Perrigo Company PLC (PRGO) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Perrigo third quarter fiscal 2006 earnings results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Judy Brown, Senior Vice President and Corporate Controller. Ma'am, you may begin your conference.

I would like to welcome all of you on the conference call. We're delighted to have you join us, and thank you each of you for your interest in wanting to learn more about Perrigo. Just so you know, joining us on the call today from management, David Gibbons, Morrie Arkin is joining us from Israel. Doug Schrank, our CFO, is here with me, and John Hendrickson, our EVP and General Manager of the Consumer Healthcare business.

First, let me dispense with the SEC Safe Harbor language. These conferences include our views of where 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 33 through 44 on our Form 10-K for the year ended June 25, 2005, with an an update in our Form 10-Q for the quarter ended March 25, 2006.

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 will now turn the call over to Dave Gibbons, Perrigo's Chairman, President and CEO.

Good morning everybody. As we have noted in the past few quarterly calls, our Consumer Healthcare business has been impacted by the pseudoephedrine issue. Despite a significant drop in pseudoephedrine-based sales, the Healthcare segment did grow the top line nicely this quarter. With federal methylephedrine legislation now in place, retailers and suppliers do have more clarity on this issue, and we do expect a more predictable sell-in process for the cough/cold season next year. At Perrigo, our product conversions are moving ahead, and we expect to have many additional reformulated products ready for the 2006/2007 season. We're feeling more comfortable now that we're almost through the most difficult part of this market transition process. And the prescription generics and API businesses are performing well. Overall we are pleased with our results this quarter.

On a consolidated basis sales were up 51% or $112 million, largely reflecting the addition of Agis results. Consumer Healthcare sales were up $22 million, or 10% to $241 million, a nice result as strong new product sales and Agis topical over-the-counter revenues offset a decline of $26 million of the pseudoephedrine-based cough and cold products.

Our Rx Pharmaceuticals and API segments both reported solid operating results. Reported net income for the quarter was $20.9 million, or $0.22 per share. Our third quarter last year, as you may remember, included charges associated with the Agis acquisition. Before the charges, net income was $16.2 million, or $0.22 per share.

Judy will now provide you a more detailed financial review of the quarter and of nine months, and a recap of last year's acquisition related charges.

Before I review the key financial components of the three and nine months ended March 25, 2006, I want to remind you first of a few important notes for comparison purposes. There were no unusual items included in the third quarter 2006 results. The year to date results, however, include first, an inventory step up charge which reduced gross margin and operating income by $5 million, and net income by $4 million after tax, or $0.04 per-share. Second, a gain of $5 million, $3 million after tax, or $0.03 per share, for the sale of an equity investment in a Canadian distribution business. In addition to these unusual items, there were two adjustments related to recalls. First, the charge for the recall of the [nasalimine] product as a result of leaky caps was in the Rx Pharmaceuticals business was $3 million before and after tax, or $0.03 per share. And second, a reversal of the accrual related to the Loratadine recall, which was $2 million, $1 million after tax, or $0.01 per share.

The Agis acquisition was completed on March 17, 2005. Argis' operating results were not included in the third quarter of 2005, but the balance sheet was consolidated at March 26, 2005. However, there were a number of nonoperating charges included in the third quarter and year-to-date 2005 results which related to the acquisition, totaling $400 million before tax, $396 million, or $5.37 EPS after tax.

As a brief reminder, this charge was comprised of $389 million before and after tax, related to the write-off of any process research and development costs. $3 million after tax related to legal work in integration support for the acquisition, which was included in SG&A. And $4 million after tax of restructuring charges within the Consumer Healthcare business, divided equally between asset impairment charges, and operational improvement and employee termination costs.

With that let's move on now to review the third quarter results. Consolidated sales were $332 million compared to $220 million in fiscal 2005, an increase of $112 million, or 51%. Incremental fiscal 2006 sales included approximately $107 million from Rx businesses. Organic sales growth was approximately 3%. Gross profit was $97 million, an increase of $34 million compared to a year ago. The gross margin percentage was 29.3% compared to 28.6% last year.

The acquisition of Agis, with its foreign income tax, taxed at different rates than the U.S. rates, and its enterprise untaxed holidays results in tax rate fluctuations from quarter to quarter. As the relative percentage of overall income in lower tax jurisdiction increases, the tax rate falls.

The tax rate in the third quarter was 30.9%, resulting from a higher percentage of foreign income than in the first half of the year. The tax rate for the third quarter of fiscal 2005 was impacted by the nondeductible charge to earnings of $389 million for the write-off of in-process R&D related to the acquisition of Agis. The effective tax rate was 36% for the quarter, excluding this charge.

Reported consolidated net income was $21 million, or $0.22 per share, compared to last year's $0.22 per share, excluding the impact of the $5.37 reduction in EPS related to the Agis acquisition.

Let's move now on to the segments of the business, focusing first on Consumer Healthcare. Consumer Healthcare sales were $241 million versus $220 million last year, up 10%. Sales related to the Agis acquisition were $16 million, new product sales were $24 million, and pseudoephedrine sales declined $26 million versus last year.

Gross profit is $52 million, a decrease from last year's $63 million. Gross profit as a percent of sales declined to 300 basis points from 28.5% to 25.5%. This decrease in the gross margin percentage is primarily due to higher obsolescence costs and lower unit sales of pseudoephedrine containing products, which were typically solid in lots margin higher than the average products in the Consumer Healthcare segment.

Operating expenses within Consumer Healthcare were $40 million in fiscal 2006, down from $43 million in fiscal 2005, primarily due to the unfavorable impact in fiscal 2005 related to the restructuring charges I described earlier. This decrease was partially offset by timing of payments related to R&D activities, and the amortization of intangible assets. In total, operating income was $21 million in fiscal 2006 versus $19 million in fiscal 2005 for the Consumer Healthcare segment.

Looking next at Rx Pharmaceuticals, net sales were $30 million this quarter. Gross profit was $12 million, or 38.2% of sales. Operating expenses were $7 million versus $2 million in fiscal 2005. The increase resulted from the acquisition of the Agis business. Research and development spending in this segment increased $2 million year-over-year.

Operating income was $4 million versus a $2 million dollar loss last year. Third quarter fiscal 2005 results consist primarily of R&D costs for generic prescription drug products related to the greenfield operations in existence prior to the Agis acquisition.

Next the API segment. Net sales were $30 million, and include $4 million of nonproduct revenue. Gross margin was $14 million, or 47.3% of net sales. Operating expenses were $6 million, and operating income was $8 million.

The other category includes the Israel businesses for consumer, pharmaceutical and diagnostic products. Net sales in this segment of the Company were $31 million. Gross profit was $10 million, or 32.5% of sales. Operating expenses were $10 million, and the operating loss was $300,000.

Finally, unallocated corporate expenses were $3 million in the quarter, and include $600,000 for onetime integration costs.

Now I would like to walk you through the nine month year-to-date results. Consolidated sales were $1,012 million compared to $700 million in fiscal 2005, an increase of $312 million, or 45%. Incremental fiscal 2000 (sic – see Press Release) sales include $318 million from the Agis businesses.

Gross profit was $290 million, an increase of $95 million compared to a year ago. The gross margin percentage was 28.6% compared to 27.8% last year. Excluding the inventory step up of $5 million in the first quarter, gross margin increased from 27.8% to 29.1% year-over-year.

Consolidated net income was $59 million versus a loss of $346 million last year. Earnings per share were $0.63 this year versus a loss per share of $4.81 a year ago. The onetime acquisition related charges recorded in the third quarter of fiscal 2005 of $396 million after tax reduced earnings per share $5.50. Excluding these charges, earnings per share would have been $0.69 in fiscal 2005.

Last year's Loratadine syrup recall reduced net income $5 million, or $0.07 per share. And this year's first quarter recall reduced net income $3 million, or $0.03 per share. The year-to-date fiscal 2006 effective tax rate was 32.9%. Excluding the impact of the nondeductible charge to earnings of $389 million for the write-off of in-process R&D last year, the effective tax rate was 36% in fiscal 2005. We estimate that the tax rate will be between 32 and 34% for the entire fiscal year.

Now let's walk through the year-to-date in Consumer Healthcare. Sales were 742 million versus 699 million last year, up 6%. Sales related to the Agis acquisition were $48 million. New products contributed $51 million. And pseudoephedrine sales declined $69 million versus the same period last year.

Gross profit of $185 million decreased $10 million from last year's $195 million. And gross profit as a percent of sales declined from 27.8% to 24.9%, down 2.9 percentage points. The decrease in gross margin percentage was primarily attributable to the lower unit sales of pseudoephedrine containing products, which were typically solid at a margin higher than the average product in Consumer Healthcare, as well as inventory obsolescence costs related to these PSE containing products.

Year-to-date operating expenses for fiscal 2006 of $118 million decreased 2%, or $3 million, compared to 2005. As noted for Q3 the decrease was primarily attributable to the $6 million unfavorable impact of the restructuring charge in fiscal 2005, partially offset by increased expenses related to the New York facility and the amortization of intangible assets. Operating income was $67 million in fiscal 2006 versus $74 million in fiscal 2005.

Moving along to Rx Pharmaceuticals, net sales were $88 million in this segment. Gross profit was $35 million, or 39.5% of sales. Gross margin includes a $3 million charge for the nasalimine recall in the first quarter, as well as a charge of $5 million for the amortization of intangibles acquired by purchasing Agis.

Operating expenses were $21 million versus $6 million in the prior year. The increase resulted from the acquisition of the Agis business. Research and development spending increased $7 million year-over-year.

Next, the API business. Net sales were $84 million and include $4 million of nonproduct revenue. Gross margin was $39 million, or 46.6% of sales, and includes a charge of $2 million for the write-off of the inventory step up. Excluding this charge, gross profit as a percent of sales would be 48.7%. Operating expenses were $18 million. And operating income was $21 million, excluding the charge for the write-off of the inventory step up.

In the other category net sales were $98 million. Gross profit was $31 million, or 31.8% of sales, and includes a charge of $3 million for the write-off up of the inventory step up. Excluding this charge, gross profit as a percent of sales would be 34.5%. Operating expenses were $32 million, and the operating loss was $600,000, including the charge for the write-off of the inventory step up. Without this charge, operating income would have been $2 million.

Finally, unallocated expenses $10 million to date, include $3 million for onetime integration costs.

Now let's change gears to cash flow. Cash flow has been very strong. Nine month operating cash flow was $111 million versus $54 million last year, an increase of $57 million. The most positive influence on this cash flow was cash from earnings, which increased from $65 million in fiscal 2005 to $106 million in fiscal 2006. Because of the acquisition, non-cash charges from amortization and share-based compensation increased $11 million year-to-date.

Perrigo has repurchased 1.4 million shares year-to-date for approximately $20 million. And year-to-date capital spending was $19 million. We expect the capital spending for the year will be between 25 and $35 million.

These last nine months have been very busy ones for Perrigo. The financial picture is a complicated one to put into focus, particularly when comparing year-over-year. Given all of the changes brought on by the acquisition of Agis, and the fluid dynamics of the pseudoephedrine issue within the Consumer Healthcare business.

If we look at the broader picture of the fiscal year-to-date, remember that in CHC the PSE changes have affected us tremendously. The $69 million year-over-year decrease in sales year-to-date had a higher than average gross margin, and the related obsolescence costs have pulled down operating profit. Topical products acquired in the Agis acquisition are now fully integrated into the business. In Consumer Healthcare new product introductions of $51 million year-to-date are positioning fiscal 2006 to be one of the strongest new product years ever. This has helped to buffer the PSE impact.

The newly acquired Rx and API businesses are performing very well, and have added a approximately $36 million in operating profit this year. From our perspective at the end of the day, the most important measure of the health of the business is really cash flow. And as I just mentioned a few moments ago, this critical measure is up $57 million from last year. If it weren't for PSE, this would have been an even stronger nine months. Now let me turn the discussion back over to Dave.

Looking at -- going back to third quarter results and looking at other third quarter developments, in the new product area we began shipping our OTC nicotine lozenge product this past quarter. And we are currently rolling those products out to broader distribution. We now have a very nice store brand offering of both gum and lozenges for the smoking cessation category.

In the quarter, we also received final FDA approval for several new prescription products, [fessoximetozone] gel for skin inflammation, ciclopirox olamine cream for skin infections, and terconazole suppositories for yeast infections. These products do have relatively modest volume, but they do help fill out and expand our topical products line.

We also received a tentative approval for sertraline hydrochloride tablets, a generic equivalent to Zoloft, for the treatment of depression. This approval came from a Perrigo investment and through a partnership with [Imagen]. Final approval on this is subject to the expiration of exclusivity enjoyed by another ANDA Filer. We would not expect to be in the market until January 2007, and when we do we expect multiple competitors at market formation in a very competitive environment. We do however still see sertraline as a nice approval for us as we continue to make progress building our Rx business.

We have talked a lot about pseudoephedrine. Let me just cover a few more things here, updates from the quarter on pseudoephedrine. With the passage of the Patriot Act by Congress, the Combat Meth Act was also approved and signed into law on March 9. The key provisions of this federal law include daily sales limits of 3.6 grams per purchase, 30 day sales limits of 9 grams, and the necessity when purchasing these pseudoephedrine-based products of showing a photo ID and signing a purchase log. All of these things were effective on April 7. And the other part of the law is that all products with pseudoephedrine in them must be behind the counter by September 30. In other words, before the next cough/cold season starts.

So what are the implications of this? Well, first of all, retailers looked at the law and realized they really don't have the capability to track pseudoephedrine purchases per day to individuals unless the product was placed behind the counter. Many retailers thus have placed all pseudoephedrine-based products behind the counter effective April 7, not waiting until September 30 when the law requires it. The results for Perrigo is that orders of pseudoephedrine products have been cut back dramatically in the final months that these products are available to OTC. And we therefore now estimate our sales of pseudoephedrine-based products for the year to come in at 90 to $95 million versus our earlier estimates of 110 to $120 million.

In terms of conversion over to phenylephrine, we continue to see new formulations of the national brand products coming to market. And our objective is to have our store brand reformulations ready for the next cough/cold season. Our outlook for fiscal year '07 for sales of pseudoephedrine and phenylephrine category products combined is now approximately 115 to $125 million for next fiscal year versus our previous estimate of approximately $140 million.

I would like to take a few seconds here also to bring you up-to-date on what we're doing in quality and compliance. Over the past few years we have employed our financial strength and resources to invest in training, technology and manpower to continually improve our processes and procedures. Maintaining the highest quality standards has always been one of our most important goals. Our efforts today are directed toward error-free quality and the continued development of a comprehensive quality system model. We're making increased investments, and we believe these increased investments will allow us to improve our overall quality systems, and to build upon our existing pharmaceutical culture. This remains a very important area of focus for us.

In terms of the outlook for the rest of this year, we are maintaining our full year guidance for reported earnings of $0.74 to $0.78 per share, despite the lower sales anticipated of pseudoephedrine-based products.

In our Consumer Healthcare business we anticipate new products to make continuing significant contributions. With the new products fourth quarter profitability should be in line with historical levels, even though we will continue to incur higher operational costs for all of the cough/cold reformulations, as well as for the investments in quality systems I ust talked about. And in spite of higher research and development investments and competitive pricing on several key Rx and API products, we anticipate with the benefit of nonproduct revenue results from the Rx and API businesses will help balance Consumer Healthcare results.

Of course, while we are investing for future growth, we have not lost focus on cost reduction and on the operational improvements necessary to bring margin improvement for us. We continue to be a financially strong Company with solid cash flow. And we will also keep our focus on maintaining that strength as we move forward.

With that, we will now take your questions. And you can direct them to me or to Judy Brown. And as mentioned earlier, Morrie Arkin, our Vice Chairman and Head of Global Rx, API and domestic Israel businesses is on the line from Tel Aviv. And John Hendrickson, our Executive Vice President and the Head of our Global Consumer Healthcare business, is on the line here with me and Judy. So we will open it up for questions now.

(OPERATOR INSTRUCTIONS). Derek Leckow of Barrington Research.

I just got a question -- good job on the overview, by the way, that was obviously complicated, and thanks for providing all that color. Judy, on your balance sheet I noticed that your long-term debt -- your net debt has gone down again. I think you are at about 26.5% net debt -- or long-term debt to capital -- is that about right?

That's about right.

I think you guys paid down some debt here it looks like. And what is the appetite for that going forward? Will you be continuing to pay that down, and what is the ability to do that the next, let's say, year?

If you look at the nine month balance sheet since June, you'll see that we have been able to decrease our net debt $61 million in the nine months. And you'll also see obviously the generation of $110 million of free cash -- operating cash flow in these nine months have been able -- have allowed us to be able to go ahead and do that. We're getting close to the fixed debt level, so we are getting to a point where the pay down of debt will not be our first priority. It also leaves us now the opportunity to continue with our share repurchase program, look opportunistically at any acquisition opportunities, and continue to pay dividends.

That leads me to my next question regarding your acquisition plans. Dave, can you give us an overview of any growth opportunities that you're seeing out there, any particular things we should be thinking about?

I am obviously very pleased with the cash performance that we have had. And we are all pleased to see that, because it does open up a lot of options. We have always said that we are a good cash flow generating Company. We continue to show that, even with the impact of the Agis acquisition, based on where we are with our net long-term debt position at this point in time. It just opens all those opportunities.

We're not feeling that we absolutely have to run out and find somebody. But we certainly are open and going to continue, just as we did in the time prior to the Agis acquisition, we're going to be looking at opportunities to make acquisitions that fit strategically into where we want to grow in the years to come. We, again we do feel our financial strength is a real strength for Perrigo. And we will look at ways to use it beyond dividends, although they will continue to be important for us, and beyond share buybacks. But no rush to feel we have to go out and do something.

The focus would be on the faster growing part of your business now, the generic Rx business. You would probably be out there looking for IP or in-process R&D that looks promising. And that is probably where you will focus your attention, isn't that right?

I would say that that is a good area of focus for us. It could be the primary area of focus. That would make sense. It doesn't mean we would foreclose looking at other opportunities. But certainly the reason we got into the generic space is because we did feel there were very good opportunities for growth there. And we would look for opportunities that would give us a chance to enhance that position and build upon strategically.

Just one last question. I want to direct it toward Morrie. Can you give us an update on the API business and the collaboration agreement there? Has there been anything new that you can talk about relating to that?

The API business is going very well and will continue to perform. Regarding that particular collaboration, our policy is not to make public more information that we already made in the releases in the past.

If I look at the revenue that we are seeing right now from that business, any particular -- I'm trying to just model it out in terms of growth. And is there anything you can help me with on that?

Maybe I can help you just quickly. If you look at the third quarter financial statements, you're going to see that within the API segment we noted $4 million in nonproduct revenue. And that reflects the sale of intellectual property assets that we talked about in our announcement last quarter as part of this collaborative agreement. And so that is part of the overall collaborative agreement income that you're seeing.

And as we had said previously, we expect a positive impact through the rest of this fiscal year and through next fiscal year and flowing into fiscal '08. And you'll see that as it happens.

Sounds great. Thank you very much, and congratulations.

Chuck Cerankosky of KeyBanc Capital Markets.

I have got a question, if you are willing to disclose it. What were the PE sales that might have offset some of the loss of the PSE product sales in the quarter?

They were very minimal at this time. It is next year -- next fiscal year is where you'll see us reach that 115 to $125 million total. And that will be made up by quite a bit of the PE phenylephrine products. This year it has been immaterial. It has been a few products, but with the timing they were available and the season, as the new products come along it has not had a big impact.

In looking at that split next year, 115, $125 million, how do you think that will be split between PE and PSE?

The great majority of it will be the phenylephrine-based product. I would see probably roughly $30 million of pseudoephedrine sales all behind the counter, and the remainder of it made up as we bring the phenylephrine products in on to the retailer shelves.

What helps the vitamin market during the third quarter?

I will let John Hendrickson give you some information on the vitamin business. It was a nice result for us. And we continue to be happy with our vitamin business performance.

Yes, in general our nutritional business, the vitamin side, has done very well. They have kind of broadened their base a little bit getting into some other customers, some other areas, have done well on the growth side. And we see continued steady growth for that business. And going there we have had good new products sales at customers, which has certainly helped their business and what they have done. And we have continued to work on relaunches on some key products with Wal-Mart, as they have continued to get behind some of the key products they have that we do with them. I think the business has done well, especially given the nutrition industry which has been tough.

(OPERATOR INSTRUCTIONS). Keith Markey of Value Line.

I had a question about the cough/cold market overall. Can you tell us just what is developing this year with the switch over from the phenyl -- pseudoephedrine to the phenylephrine?

It was actually a pretty good cough/cold season. But unfortunately, for us, it came in a year when we were not able to take full advantage of it because of our huge -- the impact of the pseudoephedrine issue. One thing with it, it was probably a little bit better year than the average year in terms of the incidents of cough -- people getting cough/cold flu symptoms. But the severity of those symptoms was actually lower than in many years. So a lot of people getting sick, fewer of them getting severe symptoms than in a normal year. But honestly, the best way to look at it I would say it was within the balance of a pretty typical cough/cold year. On the solid side, but we're not able to take advantage of it because we had the pseudoephedrine impact hit us.

Can you tell us, should we expect to see your Consumer Health gross margin increase much in 2007?

John, do you want to comment on --?

I think the -- this is John Hendrickson. Some of the things that impacted our margin this year, as Dave talked about, were really pseudoephedrine related, including both lower sales and production rates on those items, which had an impact, as well as reserves that we took to account for obsolescence of things related to those. That will certainly begin flowing through next year as basically our cough/cold sales increase over this year. And we will have that increase.

That will certainly do that and should impact margins positively from that standpoint. And as we have pulled in the Perrigo [Ensure] products and the creams and ointments there, we're going through full line reviews of those to try and look at profitability and what to do to drive those Consumer Healthcare products to a higher level. We're very focused on driving that margin certainly higher than we are experiencing now and more towards our historical level.

But we well understand that pseudoephedrine was higher than average margins, as we have covered many times. And we need to drive those improvements in our processes and operations because the phenylephrine-based products will be somewhat lower margins than historically we have had on pseudoephedrine.

I would guess then that what you're saying is you're somewhat comfortable with your inventory levels at this point?

Yes, we are. We have -- I think the team -- I will speak up for the team. I think they have done a very good job on a very regular basis monitoring the inventory levels, and trying to be spot on, right on with the accruals for inventory reserves, etc., in the pseudoephedrine area. I think they have done a great job managing through what has absolutely been a difficult season for us. And I really feel good about the job I have seen them all do.

Hardin Bethea of DePrince, Race and Zolo.

One, -- well, two questions. The first one relates to nonproduct sales in the API segment. Can you describe the margin profile of the nonproduct sales? Is it just a straight pass-through to operating profit, or is there some costs associated with those?

The assets -- what was sold -- that nonproduct revenues comprised of $4 million of intellectual property assets. And if you think about intellectual property development, it is typically more research focused. And as you know research and development costs cannot be capitalized, so based on that you can imagine that a majority of that revenue -- those costs were passed through in previous periods. So you can imagine that the majority of the value from that revenue is going to be dropping to the bottom line.

Have you described at all the opportunity, the ultimate kind of magnitude of this opportunity over the next couple of years?

No, we have not. The terms of that are confidential.

Is there anything we can talk about related to the third quarter results as we move forward? Is that going to be lumpy? Is it somewhat consistent?

The only thing that you can comment on is that this quarter contained $4 million of nonproduct revenue related to the agreement. And beyond that, it will -- income will continue, but we can't disclose in what level.

Fair enough. And then the second question related to -- if you were to look at not only the revenue loss (technical difficulty) from PSE formulation that would have an impact on gross margin, can you help me understand what the negative impact, or the drain, has been from inventory I guess from obsolescence reserves, or what the net operating profit impact has been through the year-to-date period?

Well, if you look year-to-date in Consumer Healthcare, you're going to see overall that gross margin decreased 300 basis points. We talked about the biggest component of that being pseudoephedrine driven. We lost $69 million year-over-year in PSE sales at a higher than average gross margin. And I can tell you that our average gross margin runs 25, 30%. Imagine those PSE gross margins being 10 to 15% ballpark higher than average. We have disclosed that the specific obsolescence costs related to pseudoephedrine year-to-date has been $3. -- $4 million, 3.8, $3.9 million. So that gives you an order of magnitude of the dollar impact year-to-date, but that has dropped to the bottom line, driving that 3 point change, maybe that will help you in your modeling on a go forward basis.

The last question is related to the -- I don't know how best to describe it, but the worsening sales impact versus you original expectations that it will impact the fourth quarter related to PSE. Can you -- I guess I understand that that keeps you from changing your guidance for the year. But what should it do on a -- I guess can you better describe, instead of on a normalized basis or relative to historical fourth quarter performance what that means to the fourth quarter results?

John, do you want to address that?

Yes. Dave, I think described well what was going on where you have retailers basically moving out of products and putting them behind the counter. And so we are expecting our fourth quarter sales of pseudo products to be extremely low comparative to previous years.

And so that really is the change -- the biggest part of the change in our guidance now on the pseudoephedrine sales coming down -- is a big chunk of that it us taking the fourth quarter down based on that. We will start fourth quarter -- primarily in first quarter next year and those sorts selling in the new cough/cold planograms the phenylephrine products.

And if you look in total, expect next year's pseudoephedrine replacement product business to be higher than what we experienced this year. I would say the biggest thing is the pseudoephedrine shortfall that we have experienced, which has been significant for us as a Company, no way around it, has been really offset by really strong new products at higher than average margins. While it sounds very unique, I feel good about the way we have responded in having a good new product portfolio to offset a $70 million sales shortfall, and subsequent profitability that went along with that.

I think that considering when you look at the lost sales that we have had -- been hit with on pseudoephedrine, I think John and his team, with involvement from a lot of the other folks in operations and finance and all, have worked beautifully as a team to manage through in a lot better way that I might have expected some very difficult issues that kind of cascaded on us. And retailer responses to the meth situation were harsher than we expected. And I think we responded in real time in a pretty good way to what was a very difficult situation.

Even the latest, the passage of the federal methamphetamineme legislation did take away some sales that we would have thought we might have had in the fourth -- particularly in the fourth quarter and even a little bit spilling into the first quarter of next year, are essentially pretty much wiped out.

I guess maybe the more important thing to look at is all of this recent I guess additional kind of weakening in PSE products sales in fiscal '06, that is that fiscal '07 may still be a better year on all measures pretty much.

Yes.

It absolutely does. There will be an improvement next year in the cost/cold season, because it is not only the sales part, but it is the operational efficiencies that we can put in place now the we don't have all those phenylephrine products next season to be validating and getting through our process. Judy, did you want to --?

And despite the change in the PSE specific guidance for the remainder of the full year, to John's point, new product introductions are enabling us to be able to confirm our guidance that we have provided in the last period as well.

Brent Jackson of Southport Capital.

Just a quick follow-up on the cough/cold market. If you could, could you just go back over a little bit with me and talk about market share? And with all the changes going on are you saying a change there for you in market share either up or down?

I think -- this is John Hendrickson again -- I think it has been, as we keep describing, one of the most unique years -- certainly the most unique years in the history that we have kept, as far as dynamics go in what is going on.

If you look at overall market share, not just thinking about Perrigo first, but overall market share, there are products that have done very well this year from a brand standpoint. Certainly have capitalized on some of the product charges out there. And so you have companies that have done well through this, especially product that didn't contain pseudoephedrine. And frankly done very well through this. If you look at the market and so forth for our products, our sales were certainly hit harder than retail sales of our products, because retailers lowered inventories. They sold through their inventories. And so we certainly are hit harder than actual market share performance of the product. That is harder to give you there. But they dropped their inventories, so their share did not get hit as hard as ours did from a direct sales standpoint.

The thing that hit us is just the number and breadth of products that we have across the broad productline and needing to do those. Our share of cough/cold for the whole overall definitely went down this year. The brands that had more product out there did a better job. Our share went down. They are [digging] out there with their products. This spring and into next year we need to gain that store brand share back. It will certainly come through our sales, but also at retail to regain that. Getting those products back on the shallow. Getting the consumers of those products is all part of that process, because of sort of the jumbled up year it has been.

We still -- keep in mind, we still are clear marketshare leader in store brand, and have a very powerful position by virtue of the job we have done over many, many years in this category. And we certainly are focused on regaining that strong position, or having that strong position reflected in our sales in the future in this category.

Great. Thanks and congratulations on a good quarter.

Thanks. I think we have one more question.

Chuck Cerankosky of KeyBanc Capital Markets.

John, if we look at the phenylephrine products that will be coming on stream next year, how will they impact the profitability of the Consumer Healthcare segment? Are there launch costs, or is it -- how rapidly do they get back if they do to what the gross margin was on pseudoephedrine? And then with pseudoephedrine products establishing this behind the counter role, do you see that boding well for other products that might be behind the counter, such as Plan B or the statins?

You are -- two definitely distinct questions there. I think the one is, if I look overall year-over-year, what is next year, this year, we expect cough/cold for Perrigo to be stronger next year. We expect profitability to be higher next year as an overall cough/cold segment, because of just the breadth and what we do have out there.

I believe that our cough/cold phenylephrine containing products will be at a lower margin than were our historical pseudoephedrine products. If you look at individual products, that part of it as we put our plan together next year, what we look at -- but those individual products are probably on an individual basis going to be less profitable than their pseudoephedrine counterpart was in the marketplace. But overall as a business, we will have more cough/cold sales. We will be more profitable in that segment, with given everything we have talked about, than we are this year, because of everything that one had.

And less obsolescence and more operational efficiencies next year.

Exactly. The second question, which is a good I think, on the behind the counter, and does that open up other opportunities? It is a very good question that is talked about a lot in the industry, and frankly, no good consensus as to whether that is good or not. The one thing that work works against it is pharmacists are extremely busy. And so you've have kind of got to ask well people -- how long will people stand in lines? Will the pharmacists -- what is going to happen there? That is one of those key issues.

I do think it opens up opportunities for those things. And my belief is certain retailers will execute it fantastically, if they are very strong pharmacy programs. Other retailers, especially those without pharmacies, you won't have the sales in those entities that you would before some of the laws were in effect.

Thank you all very much. We appreciate your participation.

This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.