Barr Pharmaceuticals, Inc. Q1 2008 Earnings Call Transcript

Barr Pharmaceuticals, Inc. (BRL)

Q1 FY08 Earnings Call

May 8, 2008, 8:30 AM ET

Executives

Carol A. Cox - Sr. VP, Global IR and Corporate Communications

Bruce L. Downey, Esq - Chairman and CEO

William T. McKee - EVP and CFO

Michael K. Tong, PhD, CFA - Wachovia Securities

G. Frederick Wilkinson - CEO, Duramed Pharmaceuticals, Inc.

Frederick J. Killion, Esq. - EVP and General Counsel

Analysts

Gregg Gilbert - Merrill Lynch

Adam Greene - J.P. Morgan

Tim Chiang - FTN Midwest Securities Corp.

Rich Silver - Lehman Brothers

David Buck - Buckingham Research

Ken Cacciatore - Cowen and Company

Ronny Gal - Sanford C. Bernstein

Ricky Goldwasser - UBS

Marc Goodman - Credit Suisse North America

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Barr Pharmaceuticals First Quarter Earnings Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session, with instructions being given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded. And I would now like to turn conference over to our host, Ms. Carol Cox, please go ahead.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Thank you, Kealy. Good morning everyone and welcome to Barr's earnings conference call for our first quarter ended March 30, 2008. Earlier this morning, we issued our press release through PR Newswire and have posted a copy on our company's website at www.barrlabs.com. A copy of the release has been provided to the SEC on Form 8-K.

This morning's conference call is being webcast live and can be accessed through our website on the Investor Relations section. A replay of the conference call will be available from beginning at 10:30 AM this morning through 11:59 PM Eastern Time May 22nd.

I would like to take a moment to inform investors of several important items. First, in order to provide more transparency in to the adjustments included in our adjusted earnings, our earnings release includes a chart showing our consolidated P&L on a U.S. GAAP basis, a column for adjustments impacting each line and a resulting adjusted P&L. Second, we intend to file our Form 10-Q with the SEC tomorrow.

And before we proceed with the introductions and prepared remarks on today's call, I would just like to take a minute to remind our investors that we incorporate on this conference call by reference the risks and uncertainties set forth under the heading forward-looking Statements in our earnings release and in our most recent filings with the SEC, all of which are available on the Investor Relations section of our Barr Labs website. Should statements made by management contain information that is not historical, these statements are essentially forward-looking and are subject to risks and uncertainties and consequently actual results may differ materially from those expressed or implied on today's earnings conference call.

On today's call are Bruce Downey, our Chairman and CEO; Bill McKee, our Chief Financial Officer; Christine Mundkur, CEO of Barr Laboratories; and Fred Wilkinson, the CEO of Duramed Pharmaceuticals. Bruce will first provide an overview of the financial results for the quarter and an overview of our updated guidance for 2008. Bill will follow and review our financial results for the quarter in greater detail. And finally we'll open up the call to questions and answers.

I would now like to introduce Bruce Downey.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Thank you, Carol, and good morning everyone. Revenue for the quarter was $608 million versus $597 million a year ago. Our GAAP earnings were $0.21 per share for the quarter versus $0.11 per share a year ago, and our adjusted earnings were $0.57 per share versus $0.73 per share a year ago. These results were below your expectation and they are also below ours, and there are really three principal reasons for the difference in what we expected and what we achieved.

The first is we had lower than expected sales of our oral contraceptive products. We had guided the Street and our own expectations were somewhere between $0.10 and $0.15 decline year-over-year for the quarter. That turned out to be 17%. So we had a lower than expected sale of those products.

Second, the launch of our alendronate product in February was not as successful as we had anticipated. There was more pricing pressure and lower market share than we expected to achieve. And so sales of that product were below our expectations.

And third, the sales of our proprietary products were somewhat below our expectations, principally lower sales of our Plan B product. As we research the reasons for that decline, we found that the demand sales for Plan B continued as we expected, in fact were up sequentially, but in fact, the inventory levels at end of the calendar year were higher than normal, I believe; in retrospect, there were some speculative buying anticipating a price increase which actually occurred in the first quarter and we expect the sales growth of Plan B to continue in the second half of the year once those inventories are normalized.

Looking forward, we see some continued challenges in the second quarter of the year, but we see significant improvement in the second half of the year that will continue on 2009 and 2010. In fact, we see 9 and 10 as two of the strongest years in the company's history.

Looking beyond the financial results for the quarter, I think we had some very significant achievements that laid the groundwork for the growth that we see in the second half of the year and beyond. Starting with strong growth in the sales of our European markets, those were up significantly year-over-year. We also won the Yasmin case, which I think all of you are aware, and we anticipate a launch of that product approximately the 1st of July, some time at the end of the second quarter, the beginning of the third. And with the launch of that product, we see our OC products actually increasing year-over-year '08 versus '07.

I will remind everyone that in the original guidance that we provided in February, Yasmin was not included because it was a patent challenge that has not yet come to fruition, but in the guidance that we provide later in this call, it will be included because we now have a date certain launch based on the victory in that case.

Beyond Yasmin, we completed the Mirapex trial in March. We think that's a very strong case and we are waiting decision from the court and we are about to begin a trial of the NASACORT case, another case that we think is very strong and look forward to presenting our case to the judge.

Also in the first quarter, we announced the tentative settlement of the TRI-CYCLEN LO case. We are continuing to work on the settlement papers; that's a fairly complicated settlement and is taking some time to bring that to conclusion, but we expect that to happen later this quarter. And again, that's another, I think, very positive development for us going forward.

There is a new matter that we haven't announced, but that I will today. In this quarter, we completed the transaction with Allergan where Allergan bought out the royalties and milestone payments that could have been due under the Sanctura agreement between PLIVA and that company. We concluded that transaction on what we think are very favorable terms and received $53 million for those contingent royalty and milestone payments. That will be a transaction that will be reported in our financials for second quarter, but consistent with our practice that $53 million will be excluded from adjusted earnings because it's not in the nature of operating income and consequently would be excluded from our adjusted guidance.

We continued a very aggressive R&D program in the quarter and going forward for the year we're actually spending something over 10% of our revenue now in R&D. I think that ranks among the highest in the industry and I think all of our shareholders realize that it's been the most productive part of business and the source of the greatest returns for our shareholders, and we continue that aggressive development program, both in our brand and generic businesses, and now in our biologic area. So again, it's something that I think the ability to productively develop those resources to R&D bodes well for the future.

We've continued with our very aggressive capital expansion program ensuring that we have the facilities in place to capitalize on the products that we expect to come through our pipeline. We are especially aggressive right now in expanding our injectible capability in both Brno, Czech Republic and in Zagreb, and a good deal of our R&D program is devoted to expanding that portfolio of products.

As we ended the quarter, we had over 70 ANDAs spending, 25 of those were paragraph 4 patent challenge opportunities, and over half of those we are first to file. We have 300 registrations pending around the world in other markets, almost 80 compounds or 80 molecules. Again, continue to expand our product offerings in the markets where we business.

We began in the quarter and completed in this quarter the refinancing of our European debt which had certain financial advantages to us, including a more favorable tax treatment. We've completed the FDA remediation program in Zagreb and announced to the FDA that we're prepared for a re-inspection of that facility. We remain on track to close the East Hanover facility that was operated by PLIVA, the East Hanover New Jersey facility later this summer on schedule, in fact, a little ahead of schedule.

We completed in the quarter our first... we broke to blind on the Phase III trial in our first biologic product. We expect to file the BLA for that product with the FDA later this summer, and we continue to develop the two other biologic products that would be in the nature of generic offerings. The first filing will be a BLA where we would be the brand product.

We have three Phase III trials continuing in our brand business, four NDAs pending in FDA, again with a very strong pipeline and I think a very optimistic future. And I think personally one of the most rewarding achievements of the year was to put in place a new management team that I think will propel Barr forward, not only later this year, in '09 and '10, but for a long time to come.

As you recall, we have announced and Carol introduced Christine Mundkur, who is the new CEO of Barr Laboratories, Fred Wilkinson who has assumed the position of CEO of Duramed Pharmaceuticals, our proprietary business. And under their leadership, I think, we can all expect to see great accomplishments from both businesses. And complementing both of them, Mike Bogda has assumed the position of President and Chief Operating Officer of Barr Laboratories where Mike's group will be responsible for manufacturing and releasing the products for both our proprietary and generic businesses. They have been with us a long time and it's personally very satisfying to see them assume these new positions and I look forward to continue to work them for a long time to come.

Turning our attention to the outlook for the rest of the year, we see revenues of $2.7 billion to $2.8 billion and I would point out again that the same guidance that we gave for revenue in February, but there have been some changes. As you would expect, Yasmin was specifically excluded from the February guidance and is specifically included in the current guidance because of the date certain launch and the victory in the patent challenge. Product sales $2.6 billion to $2.7 billion, the same comment about Yasmin applies. We see earnings... adjusted earnings per share between $2.75 and $3.05 per share, that's down from $3.05 and $3.35 originally projected in fn February. The principal reasons are the ones that I gave for the shortfall in the first quarter, and also some delayed launches later in the year that based on, I guess, current information and terms of our relationship with FDA, and I will remind you that the... these estimates now include sales of Yasmin, but exclude the transaction with Allergan where sold the future royalty and milestone rights for $53 million.

On the expense side, sales... the R&D program will be... the spending would be about $275 million to $285 million. That's approximately up $10 million from the original projection. SG&A remains in line between $810 million and $830 million, what we expected at the beginning of the year when we announced our guidance in February.

Again I'd say that we expect stronger performance in the second half of the year, continuing into '09 and '10. And just to mention some of the factors that we see that impact that '09 and '10 results, we see Adderall XR launch in April of 2009 where we have six months of exclusivity, the Yasmin launch which will have benefits in the second half of this year, continuing into '09 and '10. We expect to see the TRI-CYCLEN LO case brought to conclusion with benefits in '09 and particularly '10. And we see growth in our brand business throughout that period.

So, as we look forward, we look forward with optimism to the future and see a very strong, a very strong company and performance in the second half of this year and going forward from there.

With that, I will turn it over to Bill who will go through some of the details of the financials, some of the line items and then we will turn it back to you for your questions, Bill?

William T. McKee - Executive Vice President and Chief Financial Officer

Thanks Bruce, good morning everyone. Total... as Bruce mentioned, early to give you total revenue numbers. So I'll jump into the total product sales, which totaled $565 million in the March quarter, which were up about 1% or about $4 million compared to the same period last year as higher year-over-year proprietary sales were partially offset by lower generic product sales. On a constant currency basis, total product sales declined about 4% as compared to the prior year.

The sales of our generic products were $469 million during the March quarter, down slightly as compared to last year's total and down about 6% on a constant exchange rate basis as lower sales in North America were partially offset by higher rest of world sales. Of the total $469 million, North America sales accounted for $261 million while the remaining sales of $208 million were recorded in our rest of world markets.

In North America, our generic OCs totaled $93 million in the quarter, a decrease of about 18% compared to last year. This year-over-year decrease was primarily due to the impact of lower volumes on several products due to lost market share and lower pricing on products such as Sprintec and Tri-Sprintec.

Non-OC sales North America totaled of $169 million in the March quarter, a decline of about 13% as compared to last year as higher sales of fentanyl were more than offset by lower sales of Ondansetron which we launched late in 2006 and had carry over launch quantities in the first quarter of 2007, lower sales of Desmopressin due to the launch of a second generic in the second quarter of 2007 and lower prices on several products, including Warfarin and Dex Sulfate, reflecting additional generic competition.

Our rest of the world sales totaled $208 million in the quarter, an increase of $44 million or 26% as compared to last year. On a constant currency basis, rest of world sales rose $15 million or 9.4%. The rest of the world sales were driven by sales from our key markets, including Russia, Poland, Croatia and Germany, which continue to contribute over 70% of our rest of world sales. The increase compared to last year reflected strong year-over-year growth from our Western region and CEE region, which more than offset somewhat lower sales in our Southeastern European region.

In the Western region, sales were driven by higher sales in Germany and Poland, while in our CEE region, strong sales gains in Russia led the way there. Lower sales in the SEE region were caused by lower sales in Croatia due to a less severe flu season as compared to the prior year, driving lower sales on two of our top products in that market.

Turning to proprietary segment, sales for the three months ended March totaled $96 million, an increase of about $7 million or 8% as compared to the same period last year. The increase in proprietary sales was primarily attributable to increased sales of SEASONIQUE, Plan B and ParaGard, reflecting increased demand, which more than offset the expected decline in sales of SEASONALE, which has faced generic competition since September 2006.

As Bruce mentioned earlier, we see the proprietary product sales rebounding somewhat in the second quarter off of Q1's levels and anticipate significant growth in the second half of the year, driven by strong demand growth anticipated in Plan B, SEASONIQUE and in ParaGard.

Alliance and development revenue totaled about $32 million in the quarter, an increase of $7 million compared to the prior year, higher development revenues earned under our license and development agreement with Shire, and our profit sharing arrangements with Teva on Allegra more than offset lower fees associated with the development of the adenovirus vaccine with The Department of Defense.

Turning to margins, our overall reported margin on product sales for the quarter was approximately 53% as compared to 48% for the same period last year. Excluding the impact of amortization cost and an inventory step-up charge in the prior year, our overall adjusted margin increased slightly to just over 61% in the current quarter.

On our generic products, our reported margin for the three months ended March 31st was about 50% as compared to 44% in the prior year period. Excluding the adjustments related to the acquisition, our adjusted margin in the current period would have been around 57%, which is in line with the adjusted margin in the prior period.

On the proprietary side, our reported margins were 68%, up slightly from around 66% in the same quarter last year. Excluding the impact of product amortization and the Cenestin milestone payment that we talked about in our last quarter, our adjusted margins on the proprietary business came in at around 82%, a slight increase compared to last year, driven by increased contributions of higher margin products, including ParaGard and SEASONIQUE.

The operating expenses, starting with SG&A, were $194 million in the March quarter, up 8% or $15 million as compared to last year's total. Excluding charges related to litigation settlements, our adjusted SG&A increased about $20 million from $172 million to $194 million. On a constant currency basis, the SG&A increase was about $7 million or 4% and that increase reflects higher sales and marketing costs in Europe, reflecting the acquisition of ORCA and the expansion of our sales force in Russia, as well as higher legal and IT costs in the U.S., which were partially offset by lower other consulting costs in the U.S. compared to last year.

Our R&D costs totaled approximately $64 million in the March quarter, flat as compared to the same quarter last year. Excluding a charge for IP, R&D that was included in last year's total, our adjusted R&D increased about $2 million or 3%, while on a constant currency basis, the adjusted R&D actually declined about $3 million compared to last year's total.

Overall operating expenses... Bruce mentioned this in his opening remarks, just to sort of reiterate, the overall operating expenses we see increasing over Q1 levels, especially in the second quarter, reflecting higher sales and marketing costs of our proprietary segment. And for the full year, our guidance for R&D was increased, as Bruce mentioned, and our SG&A, while still in the same range we gave earlier, looks to be trending a little bit towards the higher end of the range than in our February call.

Net interest income and expense for the March quarter was $27 million compared to the $31 million of net interest expense in the same quarter last year, primarily due to lower interest expense caused by lower debt balances and lower interest rates in our debt. However, these lower interest expense costs were somewhat offset by lower interest income due to declining rates on our investments and somewhat lower average daily cash and marketable security balances.

At March 31st, we had total debt of approximately $2 billion, $1.7 billion of which remains from the acquisition, while our cash and short-term marketable securities totaled around $500 million. And in first quarter, we made our scheduled principal payments of $50 million on our five-year term loan.

Bruce also mentioned in his opening comments about our initiatives that we undertook at the end of the first quarter and in to April to centralizing the existing debt on PLIVA of books, which was around $285 million. In April, we drew down $285 million of our $300 million revolving credit facility to refinance that debt. We believe centralizing that debt gives us greater operating flexibility, operating under one set of covenants, increased tax efficiencies, extending our debt maturities on the debt overall, and also taking advantage of lower interest rates in the U.S.

We are also seeking to raise new funds through a five-year term loan facility, which will use to restore the liquidity that we have taken under the revolving credit facility to refinance the PLIVA debt.

Other income and expense was an $8 million net expense in the first quarter as compared to a $1 million gain in the prior year. And that decline year-over-year was primarily related to net foreign currency losses, including the hedging activities and reflected a very significant decline in the dollar's value during the first quarter. In fact, we saw about an 8% decline in the dollar during the March quarter, which is by far the most significant decline in the dollar that we've seen since the PLIVA acquisition.

On the income tax side, the GAAP effective tax rate for the quarter was about 42%, up very slightly as compared to 41.7% in the prior year. And on an adjusted basis, our tax rate was 33% for the quarter and we still expect that adjusted rate to be in the range of 35% to 38% that we gave at the beginning of the year, although we do see a trending down a little bit closer to the low end of that range than we saw in February.

Our EBITDA for the quarter was $153 million for the quarter ending March 31st, and our operating cash flows for the quarter totaled $101 million compared to about $132 million in the prior period, as higher net income and higher depreciation and amortization was more than offset by higher cash outflows on the timing of payments for accounts payable.

CapEx investments during the quarter totaled around $29 million for the quarter. That's a little bit off, lower, below our one rate estimates from the beginning of the year, but at this point, we're not changing that estimated CapEx for the year despite the lower Q1 spend.

And with that, I will turn it back over to Carol.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Okay, thank you, Bill. Kealy, if you could please open it to questions and answers, and just remind everyone in an effort to allow everyone who would like ask question, we would appreciate it if you could limit your questions to one. Thank you.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question will come from the line of Gregg Gilbert of Merrill Lynch. Please go ahead.

Gregg Gilbert - Merrill Lynch

Thanks. Good morning.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Good morning, Gregg.

Gregg Gilbert - Merrill Lynch

One two-part question on OCs. I was under the impression that the Barr and Watson sort of swap of customers did not result in a material share change. Is that correct? And has pricing been affected on a go forward basis? And secondly, Bill, can you quantify Yasmin's contribution to sales and EPS for '08? Thanks.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I'll take the question, Gregg. It's Bruce. There was a switch of two customers that resulted in, I would say, a slight net market share loss to us. The customer we acquired was not as large as the customer we lost, although both were major customers, and that explains, I think, the difference between the 12% and... most of the difference between the 12% and 15% we estimated for the decline versus the 17% or 18% that we saw. And there was some fall-out in terms of pricing, although that stabilized and I think the market is stable right now. We have not quantified the Yasmin contribution as we don't normally do for any individual generic product and we're not going to start with Yasmin.

Gregg Gilbert - Merrill Lynch

Can you at least tell us why you're calling it a date certain launch, then?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Because we're... a date certain, we're targeting July 1. It could be the last part of June, it could be the first part of July, because that's when we expect to launch the product.

Gregg Gilbert - Merrill Lynch

Thank you.

Operator

Thank you. And our next question will come from the line of Adam Greene of J.P. Morgan.

Adam Greene - J.P. Morgan

Thanks, good morning.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Hi, Adam.

Adam Greene - J.P. Morgan

Hi. Following up on that question too, what are the remaining issues on Yasmin? Also, does the guidance... the revenue guidance include any contribution from YAZ or new brands? And then how should we think about the revenue progression for the rest of the year?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

There is no contribution from YAZ in the estimates. The remaining thing to be done with Yasmin is prepare for the launch.

Adam Greene - J.P. Morgan

What are the hurdles remaining at the FDA, the regulatory issues?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We expect an imminent approval from the FDA. There are no substantive issues remaining.

Adam Greene - J.P. Morgan

Okay. And are there new... any of the NDAs that are at the FDA included in the guidance?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Any of the NDAs?

Adam Greene - J.P. Morgan

Yes, the brand products?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes,there is one NDA pending at the FDA where we expect to launch in the year, and there are some minor contributions, but it's less than $10 million.

Adam Greene - J.P. Morgan

And for Bill, just how should we think of revenues as we move throughout the year? Is it more back-end weighted, obviously Yasmin impacting that, but --?

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, Adam, it is back-end weighted. On the proprietary side, we see a very significant increase in the second half. I think our Q2 sales will be above Q1's levels, but I think we will still be somewhat muted by some lingering inventory issues on Plan B that, I think, run into April, but at this point, we think are pretty well solved. So, both resolving those inventory issues as well as the demand growth that we see in several of the products I mentioned earlier are going to drive pretty significant increase in our proprietary sales in the second half of the year.

The other generics in the U.S. will also show a progressive increase in revenues, particularly weighted in the second half of the year, to reflect the contribution of launches that we expect in the second half.

The ex-U.S. generics seem to be relatively constant through the year. We do see some pickup in the second half of the year, but not as significant as I've described on the proprietary side. And then, of course, on the OC side, a very significant increase, reflecting the launch of Yasmin.

Adam Greene - J.P. Morgan

Thank you.

Operator

Thank you. And next we'll go to the line of Tim Chiang of FTN Midwest. Please go ahead.

Tim Chiang - FTN Midwest Securities Corp.

Hi, thanks. Good morning. Hi, Bruce. I wanted to talk a little bit about this, the U.S. generic business, ex-oral contraceptives; I mean, it seems like that segment also disappointed. What's going on there? Was there a lot of inventory that was also built up there at year-end or is it just a function of competition that's moving into this market faster than you had thought? Do you expect sequential improvements in this business as the year rolls out? What can we expect on that line?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Well, actually I think we anticipated a decline in the non-OC generic business in the U.S. because of some of the factors Bill mentioned, increased competition, new launches by competitors and products where we were alone or maybe one of two. And then we expect most of the non-OC launches that we expect for the year are in the second half. So we expect new launches to increase in the second half of the year versus the first.

Tim Chiang - FTN Midwest Securities Corp.

And I guess you did say Fosamax, does that launch not being as successful? I mean, what really happened there? Was it just a fact that you didn't have all the strengths or was it just much more aggressive pricing than you had originally thought?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think both were a factor, Tim.

Tim Chiang - FTN Midwest Securities Corp.

Okay, great, thanks.

Operator

Thank you. And next we'll go to the line of Rich Silver of Lehman Brothers.

Rich Silver - Lehman Brothers

Yes, good morning, hello.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes, hello, Rich?

Rich Silver - Lehman Brothers

Hey Bruce. Yes, just, I guess, question I just wanted to make sure that as has been the case in the past, there are no contributions at all even on a probability weighted basis from products in litigation, is that correct?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We've said that we... only those where we have a date certain launch that we included and that remains our practice.

Rich Silver - Lehman Brothers

Okay. And then just on Fosamax, at the time that you reported your last quarter, you already knew that the pricing was weaker than expected. So, I mean, at that time, have you already incorporated that in your guidance then or I mean, what was it that changed between then and now? I think the product had already been launched.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't think it had been launched, but actually the... we had made some adjustments in our pricing at the time we gave the guidance and it came down further from what we thought.

Rich Silver - Lehman Brothers

Okay. And just lastly, can you give us any update on Allegra-D and whether that's something that could happen this year or is this... there is going to be --?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Well, there are no impediments to launching Allegra-D. We have a final FDA approval. And so that remains at our option.

Rich Silver - Lehman Brothers

And just as you look at these factors in the second quarter, you said you expected a challenging second quarter. What would you point to as being the most important factor that would keep the businesses sort of challenging, is it the inventory overhang on Plan B or something else?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

No, I think inventory on Plan B, I think, Bill mentioned, continued into April and we think we will be normalized certainly by June. So, I would expect the impact of that to be less in the second quarter. Clearly, the alendronate sales are something that are ongoing. Change in the OC market is ongoing. But I think the biggest challenge we see or I will see, at least, in the second quarter is that we have a very aggressive spend on DTC and the brand side of the business, and we expect R&D to be up sequentially second quarter over first. So, I think those two factors, in addition to some of the things we mentioned for the first quarter, carry into Q2.

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, Rich, I would echo that just by saying that we do see pretty significant increases, not only in R&D and the proprietary marketing, but also in our sales and marketing costs in Europe. So I think the point about Q2 being challenging is that even though we anticipate revenue increases Q2 versus Q1, we just see a pretty significant ramp-up in the operating expenses in that time period.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

And I'd say, Rich, you one of the things that I think has been a hallmark of ours, certainly something I believe in, we don't reduce investment in the future, whether it's DTC spending or R&D, increasing the infrastructure that we have for any of our businesses. We don't let the fluctuations of quarter-to-quarter earnings influence our planning for the future. I mean, we just don't do that.

Rich Silver - Lehman Brothers

That's fair. Okay, I will step back. Thanks.

Operator

Thank you. And next we will go to the line of David Buck of Buckingham Research.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Good morning, David.

David Buck - Buckingham Research

Good morning, Bruce. Good morning, everybody. Just a question on the timing of product launches that you referenced in the release. I guess you mentioned that second half is when you're expecting more U.S. launches. If I take a look at the new guidance and include Yasmin, it looks like a pretty big order of magnitude reduction in assumptions. Can you help out there in terms of maybe give some reference point in terms of how many products, what sales level? And just a quick one on ORTHO TRI-CYCLEN LO, it looks like you are implying that there is really going to be no revenue benefit to this year, it's going to be 2009 to 2010, is that correct?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think we expect the benefit to be in '09 and '10, yes.

David Buck - Buckingham Research

Okay.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't have off the top of my head the quantification of the new launches. It is pretty significant in the second half of the year where we have 70 applications pending. And this turns out that it's a matter of timing. More are being... we anticipate more approvals and better approvals in the second half of the year than we got in the first.

David Buck - Buckingham Research

Had you expected some in the first quarter that didn't happen?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't believe we did.

David Buck - Buckingham Research

Okay.

William T. McKee - Executive Vice President and Chief Financial Officer

That was pretty limited, David. It's more of an issue in terms of the second half of the year.

David Buck - Buckingham Research

Okay, on ex-US generics, Bill, you mentioned, I think, being fairly constant for the ex-US generics, but do we still have the third quarter that's seasonally soft in Europe?

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, I don't see any significant changes in the forecasted sales, David. And I see them growing a little bit Q2 and staying relatively constant in Q3 and then growing again in Q4.

David Buck - Buckingham Research

Okay. So even with the time off for plants in Europe, it should still be up a little bit in 3Q?

William T. McKee - Executive Vice President and Chief Financial Officer

Off of the Q1 levels, I would call Q2 and Q3 sort of flat.

David Buck - Buckingham Research

Okay. Thank.

Operator

Thank you. Next we'll go to the line of Ken Cacciatore of Cowen and Company. Please go ahead.

Ken Cacciatore - Cowen and Company

Hi, just a quick question, on... first on Yasmin, just want to know if that assumes an authorized from Bayer. And then also on the rest of world, if you minus out the currency, Bill, it looks like you are roughly flat quarter-over-quarter. I don't know if I'm doing that math correct. Could you just discuss what's going on in terms of the growth rest of world? Do I have that correct? And kind of contact of the firms [ph]?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Ken, it's Bruce. There was growth in constant dollars year-over-year and then of course with the FX differences, the growth was greater than in constant dollars. We've made what we think are the appropriate competitive assumptions for Yasmin and we're comfortable with the assumptions we've made and incorporated into our guidance.

Ken Cacciatore - Cowen and Company

Thank you.

Operator

Thank you. And next we'll go to the line Michael Tong of Wachovia Securities.

Michael K. Tong, PhD, CFA - Wachovia Securities

Hi, good morning. Just a couple of quick ones. Bruce, I heard... I just wanted to confirm, you said with the contribution of generic Yasmin, that you are going to see generic OCs growing on an annual basis '08 over '07?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Correct.

Michael K. Tong, PhD, CFA - Wachovia Securities

Okay. And then secondly, you mentioned the generic Yasmin launch and also in April of next year generic Adderall XR launch. What steps are you taking to prevent sort of what happened with Fosamax from happening again, i.e., better pricing or better market share environment than what you saw versus Fosamax?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Well, the good news, Michael, is we really are exclusive in both of those products. We're exclusive even as to Shire with the Adderall. And so we don't expect to kind of shared exclusivity that, I would say, was disruptive in Fosamax launch, and we had the added issue of having only one the two strengths with the Fosamax launch. So the competitive situation dramatically different between... among those three different molecules.

Michael K. Tong, PhD, CFA - Wachovia Securities

Great, thank you.

Operator

Thank you. And next we'll go to the line of Ronny Gal of Bernstein. Please go ahead.

Ronny Gal - Sanford C. Bernstein

Good morning, good morning. Couple of quick questions, first on the branded side, I am kind of looking at the sequential decline between one quarter of '08 and four of '07, and it went down from $122 million to $96 million; that's $26 million, and I just was wondering, is the inventory issue with Plan B was all there with it [ph] or was there some other contributors?

William T. McKee - Executive Vice President and Chief Financial Officer

Plan B was the majority of that, but we also had sequential declines on Cenestin, which I think is also buying pattern issue in the fourth quarter. Those two make up the lion share of the sequential decline.

Ronny Gal - Sanford C. Bernstein

Okay. And around the oral contraceptive, it looks just from comparing the IMS dollars to what you... to the dollars you report that the contribution of worldwide [ph] was fairly small. I am just wandering if we are setting here a trend. I mean, are we going to see people like Wal-Mart offering low discount plan and essentially forcing even in fairly low competition market to competition market, the generics to cut down significantly? That is, is the model of having differentiated generics and having a low market competition in view of the Fosamax OC experience, should we begin to re-think this?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't think so, Ronny. I think... I point out that Wal-Mart does not participate in the IMS data program.

Ronny Gal - Sanford C. Bernstein

Which explains... my point exactly is that, which is it does not look at yourselves for... into Wal-Mart have significantly allowed you to exceed what IMS is projecting.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I'm not sure I follow your question.

Ronny Gal - Sanford C. Bernstein

Oh, what I am saying is, if we just take the sales to Walgreen and just try to figure out... so far we've essentially been trying to figure out how much Wal-Mart would add to what we contract in IMS, and just the observation it that it's not been much, at least not in this quarter. And I am just wondering if the pricing to Wal-Mart is sufficient to lead to an... should we start thinking about the pricing to Wal-Mart is significantly lower than the pricing we're seeing elsewhere?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

No.

Ronny Gal - Sanford C. Bernstein

Okay. So, essentially, is it essentially just... was there a general price decline across those products that were across the OC group?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think we said that our decline was driven by two factors. One is the difference in the size of the two customers and second, some general price decline in selected products. But that has since stabilized.

Ronny Gal - Sanford C. Bernstein

Great. Thank you very much.

Operator

Thank you. And next we'll go to the line of Ricky Goldwasser of UBS. Please go ahead.

Ricky Goldwasser - UBS

Yes, good morning.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Good morning.

Ricky Goldwasser - UBS

You mentioned the speculative buying related to Plan B inventory. Do you have inventory management agreements in place with the wholesalers and what are you doing to make sure that this doesn't happen with any of the other products?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We don't have inventory management agreements in place. If I misstate that, Fred, please correct me, but I don't believe we do. And we are being more vigilant and watching the Plan B inventory purchases of our major customers. I think Bill mentioned Cenestin has been a product where historically there have been ups and downs quarter-to-quarter, and I think we were surprised this past quarter and we plan to be more careful and controlling the inventories and our customers going forward.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

I would echo that. I think the only thing to add to that, Bruce, is that Plan B and ParaGard right now are distributed through a third party distribution house and we're increasing our visibility into the orders that go out as part of this process to make sure that we control that.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

And that third party agreement was one that we inherited from Women's Capital Corporation when we purchased the product. So, it is distributed differently than our other products.

Ricky Goldwasser - UBS

And how do you... and the other products are just distributed through the regular channels.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Right, through our own warehouse and order fulfillment process.

Ricky Goldwasser - UBS

Thank you.

Operator

Thank you. And next we'll go to the line of Marc Goodman of Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse North America

Yes, Bruce, I guess the first question is, if sales are going to be the same year-over-year and EPS is coming down $0.30, I don't mean year-over-year, sales are the same with respect to the old guidance and the new. Can you just help explain why does EPS come down so much? I mean, it looks like R&D is going up $10 million, but I don't --

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think the second is that there is some reduction in margins and those probably account for the majority of it.

Marc Goodman - Credit Suisse North America

And these products that... the products that you are referring to kind of delay--

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I also think we have a higher brand marketing cost this year versus than we expected.

Marc Goodman - Credit Suisse North America

Than you expected a few months ago, you mean?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Well, certainly more than we had last year.

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, I think, Marc, I think the drivers in terms of the changes are lower margins reflecting the change in the sales mix and higher operating expense, both R&D and legal. And also, frankly, versus our earlier estimates, the FX impact in the other income, other expense line was pretty significant as we saw Q1 versus Q1. And so that's sort of been carried forward into the full year number. So that line, that other income other expense line is actually down about $10 million lower than we anticipated at the February call, nearly just reflecting a very significant decline in the dollar.

Marc Goodman - Credit Suisse North America

But as far these delayed product launches and I mean, I guess, you are talking to FDA about when you expect the drugs to get approved; I mean, these are generics, you kind of know what time, but I am not... I am a little confused what's changed here. I mean, is it basically the FDA is just so backed up that products you expected to get approved early in the year and now getting approved later in the year, is it that simple?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think they are all expected in the second half of the year, but it's later on the second half of the year rather than earlier in the second half of the year. It is related to, I guess, the throughput of the FDA. We have increased the time from filing to launch that we expect and we found that whatever... the activities of the FDA seems to be taking longer, whether it's processing a minor comment later or processing a major comment later, we are reviewing our initial application.

Marc Goodman - Credit Suisse North America

Okay, but that's been made up for --

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

It was longer than it was a year ago.

Marc Goodman - Credit Suisse North America

Right. So if you are keeping sales guidance the same, that part has been made up for and the branded issues with the inventory which will be worked through are being made up for by Yasmin. So that stay the same, but the margins are being hit here because these brand products have higher margins than you are assuming on Yasmin, plus all the other expenses we just talked about.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We have a partner on Yasmin.

Marc Goodman - Credit Suisse North America

I am sorry.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We have a partner on Yasmin.

Marc Goodman - Credit Suisse North America

Right, right, right, I understand. And just one other thing you were mentioning, things to look forward to in '09 and you mentioned a couple of things, but you did not mention YAZ. Can you tell us why you didn't mention YAZ?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Because I didn't mention it.

Marc Goodman - Credit Suisse North America

Alright. Can you go into any more detail on that?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I mentioned the things that I thought were the most significant. Grow... or I mentioned the things that I consider significant for '09 and '10, there may be others.

Marc Goodman - Credit Suisse North America

So we should not consider YAZ a significant launch in '09 or '10?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

You can make whatever assumptions, I didn't mention it. So you might assume something from that.

Marc Goodman - Credit Suisse North America

Okay, thanks.

Operator

Thank you And next we go line Rich Silver of Lehman Brothers.

Rich Silver - Lehman Brothers

Yes, just to come back to the guidance issue. Bill, you just mentioned, okay, higher R&D of $10 million, but you said that SG&A was unchanged, but you then just said that the legal expenses were higher than expected. So just trying to reconcile those two comments.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think what Bill had said was that we had... we are not changing the range for SG&A, but the current thinking is that it will be towards the higher end of range rather than the middle or lower range. And that increase

Rich Silver - Lehman Brothers

And can you give us a sense... you did say that in the second quarter that you expected SG&A to be higher because of DTC.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Correct.

Rich Silver - Lehman Brothers

Can you give us a sense on R&D and SG&A, how we should be looking at the sequential trend beyond the second quarter for both of those?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think I don't have that in front of me, but I think that you will see lower DTC spending because of the election cycles. Our experience says that advertising becomes expensive and time slots become rare during the elections cycle and so I would expect certainly by the end of July you'll see that starting to tail off. R&D is... will be up for the second half of the... for the remaining three quarters. I don't know the quarter by quarter breakdown.

Rich Silver - Lehman Brothers

Okay. And then just a quick one, the stock option expense in terms of the adjusted EPS of 57 --?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Right. The stock option expense is included in the 50 plus.

Rich Silver - Lehman Brothers

Right.

William T. McKee - Executive Vice President and Chief Financial Officer

It's not added back.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

It's not added back

Rich Silver - Lehman Brothers

Okay. Thank you.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I gave in, Rich.

Rich Silver - Lehman Brothers

Yes, good.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think it's wrong, but I am still doing it.

Operator

Thank you. And we have a follow-up from the line of David Buck of Buckingham Research.

David Buck - Buckingham Research

Yes, just two quick ones. First on tax rate for Bill, the rates moved around a bit from where we expected originally and it's lower obviously in the first quarter. Can you give your best outlook for '09, '10, perhaps what do you think that rate will trend to? And for Bruce, what's the current hurdle in getting your own version of the fentanyl transmucosal approved?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

There is still... on the fentanyl product, there is still a debate at the FDA and with Cephalon about the risk management program and we think our product is approvable, and we are prepared to go forward with the appropriate risk management when it becomes clear.

David Buck - Buckingham Research

Can you give any timing for that?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

No.

David Buck - Buckingham Research

Okay.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We made what we think are legitimate assumptions in our projection period about when we might be approved, when we might expect competition, but we haven't disclosed those.

David Buck - Buckingham Research

Okay. And you are paying a royalty to... a small royalty to them, is that part of the reduction in margins?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

No.

David Buck - Buckingham Research

Okay.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

And the tax rate for '09 and 10, that's definitely a payroll [ph] card exercise, David. It's very difficult.

William T. McKee - Executive Vice President and Chief Financial Officer

David, I would add that as we see income increasing in those time periods, I would anticipate that the tax rate should be coming down off the 42% GAAP rate that we've got, but I'll be reluctant at this point to sort to quantity, but directionally as we see higher income, both in the U.S. and abroad, then I would anticipate that the rate will be coming down.

David Buck - Buckingham Research

I guess the disappointment I have had on the tax rate is that this is supposed to be one of the synergies from PLIVA, I guess it doesn't looks like it's that clear that we will actually be seeing that.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Well, I think, David, what we have said all along and certainly even at the beginning of the transaction that the tax rate benefit that we anticipate would be evolutionary and not revolutionary and it's going to take some time to make that happen; and the most significant impact from a tax standpoint is when you develop and launch products from the low tax jurisdictions, and we are actively developing products there now.

David Buck - Buckingham Research

Right. So what's the best guesstimate on an adjusted basis for tax rate in 2009, 2010?

William T. McKee - Executive Vice President and Chief Financial Officer

I don't have it for you, David, at this time.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Okay, thank you.

Operator

Thank you. We have a follow-up from the line of Tim Chiang of FTN Midwest. Please go ahead.

Tim Chiang - FTN Midwest Securities Corp.

Hi, just to be clear. I know you've sort of updated your guidance, but do you still expect non-OC U.S. generic revenue growth of about 10% to 15% this year?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't have the numbers with me.

William T. McKee - Executive Vice President and Chief Financial Officer

Tim, no, we don't. I mean, we see it, I would guess, as probably flattish in '08 versus '07 in the non-OC U.S. generics.

Tim Chiang - FTN Midwest Securities Corp.

Okay.

William T. McKee - Executive Vice President and Chief Financial Officer

And the difference between what we had thought in February and what we are looking at now is primarily driven by the negative impact from the delay in launch timing, which, by the way, not only pushed products, the launch of product timing from, let's say, Q3 to Q4, but also, in fact, pushed some products completely out of 2009.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Few quarters into '09.

William T. McKee - Executive Vice President and Chief Financial Officer

Into '09. And then the second major contributor to that is the alendronate pricing environment. And I think Rich had asked earlier didn't you know about this? The product was launched and at the time we gave the February guidance, we had anticipated a very significant decline off of what has been even our earlier estimates of that product market environment. Unfortunately, after the call, we experienced even further significant declines, which not only affect the first quarter, but obviously had a negative impact for the full year. So, the launch timing and the alendronate pricing environment are the two major contributors to the change in the view on the non-OC U.S. generic forecast for '08.

Tim Chiang - FTN Midwest Securities Corp.

And the flattish growth for '08 or no growth in '08 doesn't factor any potential victories on patent challenge front?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

That's correct.

Tim Chiang - FTN Midwest Securities Corp.

Okay, great, thanks.

Operator

Thank you. And we have a follow-up from the line of Ronny Gal of Bernstein. Pease go ahead.

Ronny Gal - Sanford C. Bernstein

Thank you guys. A couple of quick ones, first about the adenovirus project, where do you stand in terms of talking to potential clients around this product? Essentially are we... essentially do you have any secured revenue from this product you can point to that assuming approval you will be able to go after in 2009? And second regarding the --?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Ronny, which product was that?

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Adenovirus.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Oh, okay.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Bruce, do you want me to take that one?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Sure.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Adenovirus would be sold directly to the Department of the Defense and the Department of Defense only. We will have a purchase agreement from the Department of Defense which will define units and price. That right now has been negotiated and we intend to file this BLA some time second half of 2008.

Ronny Gal - Sanford C. Bernstein

Can you give you us like a ballpark estimates of the size of this product, we have about 10 million, 30 million, 50 million?

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

I don't think we have given individual guidance on that.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We have not.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Yes, a lot of that --

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Until we have our final agreement with the DoD, I don't think we will be making any announcement.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Yes, exactly.

Ronny Gal - Sanford C. Bernstein

Okay. And second, regarding oral fentanyl, there was a lot of discussion at the panel on Fentora regarding the need for risk management program, a more significant risk management program for Fentora. If one would be established for Fentora, what's your thinking about establishing one for ACTIQ and you think about this as business advantage or a disadvantage to set one up?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

There is a risk management program for ACTIQ and it's one that's under review for modification. So obviously we will comply with whatever the FDA requirements are. I think that it does present a challenge, but we have experience in doing with risk management programs through our Claravis product and we think that's a competitive advantage that we enjoy over other generic companies.

Ronny Gal - Sanford C. Bernstein

And assuming a resolution of risk management program, do you see the possibility of your own product being approved by the agency?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes.

Ronny Gal - Sanford C. Bernstein

Thank you.

Operator

Thank you. And we have a follow up from the line of Gregg Gilbert of Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks. Bill, can you help us with how much revenue goes away following the Allergan deal?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

We had no revenue royalty projection in our February guidance although I think in updating where we stood in evaluating the offer and the negotiation with Allergan, we probably would have seen something in the neighborhood of $10 million at the end of this year, or at the beginning of 2009.

Gregg Gilbert - Merrill Lynch

And on Yasmin, Bruce, can we assume that because you are putting it in the guidance as of July 1 that the possibility of a settlement on Yasmin is zero at this point?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Possibility of the settlement was never zero.

Gregg Gilbert - Merrill Lynch

So it is possible you could settle for certainty but a later launch, you will be okay with that?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Or an early launch.

Gregg Gilbert - Merrill Lynch

Right.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I mean, we always are open to settling cases, we think that's a certain agreement that the parties work out, is always preferable to the drama of final outcome... final adjudicated outcome of the case.

Gregg Gilbert - Merrill Lynch

And if you do sell, based on our math, you could sell $50 million or $60 million in the second half of the year even with an authorized generic. Wouldn't that be very helpful for gross margins in generics, Bill?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I am not sure how it's worked through, but we have a partner and so the sharing with partner has to be factored in.

Gregg Gilbert - Merrill Lynch

You are talking about your API partner, right?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Correct.

Gregg Gilbert - Merrill Lynch

Okay. But OC margins are higher than average generic margins, aren't they?

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, they are.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes, we enjoy pretty good margins across our product line.

Gregg Gilbert - Merrill Lynch

Okay. Thanks

Operator

Thank you. We also have a follow-up from the line of Michael Tong of Wachovia. Please go ahead.

Michael K. Tong, PhD, CFA - Wachovia Securities

Hi. Hi, Bruce, can you refresh my memory as to when your supply agreement with Cephalon runs out?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Fred Killion is on the line, he can answer that question. But I believe there is a... there are two documents that are important; one is the consent order with the FTC, which I think is an unlimited duration, I believe.

Frederick J. Killion, Esq. - Executive Vice President and General Counsel

Bruce, let me address it.

G. Frederick Wilkinson - Chief Executive Officer, Duramed Pharmaceuticals, Inc.

Okay.

Frederick J. Killion, Esq. - Executive Vice President and General Counsel

We have... there are two documents that matter. One is the FTC consent decree that Cephalon entered into to get its merger approved. And the other is our contract. Our contract is a three-year contract. But the decree requires them to supply us for a longer period of time, which I believe is six years from the merger. So, our contract extends until, I can't remember the launch date, but it would be something like August or September of '09. But the decree requirement for them to supply us extends until, let's say, September of '10.

Michael K. Tong, PhD, CFA - Wachovia Securities

Okay. that's helpful, thanks.

Operator

Thank you. And we have another follow-up from the line of Rich Silver of Lehman Brothers. Please go ahead.

Rich Silver - Lehman Brothers

Sorry, Bill, you may have already mentioned this, but what is the forecast for OC growth for the year, generic OCs?

William T. McKee - Executive Vice President and Chief Financial Officer

Yes, including the contribution of Yasmin, Rich, looks like it's up around 13%... 10% to 15% for the year, let's call it.

Rich Silver - Lehman Brothers

Up 10% to 15%, and you said that in the first quarter, your expectation, you were giving sort of expectation numbers, the 17%?

William T. McKee - Executive Vice President and Chief Financial Officer

Right, in the beginning of the period back in February, we thought that the OC portfolio would be declining about 10% to 15% for the year. In the first quarter, we saw about a 17% decline year-over-year. And I think that level is probably closer to what we're seeing now on the in line, I'll call it, portfolio.

Rich Silver - Lehman Brothers

Okay. And in terms of the new introductions that didn't come through, that was pretty much all on the non-OC generics, correct?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

100% on the line, yes.

Rich Silver - Lehman Brothers

100%. Okay. All right, Just want to be clear about that. Thanks.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

There are no more OCs to generalize once we get... other than Yasmin, YAZ and TRY-CYCLEN LO.

Rich Silver - Lehman Brothers

And just as you... thanks for the explanation on the difference between the guidance on EPS versus revenues, but just as you quantify those three factors, the Yasmin being a lower margin than the margin on the revenue shortfall, you didn't quite put it that way, but you did say mix and then you said the interest expense income due to currency, and then the SG&A being at the higher end of the range. Would you say that the margin issue is probably the biggest in terms of magnitude?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes

Rich Silver - Lehman Brothers

And then SG&A being at the higher end of range, wouldn't that have already been taken into account when you provided an EPS range?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Yes.

Rich Silver - Lehman Brothers

So, why would that... I mean, I got the first reason, got the second, but the third, it seems like that's part of an EPS guidance range is that you're at a higher SG... higher end of the SG&A range, therefore the lower end of an EPS range, but you still have an EPS range?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I don't know that it converts 100% one to the other, Rich. You've got to think... you don't make the... the low end of the range doesn't necessarily assume that everything, every expense will be at the high end of the range.

Rich Silver - Lehman Brothers

So, you're basically saying that SG&A may even be beyond... no, but you're saying maybe that the SG&A spend... okay, you're saying it's unchanged, but it's at the higher end.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Right.

Rich Silver - Lehman Brothers

Okay, alright.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

One way to put that, Rich, if we were to come out with a new range, if we're doing the range for the first time, it might have been... the range might have been a little higher than we gave originally. But we're still within the range, so we aren't changing. We don't change everything every time.

William T. McKee - Executive Vice President and Chief Financial Officer

Rich, one other thing too on the margin issue on a year-over-year basis; so as we look at the numbers now compared to February, we see a decline in our overall proprietary sales today versus in February, which negatively impacts the overall margins. We see lower sales in the U.S. relative to sales in Europe, which generally has a negative impact on the margins. And although we're adding Yasmin in on the OC line, and increasing the OC revenues, that product doesn't have as higher margin or is not anticipated in our forecast to have as higher margin as the rest of the OC line. And so, those factors all together are what's driving the margins down now as compared to what we saw in February.

Rich Silver - Lehman Brothers

Nor... just on Yasmin, nor maybe as higher margin as you would expect on some of the non-OC introductions that have been delayed?

William T. McKee - Executive Vice President and Chief Financial Officer

That's probably true in our assumptions, that's right, Rich.

Rich Silver - Lehman Brothers

Okay. And then, just on the delays, is this something that now you kind of lowered your expectations generally on... as you are looking at timing issues and moving forward and do you think it's something that's kind of industry-wide or more specific to your portfolio?

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

I think that we have adjusted our thinking, I think it's industry-wide. It probably impacts us more than most because we tend to... the delays tend to be more acute on what I would call the barrier to entry products where there is unusual feature like a risk management program or may be a need for a clinical trial rather than a bioequivalent study or some issue that makes the product out of the ordinary. And because we tend to focus on those kinds of products, I think it's fair to say the slowdown may have a greater impact on us than some other companies. On the other side, those products tend to be the most profitable and we are going continue to go after them.

Rich Silver - Lehman Brothers

Okay. Alright, thanks very much.

Carol A. Cox - Senior Vice President, Global Investor Relations and Corporate Communications

Okay, thanks. The Q&A, I think we are done with the question and answers. If you could provide the replay information and thank you everyone.

Bruce L. Downey, Esq - Chairman and Chief Executive Officer

Thanks very much everyone.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 10.30 AM Eastern Time today through May 22nd at midnight. You may access the AT&T Teleconference Replay System at any time by dialing 1800-475-6701 and entering the access code of 918406. International participants may dial 320-365-3844.

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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