Perrigo Company PLC (PRGO) 2008 Q1 法說會逐字稿

Good morning. My name is Shawana and I will be your conference operator today. At this time I would like to welcome everyone to the Perrigo 2008 First Quarter Earnings Results Conference Call.

(OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the floor over to your host, Mr. Art Shannon, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you very much, Shawna. Welcome to Perrigo's First Quarter 2008 Earnings Conference Call. I hope you all had a chance to review our press releases, which we issued earlier this morning, and copies of the press releases are available on our website at www.perrigo.com.

Before we proceed with the call, I'd like to remind everyone that the Safe Harbor language contained in today's press releases also pertains to this conference call. Certain statements in the call are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and are subject to the Safe Harbor created thereby. Please see the cautionary note regarding forward-looking statements on page one of the company's Form 10-K for the year ended June 30th, 2007.

I would now like to turn the call over to Perrigo's Chairman and CEO, Joe Papa. Joe.

Thank you, Art. And welcome everyone to Perrigo's First Quarter Fiscal 2008 Earnings Conference call. Joining me today is Judy Brown, EVP and Chief Financial Officer. For our agenda today, first I will provide a brief perspective on the quarter, reviewing several of the highlights for the quarter. Next, Judy will walk through the detailed financial to talk about our outlook for the year. Then I will discuss our opportunity for omeprazole and an update on our OTC business and some of the priorities for our business. This will be followed by an opportunity for Q&A.

Obviously the first quarter was a very strong quarter for Perrigo. We had record sales, record operating income, and on our new products, are on-track to meet our goals for this year before we even launch omeprazole. We had strong positive cash flow from the operation in the first quarter where we normally are a user of cash. This is another very strong sign on the strength of our business.

Our consumer healthcare unit has $20 million in new business sales, which were a driver for this quarter as our team continues to rescue our customers from a competitor's quality problem. This opportunity is lengthening as our competitor has extended its time frame for returning to the OTC market.

As we told you at our analyst conference in September, we are looking at these sales from rescuing our customer from the competitor's quality problem as part of our business and are working to keep these sales in the future, no matter who is in the marketplace.

Customer service levels remain higher than FY07, but with the increase in sales, we will continue to strive to improve our customer service levels.

Another development during the quarter, we also began shipping in July our pediculicide products acquired in the Qualis acquisition, which we closed at the beginning of the quarter. As a reminder, these products extend our offering of high quality, affordable store brand products without adding infrastructure.

Our international businesses in Mexico and the U.K. also reported strong increases with Mexican sales up more than 35% and the U.K. growing at 18%.

The Rx business continues to benefit from the Glades acquisition. Sales are up 11% in the quarter. The API business experienced strong growth with sales up 30% in the quarter.

I'm sure we'll have plenty of questions surrounding the omeprazole opportunity and we certainly want to talk about this exciting opportunity, so I'll get into detail on that shortly. But first, let me turn the call over to Judy for a more detailed financial review of the quarter.

Thank you, Joe. Good morning, everyone. Well it was a great quarter for Perrigo. Our solid earnings performance for the quarter demonstrates the team's ability to seize revenue growth opportunities -- even in the face of pricing pressures in certain businesses -- to manage costs, and improve margins through concerted operational focus, all the while continuing to increase our investments in the future.

We are very pleased with our financial results for this first quarter of fiscal 2008. So much so that we are even more optimistic about the rest of the year. And I'll comment on our updated financial guidance in a few moments.

Consolidated first quarter sales were a record $383 million, an increase of $43 million or 12% from a year ago, with sales up significantly in all four operating segments.

Consolidated gross profit of $117 million was an increase of $24 million from last year, while the gross margin percentage was 30.5% of net sales, up 320 basis points from last year's 27.3%.

On top of this we increased our investment in R&D by 25% from last year, spending $16 million, or 4.3% of sales. A record for any first quarter.

Consolidated net income, including the positive impact of the Glades and Qualis acquisitions, was a record $34 million this year, compared with $17 million in fiscal 2007.

There were no non-GAAP adjustments in the quarter this year or last year, which thankfully will make the rest of the financial analysis very straightforward.

Earnings per share were $0.36 this year, double last year's $0.18. And please remember that last year, subsequent to our earnings announcement, we initiated a recall of certain lots of acetaminophen caplets. The total cost of that recall in the full year 2007 was approximately $4 million after tax, of which $700,000, or $0.01 per share was reflected in the first quarter fiscal 2007 10-Q, which was filed on November 9th, 2006.

Now let's go through a discussion of our business segment starting first with consumer healthcare.

Sales increased $26 million or 11% to $268 million, driven by several positive factors. Organic growth of 9% was driven by new product sales of $10 million, including our introduction of coated fruit-flavored nicotine gum. A few smaller cough/cold items, and launches in Mexico and the U.K.

We also enjoy sales of just over $20 million in incremental new business as a result of the absence in the OTC marketplace of a key competitor during the quarter. As Joe already noted, the team is intensely focused on retaining this business as Perrigo's into the future.

Our international consumer healthcare operations also performed very well in the quarter, posting a $7 million, or 22% improvement in sales with favorable currency contributing 7 percentage points of this growth.

Inorganic growth also added to the top line as we closed the Qualis acquisition in early July and as Joe noted, began shipping our first store brand pediculicide products in September.

These growth factors were partially tempered by the year-over-year impact of our exit from the fiber laxative business, which had contributed approximately $7 million to fiscal first quarter 2007 sales.

Leveraging this strong sales growth, consumer healthcare gross profit increased to $72 million, a $16 million, 28% improvement from last year. We achieved 26.8% of sales gross margin, or a 360 basis point improvement over last year's 23.2%.

This is the third consecutive quarter where gross margins have expanded and the best gross margin quarter since Q3 fiscal 2005. This was driven by the favorable mix of products sold, as well as the positive impact of production efficiencies, focused inventory management, and lower obsolescence cost. Also gross profit margins a year ago were negatively impacted by the product recall costs.

Operating expenses in total increased $3 million or 8% in the wake of a 42% increase in research and development spending. Our spending pattern in R&D has been more backend loaded in the last years. This year we are continuing our project activity pace from Q4. As a percent of sales, consumer healthcare operating expenses in the quarter were down to 15.8% compared with 16.2% a year ago.

In all, consumer healthcare ended with a record first quarter operating income of $30 million, which was 11% of sales, compared with $17 million or 7% of sales last year. The higher sales volume and improved operating efficiencies contributed to a very strong start of the year for the consumer healthcare group.

The Rx pharmaceutical segment also had a great start to the year, led by the contribution of the products acquired in the Glades acquisition last year. Net sales increased 11% to $35 million from $31 million a year ago and included $7 million from the products acquired from Glades Pharmaceuticals as well as $6 million of service and royalty revenue.

Gross profit increased 10% to $15 million or 43.2% of sales due to favorable margins on the Glades product acquired offset by pricing pressures on the existing portfolio items.

Operating expenses were relatively flat on a dollar basis, but were down 360 basis points as a percent of sales due to the leverage from higher sales volumes.

Operating income was $7 million, up 29% from last year.

On to API. By all measures, the API segment had an excellent quarter with results surpassing our expectations across-the-board. We posted 30% year-over-year sales growth, all of which was organic, and which was a record for the segment. Sales increased to $39 million, up $9 million from first quarter last year. Strong sales of key products and timing of customer purchases in light of their respective product launches drove this growth.

Gross profit was $15 million, up $5 million dollars from last year. Gross margin was 39.5% of sales, up 570 basis points from 33.8% a year ago, on the favorable mix of products sold.

Operating expenses were $8 million, up from $5 million a year ago, due to both increased R&D costs and higher employee related costs relative to last year.

In total, operating income in API was $7 million or 18.7% of sales, up from $5 million or 15.6% of sales last year.

The other category, representing our Israeli based consumer products, and pharmaceutical, and diagnostic businesses, sales were up $4 million or 9% to $41 million. While all of this growth was in fact organic, the positive effect of currency exchange rates contributed 5.2 percentage points of this improvement.

Gross profit increased $2 million, or 13% due to the higher sales volume, favorable product mix, and favorable currency, while gross margin increased 100 basis points.

Operating expenses were $12 million, up $2 million from last year, due to higher selling and administrative expenses related to higher sales volumes and currency. Operating income was down less than $200,000 to $2.5 million.

And wrapping up our business segment discussion. Unallocated corporate expenses for the quarter were $1 million, down from $4 million last year. This was due to a combination of two factors. First we benefited from the settlement of a pre-acquisition legal claim related to August, which reduced this quarter's admin expenses by approximately $2 million. And second, the fact that last year's admin expenses were negatively impacted by approximately $1 million for one time employee-related costs.

With respect to taxes, you will note that the effective tax rate for the quarter was 20.1%. Although this rate is basically unchanged from last year's 20.3%, there are two important inverse dynamics at work in this quarter's rate, which are important to gaining an understanding of our assumptions for the full year rate estimates.

As I noted in previous calls, our tax rate fluctuates each quarter, depending on a geographic mix of income before tax. In this year's first quarter, 54% of income before tax was generated by foreign operations, with tax rates lower than the U.S. statutory rate. This is down 14 percentage points from 68% of income last year. This variance raised the relative rate from last year.

Concurrently, as I discussed at our Analysts' Day presentation in September, we received a favorable tax ruling in Israel in the first quarter. In accordance with U.S. GAAP we fully recognize this impact all at once. This resulted in a one-time benefit of $4 million, or a 10-percentage point favorable impact on the first quarter effective tax rate.

The effective rate for the year is expected to be higher than the first quarter or for the balance of the year, it's expected to be higher than the first quarter. As the U.S. operations are likely to represent an even higher percentage of total worldwide income before tax than in the first quarter. Based on our expectations of worldwide pretax income mix in our updated guidance, we are still confirming an annualized tax rate for fiscal 2008 of between 25% to 28%. As always, we will continue to pursue opportunities in this area to further improve upon this rate as the year progresses. And as we continue to see benefits of our tax planning activities.

Now some comments on the balance sheet. Working capital, excluding cash and investments, was $324 million at quarter end, compared with $297 million last year, an increase of $27 million. As a percentage of sales, this represents 21.2%, down 60 basis points from this point in the year last year, and in line with our seasonal selling in and inventory builds.

Debt to total capital was 25.9% at the end of the quarter, down from 30% last year. We achieved this improvement while completing two acquisitions through the year, plus this increased focus on working capital.

Accounts receivable were $283 million compared with $230 million a year ago, reflecting the 12% sales increase from last year.

Inventories were $315 million, a decrease of 4% or $12 million from a year ago despite volume growth and the seasonal build in consumer healthcare.

Our inventory management programs have helped to bring down finished good levels, which have also allowed us to lower necessary reserves, both in dollar terms and as a percent of gross inventory.

Accounts payable were $171 million compared with $173 million a year ago. This dynamic matches the relative decrease in inventory just noted.

Cash from operating activities was $28 million in the quarter, compared with a use of cash for operations of $6 million last year. We are generally a user of cash in our first quarter as we prepare for the peak demand of the cough/cold/flu season. The story this quarter however was different with several components of cash flow showing good results. Strong sales and improved margins drove net income. Inventories were brought down and an operational focus on improvements and our procure-to-pay cycle enabled cash generation from payables.

Capital expenditures during the quarter were $4 million. Per our various project plans, the first quarter was relatively slow in terms of capital spend. But we still anticipate spending between $40 million and $50 million for the full year.

And lastly, we repurchased 202,000 shares in the quarter for $4 million through our 10b-51 stock repurchase plan.

Bottom line. It was clearly a great start to the year, generally in line with our expectations, but even more positive on the bottom-line due to the early benefit from the Israeli tax ruling. We continue to be well positioned to take advantage of our investments in quality, customer service, and R&D, as well as the launch of new products. We believe we will also continue to see the positive impact of new consumer healthcare volumes, resulting from a competitor's current absence from the market.

When we issued our guidance for fiscal 2008 in August, we expected to be positively impacted by that new business awarded to us and made reasonable assumptions based on market share and average product margins of the business we would be able to service and maintain for the full year. It now appears that this competitor's return to the market will be later in the year than previously anticipated.

With this changing scenario in consumer healthcare, and considering our strong start to the year in the remaining business units, we are updating our 2008 guidance. We now expect our full year 2008 earnings to be in a range of $1.12 to $1.22 per share, up between 26% and 37% from adjusted EPS of $0.89 last year.

I'm pleased to note that this improved guidance reflects the management team's commitment to build on the momentum we have to date, while maintaining the proper balance of investments in the future in R&D, in quality, and in technology.

Let me be clear. This guidance does not include any estimate or expectation for omeprazole. When our partner receives final FDA approval, and launch dates are finalized, we will revisit our earnings guidance at that time, including those estimates.

That said, as you revise your models based on this new information, you may wish to consider a few points. We expect year-over-year sales growth to remain strong throughout the year. We currently expect that the second quarter will be the strongest in terms of operating income improvement, based on seasonality, the timing of new product launches, and our beliefs regarding the competitive dynamics in the marketplaces in which we operate.

The second half of the year will also see the decrease of the bottom line profitability of the Rx segment, as the service revenues from collaborative R&D activities are expected to possibly decline.

As noted earlier, as we expect the full year effective tax rate to remain in the 25% to 28% range, the rates for the remaining quarters should be higher as the relative domestic income before tax is anticipated to be higher than this quarter and last year.

With this improved bottom line guidance, we also anticipate cash flow from operations to now be in a range more closely to $150 to $170 million for the full year.

And with that, let me turn it back to Joe.

Thanks, Judy. Now that Judy's given you all the details of our first quarter, I would like to go back to a year ago when I started Perrigo and discuss my priorities for the company, how it will impact 2008 and beyond. As a reminder, my five priorities are quality, number one. It's our number one priority. Number two is customer service, ensuring we have appropriate customer service levels. Number three is about new product customer-driven innovation. Number four, it's about lowering our cost base so that we can compete globally. And number five is about people development.

First -- we have and we will continue to make investments in quality. Our team is focused on meeting quality goals while continuing to challenge our cost structure. Quality will always be our primary goal. As we have seen in the market, a company cannot afford to cut corners on quality. What -- a year ago I discussed our investment in quality. This important action proved to be very timely and today we are positioned to rescue our customers with high quality, affordable products.

Second -- customer service. It is essential to our sustained growth. We have consistently improved our service level since the middle of last year. We still have room for improvement, but we are remaining very vigilant in this area and will continue to try to improve our customer service levels.

Third -- new product sales and innovation will be a key driver for Perrigo. Omeprazole -- it's the latest new product we are bringing to the market. It is indeed though the largest opportunity in our 120-year history of Perrigo. Our partner, Dexcel, settled a lawsuit with AstraZeneca on September the 27th. Perrigo will commercialize this product exclusively, offering a high quality, affordable product that can save consumers up to $150 million per year.

Brand sales of Prilosec OTC are estimated to be $750 million and growing. Our partner has not yet received final approval, but we expect to launch by the end of Q1 calendar year 2008 or just a few months from now. We have just begun working with our customers to start commercialization efforts for this important product.

In other areas of new products, the smoking cessation category, we continue to gain share. We received final approval for coated fruit nicotine gum during fiscal 2007 fourth quarter, adding another exclusive product to the category. This year, there are more exciting new products coming to market. Cetirizine, a generic version of Zyrtec should come to the market after the patent expires in late December 2007.

As a reminder, we will be vertically integrated for Cetirizine with API from our Perrigo facility in the near future. Famotidine Complete also represents a fiscal '08 opportunity after we prevail in our patent litigation.

On the topic of patent litigation, Adams Respiratory filed suit against Perrigo after we filed an ANDA with a paragraph IV generic version of Mucinex guaifenesin extended release tablets, 600 mg, a $100 plus million name brand product. We feel very confident in our position that we do not believe we infringe any valid or enforceable claims on their patents. The 30-month stay began September 27, 2007.

Finally, clobetasol foam also offers us an opportunity to launch this product after the conclusion of a 30-month stay in April 2008.

In FY 2008, we plan to file more than 10 ANDAs with more than half of those being paragraph four filings. We are increasing funding of R&D in all our business units to keep on this pace to ensure that this important growth engine is sustainable.

Fourth -- in order to be a leader in our space, you must be also a low-cost provider. John Hendrickson and our global operations team have been charged to improve our supply chain and our cost structure. He and his team have (inaudible), excuse me. He and his team have implemented major value stream initiative over the past several months and the results are clear in our quarter.

And finally, we must have the right people. We are constantly looking for the right people to help us grow our company and that progress is ongoing. I'm excited to say we held our very first global leadership team meeting in September, focusing on leadership training and development.

Overall our bottom line results have exceeded expectations. Since the second half of last year my team and I have been focused on improvements in our working capital in each of our business units. We will continue meeting weekly to focus on the metrics that help us to manage inventories and improve our processes. We've changed management long-term incentives to be based on return on invested capital for this year. We believe this is the best metric for growth and accountability. In these volatile market conditions, I like that we are positioned as a company that has the ability to generate cash from a solid foundation.

This quarter we generated more than $28 million in cash from operations in a quarter when we are normally a user of cash. We are well on our way to meet our new goal of $150 million to $170 million in cash for the year.

Overall it's a very exciting time for Perrigo. Our base business is performing well, so we increased our full-year guidance. We're taking advantage of current market conditions, investing in our future, and are being very selective about strategic acquisition opportunities, which could help us to deliver value to both our customers as well as our shareholders.

And finally, we are very excited about our omeprazole launch opportunity. Thank you. Now let's take time for questions. Operator, can you please open it up to questions?

(OPERATOR INSTRUCTIONS)

Our first question is coming from Greg Gilbert with Merrill Lynch. Please go

Thanks. Good morning. I have a few. Let's start with omeprazole. Judy, how should we think about the gross and operating margin for the product as well as what are your thoughts on the duration of possible exclusivity there?

Well specific to omeprazole, we are not yet giving guidance on the impact of that product to the operating margins yet. As I noted earlier, we're going to give very specific guidance on the product as well as the impact of the full year at time that approval is received. With respect however to the overall modeling, we've tried to give you some assistance in our press release, giving you an idea of what we believe the top line, full-year opportunity to be is and as we've also noted, we will be sharing profits with our partner Dexcel in that opportunity. Maybe I'll let -- I'll let Joe comment on the duration question.

Okay.

Sure.

Greg, I think on the duration question I think as many people know, there was one additional filing that occurred back in March of 2007 that resulted in a legal litigation that was initiated with a July 27th, 2007 start date of a 30-month stay. We believe that that gives us at least a very significant timeframe to get to the market. Additionally, 30-months from 2007 brings you well into that 2000-and -- or certainly the beginning of 2010. So clearly it's a significant opportunity for us relative to the exclusivity period.

Now when you say exclusivity, you went out of your way to say that. That implies that the innovator can't launch their own store brand version?

No. I don't think that I want to suggest that. I don't know that. I will say though that we have seen in the store brand market is very unusual. In fact I don't recall any examples of an innovator launching an authorized generic or something of that. The fact -- it's a different marketplace and at this time we expect that we will have some time period where we are out there with our product. Can't guarantee what the innovator will do though, obviously that would be up to them to make that judgment.

Thanks. Second question, Joe. I'm sure folks are curious to hear specifically what gives you the confidence that you'll keep the business that you've won. Any color would be helpful there.

Sure. I think first of all, what we've tried very hard to do is rescuer our customers from the quality problem that our competitor has. We've worked very hard to get the end product as quickly as possible, to get them a quality product, and to maintain high customer service levels. We know the competitor continue to have some issues. I can't really comment about their issues. All I can comment that we've worked very hard. We've had some extended time period now where we see that they have not returned to the market, so it gives us some greater confidence that we'll keep this product over the longer term.

Once again, we aren't (technical difficulty) be able to guarantee duration forever, but we are saying we believe this business, we've done a lot to rescue the customers, we've done a lot to maintain good customer service, and to ship them quality product, and therefore we are doing everything we can to keep this business for ours -- as ours.

And one more and I'll get back in line. Joe, what's Perrigo's exposure to cough/cold products for children, given that there's some scrutiny in that area? Thanks.

Yeah. I think many of you know that there's been quite a lot of questions and issues on the cough/cold area for children. I just remind you of a couple points, and I'll get to the exact answer to the question. First, we've done a great job at diversifying our portfolio. The total amount of cough/cold products still is important to us, but is less than -- total is 12%. When you go down to the kids' area, it's less than $15 million as a percentage of our total business. So while it's still important to us, it is certainly a smaller part as being of our business and as we diversify our business into the other areas of the generic Rx business, the API business, and of course the other areas where our consumer healthcare business.

Thank you.

Next question.

Thank you. Our next question is coming from Daniel Rizzo with Sidoti and Company. Please go ahead.

Good morning, guys. You may have already said this, but with the gross margin and operating margin gains you guys have received, is it -- I mean you said it's going to be down a little year, but we expect a year-over-year increases of next year as well?

Year-over-year increases in 2009?

Yeah. Well I'm just saying you've been trending up for the past three quarters in gross margin. I just want to know if it's going to still go in that direction?

For the remainder of 2008 you mean.

Yes.

If we look overall at the gross margin trends that we're anticipating for the rest of this year. You know we've commented in previous calls about how the operational focus particularly in consumer healthcare was to get us back to historical levels. And that was driven both by a combination of new product launches, but importantly getting our focus on inventory obsolescence control, production efficiencies, reducing rework and other items. So that is what you're really seeing is a critical driver in the last several quarters is that operational focus.

If I look out at the full year, this was a strong quarter in consumer healthcare, without a doubt. I would expect gross margins throughout the rest of this year to be trending in the mid-20s -- mid to -- I guess, high mid-20s for the rest of the year. High mid. How do you describe that? And for the overall corporation as a whole, in the upper 20s and bumping up as we have this quarter with a 30%. So strong -- we've seen strong margins this quarter in Rx with the contribution of the new products from Glade and API also had a strong quarter. As I commented earlier, with the mix of products, some of the seasonality of the products that we've brought on as new business, and the continued focus on production improvements, I'd expect us to have sort of a more stable rate throughout the year as opposed to expecting 400 basis point improvement sequentially each quarter through the rest of the year.

Maybe I'll just add a couple words to what Judy's statement is, which is absolutely correct. I think -- the only other thing I would add is that we -- towards the middle of last year took a very strong approach -- the middle of our last fiscal year I should say. We took an overly strong approach towards globalizing our supply chain, putting leadership in that area, and also beginning a process of a weekly operational meetings where we really can get to the bottom line of some of these questions and issues that we're affecting. Our variances and other items that were affecting our bottom line. And I think the team has done an outstanding job of truly globalizing our supply chain, and indeed trying to improve the efficiency of our supply chain around the world. And I think that's certainly start -- we're starting to see some of that at this point.

And Dan, just to wrap that up. We are returning to more historical rates as we promised. If I -- I think I quoted for consumer healthcare that we're back to third quarter 2005 rates, at or above that rate. Kind of passed the PSE storm that changed the rates dramatically in consumer healthcare. And any of those numbers I was just talking about, just to reference back to Greg's question, are not including any of the impact that we would expect to see with omeprazole. So we'll be commenting again on that specifically in an upcoming call, we hope in the near future. And obviously we'll be reflecting the changes and any slope changes and gross margin related to that.

Okay. Thank you.

Sure.

Thank you. Our next question is coming from Derek Leckow with Barrington. Please go ahead.

Thank you. Good morning and congratulations on a great quarter.

Thanks, Derek.

Thanks, Derek.

Just wanted to ask a bigger picture question on the gastrointestinal category. You know they got some major new products coming out in here. We've got Pepcid Complete, and of course omeprazole next year. How are you seeing the retailer as customers respond to that? Are you seeing them reposition the category to expand the shelf space? And as a follow onto that, what happens to the store brand share? I mean is that going up right now as well? And obviously we would anticipate with, I think it's a January launch time for the Pepcid Complete product, is that right? Would you expect that to continue?

Yeah. Let me try to take the total category and then I'll talk about the Pepcid Complete. Relative to the total category, we clearly do believe that retailers are very much looking forward to the launch of the Pepcid Complete, and especially the Pepcid Famotidine complete product that we will launch. We very much think there's an opportunity there as in store brand, having prevailed in the patent litigation. So we do think that the consume -- the -- both the consumers as well as the retailers believe that will be an important product.

On the omeprazole OTC product opportunity, obviously it is really a very significant opportunity. We've just begun to talk to our customers as I -- as we speak today, relative to this opportunity. But from discussions we've had with them relative to their knowledge of what we have here, they believe this is a very significant opportunity for store brand. One that can deliver a high quality affordable product and save consumers up to $100 plus million a year potentially. So we think this is something that they will continue to respond favorably to.

On the issue -- we have not come out with a specific launch date on Pepcid Complete or Famotidine Complete store brand at this time. We are continuing to work through those issues and will get back as soon as we have a specific date. However we will -- can continue to work on that to try to make progress and get that product out as soon as we can.

And is Famotidine Complete already in your guidance or not? Because there's not -- no launch date yet.

Yeah. What we do on all of our new products is we put a probability factor on our new products. So none of our new products are in it 100%. We put probability weighting on those recognizing the fact that there's always issues that -- some go faster, some go slower, but we overall have a probability weighting on all of our products. So we don't' specifically talk about any individual product in or out of our guidance.

Omeprazole though, because of it's size and its specific nature of that product has to be something that we at this time have excluded from our guidance and that we will put that in as soon as we get greater clarity on the exact launch date of that product. But given the fact it really is just -- where we just simply await FDA approval, we're very excited to believe we can launch that by the end of the first quarter calendar year fiscal -- calendar year 2008.

Okay. One more bigger picture question here. There's a new category kind of emerging within the drugstores, you know, where you've got these clinics in there and then you've got behind the counter the sort of quasi-OTC segment. I think there's been a push to kind of expand the product category overall. And I'm wondering, does that create an opportunity for Perrigo and have you guys started to see your retail customers sort of respond to that yet or is it still early days with that product category?

Yeah. I would say the general answer to your question is yes. We do believe this is a good opportunity for us at Perrigo as we work with our large retailers. On the general sense of the store clinics, we think that that will be something that continues because it offers consumers a timesavings and very greater access to healthcare, so we do expect that to increase. As those continue in the large retailers, we believe that that will benefit Perrigo simply because we've got the store brand products in those retailers and therefore if a patient is rec -- we recommend -- or the physician or physician assistant recommends a product to the consumer at the store clinic, they are simply going to get it filled at that -- in that store. So we think that is an opportunity for Perrigo as we supply the large retailers with store brand. We obviously have a significant share of the store brand market. So we do view that as positive.

On the behind the counter I think is really the category you're talking about. We continue to believe that that may expand based on what the comments of the FDA commissioner and the pursuit of going to behind the counter status. We obviously await to see what will happen with the statins, specifically Mevacor that will go before an FDA advisory committee sometime later this year. So we're continuing to monitor it, but we've had good success with behind the counter as we've seen increases in our pseudoephedrine business over the last 12 months in behind the counter sales.

Did you just say that PSE sales were up year-over-year?

Our pseudoephedrine specific sales are -- behind the counter -- are good. But we actually look at the balance though of pseudoephedrine in phenylephrine, but pseudoephedrine we've been able to launch some products back that were previously in the market and come back with those products based on customer demand.

Thank you.

And if I can add to that. Derek, I'm happy to say after many quarters where we talked about the impact of pseudoephedrine as a drag on the productivity of consumer healthcare, this is a first quarter where the combination of pseudoephedrine and phenylephrine products in our portfolio have grown year-over-year. So we hit the tipping point and are back on a growth track in that combination of products.

Oh thanks. That's great news. Congratulations.

Thank you.

Thank you, Derek.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question is coming from Linda Bolton Weiser with Oppenheimer. Please go ahead.

Thank you. Congratulations on all the good news. Just a question on the generic Priolsec OTC. Can you just remind us -- I mean are you going to be the ones manufacturing the product? And if so, is there any sort of unusual ramp up costs or cap acts associated with that?

Linda. It's Joe Papa. Thank you for the comment. Relative to omeprazole, we are working very closely with our partner, Dexcel. They will actually manufacture the tablet. We will be involved with some packaging and specific store brand opportunities. But they will be doing that.

Relative to the question on the capital, there will not be any significant capital increases. Obviously maybe a (inaudible) line here or there, but nothing significant beyond our current capital. So we think that this will have a very favorable outcome on our return on investment capital for us at Perrigo.

Thanks. And also can you just comment on -- in terms of the incremental sales that you've gained from the Weiner situation. It does seem that your run rate is maybe $20 million a quarter. That's $80 million annual sales. It does seem that's a little bit less than your 65% share would imply more than $100 million of sales. So do you think there's more that you could actually gain? Or are you looking at your current level as just stable?

Yeah. I think what I would remind you is that we -- as we talk -- as well talked about this in the past, we did say we acquired approximately our market share of $90 million to $100 million products. During the quarter as we mentioned, we shipped over $20 million but I would just simply remind you there is some seasonality of that relative to some of the products that are in the cough/cold area. Some of them are analgesics that go up as you hit cough, cold, and flu season. So we believe clearly we have acquired somewhere in the range of $90 million to $100 million annualized sales and the current sales in the quarter are trending very close to our expectations.

Okay. Thanks. And also what do you make of the FDA allowing Weiner to ship from their finished goods inventory? That would imply that maybe they would come back online maybe sooner. So how do you sort of jive that with your belief that they will stay out of the market for longer?

Let me be clear. I really can't comment on my competitors, -- when they're coming back or not coming back with products relative to their discussion with FDA. So really probably can't comment on that. What I can say though is that we've worked very hard to go out and rescue our customers. We've provided them with quality products, with good dating, which I can't comment on my competitor's dating. But we have good quality products, good dating, with good service levels, so we're going to do everything we can to keep that business. Once again, we're not building all of Weiner into our full year, but we do believe that this business is ours and one that we will do everything we can to keep this business from after we've rescued our customers.

Okay. And just one question for Judy. I think you mentioned something about the Rx segment and something about profit declines. I just didn't catch what you were saying about that.

If you remember we talked about in previous years that we had taken on a collaborative agreement -- R&D collaborative agreement in the Rx segment. We commented at the time that that started a few years ago that that was not going to continue into perpetuity. We believe that that will decline in the second half of the year, hence the waiting as I commented on earlier of the first half/second half of the year in our planning. It is not a complete decline in the overall Rx business. We expect our Glades products to continue to deliver well and the team is working on maintaining the base business on the product that they have in their portfolio. It's not a big new product year plan for the Rx business. But we do expect to see a portion of a decline in the last quarter of the year related to that non-product revenue.

And that would be a decline in sales and profit?

Yes. That's correct. And that was built into our initial guidance and in our updated guidance.

Maybe one thing I should add to my comment on the cough/cold season -- The seasonality of our business. It -- the cough/cold season so far has been slightly down from last year. So it is slightly behind last year. However it is so early in the season, it probably is very difficult to say very much more about the season. But I will say cough/cold season is slightly down about 8%-9% from a year ago. Clearly though on the other hand, we've seen data from the southern hemisphere that is was a very significant cough/cold season. So I really can't comment more about the seasonality other than just saying we're early in the season, down slightly so far, but other data tells us from the southern hemisphere it could be a significant cough/cold season. So we'll just have to keep tracking that and how that affects the seasonality of our business.

Okay. Thank you.

Thank you. Our final question is a follow up from Greg Gilbert with Merrill Lynch. Please go ahead.

Thanks. Good. In that case it's a multi-part follow up. So Joe, can you provide any updates on Olux, Nasacort and can you confirm whether you have any filings outstanding that you have not been sued on yet? Paragraph IVs.

Sure. So start with Olux. Just a reminder everyone on the phone, we filed it in August of '05, we were sued in October of '05, the end of the stay -- 30-month stay is April of 2008. It's approximately an $80 million to $90 million product. By now -- first by Kinetic, now by part of Stiefel. We clearly believe this is a nice opportunity for us. We feel we have a strong position, however, we'll have to make a decision later in the year -- late in our fiscal year or early in calendar year '08 as to when -- whether we go forward with this launch opportunity and when -- and what the issues will be at the conclusion of the 30-month stay.

On the triamcinolone acetonide nasal spray, otherwise known as Nasacort, that was a March '06 filing. It was a May 2006 we were sued by the patent holder Aventis and we believe that the end of that stay will be November of 2008. That is one that we're not quite as far along on that patent with litigation, so it's too early for us to make much more comment on that at this time.

And I think the last part of the question is, are there other paragraph IVs that we have not been sued on at this time. Is that what you said?

Yeah.

I really can't go into that, Greg. I could say we have some additional paragraph IVs. I really can't comment specifically on any of the products as to whether we were sued on, but we do have other additional paragraph IV opportunities that we believe will progress through the FDA. But I really don't want to comment on the (technical difficulty).

Okay. So last big picture question, Joe. If the omeprazole opportunity is as big and as sustained as you hope it may be, do you see a unique opportunity to invest much more aggressively in the out years internally? And/or externally? Seems like a pretty big inflection point in terms of the amount of earnings and cash flow you may have to put back into the business.

Sure. Absolutely, Greg. I think clearly we -- we're right now we're focused on having a successful commercialization. That is our primary focus of that on getting through the final stages of this and getting it out to our customers and being successful on the commercial side. So clearly that is our initial focus, but I clearly take your point.

This would drive significant value for our shareholders, give us additional -- significant additional -- cash flow, give us a chance to make some additional investments as we think -- deem appropriate. I think the important point I would go back to, Greg, is that we believe that by continuing to focus on return on invested capital that will allow us to make the best decisions for our shareholders. So while we continue to look at acquisition opportunities, we only want to go after those that we believe will add that ROIC value for our shareholders. So that would be what we would do both internally and externally relative to our position longer-term.

But we do see this as being the very exciting opportunity, one that will come earlier than expected and clearly with omeprazole being earlier than expected I mean. One that we are very excited about the prospects for continuing to change Perrigo and really grow Perrigo significantly in today's marketplace.

Thanks again.

At this time I am showing no further questions. I would now like to turn the call back over to management.

Well thank you everyone. Thank you very much for your interest in Perrigo. We're very excited as you can tell from our quarterly results and the opportunity with omeprazole and the other products. We look forward to having further discussions with you in the near future. Thank you. Have a great day.

Thank you. This does conclude today's Perrigo Conference Call. You may all disconnect and have a great day.