Perrigo Company PLC (PRGO) 2006 Q2 法說會逐字稿

Good morning, my name is Lynn, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Perrigo second quarter fiscal 2006 earnings 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. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Doug Schrank, chief financial officer. Sir, you may begin your conference.

Thanks, Lynn. 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 continued interest in wanting to learn more about Perrigo. I would also let you know that joining Dave and I here, we've got Morrie Arkin, who is the vice president of our Israel -- or vice chairman -- I'm sorry, sorry, Morrie, vice chairman of our Israeli businesses and John Hendrickson, who is executive vice president and general manager of our consumer health care business, and they'll join Dave and I as we answer questions later on the call.

First, let me dispense with the SEC Safe Harbor language. These conferences include our views of where the business is going. We will likely 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 33 to 44 of our Form 10-K for the year ended June 25, 2005. There is also an update in our Form 10-Q for the quarter ended December 24, 2005, which was filed today. 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 was filed on a Form 8-K that may be accessed from our website at www.perrigo.com. With these formalities completed, I will now turn the call over to Mr. David Gibbons, Perrigo's chairman, president, and CEO. Dave?

Thanks, Doug, and good morning, everyone. As we discussed on our last quarterly call, we are feeling the impact of the pseudoephedrine issue in our consumer health care business. We continue to do all we can to adjust to this dynamic environment that's challenging both manufacturers and retailers. Thankfully, the prescription generics and API businesses are performing very well, exceeding our expectations. We do look forward to having all of these good businesses meeting or exceeding expectations at the same time in the future.

This morning, Doug and I will recap the second quarter and our current view of the outlook for the balance of the year. Looking at the quarter on a consolidated basis, sales were up 43% or $108 million, largely reflecting the Agis results. Consumer Healthcare sales were up $21 million, or 8% to $272 million. We recorded incremental sales volume from topical OTC products and from new product introductions that was offset by a decline of pseudoephedrine-based cough/cold products of $20 million.

Our Rx Pharmaceutical and API segments both reported strong operating results. Reported net income for the quarter was $25.4 million, or $0.27 per share compared with $15.8 million, or $0.22 per share last year. Our results this quarter included a gain of $2.9 million after tax, or $0.03 per share, on the sale of a minority interest in a Canadian distribution company. I'll now turn it back over to Doug to have him provide his more detailed financial review of the quarter and six months results. Doug?

Thanks, Dave. Let me start by describing the one-time items that affect both the second quarter and the six months year-to-date results. As Dave said, this quarter's financial results included a gain of $4.7 million before tax, $2.9 million after tax, and $0.03 per share for the sale of an equity interest in a Canadian distribution business. You'll remember that last year's second quarter results included a loratadine syrup recall, which was $8.3 million before tax and reduced earnings $0.07 per share last year.

In addition to these quarterly items, year-to-date results include inventory step-up charge of $4.8 million pretax, which, as you'll remember, also reduced gross margins, and the Rx Pharmaceutical results included a $2.8 million pretax charge for the recall of the methylamine product as a result of leaky caps in last quarter.

Let's move to the second quarter results -- consolidated sales were $360 million compared to $252 million in fiscal 2005, which is an increase of $108 million, or 43%. Incremental fiscal 2006 sales included approximately $102 million from the Agis acquisition, therefore organic sales growth was in excess of 2%. Gross profit was $106 million, an increase of $39 million compared to a year ago, and the gross margin percentage was 29.3% compared to 26.6% last year.

Just a bit on income taxes -- the acquisition of Agis, with its foreign income tax, the different rates than U.S. rates, and its enterprise zone tax holidays result in tax rate fluctuations quarter-to-quarter. As a percentage of income in lower tax jurisdiction increases, the tax rate falls, and it works the other way, too.

The tax rate in the second quarter was 36.6% resulting from the higher percentage of USA income due to the seasonality of the Consumer Healthcare cough/cold/flu season. The tax rate is estimated to still be at 33% to 34% for the entire year.

The reported consolidated net income was $25 million, or $0.27 per share, and excluding the sale of the equity investment in the Canadian distribution company, net income would have been $0.24 a share.

Let me turn to the Consumer Healthcare business. Sales for the quarter were $272 million versus $252 million last year, up 8%. Sales related to the Agis acquisition were $14 million, new product sales were $17 million, and pseudoephedrine sales declined $20 million.

Gross profit was $70.6 million and it increased $3.5 million from last year's $67.1 million, and gross profit as a percent of sales declined from 26.7% last year to 25.9%. The loratadine syrup recall last year reduced that gross margin by about 2.5 percentage points.

Most of the shortfall in gross margin percentage was caused by the mix of products. The Agis-acquired products are at a lower gross margin percentage and accounted for almost one-quarter of the shortfall. The reduced sales and higher-margin pseudoephedrine products accounted for another quarter of the margin percentage shortfall, and obsolescence accounted for the remaining 50% of that shortfall.

Operating expenses were $38.5 million in fiscal 2006, down $2.1 million from last year. The added expense related to the New York facility were offset by decreases in employee-related costs, depreciation, and marketing expenses. Operating income was $32 million versus $26 million in fiscal 2005, and last year's loratadine syrup recall reduced operating income by just a little over $8 million.

In Rx Pharmaceutical, sales were $28.6 million, gross profit was $11.6 million, or 40.5% of sales, and operating expenses were $6.3 million versus $2.3 million in fiscal 2005. The increase resulted from the acquisition of the Agis business, and operating income was $5.3 million versus a $2.4 million loss last year.

In the API business, sales were almost $29 million, gross margin was $13 million, or 47.6% of sales, operating expenses were $6.3 million, and the operating income was $6.5 million.

The other category includes the Israel businesses for consumer, pharmaceutical, and diagnostic products. Net sales were $32 million, gross profit was $10.6 million, or 33.2% of sales, and operating expense were $10.2 million with operating income of $400,000. And, of course, in the unallocated corporate expenses were $5 million and include a $1.5 million for one-time integration costs as we put both Agis and Perrigo together.

Let me move to the six-month year-to-date results. Consolidated sales were $679 million compared to 479 million in fiscal 2005. That's an increase of $200 million, or 42%. Incremental fiscal '06 sales included $209 million from the Agis acquisition. Gross profit was $192 million, an increase of $60 million compared to a year ago, and the gross margin percentage was 28.3% compared to 27.5% last year. Excluding the inventory step-up of $4.8 million in the first quarter, gross margin increased from 27.5% last year to 29% year-over-year.

Consolidated net income was $38 million versus $33 million last year, and earnings per share was $0.41 this year versus $0.46 a year ago. You need to remember that approximately $0.05 a share for the acquisition-related intangible amortization is included in the fiscal 2006 earnings per share of $0.41.

And last year's loratadine syrup recall reduced net income $5.3 million, or $0.07 a share, and this year's first quarter recalls reduced net income $3.3 million, or $0.03 a share.

Looking at the individual businesses starting with Consumer Healthcare -- sales were $500 million -- $501 million -- versus $479 million last year, up $22 million, or 5%. Sales related to the Agis acquisition were $32 million, new products were $26 million, and pseudoephedrine sales declined $43 million year-over-year. Gross profit of $123 million increased $9 million from last year's $132 million, and gross profit as a percent of sales declined from 27.5% to 24.6%, down 2.9 percentage points.

For the year-to-date, the decrease in gross profit percentages was attributable on an almost equal basis to three things -- unfavorable mix of products sold; the second is the lower unit sales of pseudoephedrine-containing products; and the third is higher inventory obsolescence costs, and all of this was partially offset by the impact of the loratadine syrup recall from last year. Operating income was $45 million in fiscal 2006 versus $54 million a year ago. The $9 million shortfall is attributable to the shortfall in gross margin, which we've already discussed.

Looking at Rx Pharmaceuticals, net sales were $58 million, gross profit was $23 million, or 40.2% of sales, and that gross margin includes a $2.8 million charge for the methylamine recall in the first quarter and a charge of $3.2 million for the amortization of intangibles acquired by purchasing Agis. Operating expenses were $14.1 million versus $3.6 million in the prior year, and that increase resulted from the acquisition of the Agis business.

Turning to the API business, net sales were $54 million, gross margin was $25 million and included a charge of $1.7 million for the write-off of the inventory step-up. Excluding this charge, gross profit as a percent of sales would be 49.5%. Operating expenses were $11.7 million, and the operating income was $13.1 million including the charge for the write-off of the step-up. Without that charge, operating income would have been $14.8 million.

In the other businesses, net sales were $67 million, gross profit were $21 million, or 31.4% of sales, and that includes a step-up charge of $2.7 million for the inventory write-off. Excluding that charge, gross profit as a percent of sales would be 35.4%. Operating expenses were $21.4 million, and the operating loss was $300,000 including the charge for the write-off of inventory step-up. Without that charge, operating income would have approximated $2.4 million.

And, finally, unallocated expenses for the six months were $7.1 million and include $2 million for one-time integration costs. Let me move just briefly to year-to-date cash flow. Our cash flows were very strong. Six-month operating cash flow was $55 million versus $21 million last year, an increase of $34 million. The most positive influence on cash flow was cash-based earnings, which were also helped by the inventory payable cycle and lower bonus payments versus the prior year.

We also repurchased 1.2 million shares year-to-date for almost $16 million, and our year-to-date capital spending was $12 million, and we now expect spending for the year to approximate $35 million to $40 million. And, with that, let me turn the discussion back to Dave.

Thanks. I'll start out with some additional comments on pseudoephedrine. We've talked about it at length, and we would certainly like to work our way successfully through this issue. At this point in time, we're in the middle of it, and it's dominating our operational landscape. The legislation-driven market transition to behind-the-counter has not only created headaches for retailers and the immediate impact of lower sales for us, but it has also created additional operational [flexity]. Demand management, inventory management, production scheduling, customer service, and new product development have all been challenging.

In the product area, we have to reformulate three dozen pseudoephedrine products in a very short timeframe, and the alternative ingredient, phenylephrine, has been proved to be less stable than anticipated when combined with acetaminophen and other ingredients, and it's now taking us time to develop the right formulas. However, we will ensure that our new products are stable, safe, and effective, and we will not compromise on our quality assurance processes as we bring these products to market.

On other developments, we continued to make good progress in the integration of the Agis operations with the New York site completing the installation of our ERP system, and the Israeli sites modifying their information systems' infrastructure to align with company standards. We are now in the early stages of ERP implementation in Israel.

I also want to highlight the two significant announcements today. We received FDA approval for a nicotine lozenge product for smoking cessation, the equivalent to GSK's Commit product. We have received 180 days of market exclusivity, which will begin with our first shipments this month. This product fits nicely alongside our nicotine gum in the OTC smoking cessation category.

We also entered into two significant agreements with another pharmaceutical company. One, a supply and license agreement where we will produce the API and sell intellectual property assets. The other is a collaborative agreement with the same company to develop and manufacture two drug products.

Moving ahead to the outlook for the rest of the year, the outlook for the year remains the same, and we continue to anticipate full-year operating earnings results of $0.74 to $0.78 per share in line with prior guidance on an operating basis. The Rx Pharmaceutical, API, and other businesses have exceeded expectations in the first half of the year. This business will also be strong in the second half, although not quite as strong as it was in the first half. Margins are coming down on some key products, and R&D spending will significantly increase in the second half. But these items will be partially offset by the new supply and collaborating agreements, which will continue to contribute strongly through next year as well.

Our review of Consumer Healthcare operations and projections of current business trends indicate weaker sales and margins than originally planned primarily related to launch delays and lower sales of new products. That's versus plan, and margins will actually start to pick up from first-half levels through the second half, however.

In addition, we expect the continuing negative impact from pseudoephedrine as we convert a large number of formulations to non-pseudoephedrine ingredients. This conversion has proven, as we have said, to be more complex and difficult than anticipated. It's clear that we will not overcome the negative impact of the new product and pseudoephedrine issues to the extent that we had earlier anticipated.

While pseudoephedrine continues to be a difficult situation for us, Perrigo has been confronted with difficult outside influences in the past, and although this one is larger and more complex, it does have some similarity to the PPA product withdrawal that kind of blindsided us back in November of 2000. We worked our way through that situation, and we'll work our way through this one, as well, and we're targeting a rebound in our Consumer Healthcare business for next year.

Finally, I remember when we were in the midst of the acquisition, a couple of discussions about a year ago, where we said that these two businesses that we were putting together would complement each other nicely, and one of the ways was that we hoped that when one business was down, the other would be making up for it for a time, and that at another time those roles would be reversed, and that's what's happening this year. And, as I said earlier, the real win comes when both these businesses are meeting or exceeding expectations. That's what we're really looking forward to, and thank you, and we will turn it over to question-and-answer now.

Doug and I will answer questions here; John Hendrickson, who runs our Consumer Healthcare business will answer questions on that business; and Morrie Arkin, our vice chairman who runs the Rx, API, and other businesses is on the line in Israel and will answer questions on the Rx and API businesses. Questions.

[OPERATOR INSTRUCTIONS]

Joe Norton, Banc of America Securities.

Hey, Dave, I just wanted to follow-up a little bit more on the comments you're making about the Sudafed, and when you say that the company will not overcome it, do you mean this year or -- I just trying to get a sense -- do you just now see that business not really coming back the way you had thought, longer term?

Yes. We still feel that we will pick up a good chunk of that business and bring it back with the phenylephrine and other replacement products but probably not as optimistic about the amount of it that will come back to us at the margins we had with pseudoephedrine, say, a year ago. So when we look to next year, certainly the majority of that business will be reformulated and will be coming back, but where we might have thought earlier that a bigger chunk would be back, we are now looking at, out of that $180 million or so of pseudoephedrine business, probably getting back within the next year or so, close somewhere to the $140 million or so range in terms of sales of the pseudoephedrine -- replacement products for pseudoephedrine and sales of what's left of pseudoephedrine.

Okay, and the idea is that the Sudafed will continue to phase out, over time?

Most of the pseudoephedrine products will phase out, over time, and be replaced with other reformulated products. And we're working very aggressively at getting those products to market. Phenylephrine is the main ingredient, and it is a little less stable, and we are just being very cautious and very careful knowing the stability issues with phenylephrine to make very sure that when we go out with our products, when we put our products on the retailer's shelf, that those products -- we are very comfortable from a quality and compliance standpoint with all those products.

It's not that it's going to be a disaster to us in the future that we didn't expect, it's just going to be a little bit less brought back in than what we would have thought we could get back a year ago.

Okay. And is that based also on just those products across the board including the branded equivalents? Meaning the phenylephrine product is just not going to be as popular among consumers, or is it something more like a Perrigo issue, like you're going to lose market share?

I suspect it's a combination of those issues, Joe. I think we might lose some market share. It's a category where we had a huge market share, and you might see us lose a little bit there. And it's still a problem issue that's in a flux, so it's hard to say exactly where we will come out. John, do you want to make any comment on --

I think we expect through the transition to lose some share. We expected that all along so that's in there. I think, Joe, what you're also seeing -- or will see -- is that some of the other non-pseudo brands that are either protected by NDAs or whatever, are doing pretty well and are picking up some of the share from the brand. And just measuring up what will next year look like, we're just saying we don't think we will get all of that back, and that's why Dave's estimate of 140 from the 110 to 120 that we're estimating this year is in the ballpark of that rebound.

Okay, and so there are some of these other products out there are becoming substitutes, like I've seen ads for different decongestants so that is what's going on as well?

Yes, exactly. Mucinex is an example, it's doing very well right now. They've reported good results, and they are benefiting from some of the pseudo issues that are going on right now, I believe.

And, even, Joe, many of the brands are struggling with getting their reformulated products on the market. It certainly has been a challenge for many of the branded products as well. We are not alone.

Yes, I've noticed that. And then just a couple of other things. One of the things you guys talked about like lower -- you see lower new product sales for the remainder of the year. Could you just give us a little bit more color on what you meant by that.

Joe, this is John Hendrickson again. On the Consumer Healthcare side, we actually will have more product sales in the second half than the first -- more new product sales. We did not have the level that we had wanted it to be in the second half, though. So when we look at our forecast, that new product level is not as strong as we have wanted it to. It will still be a record new product sales half of the year for us; it will still be stronger than the first half but just not as strong as we would have predicted six months ago.

Okay, and I think initially we were thinking, like, $90 million. Was that correct?

Yes, I think we're in about the $80 million range would be our current estimate for where we'll end the year.

Okay, and then the final thing I had was just on the R&D. Did you guys talk about -- I guess I thought that would be a higher number this quarter, and I know you said that would be going up significantly.

That's merely a timing issue. There's clinicals and bio studies coming in in the second half, and we really feel that those dollars will be spent in the second half. There will be a significant ramp-up in spending, and these are things that are set, but they are going to happen, and you will see the R&D spending jump substantially in the second half. And it's all good stuff, Joe. It's for products that we're really counting on for the future. So we really feel good about the spending we're doing in the second half on R&D.

Chuck Cerankosky of Key McDonald.

First off, can you put any parameters around the sales contribution from the nicotine lozenges that were announced yesterday?

We don't know the exact sales number, but I would say, on a relative basis, Chuck, a brand is in the $100 million sales range at retail, and so given that, given our first-to-file, we'd expect to have our normal share of that $100 million. It's hard to predict exactly where that will net out.

And it will be a good margin.

All right, great. And maybe this is another question for you, John, but I'd be interested to get your view or perspective on how the stores -- or how you see pseudoephedrine product sales moving from behind the counter in states where it's been put behind the counter, and retailers behind the counter, in terms of branded versus private label, and are you seeing any help from the pharmacist steering customers to the store brands or they don't have the time -- just really interested in how this process is working, because now I'm starting to notice the branded guys are not only putting some dollar and two-dollar-off coupons out there to drive the brand. It says on some of the coupons, they ask the pharmacist for help if you can't find it on the shelf.

Chuck, this is John. You ask some really good questions. I would say this has been the most in-flux year with everything going in and on and beyond, and brands trying to understand when they're going to come out with their new product and how to drive in the short term. Some of the promotional funding we see right now that's going on to drive people to pharmacy can't continue forever. They're trying to drive incentives, but the funding is pretty big to drive people to make some of those choices.

If I had to say, in general, by this time -- by going into cough/cold season next year, things will stabilize to a more normal point where you'll have a fair amount more products on the shelf from the brands, from store brands, with reformulated product, and you will have a smaller number of selected items behind the counter continuing to contain pseudo. And so this has been as dynamic a year -- it's hard for me to answer this year exactly what's going on. Some brands have done very well, others have not done nearly as well, some retailers have done well; others not nearly as well in going through the transition. But if I had to say look beyond that and say where is going to end up, you're going to have a half-a-dozen products, in my opinion, behind the counter that contain pseudoephedrine, and the majority of the new, reformulated, new position brands out there by the cough/cold season next year for that market not containing pseudoephedrine.

In that case, are you going to want some store brand products behind the counter with the branded ones?

Yes.

Okay. And will Claritin or Schering Plough have to do clinicals to do a loratadine phenylephrine product?

In general, Chuck, yes. First of all, the primarily ANDAs, which are good sellers, good volumes, are mostly behind the counter and continue to have sales associated with them at all retailers and are doing those -- both the branded side and the store-brand side continuing to drive that way. In order for those brands to have that product in the states that regulate it, at least, over the counter, they would need to an ANDA or NDA submission to have phenylephrine in there as opposed to pseudoephedrine. So in the states that don't allow pseudoephedrine over the counter, those brands would have to do an NDA or ANDA if they wanted phenylephrine with their loratadine and phenylephrine to have it over the counter. I don't know if that answered your question, but they have some filings to do and approvals to get.

Derek Leckow of Barrington Research.

Congratulations on the three compelling events that you announced today. The first question is on the organic growth in the core Perrigo business. It's higher than I expected, and I'm wondering what's been driving that. Is that simply a function of some of the new products that you've announced? What's the expectation for those new products for the rest of the year?

Derek, this is Doug. I assume you're referring to the 2% organic growth in the second quarter.

Yes, that's right.

If you look at that growth, it's really -- it comes from the Consumer Healthcare business, and it's probably most related to the change in the seasonality of the cough/cold season year-over-year. The cough/cold season this year started sooner and went a little higher than it did a year ago, and last year the retailers really took their inventory in in the first quarter, therefore, the second quarter sales to them were a little bit lower. So I think most of it is related to the seasonality. New products had a little bit to do with it year-over-year. So it's really the combination of those things.

Okay, so where do you see the retailers' inventory currently? Is it more of a normalized level at this point, would you expect?

Yes, it's definitely more normalized than it was a year ago at this time and, if anything, it may be a little lower. That part is hard to tell, so I would say normal to low versus last year, where it was high.

Okay, thanks. My second question is on the new business, on Agis and some of the products coming through the three different categories of your business. First of all, you've got some new products that you launched in the U.S., I guess, that are coming in the Consumer Healthcare area. I wonder if maybe we could have Morrie talk about some of those products and what the expectation would be for growth there, and then also I get the feeling there is still a lot behind the curtain over there at Agis in terms of the API business and also generic pharmaceutical. Can you provide us an update on some of the products in development perhaps and also what the impact of the API announcement really means for you guys in terms of revenue.

Morrie?

Well, the announcement in our revenues -- we got the announcement of new revenues coming from the API supply and the revenues coming from the R&D and [neurological] deal that we are doing have a significant long-term effect. It will add significant amounts of this year to next year and the year afterwards, so they are really very good news, and they seem to reflect the value of our technological expertise, both in the API and in the [indiscernible].

We have very significant R&D expenditures with some near-term results. We announced last quarter that we have [indiscernible] for a foam product that represents $17 million in sales [in brand]. We expect to be the only one. We announced that we made very important progress in several nasal sprays where we think that in the near future we'll be able to announce some specific important results regarding the nasal spray. And our many other products, both in the API and in the three service products that are reaching a very important stage in the development process. We look forward, not necessarily in the next quarter but in the years to come, to a very rich pipeline that will only be richer now with the increased investment in R&D as we have announced.

And in terms of that rich pipeline, I think you guys have said before there were approximately 36 products in development. Is that still the case or has that number gone up?

There is a small less this number but some of the important products, we have -- in terms of our policy of targeting specific products where we believe we will be the first to file in [indiscernible] we have done some important progress, and we are now trying to concentrate not so much on the quantity of the number of products, but on those products where we believe we have a chance to be the first to file in a [indiscernible] situation and several of such products have either now in the stage of clinical study or the finished clinical studies and will be submitted soon. So, yes, the number, in general, is right, but, more importantly, the quality of the specific products that we are targeting. We are getting more focused in our topical field, and trying to concentrate on drugs where we have (indiscernible) significant barriers to entry, and we will believe we have the competitive edge in being able to overcome these barriers.

Thank you very much and just another question for John, if I could -- John, the Agis products that are coming through the U.S. distribution -- what's the status there and what's the outlook for those products?

Just so you know, when we break it down, we have their Consumer Healthcare products, or their over-the-counter products that flow through the traditional channels that I would manage. We have integrated those fully into our business. We are operating with those in the -- primarily the creams, ointments, topicals areas that complements our business very well. That is certainly part of our sales flowing through our numbers. There is not within that product line, there's not a lot of other big products that are flowing through from a new product standpoint. It's a relatively stable area, a relatively -- the growth isn't phenomenal, and there's not a bunch of new products switching into that. So in the new products that we have, whether it's the nicotine gum we launched, the [Apath] extended release, the recent approval of nicotine lozenge -- those are currently developed through our operations here in the States and approvals through the U.S. and launched through Consumer Healthcare. So I'm not sure if I answered your question, but it's fully integrated.

That does answer it. I think it's going to be a stable level then, I guess, with what we saw in the quarter. You'll get the -- on the lozenge product, it's $100 million at retail. It sounds like it's going to be about the same market share you expect from your typical business, which is around 25% or so, so I guess I can try to model that, is that about right?

Yes, yes, you've got to take into account typically lower selling prices that we would have versus the brand from a factory sales standpoint.

And just a reminder, we do have market exclusivity on that product that's first to file. So we're out there by ourselves.

[Ari Hershgow] of Leader.

Congratulations on a great quarter, first. My main question is regarding [Muldafineon]. If we can get an update to [technical difficulty] and what's happened there?

Morrie, do you want to take that one?

Well, as you know, we are partners of Barr on this product, and Barr has announced -- and [indiscernible] has announced a settlement with Barr. This settlement affects also us. In the settlement is mentioned Barr will – there will be a supplier of API. We are the supplier of the API of that settlement, and that actually refers to that part of the announcement that we made regarding a deal that we have made with the API business. The supply of API for the next year. This settlement will have a significant positive affect on our release -- on our numbers for the next years to come -- for this year and for the next years to come.

Are you starting to ship them right now?

I beg your pardon?

Are you starting to ship the product, the API, this month?

I don't think during this month -- as soon as possible.

Okay, and everything splits down the middle, right, between you and Barr?

(multiple speakers) We don't want to go into the details of our deals with Barr. I'm just saying as far as the API part of the Barr-Cephalon, we are the suppliers of Barr of the APIs.

I made the calculation that you -- that this agreement would be [forced] to the full generic contenders -- [fail Cephalon] about $250 million a year. So I guess that this is going to be a pretty chunky deal, if I may say so.

Nice comment on the numbers.

I think we probably should not be saying much more at this point in time. We have just finished this announcement. All this is new news, and it's very positive, I agree, Ari, it will be very good for us, but I think we probably ought to move on to other questions.

Okay, second question is you mentioned -- [indiscernible] is very strong, of course, and I am hearing your voice kind of [technical difficulty] regarding the second half, although I am looking at the very strong numbers, I am adding to that the agreement that Barr had made, and I am coming up with a pretty optimistic [view] on where your company stands right now. I know that the API is supposed to launch another big product in April. Everything from my point of view looks very positive. I'm just wondering where am I wrong or am I seeing something not right?

This is Dave Gibbons. I think if you read in the -- both in the announcement and in my discussion, I did point out that we are going to have a strong second half and certainly the agreement is contributing to that strong second half, but the second half would not be quite as strong as the first half, and that some of the margin pressures due to new competitors on our Rx products as well as a significant ramp-up in R&D spending in the second half will be partially offset with the benefits coming in from the agreement, but will not bring it up to the level that we saw in the first half, which was just outstanding performance on the part of Morrie and his team, and we won't quite get to that level in the second half. Morrie, if you have any comment, feel free.

Right now you have summarized it. The second quarter -- the second half will be strong, but as I have said, we have some very important drawbacks that are now reaching the critical stage, and we are going to ramp up this investment. It doesn't change the general strong part of the second half, but in terms of the P&L, this R&D investment will affect our results.

[OPERATOR INSTRUCTIONS]

If there are no more questions, then we thank you all for your participation, and we'll talk to you next quarter. Thank you.

Thank you, this does conclude today's teleconference. You may disconnect your lines at this time.