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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 conferenceoperator today. At this time, I would like to welcome everyone to the Perrigo2008 First Quarter Earnings Results Conference Call. All lines have been placedon mute to prevent any background noise. After the speakers' remarks there willbe 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 yourconference.

Art Shannon

Thank you very much, Shauna. Welcome to Perrigo's firstquarter 2008 Earnings Call. I hope you all had a chance to review our pressreleases, which we issued earlier this morning. And copies of the pressreleases are available on our website at www.perrigo.com.

Before we proceed with the call, I'd like to remind everyonethat the safe harbor language contained in today's press releases also pertainsto this conference call. Certain statements in this call are forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934 as amended, and are subject to the Safe Harborcreated thereby. Please see the cautionary note regarding forward-looking statementson 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 Chairmanand CEO, Joe Papa. Joe?

Joe Papa

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

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

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

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

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

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

Our international businesses in Mexicoand the UK also reportedstrong increases, with Mexican sales up more than 35%, and the UKgrowing at 18%. The Rx business continues to benefit from the Gladesacquisition. Sales were up 11% in the quarter. The API business experiencedstrong growth, with sales up 30% in the quarter.

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

Judy Brown

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

We are very pleased with our financial results for thisfirst quarter of fiscal 2008. So much so, that we are even more optimisticabout the rest of the year. And I will comment on our updated financialguidance 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 significantlyin all four operating segments. Consolidated gross profit of $117 million wasan increase of $24 million from last year, while the gross margin percentage was30.5% 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 $16million or 4.3% of sales, a record for any first quarter.

Consolidated net income, including the positive impact ofthe Glades and Qualis acquisitions was a record $34 million this year comparedwith $17 million in fiscal 2007. There were no non-GAAP adjustments in thequarter, this year or last year, which thankfully will make the rest of thefinancial 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 earningsannouncement we initiated a recall of certain lots of Acetaminophen Caplets.The total cost of that recall in the full year 2007 was approximately $4million after-tax of which $700,000 or $0.01 per share was reflected in thefirst 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 $10million, including our introduction of coated fruit flavor nicotine gum. A fewsmaller cough cold items, and launches in Mexicoand the UK.We also enjoy sales of just over $20 million in incremental new business as aresult of the absence in the OTC marketplace of a key competitor during thequarter.

As Joe already noted, that team is intensely focused onretaining this business as Perrigo's into the future. Our internationalConsumer Healthcare operations also performed very well in the quarter postinga $7 million or 22% improvement in sales, with favorable currency contributing7 percentage points of this growth. Inorganic growth also added to thetop-line, as we closed the Qualis acquisition early July. And as Joe notedbegan shipping our first store brand pediculicide products in September.

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

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

This is the third consecutive quarter where gross marginshave expanded, and the best gross margin quarter since Q3 fiscal 2005. This wasdriven by the favorable mix of products sold, as well as the positive impact ofproduction efficiencies, focused inventory management, and lower obsolescencecost. Also, gross profit margins a year go were negatively impact by theproduct recall costs.

Operating expenses in total increased $3 million or 8% inthe wake of a 42% increase in research and development spending. Our spendingpattern 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 firstquarter 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 improvedoperating efficiencies contributed to a very strong side of the year for theConsumer Healthcare Group.

The Rx Pharmaceuticals segment also had a great start to theyear led by the contribution of the products acquired in the Glades acquisitionlast 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 salesdue to favorable margins on the Glades product acquired, offset by pricingpressures 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 fromhigher sales volumes. Operating income was $7 million up 29% from last year.

On to API. By all measures, the API segment had an excellentquarter with results surpassing our expectations across the Board. We posted30% year-over-year sales growth, all of which was organic and which was arecord for the segment.

Sales increased to $39 million, up $9 million from firstquarter last year. Strong sales of key products and timing of customerpurchases 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 onthe 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 employeerelated cost relative to last year.

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

The other category, representing our Israeli based ConsumerProducts and Pharmaceutical and Diagnostic businesses. Sales were up $4 millionor 9% to $41 million. While all this growth was impact organic, the positiveeffect of currency exchange rates contributed 5.2 percentage points of thisimprovement.

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

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

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

As I have noted in previous calls, our tax rate fluctuateseach quarter depending on the geographic mix of income before tax. In thisyear's first quarter, 54% of income before tax was generated by foreignoperations with tax rates lower than the U.S. statutory rates. This is down14 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, wereceived a favorable tax ruling in Israel in the first quarter.

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

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

Based on our expectations of worldwide pre-tax income mix inour updated guidance, we are still confirming an annualized tax rate for fiscal2008, between 25% and 28%. As always, we will continue to pursue opportunitiesin this area to further improve upon this rate as the year progresses and as wecontinue 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 lastyear and in line with our seasonal selling and inventory both.

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

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

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

Accounts payable were $171 million compared with $173million a year ago. This dynamic matches the relative decrease in inventoryjust 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 aregenerally a user of cash in our first quarter, as we prepare for the peakdemand of the cough/cold/flu season.

The story of this quarter, however, was different withseveral components of cash flow showing good results. Strong sales and improvedmargins drove net income, inventories were brought down and an operationalfocus on improvements in our procure to pay cycle enable cash generation frompayables.

Capital expenditures during the quarter were $4 million. Forour various project plans the first quarter was relatively slow in terms ofcapital spend, but we still anticipate spending between $40 million and $50million 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 greatstart to the year. Generally inline with our expectations, but even morepositive on the bottom line, due to the early benefit from the Israeli taxruling. We continue to be well positioned to take advantage of our investmentsin quality, customer service and R&D as well as the launch of new products.

We believe we will also continue to see the positive impactof new Consumer Healthcare volumes, resulting from a competitor's currentabsences from the market. When we issued our guidance for fiscal 2008 inAugust, we expected to be positively impacted by that new business awarded tous. And made reasonable assumptions, based on market share and average productmargins of the business, we would be able service and maintain for the fullyear. It now appears that this competitor's return to market will be later inthe year then previously anticipated.

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

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

Let me be clear, this guidance does not include any estimateor expectation for Omeprazole. When our partner receives final FDA approval andlaunch 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 newinformation, you may wish to consider a few points. We expect year-over-yearsales growth to remain strong throughout the year. We currently expect that thesecond quarter will be the strongest in terms of operating income improvementbased on seasonality, the timing of new product launches and our beliefsregarding the competitive dynamics in the marketplaces in which we operate.

The second half of the year will also see the decrease ofthe bottom line profitability of the Rx segment, as the service revenues fromcollaborative R&D activities are expected to possibly decline. As notedearlier, 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 relativedomestic income before tax is anticipated to be higher than this quarter andlast year.

With this improved bottom line guidance, we also anticipatecash 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 ourfirst 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 andbeyond. As a reminder, my five priorities are; quality, number one. It is ournumber one priority. Number two; is customer service, ensuring we have theappropriate customer service levels. Number three; it's about new product,customer driven innovation. Number four; it's about lower our cost base, sothat we can compete globally. And number five, people developments.

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

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

Second, customer service, it is essential to our sustainedgrowth. We have consistently improved our service levels since the middle oflast year. We still have room for improvement, but we are remaining veryvigilant in this area, and will continue to try to improve our customer servicelevels.

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

Our partner Dexcel, settled a lawsuit with AstraZeneca onSeptember 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 millionand growing. Our partner has not yet received final approval, but we expect tolaunch by the end of Q1 calendar year 2008 or just a few months from now. Wehave just begun working with our customers to start commercialization effortsfor 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 nicotinegum during fiscal 2007 fourth quarter adding another exclusive product to thecategory. This year, there are more exciting new products coming to market.Cetirizine, a generic version of Zyrtec should come to the market after thepatent expires in late December 2007.

As a reminder, we will be vertically integrated forCetirizine with API from our Perrigo facility in the near future. Famotidine Completealso represents a fiscal '08 opportunity after we prevailed in our patentlitigation.

On the topic of patent litigation, Adams Respiratory filedsuite against Perrigo after we filed an ANDA with a Paragraph IV a genericversion of Mucinex guaifenesin extended relief tablets, 600 mg, a $100 plusmillion name brand product. We feel very confident in our position that we donot believe we infringe any valid or enforceable claims on their patents. The30 months stay began September 27, 2007.

Finally, clobetasol foam also offers us an opportunity tolaunch 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 thosebeing Paragraph IV filings. We're increasing funding of R&D in all ourbusiness units to keep on this pace to ensure that this important growth engineis sustainable.

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

And finally, you must have the right people, we areconstantly looking for the right people to help us grow our company and thatprogress is ongoing. I'm glad to say, we held our very first Global LeadershipTeam 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 onimprovements in our working capital in each of our business units. We willcontinue meeting weekly to focus on the metrics that help us to manageinventories and improve our processes. We have changed long-term incentives tobe based on return on invested capital for this year. We believe this is thebest metric for growth and accountability.

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

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

And finally, we are very excited about our Omeprazole launchopportunity.

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

Question-and-AnswerSession

Operator

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

Greg Gilbert -Merrill Lynch

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

Judy Brown

Well, specific to Omeprazole, we are not yet giving guidanceon 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 theimpact for the full year at time that approval is received.

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

Joe Papa

Okay. Sure. Greg, I think on the duration question, I thinkas many people know there was one additional filing that occurred back in Marchof 2007 that resulted in a legal litigation that was initiated with the July27, 2007 start date of a 30 months stay. We believe that give us at least avery significant time frame to get to the market. Additionally, 30 months from2007 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 exclusivityperiod.

Greg Gilbert -Merrill Lynch

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

Joe Papa

No. I don't think that I want to suggest that. I don't knowthat. We'll say though that we have seen in the store brand market is veryunusual. In fact, I don't recall any examples of an innovator launchingauthorized 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 areout there with our product, can't guarantee what the innovator will do, thoughobviously that would be up to them to make that judgment.

Greg Gilbert -Merrill Lynch

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

Joe Papa

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

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

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

Greg Gilbert -Merrill Lynch

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

Joe Papa

Yeah. I think many of you know that there is been quite alot of questions and issues on the cough/cold area for children. I'll justremind you a couple of points, and I'll get to you an exact answer to thequestion. First, we've done a great job at de-worsening our portfolio. Thetotal amount of cough/cold products is still as important to us, but it's lessthan, total is 12%. When you get down to the kids area, it's less than $15million as a percentage of our total business. So, while its still importantus, it is certainly a smaller part as being of our business, and as wediversify our business into the other areas of generic Rx business, the APIbusiness 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 thegross margin and operating margin gains you guys received, do you expect ayear-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 thepast three quarters in gross margin, I just want to know if this still going togo 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'reanticipating for the rest of this year, we've commented in previous calls abouthow the operational focus, particularly in Consumer Healthcare, was to get usback to historical levels. And that was driven both by a combination of newproduct launches, but importantly getting our focus on inventory obsolescencecontrol, production efficiencies, reducing rework and other items.

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

And for the overall corporation as a whole, in the upper20s, and bumping up as we have this quarter with the 30%. So we've seen suchstrong margins this quarter and Rx with the contribution of the new productsfrom Glades and API also had a strong quarter.

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

Joe Papa

Maybe I'll just add couple of words to what Judy's statementis, that, which is absolutely correct. I think the only other thing I would addis 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 approachtowards globalizing our supply chain, putting leadership in that area and alsobeginning a process of a weekly operational meeting, where we really can get tothe bottom line of some of these questions and issues that were affecting ourvariances and other items that were affecting our bottom line.

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

Judy Brown

And Dan, just kind of to it up, we are returning to more historicalrates as we promised. And I think I quoted for Consumer Healthcare, that we areback to third quarter 2005 rates, at or above that rate, kind of pass the PSEstorm that changed the rates dramatically in Consumer Healthcare. And any ofthose numbers, I was just talking about just to reference back to Greg'squestion I am not including any of the impact that we would expect to see withOmeprazole. So, we'll be commenting again on that specifically in an upcomingcall, we hope in the near future. And obviously, we will be reflecting thechanges 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 Leckowwith Barrington.Please go ahead.

Derek Leckow - Barrington

Thank you. Good morning and congratulation on a greatquarter.

Judy Brown

Thanks, Derek.

Joe Papa

Hi, Derek.

Derek Leckow - Barrington

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

Joe Papa

Yeah. Let me try to take the total category and then I willtalk about the Pepcid Complete. Relative to the total category, we clearly dobelieve that retailers are very much looking forward to the launch of thePepcid Complete and especially the Omep, the Pepcid Famotidine Complete productthat we will launch. We very much look--think there is an opportunity there instore 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 importantproduct.

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

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

We are continuing to work through those issues and we'll getback as soon as we have a specific date. However, we will continue to work onthat 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 ornot, because there is no launch date yet?

Joe Papa

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

So, we don't specifically talk about any individual productin our out of our guidance. Omeprazole though, because of its size and thespecific nature of that product, has to be something that we at this time haveexcluded from our guidance and then we will put that in as soon as we getgreater clarity on exact launch date of that product. But given the fact itreally is just we just simply await FDA approval. We're very excited andbelieve 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 anew category kind of emerging within the drugs stores, you've got these clinicsin 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 youguys started to see your retail customer sort of respond to that yet, or is itstill early days with that product category?

Joe Papa

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

So, we do expect that to increase. As those continuing alarge retailers, we believe that that will benefit Perrigo simply because wehave 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 tothe consumer at the store clinic.

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

On the behind the counter, I think is really the categoryyou are talking about. We continue to believe that that may expand based onwhat the comments of the FDA Commissioner and pursuit of going to behind thecounter status. We obviously wait to see what will happen with the (inaudible),then specifically Nasacort that will go before in FDA advisory committeemeeting sometime later this year. So, we're continuing to monitor it, but we'vehad good success behind the counter as we've seen increase in ourPseudophedrine 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 aregood. But we actually look at the balance though Pseudophedrine inPhenylephrine, but Pseudophedrine we've been able to launch some products backthat were previously in the market and come back with those products based oncustomer demand.

Derek Leckow - BarringtonResearch

Thank you.

Judy Brown

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

Derek Leckow - BarringtonResearch

Well thanks that's great news. Congratulations.

Judy Brown

Thank you.

Joe Papa

Thank you Derek.

Operator

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

Linda Bolton Weiser -Oppenheimer

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

Joe Papa

Linda, thisJoe Papa. Thank you for the comment,. Relative to Omeprazole, we areworking very closely with our partner, Dexcel; they will actually manufacturethe tablet, and we will be involved with some packaging and specific storebrand opportunities. They will be doing that. Relative to the question on thecapital, there will not be any significant capital increases, obviously maybe acurtaining line here or there, but nothing significant beyond our currentcapital. So, we think this will have a very favorable outcome on our return oninvested capital for us at Perrigo.

Linda Bolton Weiser -Oppenheimer

Thanks. And also can you just comment on in terms of theincremental sales that you have gained from the Leiner situation, it does seemsthat your run rate is maybe $20 million a quarter, that's $80 million annualsales. It does that so a little bit less than your 65% share, would imply morethan $100 million of sales. So, do you think there is more than you couldactually 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 talkedabout this in the past, we did say we acquired approximately our market shareof $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 someseasonality of that relative to some of the products that are in the cough/coldarea, some of them are analgesic, as that go up as you hit cough/cold and fluseason. So, we believe, clearly, we have acquired somewhere in the range of $90million to $100 million annualized sales, and the current sales in the quarterare 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 theirfinished goods inventory? That would imply that may be they would come backonline, maybe sooner. So, how do you sort of jive that with your belief thatthey 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 theirdiscussion 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 gooddating, which I can't comment on my competitor's dating. But we have goodquality products, good dating with good service levels. So, we are going to doeverything we can to keep that business. Once again, we are not building all ofLeiner into our full year, but we do believe that this business is ours and onethat, we will do everything we can to keep this business from after we'verescued our customers.

Linda Bolton Weiser - Oppenheimer

Okay. Andjust one question for Judy. I think you mentioned something about the Rxsegment and something about profit declines, I just didn't catch what you weresaying about that?

Judy Brown

If you remember we talked about in previous years that wehad taken on a collaborative agreement, an R&D collaborative agreement inthe Rx segment. We commented at the time and that started a few years ago, andthat was not going to continue in perpetuity. We believe that, that willdecline in the second half of the year, hence the waiting, as I commented onearlier of the first half, the second half of the year in our planning it is nota 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 thatthey have in their portfolio. It's not a big new product year plan for the Rxbusiness, but we do expect to see a portion of a decline in the last quarter ofthe 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 initialguidance and in our updated guidance.

Joe Papa

Maybe one thing I should add to my comment on the cough/coldseasonality of our business. The cough/cold season so far has been slightlydown from last year, so it is slightly behind last year. However it is so earlyin the season, it probably is very difficult to say very much more about theseason. But I will say cough/cold season is slightly down about 8%, 9% from ayear ago. Clearly there on the other hand, we've seen data from the southernhemisphere that it was a very significant cough/cold season. So, I really can'tcomment more about the seasonality other than just saying, we're early in theseason, 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 andthat effects the seasonality of our business.

Linda Bolton Weiser -Oppenheimer

Okay. Thank you.

Operator

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

Greg Gilbert -Merrill Lynch

Thanks, in that case it’s a multi-part follow-up. Joe, canyou provide any updates on Olux, Nasacort, and can you confirm whether you haveany 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 onthe phone, we filed it in August of '05, we were sued in October '05, the endof 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. Weclearly believe this is a nice opportunity for us. We feel we have strongposition however, we'll have to make a decision later in this year, in ourfiscal year or early in calendar year '08 as to when, whether we go forwardwith this launch opportunity. And when, what the issues would be at theconclusion of the 30 months day.

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

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

Joe Papa

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

Greg Gilbert -Merrill Lynch

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

Joe Papa

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

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

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

Greg Gilbert -Merrill Lynch

Thanks again.

Operator

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

Joe Papa

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

Operator

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

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