Perrigo Company PLC (PRGO) 2004 Q1 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Perrigo first quarter results conference call. (Operator’s instructions) Mr. Schrank, you may begin your conference.

Thank you Amanda, good morning everyone and welcome to the start or another New Year. These conferences include our views of where the business is going, we will make forward-looking statements we believe to be reasonable but can give no assurance that those statements will prove to be correct.

We have prepared a detailed discussion of the many factors we believe may have a material effect on our business on an ongoing basis and have included these discussion on page 25-30 on our Form 10-K for the year ended June 28, 2003.

Additionally, at certain times we will use non-GAAP financial measures that we believe better describes the ongoing financial results and trends of the business. The required reconciliation of these measures to GAAP measures is included in our press release which has been filed on Form 8K that may be accessed from our web site at www.perrigo.com.

With these formalities completed, I will turn the call over to David Gibbons, Perrigo’s Chairman, President and Chief Executive Officer.

Thanks Doug and good morning everybody. Sales for the first quarter were down 2% from $213m to $210m. Net income was $16.5m or 23 cents per share, versus income on an operating basis of $16.8m or 23 cents per share in the first quarter last year.

The weakness that we had in sales came primarily from two product categories cough, colds and vitamins. In cough cold and as you know, the season doesn’t start until the beginning of October. We’ve had a few soft cough cold seasons in a row combined with the substantial and continuing improvement in Perrigo’s service to our customers during these past seasons.

As a result, we didn’t see any substantial inventory build up prior to the season although I would say that we are now seeing normal seasonal orders coming in during the month of October.

In vitamins, we had lower unit sales and we were also faced with competitive pricing which really is a reflection of the excess manufacturing capacity in the industry today. We do see some of the industry fundamental stabilizing and we are focusing on taking costs out of our operations as well as on developing innovative higher margin new products. This is still a good business to be in for the longer term but it does make it tough on us as it does with many others in the industry in the near term.

And now I’m going to ask Doug to provide further details in his financial review of the quarter.

Thanks Dave. As Dave noted, sales for the quarter were $210m, down $3m or 2% from the year ago’s $213m. Storebrand healthcare segment sales were $191m, down $4m or about 2% from last year. Approximately $18m of the sales decline resulted from lower volumes in our cough cold and vitamin products. These declines were partially offset by new products including the Claritin D-24 equivalent product and Dr. Rosenblatt Starch Blocker weight loss product.

Net sales totaled $19m in our All Other segments, up $1m or 5% due primarily to increases in our Keefa (ph) Subsidiary in Mexico. The IRI point of sale quarterly sales data -- and I will remind you it does not include Wal-Mart sales -- indicates the following for the quarter. The cough cold allergy market was up 23%, store brand was up 22% and Perrigo was down 3%. I will remind you that we were up 30% in the fourth quarter.

The first quarter is always a difficult quarter to understand. It is immediately before the start of the cough cold flu season, and year-over-year results can be significantly affected by retail inventory levels. This year retail inventory levels were relatively low.

The IRI results are further complicated by the sales of Loratadine this year which had no sales in the first quarter last year. The analgesics market was flat, Storebrand was up 3% and Perrigo was down 5%. The category remains weak, as commodity products continued to experience price erosion. Perrigo was affected by lower gel tab gel cap product sales and was likely affected by lower retail inventories at year-over-year.

The gastrointestinal market was down 1%, store brand was up 11%, Perrigo was flat. Perrigo experienced price competitiveness in both tablet antacids and H2 blockers and had good acceptance of the (inaudible) laxative caplets or similar to Citrucel tablets.

The vitamin market was up 5%, store brand was up 5% and Perrigo was down 17%. While the market appears to have stabilized, we were affected by sharply lower sales in one of our customers where we had picked up the business and sold it in during the first quarter of last year, in essence year-over-year comps were tough.

As the market has experienced significant price competitiveness, and we have increased our focus on taking cost out of the operating business. Gross profit of $58m was a decrease of $4m, compared to last year and was 27.6% of net sales, compared with 28.9% in the first quarter last year.

Of the 1.3 percentage point decline in margin, approximately half is attributed to our store brand healthcare segment and half is attributed to our Keefa and Wrafton businesses. The decline in gross margin percentage was due to fixed --- overall, the decline in gross margin percentage was due to fixed costs related to lower production volumes and an unfavorable mix of products sold.

Operating expense for the quarter declined $2.4m after eliminating the impact of the $3.1m in litigation income last year. As a percent of sales operating expenses were 15.6%versus 16.5% before litigation income.

Distribution expense and R&D expenses in total were relatively flat year over year as outlay for our generic R&D effort were not material. Selling and administration increased $2.2m due to cost saving measures implemented at Keefa, as a result of their restructuring and moving to smaller independent retail market from a direct sell to an outside distributor. And administration was also down due to a reduction in compensation related costs.

The effective tax rate for the quarter was 36% percent. And as Dave said, net income was $16.5m, compared to $16.8m last year before the Vitamin litigation income. Diluted earnings per share was 23 cents per share--equal to last year, and again, before the Vitamin litigation settlement.

Now some comments on the balance sheet. Working capital excluding cash in the quarter was $134m versus $130m last year--an increase of $4m. Our cash balance declined from $94m at year end to $83m. This a very good performance after considering we loaned $10m to a generic drug R&D company as part of an agreement for the development of 10 to 12 products over the next two years.

Accounts receivables were $99m, compared with $106m a year ago reflecting an improvement in DSO from 42 days to 40 days. Inventories were $150m, a decrease of $10m from year end, and a decrease of $13m from a year ago.

We have said many times that there was more room for further inventory reduction. This reduction in raw materials, work-in-process and finished goods, reflects a step in that direction, and provides another example of the improvements in our core operations.

Our scheduling, manufacturing and logistics people, all played an important part in making this happen.

Cash flow from operations for the quarter was $8m compared with $9m last year, which in last year included $2m from the Vitamin litigation settlement. Capital expenditures during the quarter were $5m, the same as last year, and we anticipate spending $25m to $30m for the year.

In summary we are in a very strong financial position and continue to have confidence in our ability to take advantage of future opportunities. Now let me turn it back to Dave.

Thanks Doug. Looking at new products, I’d like to give you and update on Loratadine. Overall in the OTC Loratadine category, total sales at retail through forty weeks are approximately $350m without Walmart data. Unit movements continues to be strong but prices on the 10mg products have been dropping recently as new entrants have come into the market.

We do not have approval on our 10mg product which is obviously, very disappointing to us. We do still have one issue to resolve in answer to questions brought up by the FDA during the approval process, and our best estimate right now is that we will not have a 10mg product in the market for another 6 months or more.

Fortunately, our D-24 Loratadine product continues to sell extremely well. The 3 other dosage forms of Loratadine which would be the D-12, the Quick Dissolve and the Liquid version are awaiting final approval and we expect to be able to begin shipping those some time in the Spring.

In the nutritional products area, we’ve introduced Dr. Rosenblatt's Starch Blocker. This is a branded nonephedrine (sp) diet aid that blocks starch intake to help people lose weight. Our selling has been encouraging for this brand of product, but our overall success will depend on consumer take away and then consumer repeat purchases and it’s a little too early to tell what the long term impact will be.

In September, we also began shipping Children’s Sesame Street MultiVitamins. We have a licensing agreement to use the Sesame Street name and we see a lot of good promotional opportunities for this line of MultiVitamins.

Our outlook for the rest of this year is still positive. As we’ve noted quarter one sales were disappointing due to the weak start in the cough, cold and flu season, with the limited inventory building at retail.

We do see that changing in October to a normal seasonal pattern. At this point we feel comfortable and confident about the full year. We’re still looking for 3% to 5$ sales increase and good earnings growth in our core store brand business.

Looking at our generic initiatives, in quarter one, we had minimal funding for internal projects. We still expect incremental R&D outlays of about $5m to $7m for the full fiscal year. We did start a product development program through an outside contract R&D company. We provided funding for the development of ten to twelve generic drugs over the next two years within that initiative. We are taking important steps and will continue to, in building our generic Rx product portfolio.

And reiterating comments from our August announcement, just to remind everyone of the logic behind our entry into the generic Rx drug business and the sense that it does make for us.

Generetic Rx market is large and growing, really pretty close to 15% a year, projected out over the next five years. The margins in generic are better than in store brands. Perrigo has access to 70% of that market through our current food, drug and mass retailers.

We follow the same regulatory pathways for Rx to OTC switches as you do for generic Rx drugs. And we do have the manufacturing capability and capacity available without the need for significant capital expenditures. We believe that the entry into generic prescription drugs is a natural extension of our business.

It reinforces our goal of providing consumers with more affordable healthcare options. We will remain store brand focused and we are enthusiastic over the additional opportunities ahead for future growth, based on the strong foundation that we continue to build on.

Thank you all, and Doug and I will now take your questions.

Your first question comes from Bill Steele with Bank of America.

Good Morning. I have a couple questions. Doug, can you tell me what the benefit was from the new products in the quarter, the Claritin and the Vitamin Starch Blocker?

Bill as we’ve always done in the past, we do not talk about the individual products and what they’ve contributed but if you think about the logic that we talked about ,the total volume was down 18% or $18m in products other than the new products and we were down about $6m. So that will get you pretty close to a number that is representative.

Ok, that’s certainly much --- I follow that logic but to me those numbers seemed quite a bit higher than I would have projected so I’ll stick with that logic. Secondly, regarding the $10m payment

Don’t --- One thing you have to be careful of there is there are other new products in that mix but the two key ones are the D-24 and the Doctor Rosenblatt.

Ok.

There are others

Yah. But those would be the majority

Yeah

Ok. And then regarding the $10m payment to the generic company, are you going to venture or comment as to which company that was?

No, at this stage we will not. Bill that’s just really related to both parties and it relates to the competitive nature of this industry and therefore we will not, we will not be disclosing who that is.

Now, you need to understand that that’s a loan to this R&D venture; it’s not an investment in. As we looked at structuring the transaction, that worked best for both parties, so we’ve structured that as a loan so that we really sort-of funded some of their developments and would expect to be paid back over, I believe it’s starts payback in 05 or 07.

07, I think. Yeah and then just kind of from a shareholders perspective, are there going to be other types of agreements like that? Is that part of the plan in terms of to help jumpstart the generic business?

Bill this is Dave, I’ll answer that just very briefly. Yes, we would look to have other opportunities like that that we could take advantage of. We cannot tell you what the quantity would be or when they will hit but we are aggressively looking for opportunities like this that make sense in order to get that product pipeline flowing before we just try and do everything internally.

Ok, and then the last question is, Doug, in the other non-current assets line item, it went from $6m to $19m in the first quarter. What would that be attributable to?

That’s really where the loan is

Oh – Ok

That’s your $10m. Let me get to the number, it goes from $6m to $19m, the $10m is in that line

Perfect, Thank you very much

Yup

Your next question comes from Derek Lechow with Barrington Research.

Thank You, Good morning.

Morning Derrick

Just a question on your, I just wanted to get some thoughts from you on your market share statistics on the Cough Cold segment. If you exclude Loratadine from that, what does that tell you?

Derrick, when you look at the total category, the category includes Cough Cold, it includes Analgesics so you can’t really back that out of the Analgesic market. Probably Cough Cold market

From the Cough Cold, Ok, so there is really no way to get to that. But sufficed to say

But you can imagine that the increase in the Cough Cold and in the store brand piece of that market are up substantially due to Loratadine.

And also you had a difficult comparison a quarter a go or the last year at this time, so that would explain off why that was down 3% compared to, I think you said that the category was up 23.

Yes, the difficult comparison -- I don’t believe that there was a complete difficult quarter to quarter comparison – this is where the inventories build for the Cough Cold Season starts to take effect on the numbers.

Last year in the first quarter – it is our belief anyway and as we look at all of our customer inventory levels we’re started the build before the end of the first quarter and in this – this year they are building less and that effects the numbers – that effects our numbers relative to what is happening at point of sale.

And Derrick too is that the sale – our cough cold sales in the fourth quarter of last year were up 30% versus the previous year so we did sell in inventory ahead of the first quarter, and that also at least is a contributor even though it is a relatively limited sales quarter.

Okay and it sounds like you have pretty good visibility into your retail customer’s inventories and that is why you have maintained your guidance at 3% to 5% sales growth and also you said that you felt like the ordering patterns were back up to normal here.

Yes, we certainly are careful how we choose our words Derrick and we did look carefully at that information before coming out and sticking to that guidance.

So does it appear to you that we will make up the gap in the second quarter then? Or would that be more spread out across the second and third quarters?

No it would spread out over the cough cold season and then third quarters together.

Okay thanks a lot and then just a question on some of the balance sheet measures. You’ve done some good work there and you did say that a lot of that movement has already taken place. Do you see additional room for improvement there?

Yeah Derrick, we are just – I mean there is still room for improvement in the inventory area and I think that we will see that improvement over the next two to three years continue – it may not be a perfectly straight line.

As you make improvements you make some mistakes and you bump back up, but there is definitely more room in inventory. I think our days and inventory in total are about 100 days and you know we would hope we could get that down at least in the 75 to 80 days with, with a lot of hard work and a lot of changes in our processes.

Okay and then I wondered if you could comment on the competitive landscape and whether or not you see any consolidation opportunities out there? Any companies for sale? Or any acquisition opportunities right now?

We are always open for opportunities that would make sense, but we do not have anything on the front burners certainly today Derrick that we would be talking about.

If we see an opportunity that makes sense we would be quick to look into it in detail, but probably most of our efforts today would be aimed at expanding, putting our cash flow to work, expanding in the generic area as we try and build that part of the business up.

But that is not say that we would not take advantage of opportunities that make sense to us to help solidify our store brand positioning.

Okay thanks a lot, appreciate it.

Your next question comes from Linda Bolton-Weiser of Oppenheimer & Co.

Thank you. Hi guys how are you doing?

Good. Great. Hey Linda.

When you commented on the fact that mix was slightly negative in the quarter are you referring to the fact that it was just a lower mix of cough cold products in the quarter?

That would be what happens in the health care segment, very definitely.

Okay, and also just with regard to the vitamin market. I mean, you know, you’ve been commenting for awhile that there is excess capacity in the industry. Yet we continue to see competitors get it into it. I mean the latest announcement has been that Procter and Gamble is going introduced Olay Vitamins. What do you think the attraction is for competitors to keep coming into the market even though it seems to have poor fundamentals?

I – it’s the long term trends and demographics that are out there I believe Linda. As I said in the opening it’s a tough business in the short term, as evidenced by an awful lot of the people who are competing in this business – struggling.

You got the Royal Newmako (ph) online, getting their position in a few companies, Twin Labs. At Perrigo, we continue to feel that this is a good business to be in and that’s the way other people I believe feel and that’s why you see them coming into it.

But right now, the late 90’s-- The growth that happened in the late 90’s got a lot of people who commit to a lot of new capacity and that certainly has having in impact on pricing and on the financial situation with a lot of people out there. But we still think it’s a great business to be in.

Okay. Also you had talked about ---doing some word to secure foreign sources of some of their materials, how is that coming ---what progress have you made on that?

Yeah Linda, we have talked about that where we continue to make good progress at ---as you look at sort of just take the three biggest items that we would purchase, Aspirin is virtually, is almost all sourced offshore.

I’d say acetaminophen is started to be purchased offshore this year for the first time and that will ramp up probably next year and the year after and Ibuprofen is still pretty much in the U.S with plans to try to move that in probably the 05 time frame and these things take more than—

You just don’t switch vendors overnight but those are examples of how we’re moving the business offshore where products are cheaper and where we’re bringing online very high quality FDA facilities to produce the volume that we need and of course we’re pretty big volume user.

Okay. Alright. And finally, this on the SG&A ratio I think you have mentioned that one of the reasons for the decline was something related to the distributors. Can you repeat what that was and if that will be effect for the remaining quarters of the year?

Yes. Last year if you remember we have the key for restructuring about a year---almost probably five quarters ago. What that restructuring anticipated in Mexico was really---we really refocused our business and we got out of a business that was selling direct to very small retailers and move that business to distributors.

In that process the gross margin dropped in our other segment because of that and the SG&A dropped almost dollar for dollar and it really took away a business that was very hard to service and one that we didn’t feel we’d had a great growth opportunity and that cause half of that ---over half of that SG&A decline.

Okay. And just one ---

I guess for the rest of the question that really probably took effect in the second and third quarters last year so it was really the obvious difference is really in the first quarter and we will come up against the smaller numbers as we get farther out the year last year.

Okay. And then finally, in the cash flow statement it indicates an investment in equity subsidiaries, I mean it’s small but what is that?

That’s one of our investments in an API supplier.

Okay. What’s API?

Oh, I’m sorry, raw material supplier. As we vertically integrate in a couple of different key commodities -- and I’m really sorry about that. It’s an investment in a venture where we’re partnering with a raw material producer to really try to get at some cost savings and the API is the key pharmaceutical ingredient that goes into the product.

Okay, so do you plan to do a lot more of these types of things?

This is Dave. We would be looking to do more of that as we move forward. I think there are opportunities for backward integration and we’ll take advantage of those as we see the opportunities, particularly to look offshore where cost are lower, and when we’re assured that we can have the quality and FDA compliance that we absolutely insist on.

We think there will be other opportunities like this Linda and we are aggressive of looking for those opportunities.

Okay. Well thank you very much.

Thank you.

Your next question comes from Doug Lane with Avondale Partners

Hi, good morning everybody.

Hi Doug.

On these---venture here the 10 to 12 new products in the generic you mentioned a couple of years to develop but how long do you think it will be before thy would come to market?

It’s really hard to say now. We would expect to start having some products filed before the end of this fiscal year. A couple of products we should get filed before the end of this fiscal year and so you could see them come to market in ’05 but I do think ’06 is the first where you’ll see any substantial volumes from the generic initiatives.

Okay. And from an investment standpoint, the financial commitment is this one time loan and that’s it or over a little more down the road?

In terms of this particular company?

Yes.

We would not anticipate any additional loans

Okay. And there are no expenses or anything coming to the P&L because of this?

The only expenses that would ---it’s not related to this investment it would be related to the development of the generic products. I mean, there could be bio studies and legal cost etc., but we basically have an outside R&D provider doing the R&D work.

As we come to market there will be cost---they’re not related to this ---to the loan they’re related to the products that this providers is providing.

Right and then your job is to take those products and make them into saleable?

Yes, absolutely.

Okay. And on the R&D ramp, will we succeed at the second quarter?

No

That will be more second half?

Yeah. The best way I could say and you know that how it is with new products like this you don’t know exactly when, it will not be second quarter the best way I can phrase it I think Doug ---is to say before the end of our fiscal year we would expect to have some products filed.

Okay. Before I go on the tax rate was 36%, is that good for the year?

Yes sir.

Okay. On the R&D line item in the P&L where you mention didn’t really have any meaningful added expenses in the quarter? Are they going to start to show up in the December quarter?

Doug as Dave said you know we’ve talked about spending $5m to $7m in the generic R&D area.

Right.

For the year. We spent under $500,000 in the first quarter. I can envision that that would ramp up slightly, it might double in the second quarter and then I think it’s going to really start to move in the third and fourth quarters. That’s how I would think about it.

Got it, got it. Okay. And is there any way that you can give us sort of an average pricing number for the --- is there any way to break down and broke down sort of new products versus existing price, can you pricing in volumes --- is there any way to get arms around that?

Doug no, there really isn’t. We kind of look at price mix and because of those many, many products and the many fluctuations and with B-24 Loratadine coming in price goes up volume doesn’t really follow because it’s a much higher price product. So we really---we haven’t figured out internally how to break that out in a way that would be something that we would want to communicate.

But it sounds like pricing on balance is difficult so we should assume that pricing is going down not up on balance for your company.

Yes that’s correct.

Okay, that’s what I wanted to get at and it’s just tough to get around an order of magnitude on that.

Right.

Okay. Thank you.

Our next question comes from Charles Cerankosky with McDonald Investment.

Hello guys, how you’re doing?

Hey Chuck.

If we had worked ahead this inventory situation where the retailers delaying some of the buying just now, how are you able to get inventories down during the quarter and keep them low that looks like a pretty good job --- one would have thought you would have had some inventory back-up?

I think it’s an example of what we have been able to accomplish throughout the year Chuck just better demand management system that contributes to us through the linkage to the retailers. We’re able to respond much more quickly.

We do build in core items before the start of the season but we’re doing more and more for example in Bright Stock, where we put the products up without putting the labels on the product and then we’re able to come much closer to a just in time final package labeling process before shipping the products out.

So it reduces our whip and reduces our finished goods all along the way, so we just by a lot of the different things we’ve been doing, it all comes together to allow us to manage inventories much and continue to have the best costumer service levels this company has ever seen.

Dave, do you have any concern that the retailers might be putting a little too much confidence in your service levels, if order of volumes came back suddenly?

At this point no I don’t, I think we’re capable unless it had a phenomenal respite -- spike up.

Keep in mind, we’re doing a lot more management of the inventories with the retailers, it’s a lot more working together on the inventory levels, than we ever use to be. We’ve got quite a bit more and we, for example in October have seen seasonal demands as expected in the season and we’re still staying at the same customer service levels.

Okay.

A sharp spike on a few items Chuck, no question could have an impact, if there’s a sudden two or three weeks spurt of just everybody coming down with the flu, certainly there could be some impact on selected items. But overall we really feel pretty comfortable, I‘d say we feel very comfortable with our ability to respond on customer service.

Okay so the whole supply chain might just become more efficient?

I really feel that’s the way we’re headed. And a key part of it is linkage to the point of sale numbers, so that we can see what’s flowing through and moving out and try and get an early read.

Business lost during the quarter, we’re talking about including can you give us some detail on the Gel Cap business that you’ve lost?

I guess it was close to a year ago probably that we -- maybe eight or nine months ago -- that we mentioned we would be losing some business because of the supplier issue the Gel Cap, Gel Tab area. And I’d say that is happening exactly the way we said, we felt we could lose maybe half that business and that’s probably about what might be impacting us here. So in the quarter it was pretty much what we expected and it was a loss of business that did have an impact.

Where are you at on doing the Gel Coating in house?

I think we’re coming along pretty nicely on it and I think that we will be getting the way we need to be on that. Right now we are able to supply our customers with the inventory we had built up for them and so we don’t see an issue on this at this point in time.

We’re still feeling pretty comfortable with what we’d said earlier, which was that we would lose maybe even half this business and then we would start to gain it back when we had our own source of supply in place.

Okay on the loan to the R&D Company the Generic R&D contract. What is that party required to do ergo?

That party is required as part of the overall agreement, first of all that party is required to pay us the money back, it is a loan, so we will get that money back and we’re well secured this.

So that’s just not an issue, but certainly the other reason for doing that was to allow the company upfront to have some of the funding they needed to more quickly get products developed for us and get them to a position where they can be filed faster than they might otherwise have been able to do.

And there’s a cost sharing and a profit sharing arrangement with the company that is totally independent of the loan, and it is pretty typical of what you would expect with a contract R&D house for the type of products we’re asking them to develop for us.

But Dave are they required to have a 10 handers (ph) for you with 3 per year over the next three years, something like that?

They are required to have something like that Chuck, they’re required to have new products that are chosen in conjunction with our people, these are not just products that they have and they say would you like it.

We have a very integrated process in choosing what products they are going to work on and so these are products of Perrigo’s choosing that fit in with the expertise of this particular contract R&D operation. And we together have selected the products and put timetables in place for the delivery and filing of those products.

Alright that’s what I’m looking at and Doug can you talk about current balance sheet strength and stock repo. As well as the dividend increase?

I can talk about all of those Chuck we still have about $12.5m left under our stock repurchased that the Board’s approved, so that’s pretty much has left. As we continue down the path we’re looking at opportunistic good points to enter the market and have done that as you know over the last two to three years.

The dividend is still at 10 cents -- it’s really at 2 ½ cents a quarter, 10 cents a year and that is I think we’re in—we’ve paid 3 of those so or 2 of those I’m sorry and that is continually reviewed at the Board level, and that decision is really one of those that comes up usually once a year and it’s a Board level decision and we keep looking at that constantly.

When would the Board next review the level of the dividend?

We’re probably going to talk to the Board about it on Tuesday.

Thank you.

Your next question comes from Rick Patten with CMS Capital.

Thank you hi. First question with regard to Gel Cap or Gel Coating. What should we think about in terms of the timing of when you will have developed that capability in-house?

We’re coming along we’re well along than we would expect to have that underway certainly here in this fiscal year and probably more end of second quarter, third quarter or somewhere in that range. I can’t give you an exact timing on that but it would certainly be in this fiscal year.

Oh that’s right.

But it would certainly be within this fiscal year.

And then secondly, can you talk about the IRI market share data that you gave? Obviously there are problems with that data generally, including, Wal-Mart’s not in it. The numbers you gave obviously look like your share is dropping across categories relative to the store brand sector in particular.

I’m just curious what other perspective you might give on that in terms of what you feel might be –is that representative of what’s really going on? Do you think your share trends are better than that? Are you actually gaining share in categories?

I think you---it’s hard to get a snapshot in one quarter particularly before you’re into the season and I think that we lose some competitive positioning in some products and we gain some competitive positioning in others.

And nothing dramatic is happening that would be any different that I would feel is normal competition that we have to face. Where we’re facing people who are prime in a certain product and we are not prime, we are always going to be open to more significant price competition. Where we are in a business where there is excess manufacturing capacity, there can be pricing that we decide not to go down and meet in certain cases.

But you know put together there is nothing happening out there that is a big surprise or shock to us that we’re not prepared for or we don’t see in the light of it being normal business competition. And we’re on a perpetual goal of reducing our cost so that we can continue to be more price competitive at every level.

We also have a goal of bringing new products to market, improving our customer service and bringing all kinds of other added value things to our customers that make us important to them and help them drive product off the shelf rather than just full prices that would get the product on the shelf.

We recognize the importance of all of those things together and there is nothing that is any different than what we’ve been competing against out there in this quarter that would make us thing other wise.

And I suppose implicit in that is that you would expect the market share numbers if I’m looking at your figures relative to store brand would look quite a bit better next quarter than they do this quarter.

I would expect market share numbers will fluctuate. And that over all we will be able to at lease maintain our 65% share.

Okay, let me ask lastly with regard to the full year sales out look being essentially unchanged despite a little bit of a short fall in this quarter, implicit in that is the idea of that the cough and cold season as a whole you don’t see any different just because it got off to a slower start for you. Is that accurate?

Yes correct. They don’t even start coming out with the numbers till the last week of September to start calculating data on how many people are getting sick with the flue.

And so it is extremely early in the season but just from the very, you know, first few weeks of data, it indicates a, roughly normal cough, cold, flue season.

Yes okay thank you.

Again I would like to remind every one if you would like to ask a question please press star then the number one on your telephone key pad. You do have a follow up question from Derek LeChow with Barrington Research.

Thank you. You’ve answered my question on the R&D, the incremental R&D ramp up here in the second half. Have you already added and do you plan to add any additional personnel in that business that would help you get additional expertise?

Absolutely. We are actively recruiting a number of key positions for the generic Rx initiative.

And have any of those been sold yet or are they still out there?

There has been one position filled at a --- not at a top executive for the business level. And there are a number that I think where we’re coming close on. But I’m not prepared to say anything about those at this point.

Okay and then have you had any discussion with existing manufactures that might be having some capacity issues that might lead to some collaboration here or some perhaps accelerate your ramp up of this business?

Yes we do have contract manufacturing amounts to probably about 5% or so of our over all manufacturing out put. And we think that there may very well be a profitable opportunity here to increase that percentage for us. And we are talking to folks about being able to do that.

Okay and that would be incremental to your existing guidance on sales growth wouldn’t it?

It would be incremental but it is never short term when you start looking at bringing in contract manufacturing business with pharmaceutical companies. It’s you know from the time we start talking to some body it could be a year before start producing a product for them.

It may be less, but it certainly is not some thing that we talk to some body and next month we would expect to start generating business.

Okay and then would you anticipate a similar level of R&D spending for this initiative in 2005?

That is one that I would prefer to hold off the answering at this point in time until we see where we are going with setting up our internal operation and with outside alliances.

But I would certainly say that it would be -- that if you looked at ’05 to say that we’d at least be at a running – at the same running rate we are in the third and fourth quarter of this year is probably up there – it’s certainly be a fair way to look at it.

Okay thank you very much.

Your next question comes from Linda Bolton-Weiser with Oppenheimer and Co.

Thanks just a follow up on the Laratadine market did you say it was $350m at retail? And what would be the estimate including Wal-Mart would it be about double that?

No it wouldn’t be double that. I can give you – I could tell you if you look at forty weeks at $350m in retail sales without Wal-Mart if you wanted to take a thumbnail number to put on there you might say that that might equate to $600m to $650m in retail sales on an annual basis, on a 52 week basis.

Okay.

And that’s just a rough calculation because we don’t have access to all the information you would need to really know what that number would be.

Okay. And on your new branded diet product have you gotten distribution for that that’s similar to the distribution of your regular other types of diet products?

Yes we’ve had distributions with a lot of the same people we just haven’t had it to the same extent. This is only been out for couple of months so we don’t have the same HTV numbers on the – Dr. Rosenblatt's last product that we would have on our other products.

But at where we do have it placed it is with the same traditional people that we have our other vitamin and nutrition business with. But we don’t have the same depth of penetration yet.

Okay and I mean could this mean that maybe you’re thinking about doing some other types of branded OTC products?

Linda the best way to answer that is to say what it really would tell you is that we’re open to doing these types of things as we’re showing with Dr. Rosenblatt's and with Sesame Street. But I would not say to expect that we’re aggressively out there with a whole line up of brands ready to pop out onto the market that would not be true.

Linda Bolton –Weiser: Okay and just on final thing on the 10 to 12 products that you are having this out side company work on. Are you trying to focus on any particular of therapeutic areas?

Not at this early stage. I would say that certain maybe when we’re a little further down the road we might start to narrow in. Right now we’re looking at what are some of the best opportunities where we in the long term would have capability in manufacturing it here at our facility at some point in time and what’s the best fits are. But we have not narrowed into a particular therapeutic area yet.

Okay thank you very much.

Thanks Linda.

Your next question comes from Doug Lane with Avondale Partners.

On this R&D spending, I’m sort of getting a picture here that if it’s $5m to $7m in the second half of this year then that’s kind of a $10m to $14m run rate so we’re going to have additional ramp up in ’05. So are you looking for another year of flat EPS on ’05?

It’s way too early for us to be able to see what we’ll be looking at in ’05. What I would say is that if the – we say we’re going to spend $5m to $7m this year that we would probably spend some what more next year. I am not – we are not anticipating today that would be $10m to $14m.

On an annual run rate basis?

On an annual run rate basis you now maybe we’re spending, you know I’d have to put pen to paper on it and figure it out. But we have not – we don’t have any projection of spending $10m to $14m next year, but I think it’s probably a correct assessment to say that it’s probably going to be a little bit more than $5m to $7m because we’re you know we’re going to be ramping up in the third and fourth quarters.

Okay. Thank you.

At this time sir there are no further questions.

Okay thank you all very much appreciate your participation.

Thank you folks for participating in today’s conference call. You may now disconnect.