Perrigo Company PLC (PRGO) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Perrigo Third Quarter Fiscal 2005 Earnings Conference Call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr.Douglas Schrank, Perrigo's Chief Financial Officer. Sir, the floor is yours.

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. We specially want to thank those of you who are joining us from Israel for the first time. Welcome.

First let me dispense off the SEC Safe-Harbor language. 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 this discussion on pages 27 to 33 on our Form 10-k for the year ended June 26, 2004 and pages 13 to 28 in our S-4 filed on February 14, 2005. 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 a Form 8-K that may be accessed from our website at www.perrigo.com. With these formalities completed, I would now turn the call over to David Gibbons, Perrigo's Chairman, President and CEO. Dave?

Thanks Doug and Good morning everybody. Our third quarter ending March 26, 2005 included the completion of the acquisitions of Agis Industries on March 17th. I am pleased to welcome our Vice Chairman, Mori Arkin, who will be available on our call this morning to take part in the Q&A with Doug and me following our formal comments. There is certainly more complexity in the financials this quarter.

Doug is going to discuss the financials for the quarter and 9 months, and will also walk you through the purchase accounting of this acquisition. But first, let me provide you with an overview of the quarter. In the quarter, we reported a loss of $379 million and a loss per share of $5.15. Before the one-time charges related to the acquisition, net income was $16.2 million or $0.22 per share. Sales were down 5% or $13 million to $220 million.

Our revenue decline was the result of lower sales in consumer health care, where we were directly impacted by a weak cough/cold season and lower sales of loratadine-based products, as well as lower vitamin sales. This year we experienced a very different pattern to the cough/cold season compared to the early and severe peak season that we had last year. While there was a pick up in illness levels during the March quarter, peak demand did not hit until well into February.

At that point, retailers were able to meet a good deal of demand from on-hand inventory, which did not generate heavy re-orders for us in the quarter. Loratadine sales were impacted by more competitive pricing and we were up against a tough comparison to the same quarter last year when we were launching the quick-dissolving syrup products. We expect a tough comparison again in the fourth quarter.

As you know, our vitamin sales have been very strong recently, up 27% in the first half of '05. However, we gave back some in this quarter. We weren't helped, as was the industry wasn't helped either with the negative news about Vitamin E that came out overt past few months. Our UK sales were down in the quarter due to some lost contract business and our decision to turn down some low-margin Vitamin business. Mexico sales were up and we continue to increase our volume in the store-brand segment.

I'll now turn the discussion back over to Doug for a financial review of the quarter and 9 months. Doug?

Thanks Dave. Before reviewing the key financial components in the third quarter, I've got just a couple of overview comments. The Agis acquisition was completed on March 17th and Agis is included in the consolidated balance sheet on March 26th 2005. However, Agis' operating results are not in the third quarter, but will be included in the consolidated results beginning in the fourth quarter of our fiscal year.

However, there are a number of non-operating charges that are included in the third quarter and 9-months year to date, which relate to the acquisition. They are, number one, the write-off of in-process research and development. US accounting standards require the write-off of the net percent value of future cash flows for products and development, which have not yet been approved by the FDA. This charge has no tax benefit and totaled $388.6 million.

Secondly, cost related to the acquisition for tax advisory accounting and integration support are included in SG&A and totaled $4.6 million. In addition, Perrigo Company charges for streamlining of operations relating to manufacturing as we looked at the combination of the 2 Companies was $3.2 million.

And finally Perrigo had some employee termination benefits as we looked at the combined companies, up $3.2 million. These last 2 items are included in the restructuring charges in the P&L. To summarize, that's 388.6 million for in-process R&D, and I will refer to that as IPR&D, and $10.9 million for acquisition-related costs, asset impairments, and operational improvements. So let's look at the third quarter results. Consolidated sales of 220 million decreased 13 million or 5% from a year ago due to the sales shortfall in the consumer health care segment.

Consolidated sales included approximately $2 million of favorable currency translation. Consolidated gross profit of 63 million was a decrease of 5.8 million compared with last year's 69 million and gross margin percentage of net sales was 28.6% compared with 29.5% last year. The effective tax rate for the quarter was 1.4%, but excluding the write off of in-process R&D, the effective tax rate would have been our normal 36%.

Consolidated net loss of 379 million and the loss per share was $5.15. Excluding the $388 million write-off of IPR&D and the 10.9 million in charges for acquisition cost and restructuring, net income would have been 16.2 million or $0.22 per share compared with 17.7 million and $0.24 per share in fiscal 2004. I will now take you through a more detailed review of our current 4 business segments. Understanding the progress in each of these segments will give you a better picture of the consolidated results.

But before I do that, let me -- before I start with consumer healthcare, let me give you the market overview from an IRI point of sale data for the key product categories. It is a little different than in the past because the cough, cold, flu season is over, it really ends effectively March 31, it is much more meaningful to compare the last 9 months of market data to Perrigo's 9-month year-to-date results. So that's what we have done. So, for the 9 months ending March 20, that's the last time IRI is available and remember IRI data does not include any Wal-Mart data because they do not submit it.

The cough, cold market was up 5%, Store Brand was up 6%, and these are both at retail, Perrigo was flat and that's at our manufacturing side. Perrigo's sales were weak year-over-year versus retail sales growth. The slow start to the season with a late pickup at retail did not work in our favor.

With adequate inventories available following the season's slow start, retailers managed to meet demand in our third quarter from on-hand inventory with limited customer re-order activity. We estimate that total retail inventories are down 5-10% from where they were at the end of March last year. In addition, fiscal '04 had significant Loratadine new product selling versus fiscal '05, which had some Loratadine price erosion due to new competitors entering the category. All in all though, we did not lose market share.

The Analgesics market was down 2%, Store Brand was down 4%, and Perrigo was down 4%. Analgesics more closely followed flu symptoms during the cough, cold, flu season and overall analgesic sales were down as incidents of flu and high fever reported this year were very low.

The gastrointestinal market was up 2%, Store Brand was down 6%, and Perrigo was down 4%. A lower dollar sales for Perrigo reflect lower antacid sales and very competitive antacid pricing due to the Prilosec OTC national brand.

The Vitamin market was down 3%, Store brand was down 6%, and Perrigo was up 9%. Through the first 9 months, Perrigo had success with new products and higher sell-through at certain accounts. However, quarterly sales varied due to the timing of retail inventory replenishment. Now, moving to the Consumer Healthcare segment. Sales for the quarter decreased $12 million or 6% from $206 million to 194 million. Consumer Healthcare incurred lower sales of Loratadine due to higher introductory sales last year, and lower sales of vitamin products due to the timing of customer share purchases.

Remember, vitamins are up 9% here to date, but they were down in the third quarter. Consumer Healthcare gross profit decreased from 65 million to 58 million or about 10% and as a percent of sales gross margin declined from 31.5% to 30%. The 150 basis point decline resulted because we anticipated higher production in net volumes and staff accordingly. Because of the lower severity of the cough, cold and flu season and retailers lowering inventory in the third quarter, this volume never materialized and leaves excess manufacturing cost per profitability.

Operating expenses include a $6.4 million charge for restructuring. Excluding these charges, operating expenses decreased 8% or $3 million from 36 million to 33 million due primarily to a decrease in compensation related expenses such as employee bonuses and medical cost. So, the short fall in gross margin was partially made up by a reduction in cost in operating expenses. All in all, the Consumer Healthcare segment was $4 below last year excluding the charges already discussed. The reduced severity of the cold and flu season and the late pickup at retail took its toll on this business to the third quarter.

In the pharmaceutical segment, the operating loss was 1.8 million compared with 1.6 million last year as we continued to fund the start up of our generic prescription drug business. In the UK, sales decreased 2 million to 19.8 million from 21.8 million last year despite a currency translation gain of approximately $2 million. Operating income in this business was 400,000 versus 200,000 last year, and these results are disappointing. We still have work to do to reduce the business breakeven point.

In Mexico, sales increased $900,000 or 18% to almost 6 million due to increased volume in the store brand market. Operating income increased $900,000 as we made progress in changing the Mexican business model to concentrate on store brand sales and less on sales to the government. In summary, consolidated operating income in the quarter was 23.8 million versus 26.5 million last year before acquisition related charges. The operating income decline incurred in Consumer Healthcare.

Before reviewing the key financial components of our first nine months, a couple of reminders. As a result of the previously reported second quarter recall of Loratadine syrup, sales year-to-date were reduced 6.3 million, pre-tax earnings were reduced 8.3 million, and net income was reduced 5.3 million or $0.07 per share. Also in the second quarter a year ago, that's in fiscal '04 as a result of an IRS federal package examination we recorded a one-time income tax benefit of $13 million or $0.18 per share. Finally, the acquisition related cost and charges, the fiscal '05 Loratadine recall expense and the fiscal '04 tax benefit will cause some confusion as we discussed the year-to-date results. I will try to identify net income in earnings per share both before and after these items.

Looking at consolidated sales, which were 700 million, an increase of 1% from last year. The consolidated sales included 14 million from the Peter Black acquisition, approximately 6 million from currency translation and were reduced by $6 million for the Loratadine syrup recall. So, on a comparable sales operating basis, sales were down 1%. Consolidated gross profit was 195 million, was a decrease of 10 million compared with a year ago, and the gross margin percentage was 27.8% compared with 29.6 last year. Excluding the effect of Loratadine recall, gross margin would have been 203 million versus 205 last year or 29%, that's a 60 basis point decline from last year, and this decline was caused by the Consumer Healthcare lower production volumes in the second and third quarters.

The year-to-date effective tax rate was 7.4%, but excluding the write off for in process research and development, the effective tax rate was 36%. Reported consolidated loss was 346 million or a loss of $4.81 per share and I can't get used to saying that number. Excluding the write off of IPR&D and the other acquisition related expense, Loratadine recall and the tax benefit last year, net income was 54.9 million this year versus 59.4 last year and earnings per share was $0.76 this year versus $0.83 a year. Looking at year-to-date segments, in the Consumer Healthcare business, sales were $612 million versus $624 last year, down $5 million or 1% excluding the loratadine recall. Strong vitamin and feminine hygiene product sales were offset by declines in antacids, analgesics, and diet-aid products. Excluding the product recall effect of 8.3 million, gross profit decreased 6 million, and as a percent of sales, gross margin declined from 30.9% to 30.5% due to the fixed costs related to the lower production levels in the second and third quarter. Excluding the restructuring charges, operating expenses increased only 1% or $1 million, due primarily to an increase in R&D spending of $2 million, offset by lower product liability cost and a decrease in compensation related expenses.

In Pharmaceuticals, the operating loss was $5.5 million compared with a loss of $3 million last year. In the UK Operations, year-to-date sales increased $18 million to $67 million, the Peter Black business accounted for approximately $14 million of that and currency translation gains accounted for another 6. Operating income in the UK was $2.3 million, up from $1.5 million last year. In Mexico, sales year-to-date increased from $18.7 to $19.1 million, and operating income was $1.7 million compared to $600,000 last year, as we continued to develop the retail store brand business. On a consolidated operating income basis, excluding the $8.3 million charge for loratadine and the Consumer Healthcare restructuring charge, operating income was $82.9 million compared with $90.6 million last year, and again the decrease was primarily in the Consumer Healthcare segment.

Now, let me turn to the balance sheet and talk a little bit about what is a very new balance sheet to us. The total assets at March 26, 2005 reached $1.7 billion, an increase of $1 billion from June 26, 2004. This significant change reflects mainly the goodwill, tangible assets, intangible assets, and a restricted cash deposit in connection with the purchase of Agis Industries. These amounts were partially offset by a reduction of cash and investment securities used to affect the transaction.

One of the key items on the balance sheet is inventory, and our independent valuation professionals assisted management in determining the fair value of the inventory acquired. This fair value is based on the estimated selling price of the inventory, less appropriate cost to complete any working process, and related profit margins. At March 26, 2005, a step-up in the value of the inventory of almost $28 million is included in the opening balance sheet. This amount, this $28 million, will be charged to cost to sales over the next 3 to 6 months, but it's not expected to have any impact beyond that. That's actually normal purchase accounting.

At closing, Perrigo also entered into a loan agreement with an Israeli bank for $400 million and simultaneously, deposited $400 million in that same Israeli bank. As required, these amounts were reported separately on the consolidated balance sheet as long-term debt and restricted cash, and Perrigo will pay interest expense on the loan and receive interest income on the deposit in subsequent periods, which is a fairly -- the net -- the spread between those is a very negligible amount.

The purpose of this transaction is to provide an appropriate and effective mechanism to move cash internationally. Total liabilities at March 26, 2005 increased from the year-ended 2004 by $900 million, representing mainly new bank debt of $215 million and the $400 million fully secured loan I noted earlier associated with the Agis purchase. Shareholder equity at the end of March reached almost or above $600 million, up $73 million from year-end June 2004. This increase mainly reflects the Perrigo shares issued to Agis shareholders in connection with the Agis acquisition and debt of the loss after the one-time $389 million write-off of In-Process Research and Development, which was recorded this quarter.

Cash flow from operations for the nine months year-to-date was $54 million compared with $104 million last year. The increased use of cash is primarily due to a decrease in net income of $30 million, excluding the write-off of the IPR&D related to the Agis acquisition, lower accounts payable of about 20, basically due to lower production levels and lower inventory levels and then the payment of employee compensation items for fiscal 2004. Capital expenditures for the nine months were 16 million and we now anticipate spending 20 to 24 million for the year. So with that, a very complicated quarter and year-to-date and hopefully that was all clear and let me turn it back to Dave.

Thanks, Doug. Looking at other third quarter business developments, we began shipping our Nicotine gum product the Nicorette equivalent this past quarter. We are off to a good start, but as we've previously reported, we had more demand than we have supply. We are working to correct that now and we do expect this to be a good product for us in fiscal 2006.

Perrigo filed 4 Solid Dose ANDA's in the quarter and now a total of 11 so far this year. And last week, we received approval for prescription Naproxen tablets. This will be a relatively small contributor when we begin shipping in fiscal 2006, because there were large number of competitors in the market today, so won't be a big impact.

Agis filed three Topical ANDA's in the quarter and have now filed a total of five in the past nine months and so far this fiscal year, Agis has received approval for three new products, Mesalamine Enema and Halobetasol Ointment and cream products. I also want to comment on some very recent developments in the area of our Pseudoephedrine products. Over the past two weeks, this train has been moving a lot faster than it had been moving prior to that. There have been some significant developments as retailers have announced plans to move certain Pseudoephedrine-based products behind the counter.

The plans and timing certainly differ somewhat but virtually all retailers are now moving at least a portion of their Pseudo products behind the counter. We are developing phenylephrine-based alternatives for the most popular Solid Dose products. In fact we began shipping a store-brand equivalent to pseudophed PE, that's one of the leading brands in the March quarter and will be phasing in reformulated products as soon as possible throughout the 2005 and 2006, cough and cold season. It certainly appears to us now that the move behind-the-counter with the accelerated activity here is going to have some negative impact on our cough/cold/allergy/sinus sales over the next 12 to 15 months. It is too early at this point with the way things are moving to be able to measure what that effect would be.

I did want to make a brief comment on the Agis acquisition and integration. We are now with different companies and we had been before March 17, certainly we're much more of a global company, involved not only in consumer healthcare but very much in generic prescription drugs and APIs. We've got an influx of talent and leadership and new technology that is part of the combined company, excellent R&D and experienced global management team to take us into the future.

From our standpoint, we see the integration has been off to a very good start and in fact we are now in the middle of our forecast and budget planning for fiscal year 2006 and that planning will be finalized by the end of June. We are working hard to take advantage of all the opportunities that we see in front of us. Looking ahead, the first time Agis would be included in our consolidated results would be when we report next quarter. We do see a mix of factors impacting our results.

We do expect to incur additional cost in the fourth quarter resulting from the acquisition as we have noted in the press release and as we include Agis results for the first time in the fourth quarter, total shares outstanding will increase to reflect the 22 million additional shares that were issued for the acquisition. For our core store brand business, consistent with historical seasonal patterns, we anticipate lower sequential sales and profits in Q4.

Sales of new nicotine gum products should help offset lower sales and profits from Loratadine products. For the full-year, we anticipate reported results to range from a loss of $4.45 to a loss of $4.55 per share and on an operating basis, we would expect income in the range of $0.90 to $0.94 per share. And at this point Doug, Morris, and I would now will be available to take your questions, and again we ask you to please limit your questions so that every one has a chance to participate.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Derek Leckow, Barrington Research.

Thank you. Good morning.

Hey Derek.

Just a question here on the outlook that you are providing for the fourth quarter. I am going to be adjusting the shares. I guess by 22 million shares and then of course you gave the net income expected of $0.90 to $0.94. Could you also help us a little bit with the topline in terms of the addition of Agis, maybe provide a range of what you feel comfortable with in terms of revenue?

Derek, that's a good question that I don't actually have an answer to, I can talk to all about the bottom line, but I can't tell you the topline. I would expect the sales to be pretty comparable year-over-year for Perrigo and that the August sales would be up, but I will have to do, I got to do little bit research on that one.

Okay. Well, if I take the August sales from -- that you have already reported for last year for example, what about seasonality there? Should we just kind of take the number and divide it by 4 to get to a reasonable number for fourth quarter?

Derek, you have to look at the trend within August. I think you will see sales increasing for some products over that timeframe and decreasing for others. So, I am not familiar enough yet to give you good guidance on that, nor would I normally do that at this point in time.

Okay. There is some confusion here, it might be helpful to -- I will follow up with you offline, I've got some other questions. In terms of the pipeline of products, maybe you can talk about that in terms of the Consumer Healthcare business, not just for fourth quarter but for next year and then maybe talk a little bit about some of your pharmaceutical products that are coming online next year. I assume we will see a significant increase in the pharmaceutical segment in 2006.

Yes, this is Dave. Certainly the reason for the Agis acquisition was to get a set pipeline of products that they have and as you know, we have some filings, products, we have not gotten approvals on yet and haven't disclosed and they have the -- they have the same, and we will be giving more specific guidance for fiscal 2006 when we report the next quarter. At that time, we will have finished our plan -- budget and planning process for fiscal 2006 and as usual with the first call of the new year where we report this year's results, we will give you more specific information and guidance for fiscal 2006.

Okay. So pharmaceutical then will be pretty much in the dark as far as the outlook is concerned, but as far as the Consumer Healthcare business, are there new products there that you can talk about?

The main new product that will be a contributor, that we see as a big contributor for next year will be in the smoking cessation area. We talked a little bit about that. I think it's a great category for us. We are off to a good start in terms of consumer retailer response. We are talking about a total market income of probably $400 or so million dollars of retail. Then, you have got patches, you have got the lozenges, total market at retail is probably somewhere in the $625 million range. So, it's really a pretty good size market of retail and we are starting out with the gum and we are looking to introduce the other product forms in the future as we go along, and we think we have a good opportunity there. We will have more capacity coming on stream by the middle of first quarter fiscal 2006. Sometime in August we would expect that additional capacity to kick in. So, we will be more prepared next year to meet the good response that we have seen for the smoking cessation product. So, no question, the smoking cessation will be the driver of the new products for us for next year in the OTC area.

And then as far as any Rx-to-OTC switches, what are the odds we might see something in terms of an Rx-to- OTC switch perhaps in the statin area?

I don't see any opportunity there for Perrigo, I don't think that's going to happen in the short-term. There is a lot of differing opinion as to whether the statins will go over the counter or behind the counter, or will they stay prescription, but certainly in -- looking at fiscal 2006 we don't see an opportunity for Perrigo there.

Okay thanks.

Long-term we think its a good opportunity for Perrigo, and we will be very focused with, going into the future in the whole area of Rx-to-OTC switches and that's where you will see us put a lot of our efforts for solid dose products, will be products that we can benefit from in the Rx-to-OTC switch area, we can benefit by doing the work on them. We will be ready if they go OTC, and it they don't, we will be another competitor in the Rx area. So, that will be a big area of opportunity for us, but in terms of the statins that's not short-term opportunity for Perrigo.

Thank you.

Derek, this is Doug, I never like to get a not-answer. If you look at the sales for the quarter and you look historically at Perrigo and just look at Perrigo you will see that we run plus or minus 200 million in the fourth quarter. I think you know it's the lowest quarter of the year. If you just look at August and you look at the sort of run rate for the last, which you will see in the 10-Q today, you can probably use a number around a 100 million and that's going to be the relative ongoing size of the business, plus or minus I won't comment on, but to get you -- since this is new to all you, that sort of puts a ball park number of the sales number for a quarter. And I apologize for not knowing that right off the tip of my tongue.

No, that's exactly what I was looking for, I appreciate that, Doug. Thank you.

Charles Cerankosky, Key McDonald

Good morning everyone. Got a question about loratadine. What -- your comments regarding those sales volumes surprised me a little bit because in running around various stores it looks like the price point under the branded product has been actually rising and then I think you guys originally expected some fall off in the initial pricing of loratadine, but I am seeing the Claritin brand as well as Store brand going up in price, and are you not benefiting from that?

I think there is just more competition in the category today than there had been in the past. In addition, Chuck as we look forward we have the pseudoephedrine issue which at some point as the D24 product would move behind the counter thus put a level of uncertainty into that item. We see -- we don't think we have lost a lot of market share but there has been pricing erosion on our loratadine products. So, may be the retailers are making more margin but we are not.

Gotcha.

Chuck, you got to realize that we don't set store price and as competition comes into the market place with, -- we were the first in the D24 and the D12, as competition comes into our market place just like in the Generic Rx business, we can't and often do face price erosion, that may be different than what's going on at retail pricing.

Okay, thank you very much.

Joe Norton, Banc of America

You made a comment about the retail inventories, I think you said down 5 to 10%, what does that mean, down 5 to 10 versus last year or versus the season?

Yes, Joe, as we talk to retailers and as we have some visibility to retail inventories through our VMI process. It looks to us like the retail inventory for cough/cold products, that's what really we are talking about, is down 5 to 10% at the end of this season versus the end of last year's season. And that relates to the fact that last year we had this really strong season in the beginning, retailers had to reorder right away and didn't know how much -- you never know completely how much you need. This year the season never really got started until January, was a dome season and they could see what was happening so they were able to reduce their inventories below what they were a year ago. And so as we -- if you think about it as we go forward they are going to have to replenish that at some point in time and that will happen between now and the next season.

Well, I am curious -- I am wondering what is the retailers' plan in the business this year, because I know everybody jumped on it early last year, because of the prior year-end, but now does that mean the retailers are going back to kind of a later way re-approach or what do you think the sort of the build is going to look like and when?

This is Dave. I don't think you will see a hold back in terms of the build. Retailers are not, did not get burned this year. They were not stuck with a lot of inventory that might make them wonder what they ought to be doing. I have also heard that at least early indications are that we will have an earlier flu season, this coming season. So, I think you will see a pretty typical build on the part of the retailers as we go into the upcoming flu season and again they are not stuck with a whole lot of inventory. So, I don't see that as any, I wouldn't want to present that as being any super opportunity for us, but I also just if you want to highlight the fact that they are not going to be carrying any excess inventory into next season either.

So far you guys have been -- your flow, your sort of seasonal flow will kind of look like it did last year in terms of when you began the build and the selling ?

I think we would probably build a little more slowly than we did last year but we will still be building enough to make sure that our retailers are prepared for the season and have good inventories and now we are prepared to resupply if the season does hit hard. What you can't build for, Joe is the kind of season we had last year where there is just a very sudden and unusual peak and it becomes very hard to be able to replenish one like we had in December a year ago. But we will build that to be able to keep our retailers well supplied and to replenish them even if it is a robust season.

And then secondly I just, I was curious about the -- I think there was a sense of maybe there were some sort of product that could be commercialized into the OTC. Some of these skincare products from Agis and wondered if you had any update on that or is there anything we might see in '06?

I don't anticipate any material volume coming from new Agis OTC's skincare products that are moving into skin care from Agis. I would not see any kind of material volume driven by that in '06.

Okay. And is that because -- I mean, there is opportunity there I would assume?

I think there is definitely opportunity, in fact, I think there is opportunity for some of the existing products that Agis has in OTC as we start selling them through the Perrigo sales and distribution system as well. They have got equivalents to Neosporin and Neosporin maximum strength and to other products that I think we have some opportunities to be able to drive some growth and but I don't in the short term see new product development or new products moving in a big way in a material way in the topical area into the OTCs.

Linda Bolton Weiser, Oppenheimer.

Thanks. Hi guys. How you are doing? Just on your kind of going forward your priority for use of your cash flow. I guess I was a little surprised to see an additional share repurchase announcement given that you have more debt. Can you just prioritize how intent to use your cash flow?

Linda, yeah, first of all, we will generate a fair amount of cash flow. So, if you look at the net debt that is on the balance sheet and, of course, you have got the balance sheet as really as of March 26, we have got a number of pieces of debt that are still outstanding related to Agis and Perrigo that will ultimately consolidate into the most efficient cost debt. But if you take the debt outstanding minus the cash, you will see that our debt position is really only about $240 million. So, for the cash flow that we generate which if you combine the normal Perrigo operating cash flow of somewhere between 90 and 110 million plus Agis, we generate a fair amount of cash. So the reason for the stock repurchase is that it gives us the option to in fact, what I would like to do is maintain a fairly significant level of debt relative to historical purposes. And with all of that cash that we are going to generate, our stock buyback is the option of choice unless there is an acquisition and, of course, given that it will take us at least 12 to 18 months to integrate Perrigo, Agis; that leaves the stock repurchase over the next 6 to 12 months.

Okay.

It is really because of all the cash we generate and the desire not to pay down debt to get some leverage for the shareholder with .

Okay. that's actually all I had guys. Thank you.

[OPERATOR INSTRUCTIONS]. There appear to be no other questions.

Thank you all very much.

Thanks guys and girls.

Thank you ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.