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Hi-Tech Pharmacal Co., Inc. (NASDAQ:HITK)

F1Q2013 Earnings Conference Call

Sep 5, 2012 10:00 AM ET

Executives

David Seltzer - President and Chief Executive Officer

William Peters - Chief Financial Officer and Vice President of Finance

Analysts

Randall Stanicky - Canaccord Genuity

Timothy Chiang - CRT Capital Group

Sumant Kulkarni - Bank of America Merrill Lynch

Scott Eisler - Moors & Cabot

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One and 2013 Hi-Tech Pharmacal Earnings Conference Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

Before we begin the company has asked me to read the following statement. Forward-looking statements, statements which are not historical facts in this conference call, are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees, and investors are cautioned that all forward-looking statements will involve risks and uncertainties including, but not limited to, the impact of competitive products and pricing; product demand and market acceptance; new product development; the regulatory environment, including, without limitation, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other results; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission. These statements are based on management's current expectations and are naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Hi-Tech is under no obligation to and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

I would now like to turn the call over to Mr. David Seltzer, President and CEO. Please proceed, sir.

David Seltzer

Thank you. Good morning, everyone. I'm David Seltzer, and I would like to welcome all of our listeners to our conference call this morning. The purpose of today's call is to discuss this morning's earnings release for the first quarter ended July 31, 2012. Joining me on the call this morning is our Chief Financial Officer, Bill Peters. In a moment, I will turn the call over to Bill who will review the financial results for the quarter and then I will make some comments on the quarter and give an update on some more current events. Bill?

William Peters

Thank you, David. Sales for the quarter declined 7%, to $52 million from $56.2 million the previous year. Sales of generic products were up 6%, to $45.9 million. Strong unit sales of Fluticasone Propionate nasal spray offset lower – were offset by lower average prices that resulted in sales of $22 million in the quarter down from $26.2 million in the previous year. Pricing and units declined and Dorzolamide ophthalmic products also contributed to lower sales. Recently launched products including Lidocaine sterile jelly and Lidocaine 5% partially offset these declines.

We had particularly strong sales in the months of May and June, but July was fairly weak as we had a strong start and fast end to the allergy season. Additionally, after the quarter was over we learned that the inventory levels of Fluticasone at wholesalers had declined materially. This led to higher levels of accounts receivable reserves and lower sales at the beginning of August. In June, we also had higher than typical purchases by a large customer on an incentive rebate plan which led to a higher rebate level than previously anticipated. This rebate went back to sales dollar one for the previous 12 months. Post period of shelf stock adjusted pricing adjustment primarily for Fluticasone also impacted the quarter. Sales for our healthcare products division were down to $3 million for the quarter and $3.5 million in the previous year.

In-store pricing promotions such as free after register rebates and heavy coupon use which were part of our campaign to re-launch Nasal Ease led to this decline.

Hi-Tech's ECR Pharmaceuticals subsidiary declined to $3.1 million in sales from $3.7 million in the prior year. Sales of Lodrane prescription strength, the subsidiary's top product line, dropped to 0 from $2.4 million after the company discontinued the product at the end of August, 2011. Partially offsetting the loss of Lodrane were sales from newly acquired TussiCaps and strong sales of Dexpak and Bupap.

Cost of sales increased to $26.7 million from $23 million, an increase as a percentage of sales to 51% from 41%. Pricing on our Fluticasone and Dorzolamide products, were the primary reason for this change. Rebate and couponing at the healthcare products division also negatively impacted the margins this quarter.

Sales, general and administrative spending increased to $10.6 million from $8.8 million, which excludes amortization expense which we now break out on a separate line. The increase was due to higher advertising expenses supporting our re-launch of Nasal Ease and our newly acquired Sinus Buster products. Additionally, we had increased spending in our ECR subsidiary as a result of the 30 contract sales representatives we added in October 2011. The company stopped using these reps at the end of July.

We now breakout amortization on a separate line item, because it has become a significant portion of our expenses after several acquisitions over the past year. Amortization increased to $1.8 million from $800,000 in the previous year. This increase was primarily due to the TussiCaps and Sinus Buster acquisitions. Research and development expenditures increased to $4.5 million from $3.4 million as the company increased headcount and external development projects.

Additionally, the company acquired the rights to a new product which will acquire a clinical trial. The cost of this acquisition was expense/payments were made in the last two quarters. The company now has four R&D projects requiring clinical trials, three of which were undertaken with partners.

Royalty income was relatively unchanged to $600,000. Remember that a key component of this income stream, royalties from products we divested from our former Midlothian division, ended during our fiscal first quarter. This royalty stream accounted for approximately $1.5 million of the royalties received over the last year.

The company reported net income from continuing operations of $6 million compared to last year's $13.8 million. The diluted EPS was $0.44 per share.

On April 30, 2012, the company had approximately $92.3 million of cash, up from $87.5 million in the previous quarter. As of today, we have 14 products awaiting approval at the FDA targeting branded sales of approximately $1.5 billion, including Mesalamine 400-milligram for which Hi-Tech has a financial interest but is owned by Par Pharmaceuticals. Additionally, we have approximately 20 projects in active development targeting over $3 billion in sales.

As usual, we are not giving any formal guidance, but I will discuss the trends we are seeing as of now. We continue to anticipate growing the top line this year in all of our businesses. Generic product launches, which will be discussed by David, will drive the generic increase. However, as I indicated on the last call and we’ve seen in this quarter’s results we anticipate sales declines in our top-selling Fluticasone product as a result of the additional competitor which came on the market in January. We anticipate growth across our leading health care products, OTC product lines, and sales from the re-launch of Nasal Ease, the homeopathic allergy reliever. Additionally, we will get a full year of sales from our newly acquired Sinus Buster products, which we purchased in March. These factors will contribute to a double-digit growth rate for this division.

We expect increases in our ECR branded pharmaceutical business with growth in our Bupap and Dexpak lines. TussiCaps sales are expected to be much stronger, as we will have a sales and marketing campaign for the full year, and we anticipate that sales will increase versus last year's weak cough, cold and flu season.

We anticipate that our cost to manufacture key suspension products, such as Fluticasone, will come down in the second half of the year as we bring new manufacturing equipment online and we benefit from lower input costs.

Our R&D expense is expected to grow as we are now developing 4 generic products, which will require clinical trials. Three of these projects have strategic partners and all four are in different therapeutic categories. We expect that the clinical trial for the first and second projects will begin in the second and third quarter respectively, which will lead to higher costs at that time. Additionally, we have added internal staff to help grow our R&D pipeline.

I will now turn the call back over to David.

David Seltzer

Thank you, Bill. While the quarter did not produce the stellar results that we yet become used to, we still remain very positive about the year ahead of us and are not overly concerned with any one quarter results. Our generic sales declined in the quarter as compared to last year, but keep in mind that in the comparable quarter last year, we had a very different pricing environment for our Fluticasone nasal spray and our Dorzolamide ophthalmic solution products, our top two generic products. While our unit sales for Fluticasone did increase, our average selling price decreased. Several reasons for the lower pricing which include the entry of a new competitor to the market in January of 2012 and our selling to certain key customers at lower pricing now that we did not sell to last year including the U.S. government. We have seen pricing pressure for Dorzolamide for the past year including a significant decrease over the past 6 months. We have lost some market share, but have retained a leadership position. However, the pricing is lower across the board in customers.

On the more positive note for the quarter, other recently launched products continue to gain market share and are becoming significant are generic business. These products in clued the Lidocaine ointment 5%, our Clobetasol line of topical products, Buprenorphine, Nystatin oral solution, Levofloxacin oral solution, Gabapentin oral solution and Ranitidine Hydrochloride.

In August, the current quarter, we introduced Paregoric USP to the market. The product is unapproved; however, the FDA is aware that this being marketed for use in drug shortage and it is being reimbursed by Medicare and Medicaid. We are currently the only company marketing this product and believe it will be a good contributor to this year’s generic business.

In addition, we have launched Levetiracetam oral solution, Lorezapam oral solution and Gabapentin in Unit Dose. We are currently the only supplier of Unit Dose Gabapentin and believe this item will do very well in hospitals and nursing care facilities. We do plan to launch two additional products and four additional Unit Dose items this year. If we can continue to gain share with several of the products mentioned earlier I am confident that we can still grow our generic business in terms of revenues this fiscal year.

Our new high speed Unit Dose filling and packaging machine has been installed and is undergoing validation. We anticipate being in full operation with the machine by the end of the second fiscal quarter of this year. This will give us the capacity needed to make timely[ph] product introductions and establish ourselves as a leading supplier of Unit Dosed liquids as this market continues to grow.

Research and Development spending grew to $4.5 million up from $3.4 million for the same period last year. This increase is due to our focus on building our generic product pipeline. We have expanded our staff to meet the growing demands placed on R&D. The focal point of the company’s growth in generics for the future. We currently have 14 products awaiting FDA approval and 20 additional products in active development. As Bill mentioned, we have four projects that require clinical trials. While three of the four items are all in partnerships together they address a market of greater than $1.5 billion according to IMS and upon a successful entry to the market can have a great impact on sales and earnings for the company.

We believe strongly that while these projects are more challenging and more expensive than typical projects. Once approved they will have few competitors. As we have shown in the past, our investment in R&D has paid off for us and we have great confidence that, that will continue and accelerate as we get more products submitted and approved. Our healthcare products division reported a decrease in net sales of $3 million from $3.5 million for the same period last year. The decrease was primarily of the result of a planned in-store promotion and couponing program relating to the launch of Nasal Ease at a major retailer. These sales shortfalls were partially offset by sales of the Sinus Buster brands which we acquired in March 2012.

As we mentioned at the end of the last fiscal year, we have made a decision to invest in several of our consumer brands through promotion and advertisings and we are pleased with the sales of these items at retail level. We fully expect our OTC brands to show nice sales growth to show nice sales growth over last year on an annual basis.

In the current quarter, we have gained distribution with major retailers for two of our brand products, Zostrix foot pain and DiabetiDerm Antifungal. In addition, we have had a successful launch of our newest Zostrix hot and cold therapy, including the two leading drug chains in the country. OTC consumer brands are a growth category and we are well positioned to grow our existing brands and to acquire additional brands as well.

ECR Pharmaceuticals reported a decrease in sales to $3,095,000 from $3,707,000 in the same period last year. The decrease was primarily due to the lack of sales of Lodrane which were still included in last year’s sales. We stopped shipping Lodrane in August 31, 2011 and last year’s sales of Lodrane were approximately $2.4 million. Increased sales over Bupap and Dexpak line and our more recently acquired TussiCaps and Orbivan, partially offset the sales supply in this period. We continue to be confident that TussiCaps will have a much stronger year in sales as we have had more opportunity to train our sales representatives and we expect an increase in demand for hot and cold products this year as compared to last year, which recorded the mildest hot and cold season in more than 20 years.

Our balance sheet remains very strong and we have great ability to continue building the company both organically as well as through licensing and acquisitions.

Thank you for your time and we are now prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Randall Stanicky from Canaccord Genuity, please proceed.

Randall Stanicky - Canaccord Genuity

Great. Thanks guys for the question. Just a couple. David, first, as you talk about guidance for growth in all the segments on a top line, does that imply specifically that we can expect revenue for fiscal ’13 to be at or above the $230 million that you did last year?

David Seltzer

Yes.

Randall Stanicky - Canaccord Genuity

Okay. Can you talk maybe a little bit more specific about the timing of some of the launches and where do we get confidence given that we are run rating right now well below that – that some of those things can hit?

David Seltzer

So, as I mentioned on the call, we have had a lot of product introductions in the last 12 months. I think that some of the products that we mentioned including the Clobetasol products, the Paregoric product, are generic to Subutex. Obviously, some of these issues have like old products some of these products have particular issues. But if things go well, a lot of these products have great potential for sales and profits on a go forward basis. If you take a look at Subutex, it’s almost a $90 million market with only two competitors. We do have an agreement with a company overseas and had some difficultly in bringing inventory in, but we feel that we have gotten pass those issues and we feel that that going to be a significant product for us. We are very pleased that we were able to reintroduce Paregoric. So, I think in the Lidocaine, 5% ointment, did great on the initial launch and we have high hopes for that. So, I think that we have a lot of products that – and a lot of unit products we think have great potential. So, we do believe that our generic line has a lot of potential aside from obviously the two biggest products in our portfolio, which are the Fluticasone and the Dorzolamide Ophthalmic products.

Then we have two additional product launches, one of them we had mentioned was going to be a December launch, which we now think will be more like February and another product besides that and then we have four more Unit Dose products that we will be bringing to market this fiscal year. On the Unit dose products, some of them are just going to be nice – we think that the unit dose business is a great business going forward. There are not a lot of companies in it. It’s a growing market because obviously the graying of America, more people are using hospitals and nursing homes and we think that’s a great place for us to grow our liquid line. But we think there were items like Gabapentin, we are not sure because that market right now doesn’t even exist in unit dose, but we think that – so potentially that could be a very nice several million dollar product for us.

So, I think that overall our generic line is going to do well. Obviously, if Fluticasone pricing, which is -- Flonase is our biggest product. So if that pricing comes under tremendous pressure then things can change. But we do think that we have got enough good product launches, enough products in our pipeline that we are continuing to go out there and gaining market share on—that we can still turn out to have a good year, or a decent year.

Randall Stanicky - Canaccord Genuity

I mean, just to be more specific. Given the timing of some of these things and how they are going to play out, just for those on the line, I mean, we are not surprised next quarter, how should we expect that to ramp? I mean, you did $52 million in revenue this quarter. It sounds like a lot of these launches are sort of back fiscal half weighted. Should we expect a good ramp in the October quarter?

William Peters

Well, first of all, we don’t like to give our quarterly guidance and we stick to the full year just because of the timing of different things can vary a lot in small companies. But, yes to your question Randall, that it is definitely second half loaded with these new launches and stuff.

Randall Stanicky - Canaccord Genuity

Okay. And then, Bill, the other question from me, I think a lot of people were a little bit surprised with the gross margin this quarter. Last quarter we talked on the call about potentially approaching a gross margin level that was, that you saw on fiscal 2012. How are you thinking about that now, and has anything changed? And then, can you just maybe talk about how that ramps, I assume that’s going to be linked to a lot of these new launches?

William Peters

Sure. We have seen some more pricing declines on Fluticasone since the last call. So that has come down somewhat. I think on the last call, I believe I said that we were going to be a little lower than we were in 2012. And I think on the last call, I also said we are going to be where we were today. So, let me clarify that and say that we expected the year to be close to where we were on the fourth quarter, not the entire fiscal year last year. And that said, the first half of this year we expect to be lower than that and the second half we expect to be above that. And part of that increase in the second half of the year has to do with the timing of getting certain manufacturing efficiencies online and also getting certain supply input pricing, some relief in that area, as well as new launches, the two new launches David talked about plus the additional launches on the Unit Dose product. And then we will also have the new Unit Dose machine online in the second half of the year, which is more efficient than we have in the first half. So, there is going to be a variety of different reasons why it is going to increase in the second half of the year. That said, the healthcare products margin was particularly hurt this quarter by some of those one time pricing promotions, which led to lower than average margins. We will be releasing the segment information in the footnotes of 10-Q, which should either be out on Friday or Monday then we will give the breakdown of the divisional margin as well. You will see that healthcare is down a little bit from last year, but we expect that to be up and healthcare actually will have higher margins this year than it did in the previous year.

Randall Stanicky - Canaccord Genuity

Okay. That’s great. Thanks guys.

Operator

Thank you for your questions. The next question comes from Tim Chiang from CRT Capital, please proceed.

Timothy Chiang - CRT Capital Group

Hi, David and Bill.

David Seltzer

Hi, Tim.

Timothy Chiang - CRT Capital Group

You talked a little bit about the potential for margin improvement through the fiscal year. I mean, what sort of margin do you think you can get back to with Flonase manufacturing equipment, the unit dose launches, the Paregoric launch? Can you get back into the low 50% gross margin range?

William Peters

We believe that we can for the entire company. However, we think that we are going to be below that in the first half of the year and above that in the second half is the way we anticipate at this point. So, I will take your models with that point in mind.

Timothy Chiang - CRT Capital Group

Okay. And then, David, I wanted to ask you about uses of cash. Certainly, you have been building cash. The launch of Flonase certainly did a lot better than anybody would have thought for a lot longer and now you have got $92 million on the balance sheet. I mean, what are your plans with that cash?

David Seltzer

So, obviously, our first plans and we continue to look to grow all of our businesses via licensing and acquisition opportunities. We are seeing a lot of opportunities. We don’t see that much in the generic business. However, on the generic side we think that we are wisely investing in R&D and we think that we will inevitably get big payoffs for that as we have in the past, but we continue to look for products. We continue to look for brand products to acquire OTCs and our ex- products.

We would like to use the money obviously to help grow the business. You can grow the business organically but we obviously got our ears and eyes open all the time and we are always looking at things to acquire. Considering -- obviously we get many questions about returning capital to shareholders, dividends, buybacks and well we don’t comment on those things in particular, I can just tell you that nothing is off the table at this point. We do realize that the company continues to build cash and we expect that we will continue to do so. We think we have a great business, but yes we think we could become a very significant business over the next couple of years. Given some organic growth and given some of the right opportunities that come along. So, as we have said and we continue to say we continue to look for opportunities, companies to acquire that would make good strategic sense for the future growth of the company. However, when it comes to returning capital to shareholders in the form of either dividends or stock buybacks that nothing is not being considered at this time. However, we can’t guarantee anything either.

William Peters

And just to clarify on one point of what David said, Tim and that is about the in-licensing of products. We mentioned that we now have four products that require clinical trials in R&D, one of those products was in-licensed this quarter and over the last couple of months and we expensed the in-licensing fees from that as a product that we in-licensed from a company outside of the United States, it’s being made outside of the United States for foreign markets and we are going to bring that product to the US, but in order to do so we need to run it through clinical trials and then get it approved by the FDA first. So, while there is work to do that I think it’s -- one, it’s use of our cash and two it’s a little bit of an earnings hit in the current quarter on the R&D line, but three it shows our commitment to our R&D pipeline and building up the pipeline and making it the strongest pipeline we’ve ever had and what we hope will be a pipeline which will have several products, but should have insulation from competition because of the high barriers to entry.

Timothy Chiang - CRT Capital Group

I mean, I think that’s a great strategy, but I do think at least in the past you guys have layered on top of that accretive type acquisitions and it seems like based on where the stock is trading today, people are concerned about the bottom line. What do you think you guys can do with the cash to augment that bottom line? I mean, do you guys –

David Seltzer

Tim, we are looking. We are not a company that’s just going to go out there and buy anything we can and just because that is cheap. We are looking for things, but we are looking for things that will be strategic to the company and to the growth that make a lot of sense. So, obviously it’s frustrating and it’s frustrating, you can imagine to us as well. We are not just management but we are shareholders. However, I can tell you that we are working very hard on the BD side. We are looking a lot of different things. We would love to layer on a couple of things with all of the cash that we have and all of the borrowing power that we have, believe me. So, it’s not as if we are not out there every day, pounding the pavement, looking for opportunities, but as everybody knows, the opportunities of – everybody is out there looking for things, things are not cheap anymore. But, when the right one comes along we are not going to hesitate to pull the trigger and I think that it’s a matter of time. I mean, you look at a lot of things, not everything makes sense, but inevitably you find the right thing and you do it.

Timothy Chiang - CRT Capital Group

Okay. Just one last follow-up. What’s going on with Mesalamine at this point? I mean, are you guys going to run the PK [ph] studies?

David Seltzer

So, what’s going on with Mesalamine is that obviously what’s public is that the FDA is requiring the PK studies and I think that we said a couple of times on the call that we believe (inaudible) because they are no longer public probably as of today, I think or within a few weeks. But, we believe and so do they that there is a future in Mesalamine. So, we don’t think we are calling this project a dead project, we are not writing it off, we do think there is a future to it. I can’t give you much more detail than that, but that can kind of answer a whole bunch of your questions. There is going to be opportunities for the Mesalamine 400 mg. Obviously, comes regulatory risks as with any products that you try to bring to market. But, we do believe that Mesalamine has got a future over the next couple of years and we will continue to pursue that.

William Peters

And I think it’s also been communicated publicly that the filing was changed from a paragraph four to paragraph three, so we would not anticipate any sales of that product until after the patent expires in July of 2013.

Timothy Chiang - CRT Capital Group

David, you mentioned that one of the mystery products that you would plan on launching in December has been pushed out to February, is that right?

David Seltzer

Yes, one product that we had we were off a little bit on our timing and we had anticipated a December launch but now it looks like it’s going to be a February launch.

Timothy Chiang - CRT Capital Group

Are there any reasons that you could provide?

David Seltzer

Nothing really major, just a little bit of a hiccup in transferring the product. Nothing that we really had any control over, but nothing major that’s setting it back much longer than that.

Timothy Chiang - CRT Capital Group

Okay. Great. Thank you guys.

David Seltzer

Alright.

Operator

Thank you for question. Your next question comes from Sumant Kulkarni from Bank of America Merrill Lynch, please proceed.

Sumant Kulkarni - Bank of America Merrill Lynch

Good morning. Thanks for taking my questions. The first one is on Flonase. Would you say that you have been surprised by the level of pricing decline given Wockhardt’s entry?

William Peters

I would say no, but it does continue to come down and has continued to come down slowly. What’s also happen (inaudible) we actually have a slightly different customer mix now which leads to an average lower share price. Around this time last year or in the first quarter last year we started to pick up a large customer and we are only taking a portion of their sales, and because it’s a large customer their pricing is very low. And we are now accounting for 100% of that customer’s business. So, because of that our average share price has dropped faster than the pricing to all customers has dropped. So, it’s not – and it has come down. We also over the past year have picked up the government contract that’s I guess public to the government website, so the government has lower than average pricing as well. So, it’s not necessarily that pricing has come down to customers but just that our customer mix within our unit sales has skewed now to a lower pricing mix of customers.

Sumant Kulkarni - Bank of America Merrill Lynch

Right. Given that the product is so important, could you give us some color on the gross margins on that product relative to maybe the corporate margins in this quarter?

William Peters

Yes, it’s not far from the corporate margins and of course the high tech generic margins are a little bit below the corporate margins.

Sumant Kulkarni - Bank of America Merrill Lynch

On the ECR product sales, what are your assumptions for the cough, cold, flu season this year? Are you expecting more of a normal season or much higher than normal type to drive the growth there?

William Peters

We are anticipating a normal season which comes off of last year’s very weak season. So, we anticipate an impact from the season demand as well as an increase in promotional activity should have a positive impact on the TussiCaps sales, particularly we were expecting a fairly large percentage increase with TussiCaps sales.

Sumant Kulkarni - Bank of America Merrill Lynch

On the four products that you have now that require clinical trials, when should we expect launch activity, are those years out or could they be sooner than that?

David Seltzer

As of right now, all of those are a year’s out, 3 or 4 years out. So, I guess there is a possibility of one could be earlier than that. But, obviously it’s a little bit unlikely, but part of it depends on timing of – you know, what goes on with the trial, that the trial will run well and all of that. We do have more control over one that the trial start as I mentioned in my call that trial for the first one is beginning now, and our second quarter and the next second one should begin in our fiscal third quarter.

Sumant Kulkarni - Bank of America Merrill Lynch

And should we expect the trials to become public on clinicaltrails.com?

David Seltzer

I believe that they will be. I haven’t looked recently to see if…

Sumant Kulkarni - Bank of America Merrill Lynch

And in terms of the margin expansion in the second half of the year, if we leave aside the new launches which could drive a bit of the margin expansion, are the other things completely under your control and more definite so to speak?

David Seltzer

Well you know, in the generic business, nothing is ever completely in your control including actions by competitors, so our assumption though, is that, Fluticasone pricing does continue to slowly come down from where we are where today, but then at some point, hits a steady level point.

William Peters

I think your question was if and I think the answer is that what we are expecting to drive the margins in the second half of the year are going to be in some cost cutting on components and raw material and better manufacturing efficiencies, is that right?

Sumant Kulkarni - Bank of America Merrill Lynch

Yes, that’s right.

William Peters

So that’s more under our control. And we do believe that, that it will start impacting the second half of the fiscal year when that part business is more under our control than what a competitor might do, as far as pricing.

Sumant Kulkarni - Bank of America Merrill Lynch

Okay, and on the R&D expenses, for how long should we expect this kind of ramp up to continue, or is this a new base for here now?

William Peters

This is not our new base. We see in the businesses that we’re in, we see some great some great opportunity in Ophthalmic and nasal sprays and topical products, so. We’re gung ho on R&D, we think I don’t believe that it’s going to get much much higher than these levels, but I think that this is kind of a new basis where you should expect spending to be for the next few years.

Sumant Kulkarni - Bank of America Merrill Lynch

Thank you.

Operator

Thank you for your question. Your next question comes from Scott Isler from Moors & Cabot. Please go ahead.

William Peters

Good morning.

Operator

Go ahead Scott, your live in the call.

William Peters

I guess we answered his question.

Scott Eisler - Moors & Cabot

Hello, hi can hear you guys. So most of my questions have been answered, but I’m going to just kind of fill in some of the things that I have questions on. Of course, all of us, keep talking about there’s 20% of the market cap, $92.3 million now in cash and certainly I am sure that there are discussions about paying a dividend or a onetime dividend, especially in calendar 2012. The question I have is, have you thought about taking some of the cash and growing Flonase or other products in Europe or Central or South America, there is such a large market for that. And my last question and then I’ll hang up in displacement, is about promotion. In here in a release, you talked about you guys spending more money on advertising, can you tell us where the advertising is going on and I guess another follow up would be, are there any other companies that you’re aware of right now that are trying to compete with you for floating? Thank you very much.

William Peters

So when we addressed the (inaudible) of the dividend before and we said that relating to a dividend or special dividend or share buyback that while we don’t comment. All those items are matters that have been considered to very well aware of the amount of cash that the company’s holding onto right now, so nothing is off the table as far as consideration there. As far as exporting Flonase, certain parts of the world are still opportunities. Europe is probably not because they already have a generic Flonase there and its rather competitive but we are looking into opportunities to export, not just Fluticasone, but a bunch of our products. That really requires when you don’t have a global operation as we don’t at this point, that requires finding the right partner in the right country to do that. So it’s not really a function of spending the money to do that, but more of finding the right partner to do that. But that’s something that we’ve been trying to do, had some success, had some failures, but we keep on pushing in that area. But the main focus obviously we still think that there’s tremendous growth ahead of us in the U.S market. And as far as advertising and promotion, I think that you know, you can see, if you listen to ESPN, CVS, (inaudible), you’ll hear our Magoxx commercials which are really starting to kick in, as we’re starting to see improved sales with some of our key retailers, that’s radio and I think that everybody by now has seen some of our adds for Nasal Ease and I think that you’ll see more of it this coming. Obviously, we are going to do it when it comes more towards allergy season, but we have Nasal Ease and Sinus Buster. So Nasal Ease are TV commercials and Sinus Buster right now, where actually when that also gets in of more allergy season and cough, cold related, you will see some more radio and potentially some TV there as well. But what we were referring to today was in store promotions, where you do couponing and at particular retailers, when they are first launching a product to get customers, so it’s a form of advertising but it’s just some through the stores and it comes in the form on deductions, so it comes off from sales, that’s what we’re referring to on today’s call.

Scott Eisler - Moors & Cabot

Great, thank you.

William Peters

And you’re welcome.

Operator

Thank you for your question. I would now like to turn the call over to David Seltzer for closing remarks.

David S. Seltzer

Yes, so we appreciate your time today and the good questions. And we hope that we have answered them as well as we can, as always we’re here when you guys want to call and ask any additional questions. Thanks for your time and we’ll talk to you soon, thanks.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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