Perrigo Company PLC (PRGO) 2004 Q3 法說會逐字稿

Good morning. My name is Jody, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Perrigo Company's third quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press star then the number two on your telephone key pad. Thank you.

I would now like to introduce Mr. Doug Schrank, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Jody.

I would like to welcome all of you on the conference call. We are delighted to have you join us and thank each of you for your interest in wanting to learn more about Perrigo.

First, let me dispense with the Safe Harbor language. These conferences include our views on 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 an our business on an ongoing basis and have included this discussion on pages 25 to 29 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 describe 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 8-K that may be accessed from your web site at www.perrigo.com.

With these formalities completed, I will now turn the call over to Dave Gibbons, Perrigo's Chairman, President, and Chief Executive Officer. Dave?

Thanks, Doug, and good morning, everybody.

It is, again, a pleasure to report excellent results for Perrigo during our third quarter and year-to-date. Sales for the quarter were up 14%. The drivers of the sales increase were the loratadine D24 product introduced last June, which continues to do very well, as well as initial shipments of new loratadine products, the loratadine syrup and loratadine quick dissolve ready tabs.

We were also able to refill the cough, cold and flu product pipeline following the unusually high peak that we experienced in December when the season had an early peak this year.

Our right vitamin category business also grew this quarter.

And in addition, Peter Black, our acquisition in the UK, contributed for the first time and we also had increased sales of OTC products at our ongoing UK business, the Wrafton acquisition we had made a few years back.

In the US, as in the last quarter, we saw increased volume combined with good operating efficiencies, and that combination yielded good operating income results for us. We continue to really be pleased with the result of our revenue growth when it's combined with the ongoing superb operational performance from the Perrigo team.

For nine months, our sales are up 7%, and excluding the tax benefit of $13 million, our earnings from operations are up 24%, to $59 million or 83 cents per share.

At this point, I'd like to turn the call back over to Doug so he can review some of the details for both the third quarter as well as nine months year-to-date. Doug?

Thanks, Dave.

Before reviewing the key financial components of the third quarter, let me make three overview comments.

First, the Peter Black acquisition was completed in December of '03 and there their results are included in the income statement for the first time in our third quarter.

Secondly, with the acquisition of Peter Black, we have realigned our reporting segments. We now report the following segments. Consumer healthcare, which includes our US operations excluding the generics business, pharmaceuticals, which is our entry into the generic Rx business, our UK operations, which now combine both the Wrafton and Peter Black ,and our Mexican operations, which is the continuing Quifa business.

Finally, as a reminder, nine months reported results include a one-time tax benefit of $13.1 million, or 18 cents per share, that was recognized last quarter.

Onto the third quarter. It was another great quarter.

We had strong volume including sales for Peter Black Pharms and a favorable margin mix resulting from new product sales and cough/cold sales as we refilled the pipeline following the unusually high seasonal peak in December.

As Dave noted, consolidated third quarter sales of $231 million increased $28 million, or 14% from a year ago's $203 million. The consumer healthcare segment accounted for the majority of the dollar increase, as its sales increased 11% or $20 million from $184 million to $204 million. Sales increases in our cough, cold and vitamin products were offset by declines in the antacids and analgesics categories.

Sales in our UK operations increased from $11 to $22 million, with Peter Black accounting for $7 million of the increase. $2 million was due to higher sales of OTC and contract products at Wrafton, and $2 million was due to the exchange rate fluctuations.

The Mexican operations sales declined from $8 to $5 million due to lower government contract sales and distributor sales.

Moving onto the marketplace. The IRI dollar sales for the point of sale data for the 12 weeks ending March 21 for store brand sales dollars indicates the following, and I would remind you this excludes Wal-Mart.

The cough/cold market was down 4%. Store brand was up 6%. And Perrigo was up more than 30%.

Perrigo sales were very strong due to loratadine, including ongoing D24 shipments, the first shipments of loratadine syrup and loratadine quick dissolve.

The pipeline fill following the highest seasonal demand experienced in December also contributed to strong cough/cold growth. The analgesic market was down 7%, store brand was down 8% and Perrigo was down 3%. The market was down, and Perrigo's analgesic sales held up reasonably well versus that trend. There were no significant new products in the quarter.

Gastrointestinal market was up 3%, store brand was flat and Perrigo was down 15%. The lower dollar sales for Perrigo reflect the loss of some antacid tablet business and very competitive price pressures in H2s and loperamide.

The vitamin market was down 2%, store brand was flat and Perrigo was up 12%. This quarter, we experienced good gains in the core vitamin product categories.

Gross profit in the third quarter of $66.6 million was an increase of $7.9 million compared to last year, caused primarily by sales of new products containing loratadine.

Gross margin percentage was 28.9% of net sales, compared with 29.1% in the third quarter last year. The consumer healthcare margins were up 1 percentage point, which offset declines in the UK and Mexico. The continued success of a number of supply chain initiatives, overall efficiency improvements in our domestic manufacturing operations and a favorable domestic product mix contributed to the gross profit margins. Operating expenses in total increased $4 million in a quarter. As a percent of sales, operating expenses were 17.4% versus 17.9% for the same period last year.

R & D expense increased $1.2 million, Selling and administration expense increased $2.4 million due to the addition of Peter Black and bad debt expense in Mexico. The effective tax rate for the quarter was 36%. And net income was up 26%, to $17.7 million compared to $14.1 million last year. Diluted earnings per share were 24 cents compared with 20 cents a year ago.

Moving onto the nine months. Consolidated sales were $686 million, up 7% compared with sales of $643 million last year. That's an increase of $43 million. The consumer healthcare segment accounted for most of the increase, as it increased 6% from $584 million to $617 million.

Almost all of the sales gain was due to volume increases. Gains were greatest in the cough/cold/flu and diet aides and were up in most product categories. These gains were reduced on a year-to-date basis by declines in vitamins, antacids and products related to the tablet/caplet gelatin coating process.

UK sales increased 36% from $36 million to $49 million due mainly to the addition of Peter Black. Mexican sales declined 19% from $23 million to $19 million. Each of our foreign entities was influenced by currency exchange as the British pound strengthened and the Mexican peso weakened versus a year ago. The net currency effect here to date was $2 million on the sales line.

Gross profit increased $14 million, or 7%, to $199 million, primarily due to increased sales volumes of new products. As a percent of sales, this was 29% compared to 28.7% last year.

As as in the third quarter, consumer healthcare margins were up 1 percentage point, which was offset by declines in the UK and Mexican businesses.

Operating expenses for the year, the major differences were in R&D, R&D was $18.6 million compared to $16.2 million last year. That increase is due mainly to generic Rx spending.

Selling and administration expenses declined $3 million, or 4%, reflecting lower bad debt expense, the decline of SG&A in our Mexican operation and just really good overall spending control throughout Perrigo.

I would remind that you we recorded $3.1 million in vitamin litigation settlement income in the first quarter of last year. And the effective tax rate year-to-date was 21.9% after the one-time tax benefit adjustment in the second quarter. Excluding this adjustment, it would have been at 36%.

Net income for the nine months was $72.5 million compared with $49.7 million last year. Earnings per share were $1.01 compared with 70 cents last year. Excluding the one-time tax benefit of $13.3 million recognized last quarter, earnings were $59.4 million, or 83 cents per share.

Now, some comments on what continues to be a very strong balance sheet.

Working capital, excluding cash at quarter end, was $119 million versus $132 million last quarter and $109 million last year. Our cash balance increased from $94 million at year end to $156 million.

Accounts receivable was $104 million compared with $85 million a year ago. This increase reflects strong sales at the end of the third quarter.

DSO was 41 days, up from 38 days a year ago. Inventories were $155 million, a decrease of $5 million from year end and a decrease of $1 million from a year ago, despite the addition of $9 million for the Peter Black acquisition. Days of inventory on hand dropped from 105 days a year ago to 90 days this year.

Cash flow from operations for the past nine months was $104 million versus $82 million last year, and free cash flow was $86 million versus $62 million a year ago. Capital expenditures for the first nine months were $19 million and we anticipate spending approximately $25 to $30 million for the year.

The Perrigo team at all levels contributed to this first nine-month results, from sales and marketing to quality to operations to logistics and all of the staff functions, they have all done a terrific job and all -- you can see them in the numbers.

So let me turn it back over to Dave.

Okay, thanks, Doug.

Year-to-date, as we look at where we are and look forward to the fourth quarter, so far this year our revenue growth has exceeded expectations as our new products have been well received. We've launched some innovative nutritional products such as Dr. Rosenblatt's starch blocker and the Sesame Street vitamins. And we've also had good success with OTC ANDA products.

We've had seven ANDA approvals over the past seven months, which I think is probably a record for Perrigo in that time period. That includes three that we received this past quarter. Those three would be the store brand equivalents to children's and junior strength Motrin, the store brand version of Aleve cold and sinus extended relief and the store brand equivalent to the Monistat Three combo pack.

Each of these products individually has relatively modest sales potential but combined they'll be a decent contribution to us and we begin shipping them in the fourth quarter.

Also shipping in the fourth quarter will be ovulation test kits and a Metamucil capsule equivalent product.

And finally, regarding our Perrigo generic pharmaceutical program, I'm not going to be saying much on that. We are in the process of doing due diligence on the Lannett Company that we talked about in the past. This makes sense for us as it would accelerate our entry into the generics business. There are a couple of key issues here that we need to get comfortable with before deciding finally whether to exercise the option that we have to acquire the shares of the majority shareholders.

In addition, we're now in the middle of our planning process for fiscal year '05, and we will be commenting on our fiscal '05 outlook at our next conference call after we have completed the planning process and we are reporting on our final fiscal '04 results.

And at this point in time, at the conclusion of a great quarter for Perrigo, I'd like to open it up for questions, this call up for questions, for either me or for Doug. Any questions?

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Please hold for your first question.

Your first question comes from Doug Lane from Avondale partners.

Yes, good morning, Dave and Doug.

Good morning.

First question. Doug, you mentioned that you got $2 million benefit from currency from the UK. What was the total currency impact of the quarter, if you include the peso?

It's $2 million.

Okay. So that $2 million is company-wide for the quarter?

Yes, sir.

Okay. Second question, Dave, you seem pretty cautious on the Lannett acquisition. Would you just characterize for us the probability of that materializing? Is it 50/50? 60/40? Give us some sort of probability there?

I can't really give any probability. If there's any indication of caution, it's probably more than I'm being cautious not to say much about it while we're in the due diligence phase. I wouldn't read too much into that.

I do think there are some things, as with any potential acquisition, that need to be proven or disproven during due diligence and we're in that process and just don't have anything to talk about at this point in time, other than we are in the midst of ongoing due diligence. So caution is not necessarily an indication of our feeling of whether we'll complete it or not. It's more of just I want to be cautious because we are in the midst of due diligence.

Okay, fair enough.

Sticking on the generics. The R&D spending was up, but only I think you said $1.2 million, so it wasn't quite what I was looking for. If I remember right, you were saying incremental $5 million in June '04 and, you know, a full year of $8 million run rate for June '05. Are those those numbers still what you are looking at today?

I think we'll be a little bit lower than what we had expected. I don't think we'll be terribly far off, but we have recently hired a Vice President of R&D for generics. He only started on February 1st.

And in addition, when you factor in that we're looking at the Lannett acquisition very seriously, we will probably be a little bit slower at ramping up our internal R&D spending, and particularly moving into develop our own generic R&D operation until we move forward further with Lannett and understand what we have there with Lannett.

Okay.

So to be clear, I was sort of looking at it as a three pronged approach. One was the $10 million loan to the independent shop. The other was your internal development, and then the third would be Lannett. It sounds like there's a possibility that the two and the three could be combined ultimately down the road so that that would be integrated together. Is that a fair characterization?

I think it's fair. Certainly what we just want to be a little cautious of is that before we go doing too much spending in building up a brand new generic R&D operation, we ought to take the next couple of months as we're evaluating Lannett and deciding for sure what we have there before we go spending on a new facility and bringing in too many new people. I think, certainly, we'll have that figured out once we complete the due diligence. And that will be taking place over the next couple of months.

In terms of the $10 million loan, I'll toss that back to Doug to remind you of where we are on that. There was something reported on that that I'll let Doug review with you.

Yeah, Doug, if you remember, that $10 million loan was to really help this R&D developer get through a hurdle. He really needed to cash so he could develop the products that we had in the pipeline with him.

After the quarter ended, and you'll find it in the queue, he paid back that $10 million loan. It's still part of our strategy of generic development to partner with people. I just -- I want to be very up front about the loan. That was -- we had not really expected it to be paid back as quickly as it was, but you know me. I'll always take the cash. But it's still -- our program with them continues.

So the fact that you got your money back doesn't mean that their development of 10 to 12 new products has been derailed? That's still on track?

That's still on track.

Okay. And finally, Doug, I know you're not commenting on '05 until the next conference call but isn't it fair that with the strong flu season for you last year in December that we do face the prospects of a down quarter in the December quarter given just the very difficult comparison there?

This is Dave. I'll answer that one.

Okay.

And I'd start by saying you are absolutely right. We face a daunting prospect as we go into the second quarter of next year.

Having said that, we are working very diligently to come up with promotional programs and plans in which to try and drive business and make sure that we get product out there to be available to the consumer that will enable us to face up to that tough second quarter. So, you know, really in some -- yes, absolutely we face a tough second quarter next year. But I would also say we're not going to lay down and just accept that it's going to be impossible to meet. We're going to do everything we can to have another bang up quarter in there.

Yeah. No, you've had two terrific quarters back-to-back now.

So, okay. Thanks a lot.

Your next question comes from Derek Leckow from Barrington Research.

Thank you, good morning. And congratulations on a great quarter.

Thanks, Derek.

Just looking at your consumer healthcare segment, you know, you are coming off of a record new product introduction cycle here, and I believe you still have loratadine 10 milligram coming up. Can you talk a little bit about the -- again, in light of the comparisons that you are facing, any particular additional guidance you want to provide us with in terms of new product introductions next year that could help you continue this growth pattern?

No. I don't have anything new to add other than what's already out there. The 10 milligram, we are still hoping to have during the year. We are still hoping to have D12 at some point during the year, but we really don't have anything new to say on either one of those.

Certainly this year we have benefited more than we have benefited in most years with the addition of the loratadine D24. That's been a, certainly a big winner for us this year. And we do not have any single product on the horizon for next year that would be the equivalent of the impact that that product has had for us.

Okay.

And as far as the category, the entire category is concerned, the allergy products, it seems to me that they're exceeding your expectations internally right now. Are you seeing any particular cannibalization of existing products in the category?

No, I think that the new products we've introduced in that category have pretty much just been a plus for us. It's been very positive, those three new products.

Okay. Thank you.

My next question deals with the generic prescriptions venture. Can you talk more about some of the mechanics on the internal project there? It sounds like the, you know, you're kind of taking the stance now that you are kind of putting that on hold a bit just as you are evaluating the Lannett business. Is that fair?

You're talking about such a short time frame here. We did go ahead. We brought in a new VP of R&D, very highly regarded, [Jatin Sha] and we're very pleased with that. He is busy doing a lot of work to establish us and have us ready to set up our, you know, a generic product development program.

All we're saying here is that as we complete the due diligence over the matter of a couple of months, we're not going to perhaps go as hard at getting a new R&D facility, bringing in equipment to it and staffing it up as quickly as we might have thought we would until over the next couple of months we figure out what we have and where we're going with Lannett.

Okay.

It is not a -- there is certainly not any major hold up here. We are as committed as ever to moving forward aggressively in building our R&D product pipeline. It's just trying to be sure that we're smart here with somebody like Doug looking after our cash. We just don't want to be duplicating something that we might be getting with Lannett. And so just for a couple of months, we'll be a little bit cautious here in the spending as we ramp up R&D.

But we are still as aggressive as can be at wanting to get into the generic prescription drug business, and we still are, as I say, very aggressive in our thoughts there.

And I think the option, can you remind me again when that expires?

Early August.

Early August, okay.

Third question deals with the Peter Black and Wrafton businesses. Looks like sales, you know, have doubled here, but profitability really hasn't improved there yet. It looks like it's actually down year on year. Can you talk about that in light of your outlook for next year?

Yeah. This is Dave again.

Remember, we bought the Peter Black business. It is a business that we got some pretty good sales bump with, but was essentially a break-even business and was not contributing much operating income and in fact, it has a negative impact on our gross margins overall because their gross margins were so low.

In the quarter, our Wrafton business was actually very positive. It was up.

And I guess the final thing I'd say there, is one of the things that was attractive about the Peter Black acquisition was how well it goes together with what we had with Wrafton. Wrafton's strong in OTCs, Peter Black's strong in vitamins. And we are just now finishing up putting together the integration plan and starting to move forward on the integration plan for the two businesses where we would hope to take some costs out of the combination of those two businesses. And we'd be happy to share what we think for next year when we have finished that process and we report next time on our total '05 outlook.

But, you know, we again think that the logic of putting those two companies together makes a lot of sense. We see some good cost takeout opportunities and we are finalizing those right now.

We should see an improvement in the trend on profitability there, sequentially, speaking if we look at the coming year, we should probably see a modest improvement every quarter.

Derek, this is Doug.

The Peter Black business actually had a loss in the first quarter that we owned them. The integration plan is really targeted to take out a few million dollars of the combined businesses. I think you'll start to see that benefit as we get into -- and I know you'll start to see that benefit as we go into '05, and we think we'll end one a much more profitable business, combined, as we get there.

All right, thanks.

And then finally, Doug, could you talk a little bit about your uses of cash next year? I mean, you've got a balance of cash that's kind of growing here and looks like it will continue to grow next year.

You also have some share creep. It looks like shares are up 1.5% here sequentially and about 3% up next year. Do you think you might get more aggressive on your share repurchase and mainly just want to outline your priorities on uses of cash?

Yeah, Derek, first ever all, we are delighted to have that cash, particularly as we look to expand into the generic business. You know, we've talked, you know we've looked at a number of acquisitions. We have the Lannett option on the table. That will, quite frankly, get rid of a fair bit of that cash right out of the box. Don't quite know exactly how that transaction will be structured, but we have been really generating cash, protecting it, as we have planned to go into the generic business.

As it relates to stock buyback and the share creep, we've always taken the approach of buying back stock when it looks attractive to us and when it would look an attractive proposition for the share holders. So we will always do that. We still have $20 million authority from the Board at today's price. You know, we would think harder about that than other prices but we will continue to look at that.

But, you know, we're really fortunate to have that cash.

Okay.

What is your assumption for shares outstanding for 2005, Doug? Do you have a figure you can share with us?

Right now, I would say it's probably -- you have to understand the shares outstanding, I really look at diluted because it really reflects the --

Right, so do I.

Cost to the shareholder. And that is really dependent upon the stock price.

The reason that number's gone up is really because the stock price has gone up. The basic has gone up because people have exercised options.

I that I that the 72 1/2 to 73 million shares is probably the number that will be out there for next year, but I really -- that's really more dependant on stock price than anything else.

Appreciate it. Thank you very much.

Your next question comes from Chuck Cerankosky from McDonald Investments.

Good morning, everyone.

Hey, Chuck.

Good morning.

Great quarter.

Thanks.

Thanks.

Doug, I'm even amazed you parted with $10 million to lend to that guy, so you got to be happy getting it back.

Always makes me happy, Chuck, to have it back in my pocket.

Looking at next year, I'm also aware of the tougher comparison. Dave, can you give us some thoughts regarding the whole loratadine product line you'll have in place in fiscal '05, what you think will be happening to Perrigo's volume trends in there and the pricing of the product?

Well, the only thing I can be sure of is we'll have the three products that we have today. We're certainly hopeful of having the 10 milligram and having the D12 product but you know, all we can be sure of is what we have. Right now, the D24 product continues to be a good sales and profit contributor and we do not currently have anyone else out there with a product competing with us in store brand.

I really can't tell you, Chuck, when somebody would have another product out there. It is certainly very possible that at some point during fiscal '05, somebody else will have a product to compete with us in the D24 part of that business, which is the, you know, the main driver of our volume there. So I just -- it's hard to guess when. I can't really do any more than guess at when that would be at this point in time.

How about pricing, Dave, when you look at it? You know, you're looking at competition coming in the D24. Perrigo will be a new competitor in the 10 milligram and the D12. Does that imply with a high degree of probability that prices come down in those product lines?

Yes. I would be pretty comfortable with the fact, and pretty accepting of the fact, that as with any other new product in this business or new line of products when they go OTC, after exclusivity runs out and as more people enter the market, absolutely, Chuck, prices will come down. Margins will shrink.

Okay.

Switching over to the gel cap issue. Where are you at on internal production or finding additional outsourcing for that?

We are producing product internally, and we're pretty much about where we had expected to be. We didn't lose quite as much. I think we had put out there that we might lose up to half our business or roughly 16, 17, and we're doing better than that. We haven't lost as much of that. And I do think at this point now that we've got our internal capability gearing up, we will stabilize and start to gain some of that back.

By producing internally, you're going to have -- you're going to manufacturer all of your internal needs?

Yes.

Okay. Great. Great.

All right. Great quarter. That's all have I right now.

Thanks, Chuck.

Your next question comes from Linda Bolton Weiser from Oppenheimer and Company.

Thank you, hi, Doug and Dave. Good quarter.

Thanks.

Can you just touch again on that issue you mentioned with receivables being just a little bit high. I think you said it was due to some sales toward the end of the quarter. Can you elaborate what that was and how that might have impacted sales -- affected sales growth in the quarter?

Linda, it's just a matter of sales year-over-year. We had higher sales in the -- first of all, receivables, since they are only outstanding for 40 days, it's really the sales in the last month that turn into receivables. We had a better month in March of this year than we had in March of last year so that raised receivables. We also had Peter Black in the mix this year, which we didn't have last year so that raised receivables.

It really is -- it relates to -- sales relates to the full quarter. Receivables just relates to the last month. There's no -- there's no bump that happened or there's no real reason for it other than that's just the way sales came through this year.

It's really related to how the season works and how the retailers order and need their inventory refilled as a season declines. So there's really not any significance to that receivable balance. It will come right back down at year end.

Okay.

Also, a couple of the consumer product companies have been talking about a potentially more favorable pricing environment. Some people have even mentioned Wal-Mart when they talk about that. Can you make any comment on what you see going forward versus maybe the pricing environment in the past?

This is Dave. I see continued challenges on pricing without a whole lot of opportunity for significant price increases. I think it will continue to be a challenging environment and we will continue to try and drive our costs down to wherever we can be able to hold our prices stable or even continue to be very competitive with our pricing on any opportunities we see out there.

So I would -- I mean, we're early in our planning process for next year, but we certainly had at least some discussions on pricing, and I would not see pricing turning favorable for us in '05 at all.

Are you experiencing any unusual cost pressures at this point?

No. I would say we still see opportunities -- with the team that we have in place here at Perrigo today and the job these folks have done, I think we're still going to be planning on taking costs out of our system, not adding costs in.

Okay.

And finally, just on the fourth quarter projection that you gave for EPS, I guess I'm a little surprised that it's so high. I guess I had the feeling or impression that last year's fourth quarter was somewhat boosted by an earlier than expected sell-in of the new loratadine product, if I'm remembering correctly. So can you somehow explain how the comparison is more favorable with earnings to be expected this year versus last, even with that hard comparison?

I think it is a tough comparison but we shipped the loratadine D24 in in June. We are still alone out there on the store brand D24 and now we'll have three months in the quarter to ship. We also introduced -- just recently introduced the two new products.

We also mentioned a number of other smaller products but three new products that will be shipping in the fourth quarter, the three new ANDA products as well as a couple of other monograph products.

So -- just when you put all that together and then you combine it with the continuing improvements that we have made in our operations, you continue to get a good impact on the bottom line, Linda.

Okay. Well, that's good.

Just one more thing. On the new products that you mentioned, all of them put together, I guess I estimated that maybe that would mean $15 to $20 million of sales for you guys. Is that a reasonable estimate?

That's probably high, probably, you know, hard to say, Linda. But it's probably high.

Oh, really?

Yeah. I mean it's not way out of the league. I'm not going to comment on specific sales opportunity, but it's not way off base but it's probably a little bit high.

Okay. And in terms of the timing of those things as we flow through the quarters of '05, I mean, you know, is it going to be like an even growth pattern or can you comment on that?

I don't -- I'm not ready to comment on that yet. I do understand, we certainly understand as well as all you folks do, the challenge we have in the second quarter, and the impact, which we don't know yet, of competitive products in the Claritin equivalents, and when we're going to be able to start selling the 10 milligram, although that won't have a big impact anyway at this point in time, and D12.

I'd say we're a little early to be commenting either on what we expect for fiscal '05 results and what that pattern would be.

Okay. Well, thanks very much.

Thanks, Linda.

Your next question comes from Steve [Ricchio] from Bear Stearns.

Hey, guys, great quarter.

Thanks.

Quick question on the balance sheet, I guess, the supplemental disclosure. Looks like your allowance for accounts went down while sales went up. Could you just comment on that?

Yes. Steve, this is Doug. Good catch by the way. I was figured somebody would catch that.

Basically, we've had a very conservative posture on a single customer who came out of bankruptcy a while back.

Okay.

And as we saw their earnings release and the nice job that they have done, the cash they have generated, the cash they have available to, we really had to back off that conservative posture.

Okay.

And that's, in a nutshell, what it is.

Okay, good job. Thanks, guys.

Yep.

Your next question comes from Steve [Ballaquet] from Argus Partners.

I normally track the prescription markets, so I guess I'm less familiar with OTC, but I'm curious if you would be on the hook for any short of chargebacks on the price declines on any loratadine product already sold into the channel that may come down in price in the future, if you do see competition in that marketplace?

No. The store brand OTC business does not operate the same way as prescription Rx. We're well aware of the chargeback approach when prices drop in prescription Rx and as we go into prescription Rx, we'll be prepared to deal with it in the normal terms the way that the generic Rx companies do. But in OTC, that is not part of how the business operates.

Okay. All right. Great. Thanks.

Your next question comes from Bill Steele from Banc of America.

Thanks. Good morning.

Hi, Bill.

Hey. A couple of questions.

Can we go through just the breakdown of sales in the quarter, the 14% increase between acquisitions, organic and maybe new products?

Yeah, Bill. It's pretty straightforward. If you look at the Peter Black acquisition in the quarter, it's about $7 million.

Okay.

And if you look at the exchange rate it's about $2 million. So that would drop you from a 14% growth to about 9% growth.

Okay.

The rest of the growth, a fair bit or the majority of the rest of the growth comes from new products. Not all of it, but most of it, mainly.

Wouldn't the base -- is the base business around 2% to 3%?

That's what the market's growing, yeah.

Right. So we can say 6%or so, 6% to 7% would be new products?

Yeah. You can say that. I think that's as good a model as you can create. I think that's fair.

Okay.

With regard to the interest expense line item, Doug, it kind of popped in the third quarter, although your balance sheet, as you know, strengthened. I'm kind of wondering, is there anything else in there besides -- is that pure interest expense or is there some other?

I can tell you, there is some other, and the other is related to when we purchased Peter Black, we put some money in the UK. We had some gain when we converted that back to dollars, yet we're looking at hundreds of thousands of dollars. Not a whole lot.

So it's like a hedging gain?

Well, it's really not a hedging gain. It's really the conversion. We actually anticipated needing more pounds than we actually ended up using.

Okay. So the appropriate run rate then for actually what would be interest income would be 500?

Yeah, 500 or 600.

Okay, 500 to 600. And with regard to cash flow from ops for the full year, are you kind of anticipating -- what are you anticipating for the fourth quarter, because that fourth quarter cash flow does bounce around a little bit.

Well, it really does. And it makes it very difficult to forecast. I went back and looked back at the fourth quarter last year and you'll find operating cash flow is negative by a couple million dollars. Obviously there's earnings.

What's very difficult to forecast is what happens to -- and you have to forecast the day, because that's when the year closes. It's very difficult to forecast a receivable balances and inventory balances. So I'm guessing, and this is really the quarter you have to guess in. I'm guessing that it will be flat and it could be plus or minus, and likely plus versus minus, upwards of $10 million, but it's a wild guess.

That's kind of where I am.

You know, historically, as I've thought of the fourth quarter, at least historically, given our new situation, I think about it as fairly flat with the fluctuation coming from the balance sheet.

But as you said, if your receivables come down --

Yep.

That should be pretty good. And receivables, by the way, generated you $20 million in the quarter so it shouldn't be an issue there.

But receivables still come down from where they are.

Yeah, absolutely.

And did I hear you say, Doug, that Peter Black cost you about $2 million in the quarter?

Yes. Well, no, not Peter Black. The foreign currency exchange added $2 million in sales in the quarter.

But when we were talking about Peter Black -- okay, what was the Peter Black -- ?

Peter Black had a loss in the quarter.

But of just between zero and a million?

Yeah.

So minimal then?

Yeah. Probably half of that million.

Okay. That's it for me. Thank you very much.

Thanks, Bill.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad.

Your next question comes from Linda Bolton Weiser from Oppenheimer Company.

Thanks.

Just a follow-up on the Lannett potential acquisition. If you decide not to go through it with it, will you issue a press release or publicly announce it or will you just allow the time frame to expire?

Anything like that, Linda, would fall under the 8-K requirements and we would have to issue an 8-K and a press release. That would be a considered a significant event.

If you decided not to go ahead with it?

Yes.

Okay. Thank you very much.

Okay, thank you.

And I think that's probably all the time we have for questions. Appreciate all of your attention. And we'll talk to you next quarter.

This concludes today's Perrigo Company third quarter results conference call. You may now disconnect.