking cessation category, we continue to gain share. We received final approval for coated fruit nicotine gum during fiscal 2007 fourth quarter adding another exclusive product to the category. This year, there are more exciting new products coming to market. Cetirizine, a generic version of Zyrtec should come to the market after the patent expires in late December 2007.

As a reminder, we will be vertically integrated for Cetirizine with API from our Perrigo facility in the near future. Famotidine Complete also represents a fiscal '08 opportunity after we prevailed in our patent litigation.

On the topic of patent litigation, Adams Respiratory filed suite against Perrigo after we filed an ANDA with a Paragraph IV a generic version of Mucinex guaifenesin extended relief tablets, 600 mg, a $100 plus million name brand product. We feel very confident in our position that we do not believe we infringe any valid or enforceable claims on their patents. The 30 months stay began September 27, 2007.

Finally, clobetasol foam also offers us an opportunity to launch this product after the conclusion of the 30 months stay in April 2008. In FY 2008, we plan to file more than 10 ANDA's with more than half of those being Paragraph IV filings. We're increasing funding of R&D in all our business units to keep on this pace to ensure that this important growth engine is sustainable.

Fourth, in order to be a leader in our space, you must be also a low cost provider. John Hendrickson in our Global Operations team has been charged to improve our supply chain and our cost structure. He and his team have implemented major value stream initiative over the past several months and the results are clear in our quarter.

And finally, you must have the right people, we are constantly looking for the right people to help us grow our company and that progress is ongoing. I'm glad to say, we held our very first Global Leadership Team meeting in September focusing on leadership training and development.

Overall, our bottom line results have exceeded expectations, since the second half of last year my team and I have been focused on improvements in our working capital in each of our business units. We will continue meeting weekly to focus on the metrics that help us to manage inventories and improve our processes. We have changed long-term incentives to be based on return on invested capital for this year. We believe this is the best metric for growth and accountability.

In these volatile market conditions alike, that we are positioned as a company that has been building to generate cash from a solid foundation. This quarter we generated more than $28 million in cash from operations in a quarter where we are normally a user of cash.

We are well on our way to meet our new goal of $150 million to $170 million in cash for the year. Overall, it's a very exciting time for Perrigo, our base business is performing well, so we increased our full year guidance. We are taking advantage of current market conditions, investing in our future and are being very selected by strategic acquisition opportunities which could help us to deliver value to other customers as well as our shareholders.

And finally, we are very excited about our Omeprazole launch opportunity.

Thank you. Now, let's take time for questions. Operator, can you please open up for the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Greg Gilbert with Merrill Lynch. Please go ahead.

Greg Gilbert - Merrill Lynch

Thanks. Good morning. I have a few. Let's start with Omeprazole. Judy, how should we think about the gross and operating margin for the product as well as what are your thoughts on the duration of possible exclusivity there?

Judy Brown

Well, specific to Omeprazole, we are not yet giving guidance on the impact of that product to the operating margins yet. As I noted earlier, we are going to give very specific guidance on the product as well as the impact for the full year at time that approval is received.

With respect, however, to the overall modeling, we've tried to give you some assistance in our press release giving an idea of what we believe the top line full year opportunity to be is and as we've also noted, we will be sharing profits with our partner Dexcel in that opportunity. Maybe I will let Joe comment on the duration question.

Joe Papa

Okay. Sure. Greg, I think on the duration question, I think as many people know there was one additional filing that occurred back in March of 2007 that resulted in a legal litigation that was initiated with the July 27, 2007 start date of a 30 months stay. We believe that give us at least a very significant time frame to get to the market. Additionally, 30 months from 2007 brings you well into that 2000 and/or certainly at the beginning of 2010. So, clearly it's a significant opportunity for us relative to the exclusivity period.

Greg Gilbert - Merrill Lynch

Now, when you say exclusivity, you went out of your, let's say, say that and does that implies that the innovator can't launch their own store brand version?

Joe Papa

No. I don't think that I want to suggest that. I don't know that. We'll say though that we have seen in the store brand market is very unusual. In fact, I don't recall any examples of an innovator launching authorized generic or something of that effect. It's a different marketplace, and at this time we expect that we will have some tight periods where we are out there with our product, can't guarantee what the innovator will do, though obviously that would be up to them to make that judgment.

Greg Gilbert - Merrill Lynch

Thanks. Second question, Joe I'm sure folks are curious to hear specifically what gives you the confidence that you'll keep the business that you want, any color would be helpful there?

Joe Papa

Sure. First of all, what we've tried very hard to do is rescue our customers from the quality problem that our competitor has. We work very hard to get them product as quickly as possible, to get them a quality product, and to maintain high customer service levels.

We know the competitor continues to have some issues, I can't really comment about their issues. All I can comment is, that we work very hard. We have some extended time period now where we see that they have not returned to the market, so it gives us some greater confidence that we'll keep this product over the longer term.

Once again, I wouldn't be able to guarantee duration forever, but we are saying, we believe in this business, we've done a lot to rescue the customers, we've done a lot to maintain good customer service, and to ship them quality product. And therefore, we are doing everything we can to keep this business as ours.

Greg Gilbert - Merrill Lynch

One more, and I'll get back in line. Joe, what's Perrigo's exposure to cough/cold products for children, given that there is some scrutiny in that area? Thanks.

Joe Papa

Yeah. I think many of you know that there is been quite a lot of questions and issues on the cough/cold area for children. I'll just remind you a couple of points, and I'll get to you an exact answer to the question. First, we've done a great job at de-worsening our portfolio. The total amount of cough/cold products is still as important to us, but it's less than, total is 12%. When you get down to the kids area, it's less than $15 million as a percentage of our total business. So, while its still important us, it is certainly a smaller part as being of our business, and as we diversify our business into the other areas of generic Rx business, the API business and of course the other areas of Consumer Healthcare business.

Greg Gilbert - Merrill Lynch

Thank you.

Art Shannon

Next question.

Operator

Thank you. Our next question is coming from [Daniel Russell] with Sidoti & Company, please go ahead.

Daniel Russell - Sidoti & Company

Good morning, guys. I remember you said this, but with the gross margin and operating margin gains you guys received, do you expect a year-over-year increases next year as well?

Judy Brown

Year-on-year increases in 2009?

Daniel Russell - Sidoti & Company

Yes. Well, I am just saying you've been trending up for the past three quarters in gross margin, I just want to know if this still going to go in that direction?

Judy Brown

For the remainder of the 2008 you mean.

Daniel Russell - Sidoti & Company

Yes.

Judy Brown

If we look overall at the gross margin trends that we're anticipating for the rest of this year, we've commented in previous calls about how the operational focus, particularly in Consumer Healthcare, was to get us back to historical levels. And that was driven both by a combination of new product launches, but importantly getting our focus on inventory obsolescence control, production efficiencies, reducing rework and other items.

So, that is what you are really seeing as a critical driver in the last several quarters, it is that operational focus. If I look out at the full year, this was a strong quarter in Consumer Healthcare without a doubt. I would expect gross margins throughout the rest of this year to be trending in the mid to 20's, mid to I guess high mid-20s for the rest of the year, high mid, how do you describe that.

And for the overall corporation as a whole, in the upper 20s, and bumping up as we have this quarter with the 30%. So we've seen such strong margins this quarter and Rx with the contribution of the new products from Glades and API also had a strong quarter.

As I commented earlier, with the mix of products some of the seasonality of the products that we brought on as new business, and the continued focus on production improvements, I would expect this to have sort of a more stable rate through out the year as appose to expecting 400 basis point improvement sequentially each quarter through the rest of the year.

Joe Papa

Maybe I'll just add couple of words to what Judy's statement is, that, which is absolutely correct. I think the only other thing I would add is that, we towards the middle of last year took a very strong approach (inaudible) last fiscal year I should say, we took a very stern approach towards globalizing our supply chain, putting leadership in that area and also beginning a process of a weekly operational meeting, where we really can get to the bottom line of some of these questions and issues that were affecting our variances and other items that were affecting our bottom line.

And I think the team has done an outstanding job of truly globalizing our supply chain and indeed trying to improve the efficiency of our supply chain around the world and that's certainly we are starting to see some of that at this point.

Judy Brown

And Dan, just kind of to it up, we are returning to more historical rates as we promised. And I think I quoted for Consumer Healthcare, that we are back to third quarter 2005 rates, at or above that rate, kind of pass the PSE storm that changed the rates dramatically in Consumer Healthcare. And any of those numbers, I was just talking about just to reference back to Greg's question I am not including any of the impact that we would expect to see with Omeprazole. So, we'll be commenting again on that specifically in an upcoming call, we hope in the near future. And obviously, we will be reflecting the changes and any slope changes and gross margin related to that.

Daniel Russell - Sidoti & Company

Okay. Thank you.

Judy Brown

Sure.

Operator

Thank you. Our next question is coming from Derek Leckow with Barrington. Please go ahead.

Derek Leckow - Barrington

Thank you. Good morning and congratulation on a great quarter.

Judy Brown

Thanks, Derek.

Joe Papa

Hi, Derek.

Derek Leckow - Barrington

Just want to ask a bigger picture question on the gastrointestinal category. We've got some major new products coming out here. We've got Pepcid Complete and of course Omeprazole next year. How are you seeing the retailer, those customers respond to that? Are you seeing them repositioned to category to expand the shelf space and as a follow on to that, what happens to the store brand share? Is that going up, right now as well and obviously we would anticipate with, I think, its January launch time for the Pepcid Complete product, is that right? Would you expect that to continue?

Joe Papa

Yeah. Let me try to take the total category and then I will talk about the Pepcid Complete. Relative to the total category, we clearly do believe that retailers are very much looking forward to the launch of the Pepcid Complete and especially the Omep, the Pepcid Famotidine Complete product that we will launch. We very much look--think there is an opportunity there in store brand, having prevailed in the patent litigation. So, we do think that the, both the consumers as well as retailers believe that would be an important product.

On the Omeprazole OTC product opportunity, obviously, it is really a very significant opportunity. We've just begun to talk to our customers as we speak today, relative to this opportunity, but from discussions we've had with them relative to their knowledge of what we have here, they believe this is a very significant opportunity for store brand, one that can deliver a high-quality, affordable product and save consumers, up to a $100 million plus a year potentially.

So, we think this is something that they will continue to respond favorably to. On the issue, we have not come out with a specific launch date on Pepcid Complete or Famotidine Complete store brand at this time.

We are continuing to work through those issues and we'll get back as soon as we have a specific date. However, we will continue to work on that to try to make progress and get that product out as soon as we can.

Derek Leckow - Barrington

Yeah. And is Famotidine Complete already in your guidance or not, because there is no launch date yet?

Joe Papa

Yeah. What we do with all of our new products is, we put a probability factor on our new products, so none of our new products are, you know, 100%. We put probability waiting on those recognizing the fact that there is always issues that some go faster, some go slower, but we overall have a probability waiting at all of our products.

So, we don't specifically talk about any individual product in our out of our guidance. Omeprazole though, because of its size and the specific nature of that product, has to be something that we at this time have excluded from our guidance and then we will put that in as soon as we get greater clarity on exact launch date of that product. But given the fact it really is just we just simply await FDA approval. We're very excited and believe we can launch that by the end of the first quarter calendar year 2008.

Derek Leckow - Barrington

Okay. A one more bigger-picture question here. There is a new category kind of emerging within the drugs stores, you've got these clinics in there, and then you've got behind the counter there is sort of [quays OTC] segment. I think there has been push to kind of expand the product category overall. And I'm wondering is that that create an opportunity for Perrigo, and have you guys started to see your retail customer sort of respond to that yet, or is it still early days with that product category?

Joe Papa

Yeah, I would say, the generally a few question is, yes, we do believe this is a good opportunity for us at Perrigo, as we work with our large retailers. On the general sense of the store clinics, we think that that will be something that continues because it offers consumers time savings and very greater access to healthcare.

So, we do expect that to increase. As those continuing a large retailers, we believe that that will benefit Perrigo simply because we have got store brand products in those retailers and therefore if a patient is, we recommend or the physician or physician's assistant recommends a product to the consumer at the store clinic.

They are simply going to get it filled that back in that store. So, we think that is an opportunity for Perrigo, as we supply the large retailers with store brand. We obviously have a significant share of the store brand market. So, we do view that as positive.

On the behind the counter, I think is really the category you are talking about. We continue to believe that that may expand based on what the comments of the FDA Commissioner and pursuit of going to behind the counter status. We obviously wait to see what will happen with the (inaudible), then specifically Nasacort that will go before in FDA advisory committee meeting sometime later this year. So, we're continuing to monitor it, but we've had good success behind the counter as we've seen increase in our Pseudophedrine business over the last 12 months in behind the counter sales.

Derek Leckow - Barrington

Would say that PHE sales were up year-over-year?

Derek Leckow - Barrington

Our Pseudophedrine specific sales are behind the counter are good. But we actually look at the balance though Pseudophedrine in Phenylephrine, but Pseudophedrine we've been able to launch some products back that were previously in the market and come back with those products based on customer demand.

Derek Leckow - Barrington Research

Thank you.

Judy Brown

If I can add to that, Derek I'm happy to say after many quarters we've talked about the impact of pseudophedrine and the drag on the productivity of Consumer Healthcare. This is the first quarter where the combination of pseudophedrine and phenylephrine products in our portfolio have grown year-over-year. So, we hit the tipping point and are back on a growth track in that combination of products.

Derek Leckow - Barrington Research

Well thanks that's great news. Congratulations.

Judy Brown

Thank you.

Joe Papa

Thank you Derek.

Operator

Thank you. (Operator Instructions) Our next question is coming from Linda Bolton Weiser with Oppenheimer. Please go ahead.

Linda Bolton Weiser - Oppenheimer

Thank you, congratulation on all the good news. Just a question on generic problems like OTC--can you just remind us, I mean are you going to be the one who is manufacturing the product, and if so is there any sort of unusual ramp up cost or CapEx associated with that?

Joe Papa

Linda, this Joe Papa. Thank you for the comment,. Relative to Omeprazole, we are working very closely with our partner, Dexcel; they will actually manufacture the tablet, and we will be involved with some packaging and specific store brand opportunities. They will be doing that. Relative to the question on the capital, there will not be any significant capital increases, obviously maybe a curtaining line here or there, but nothing significant beyond our current capital. So, we think this will have a very favorable outcome on our return on invested capital for us at Perrigo.

Linda Bolton Weiser - Oppenheimer

Thanks. And also can you just comment on in terms of the incremental sales that you have gained from the Leiner situation, it does seems that your run rate is maybe $20 million a quarter, that's $80 million annual sales. It does that so a little bit less than your 65% share, would imply more than $100 million of sales. So, do you think there is more than you could actually gain, or are you looking at your current level as just stable?

Joe Papa

Yeah. I think what I would remind you, is that as we talked about this in the past, we did say we acquired approximately our market share of $90 million to $100 million products. During the quarter, as we mentioned, we shipped over $20 million, but I would just simply remind you there is some seasonality of that relative to some of the products that are in the cough/cold area, some of them are analgesic, as that go up as you hit cough/cold and flu season. So, we believe, clearly, we have acquired somewhere in the range of $90 million to $100 million annualized sales, and the current sales in the quarter are trending very close to our expectations.

Linda Bolton Weiser - Oppenheimer

Okay. Thanks. And also, what do you make of the FDA allowing Leiner to shift from their finished goods inventory? That would imply that may be they would come back online, maybe sooner. So, how do you sort of jive that with your belief that they will stay out of the market for longer?

Joe Papa

Let me be clear. I really can't comment on my competitors, when they are coming back or not coming back with products relative to their discussion with FDA. So, probably can't comment on that. What I can say though, is that we work very hard to go out and rescue our customers.

We've provided them with quality products with a good dating, which I can't comment on my competitor's dating. But we have good quality products, good dating with good service levels. So, we are going to do everything we can to keep that business. Once again, we are not building all of Leiner into our full year, but we do believe that this business is ours and one that, we will do everything we can to keep this business from after we've rescued our customers.

Linda Bolton Weiser - Oppenheimer

Okay. And just one question for Judy. I think you mentioned something about the Rx segment and something about profit declines, I just didn't catch what you were saying about that?

Judy Brown

If you remember we talked about in previous years that we had taken on a collaborative agreement, an R&D collaborative agreement in the Rx segment. We commented at the time and that started a few years ago, and that was not going to continue in perpetuity. We believe that, that will decline in the second half of the year, hence the waiting, as I commented on earlier of the first half, the second half of the year in our planning it is not a complete decline in the overall Rx business.

We expect our Glades product to continue to deliver well, and the team is working on maintaining the base business on the products that they have in their portfolio. It's not a big new product year plan for the Rx business, but we do expect to see a portion of a decline in the last quarter of the year related to that non-product revenue.

Linda Bolton Weiser - Oppenheimer

And that would be a decline in sales and profit?

Judy Brown

Yes. That's correct. And that was built into our initial guidance and in our updated guidance.

Joe Papa

Maybe one thing I should add to my comment on the cough/cold seasonality of our business. The cough/cold season so far has been slightly down from last year, so it is slightly behind last year. However it is so early in the season, it probably is very difficult to say very much more about the season. But I will say cough/cold season is slightly down about 8%, 9% from a year ago. Clearly there on the other hand, we've seen data from the southern hemisphere that it was a very significant cough/cold season. So, I really can't comment more about the seasonality other than just saying, we're early in the season, down slightly so far, but other data tells us from the southern hemisphere, it could be a cough/cold season., so we just have to keep tracking that and that effects the seasonality of our business.

Linda Bolton Weiser - Oppenheimer

Okay. Thank you.

Operator

Thank you. Our final question is a follow-up from Greg Gilbert with Merrill Lynch, please go ahead.

Greg Gilbert - Merrill Lynch

Thanks, in that case it’s a multi-part follow-up. Joe, can you provide any updates on Olux, Nasacort, and can you confirm whether you have any filings outstanding that you have not been sued on yet, Paragraph IV?

Joe Papa

Sure, so I'll start with Olux, just a reminder everyone on the phone, we filed it in August of '05, we were sued in October '05, the end of stay, 30 month stay is April of 2008, its approximately an $80 million to $90 million product by now. First by Connetics now by part of Stiefel. We clearly believe this is a nice opportunity for us. We feel we have strong position however, we'll have to make a decision later in this year, in our fiscal year or early in calendar year '08 as to when, whether we go forward with this launch opportunity. And when, what the issues would be at the conclusion of the 30 months day.

On the Triamcinolone Acetonide nasal spray, otherwise know as Nasacort, that was a March '06 filing. It was in May 2006, we're sued by the patent holder Aventis. And we believe that the end of that stay would be in November of 2008. That is one that we're not quite as far along on that patent litigation. So, it's too early for us to make much more comment on that, at this time.

And I think that the last part of the question is, are there other Paragraph IV's that we’ve not been sued on at this time. is that what you are asking?

Joe Papa

I really can't go into that Greg, I could say we have some additional Paragraph IV's. I really can't comment specifically on any of the products as to whether we were sued or not, but we do have other additional Paragraph IV opportunities. We believe we'll progress through the FDA, but I really don’t want to comment on that.

Greg Gilbert - Merrill Lynch

Okay. So, last big picture question Joe. If the Omeprazole opportunity is this big and as sustained as you hope it maybe do you see a unique opportunity to invest much more aggressively in the out years, internally and/or externally? Seems like a pretty big inflection point in terms of amount earnings and cash flow you may have to put back into the business?

Joe Papa

Sure absolutely great. I think clearly right now we are focused on having a successful commercialization that is our primary focus of that. Getting through the final stages of this, and getting it out to our customers, and been successful on the commercial side. So, clearly that is our initial focus, but I clearly take your point this would drive significant value for our shareholders, and give us significant additional cash flow. Give us chance to make some additional investments, as we think deems appropriate.

I think the important point I would go back to Greg, is that we believe that by continuing the focus on return on invested capital, it will allow us to make the best decisions for our shareholders. So, while we continue to look at acquisition opportunities we only want to go after those that we believe will add that ROIC value for our shareholders.

So, that would be what we would do, both internally and externally relative to our position monitor. But we do see this as being a very exciting opportunity. One that will come earlier than expected and clearly with Omeprazole, being earlier than expected I mean. One that we are very excited about the prospects for continuing to change Perrigo and really grow Perrigo significantly in today's marketplace.

Greg Gilbert - Merrill Lynch

Thanks again.

Operator

At times time, I am showing no further questions. I would now like to turn the call back over to management.

Joe Papa

Well, thank you everyone. Thank you very much for your interest in Perrigo. We are very excited as you can tell from our quarterly results, and the opportunity with the Omeprazole and the other products. We look forward to having further discussions with you in the near future. Thank you. Have a great day.

Operator

Thank you. This does concludes today's Perrigo conference call. You may all disconnect and have a great day.

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Source: Perrigo F1Q08 (Qtr End 9/29/07) Earnings Call Transcript
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