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Endo Pharmaceuticals Holdings, Inc. (NASDAQ:ENDP)

Q3 FY08 Earnings Call

October 30, 2008, 10:00 AM ET

Executives

Blaine Davis - IR

David P. Holveck - President, CEO and Director

Nancy J. Wysenski - COO

Edward J. Sweeney - VP, Controller and Principal Accounting Officer

Analysts

Ian Sanderson - Cowen & Co., LLC

Gary Nachman - Leerink Swann & Company

Annabel Samimy - UBS Securities

James Dawson - Buckingham Research Group

Ken Trbovich - RBC Capital Markets

David Windley - Jefferies & Company, Inc.

Tim Chiang - FTN Midwest Securities

Gene Mack - Lazard Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the Third Quarter 2008 Endo Pharmaceuticals Earnings Conference Call. My name is Francine, and I will be your coordinator for today.

At this time all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the presentation over to your host for today's conference, Mr. Blaine Davis, Vice President of Corporate Affairs. Please proceed, sir.

Blaine Davis - Investor Relations

Thanks Francine and good morning everyone. Thanks for joining us.

I will begin today's call with a brief summary of the third quarter financial results we reported this morning and then Dave Holveck, our President and CEO; and Nancy Wysenski, our Chief Operating Officer, will provide an outlook for the business.

Following our prepared remarks, we will open the call for your questions. In addition to Dave and Nancy, joining us on the call for the Q&A session are Ed Sweeney, our Vice President and Controller as well as Karen Adler [ph] Vice President Finance and Treasurer.

I will remind that any forward-looking statements by management are covered under the Private Securities Litigation Reform Act of 1995 and subject to change. Risks and uncertainties are described in today's press release and in our filings with the SEC. Listeners should not rely on any forward-looking statements and the company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, during the course of the call we may refer to non-GAAP financial measures that are not prepared in accordance with the accounting principles generally accepted in the United States and that may different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's current report on Form 8-K filed with the SEC earlier today for Endo's reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning.

Now let me briefly summarize our third quarter financial results. Net sales increased 18% during the third quarter to $316.8 million versus $269.5 million a year ago while nine months net increased 17% to $913.2 million compared with $781 million in 2007. As Nancy will describe in a few moments, these increases were driven mainly by the growth in net sales of Lidoderm and Opana.

Third quarter earnings per share also increased over the same period in 2007. Third quarter diluted earnings per share were up 30% over 2007 to $0.57 per share in the 2008 third quarter and up 13% for the nine months ending September 30th, 2008 to $1.48 per share versus $1.31 per share in 2007. Adjusted diluted earnings per share rose 39% from $0.46 in the third quarter in 2007 to $0.64 per share in the 2008 third quarter and rose 21% to $1.70 per share for the nine months ending September 30th, 2008.

Now I'll turn the call over to Dave.

David P. Holveck - President, Chief Executive Officer and Director

Thanks Blaine and welcome.

I believe our financial results for the third quarter demonstrates the consistent and solid performance of our business and reflects our efforts to increase revenues, control expenses, and operate more efficiently. As Nancy will describe in a moment, we continue enjoy a strong reputation in our target markets. Demand for our product remain high and our field teams are working smarter and more effectively. All this translates into a solid performance for our brands.

I also believe the recent reorganization is beginning to produce tangible results and will allow us to create and capture significant value in the long run. One of the benefits of the reorganization has been the flexibility to pursue new products and technologies that fit our core strengths in pain management, especially generics and drug development.

Our business development activities are focused on finding new opportunities to expand our business in therapeutic categories, it can be associated with our expertise in pain including the management of both benign and malignant disease in areas such oncology, nephrology, and urology.

While I am not going to predict when we will find the next product or technology to acquire or end license, I can tell you that out business development activities are my top priority. I am committed to strengthening and expanding our product line, increasing revenues, and creating value for patients and shareholders. While I take a long view on our mission, and appreciate that there maybe some inpatients to see us get deals done, I assure you that we are pursuing all avenues of new business opportunities before us.

I feel the sense of urgency. This is why I am focusing much of my time on evaluating future business opportunities for Endo. Our primary mission is to build the business and grow revenues. I am confident the team appreciates this dynamic and remains focused on those objectives. The team also appreciates the competitive environment, which we operate. Speed and efficiency are important factors in developing and marketing drugs successfully.

Our new head of R&D Dr. Ivan Gergel is refining his organization to build core capabilities and functions so that we take on a greater number of early and late stage projects. Ivan is in the process of building a virtual R&D model, which will allow us to run multiple development projects in parallel without dramatically increasing the size or cost of his team.

Our sales organization remains one of Endo's strongest assets that we will continue to leverage as we search for new business opportunities and evaluate potential partnerships in the pain space and other therapeutic areas. It's also a flexible asset. Since a portion of our sales effort is supplied through a contract sales organization, who's size we can adjust if necessary.

Our search for new financial officer is well underway, and I am confident that we will be able to attract a highly qualified executive to fill that position. With the exception of the CFO position, I feel that we now have the right senior management team in place to build and grow our business.

In summary, demand for our products remain strong, our cost control measures are improving our bottom line. We are making good progress in streamlining the organization and we are actively pursuing new opportunities to expand and strengthen our business.

In addition, based upon our product sales, effective expense management and share repurchasing activity, you are raising our adjusted dilutive earnings per share guidance on a range of $2.15 to $2.19 to a new range of $2.26 and $2.30 per diluted share. I am very pleased with the performance of the business for the quarter and committed to our new strategies to report growth of this business.

So now I'll turn it over the call to Nancy for what to be a more detailed review of our commercial operations and outlook. Nancy?

Nancy J. Wysenski - Chief Operating Officer

Thanks Dave and good morning to everyone on the call.

I'm pleased to report we had a very solid third quarter for three important reasons. First, we examined our current physician targeting efforts and made some changes. We took the time to better understand our healthcare providers and develop the revised physician targeting program for our reps.

These changes enable us to focus the strength of our sales force and the most appropriate and productive targets. Second, we've optimized our sampling efforts to provide a greater degree of focus and where sampling will provide the best return for the investments. Third, we changed the product mix of our pharma 1 primary care sales force and our pharma 2 contract sales organization.

During the third quarter, we added Voltaren gel to our primary care sales force mix and added Lidoderm to our contract sales force mix. We believe these changes as well as additional changes we are planning will leverage our current assets to produce a greater return by maximizing the productivity of our sales effort.

In a few moments, I'll describe some of the enhancements to our commercial business that we are currently testing to help us to increase revenues. But before I do that, let me comment on our products performance for the quarter. I'd like to start with Lidoderm, which grew 11% in the third quarter to $194.1 million in net sales. This reflects good, but maturing demand for the product as we pursued a renewed focused across high prescribing physicians, who treat patients with post herpetic neuralgia to sustain sales growth.

The numbers also reflect the impact of new managed care agreements on pricing discounts, which are likely to continue. Lidoderm is a strong franchise, which we believe will benefit from new sales and marketing strategies that we are in the process of implementing.

Sales of Opana and Opana ER were up 73% in the third quarter to $41.5 million reflecting strong demand for these products, and the success of new physician targeting programs. The results also reflect our successful managed care contracting strategy for Opana, which has increased sales volume, but occasionally resulted in lower unit price as we recently saw with a large managed care contract. We anticipate that there will continue to be fluctuations in price and volume with new managed care contracts. But we believe this is the right sales and marketing strategy for the Opana franchise.

The launch of Voltaren gel also continues to go well. Prescription trends reflect solid growth, and we see good opportunities to build this brand and expand the topical pain market in osteoarthritis. We are doing a lot of medical education and getting good responses from our primary care physicians, specialists, and pharmacists. Sales of both Frova and Percocet were in line with our expectations for the quarter and seems to be tracking with the general market for each product.

In terms of our specialty generic business, we are now focusing on higher value generics, where our formulation expertise, ability to develop high potency compound and expertise in drug delivery capabilities can be applied. This approach is working well. We currently have six ANDAs under review by the FDA. And we are perusing a growing number of development projects within our generics business.

In addition to the sales initiatives Dave and I have already described, we're also testing a new approach within one of our primary care sales groups. We rolled out flexible analytics to the sales team to now make adjustments to call plans at the territory level.

This new capability enables them to leverage their expensive knowledge of both local prescribers and managed care formularies to best promote our products to the most appropriate health care professional. In addition, we were pursuing efforts to better coordinate our managed care contracting and medical affairs support to meet the local and regional needs of our prescribing audience. Augmented by further enhancements in sales training and patient education support, we intend to make Endo sale force even more effective.

We believe this investment in staff education m redeployment will have a measurable impact on sales. Our industry is slowly adapting to the ever-changing operating environment in healthcare today. And we think we are ahead of the curve by implementing these changes.

In summary, it was a good quarter for the commercial business. Thanks to the consistent and solid performance of our brands, the execution of changes to our sales and marketing organization and the implementation of new programs to support our future growth. Thanks to this performance, we remain on track for our 2008 net sales guidance.

That concludes my prepared remarks. So let me turn it back to Blaine to begin our Q&A session.

Blaine Davis - Investor Relations

Thanks Nancy.

Francine, I think we're ready to start the Q&A session. And just as a reminder for everyone on the call, we do also have Ed Sweeney and Karen Adler here from our finance function. They are available to answer your questions.

Question And Answer

Operator

[Operator Instructions]. Our first question comes from the line of Ian Sanderson of Cowen & Company. Please proceed.

Ian Sanderson - Cowen & Co., LLC

Good morning, thanks for taking the question. A couple here; first, could you perhaps provide a bit more color on the cost reduction moves in Q3 and particularly as they relate to the R&D side of things? There was a contract termination charge and maybe you could elaborate on that. Secondly, on the balance sheet, has there been any in the status of the auction rate securities in Q3, and maybe if you could breakout the operating cash flow in the quarter.

David P. Holveck - President, Chief Executive Officer and Director

Yes, this is Dave Holveck. Let me take the first part, and I'll ask either Ed or Karen to give you a little bit of an update relative to the auction rate.

Relative to the cost reduction, as we indicated to you, couple elements play into the expanse changes relative to the third quarter. One is the decisions we made on our product pipeline. And that was a major element that impacted our third quarter expenses. The other area was relative to a lot of what Nancy described in terms of our sales team, marketing efforts. And to some extent just the way we've changed organization and we do see organization, we've gained some efficiencies in that area. So, I would say that the bulk of expense is a function of the R&D as well as the restructuring of our commercial organization.

Now relative to the second part of your question, for auction rate, I'd like Karen to give a perspective on that.

Unidentified Company Representative

Okay. In the third quarter, we actually reduced it by almost $20 million, our auction rate securities. And actually subsequent to the end of the third quarter, we've actually another $11 million called. So our balance was $285 million at the end of the third quarter. We did also have an unrealized loss on that of $27 million as well. Did that answer your question or would you like me to...

Ian Sanderson - Cowen & Co., LLC

It does. And maybe if you could give us jus a sense of the operating cash flow in the quarter and share repurchase activity in the quarter.

Unidentified Company Representative

Okay. Ed Sweeney is going to take that.

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

Okay. The operating cash flow during the nine period, which was what we disclosed, has declined from the prior year due to the significant AR collections on sales of Opana ER and it took place at the end of '06. So those collections are significant in the beginning of '07, so that is the main driver of the decline our operating cash flows for the prior year.

Ian Sanderson - Cowen & Co., LLC

Okay. And share repurchases activity in the quarter.

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

During the quarter, we repurchased another $3.8 million shares.

Ian Sanderson - Cowen & Co., LLC

Okay. Thank you, very much.

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

Thank you now.

David P. Holveck - President, Chief Executive Officer and Director

Thanks Ian.

Operator

Our next question comes from the line of Gary Nachman of Leerink Swann. Please proceed.

Gary Nachman - Leerink Swann & Company

Hi, good morning. First question is could you give some more detail on the types of managed care wins that you are getting on Lidoderm and Opana? You seem to be doing good job there and the impact on pricing for those products.

David P. Holveck - President, Chief Executive Officer and Director

Go ahead, Nancy. I'm sorry.

Nancy J. Wysenski - Chief Operating Officer

As I stated during the prepared remarks, part of what you are seeing in the third quarter is a successful execution of our contracting strategy for Opana specifically. We have 80% coverage in commercial plans and about 65% on Part D plans at either the Tier 2 or Tier 3 level. In the third quarter alone, we signed five new agreements. And what that means is that we are seeing a little bit of the impact of the pricing that goes with those agreements prior to having benefit of the volume that will come with them.

Now Lidoderm is the slightly different situation because of course that product has been contracted a little bit longer. Because new sales that we continue to see reuptake if you will win contract expires or resigned. And we have seen slight in pricing, which is very typical. I would say for a mature product at this stage in its life cycle.

Gary Nachman - Leerink Swann & Company

Okay. Should we assume continued price decline going forward when we model this out for both of these products?

Nancy J. Wysenski - Chief Operating Officer

We do expect to continue to see some decline and in the case of Opana that should be offset by volume increase.

Gary Nachman - Leerink Swann & Company

Okay. Also on Lidoderm, are you guys still expecting a big bump in the fourth quarter because of the wholesaler? So should we look at the growth rate in the third quarter? That's sort of reflective of what we should except in the fourth quarter.

Nancy J. Wysenski - Chief Operating Officer

I wish I could give you the answer, Gary. It's really hard to speculate on the purchasing patterns.

Gary Nachman - Leerink Swann & Company

Okay. And then lastly on both Voltaren gel was there some stocking or recognition of the deferred revenue in there in the quarter and how many tubes for RX are you up to and what's your target for that product? And RX has gone up dramatically. Is it being used chronically at all or it's for acute pain at this point?

Nancy J. Wysenski - Chief Operating Officer

Yes, well a lot of questions. Let me see if I can get them. And then I am going to go to Ed to catch whatever I miss. Voltaren gel is performing well. As you said the TRXs are picking up. We have now booked $11.3 in sales in part of that is due to recognition now on the stocking and I'll let Ed speak to that in jus a moment. The physician community is really welcoming this product both in primary care and specialists. We are now at point, where primary care physicians are ready to surpass specialists in terms of the total number of scripts they're writing. And we think that is due at least impart to the fact that we finally have a full promotional campaign out there. We have a very energized sales force behind to this product. And we think that it is definitely contributing to growth of the topical osteoarthritis market.

Ed, do you want to take the specifics on the revenue recognitions?

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

Sure. We were able to begin recognizing revenue on a complete basis during the third quarter due to the fact we met the accounting rules for the recognition of revenue.

Nancy J. Wysenski - Chief Operating Officer

I might come back to one question you also asked, Gary, which was about the chronic versus acute nature of the drug. As you know, our indication is for osteoarthritis and that is a chronic disease. So, we would expect that overtime we will have a growing number of TRX relative to new RXs.

Gary Nachman - Leerink Swann & Company

Okay, just on the tubes for RX...

Nancy J. Wysenski - Chief Operating Officer

I'm sorry, yes. We are at about two tubes per RX right now. And we anticipate that will continue to grow over the next 12 months.

Gary Nachman - Leerink Swann & Company

Any target there? Did you double it potentially?

Nancy J. Wysenski - Chief Operating Officer

Not exactly certain yet, we are looking at that right now.

Gary Nachman - Leerink Swann & Company

Okay. Thank you.

Nancy J. Wysenski - Chief Operating Officer

Thank you.

Operator

Our next question comes from the line of Annabel Samimy [UBS Securities]. Please proceed.

Annabel Samimy - UBS Securities

Hi. Thanks for taking for taking my call. Can I just reiterate the question on Voltaren gel? I didn't quite understand the stocking or the revenue reorganization response that we heard. The prescriptions clearly didn't seem to imply $10 million. So, if you can go to that a little bit more clearly.

David P. Holveck - President, Chief Executive Officer and Director

Sure. At the end of the third quarter, we had recognized revenue just based upon prescription demand. So it's only the two that actually made its way into the hands of patients we recognize revenue on. During the fourth quarter... I am sorry, during the third quarter, we were able to recognize revenue based on our shipments to the wholesaler. Did that solve the question?

Annabel Samimy - UBS Securities

Yes, that's great. And also you had mentioned that you have six ANDAs filed. Can you gives us an idea of what those ANDAs might be or are you keeping that under wraps?

Nancy J. Wysenski - Chief Operating Officer

Yes, for competitive purposes we prefer to not share that.

Annabel Samimy - UBS Securities

Okay, and just separately on the gross margins, noticed that has come down a little bit. Can you just talk about that as a mix shift and what is pulling it down?

Nancy J. Wysenski - Chief Operating Officer

The majority of that decline was due to some of the rebating effects on pricing that we saw on Opana and Lidoderm.

Annabel Samimy - UBS Securities

Okay. And one last question if I may, in this environment, there has been a lot of discussion about your companies not being in financial positions to continue through clinical development in some of their products. Have you seen opportunities improve over the last month or so as we are seeing this environment deteriorate? And what would your first priority be for business development? Are you still focused on trying to get product for 2009?

David P. Holveck - President, Chief Executive Officer and Director

Yes, good question, and yes, I think the environment again from the position of where we sit relative to our cash position does give us certainly greater opportunities. I certainly came back from my recent visit over the European partnering conference. And again the discussions as well as the environment is an element that does give us some opportunities, and so we are perusing those. I think how we look at our business going forward. Our strength is certainly in the pain area, and we are going to continue to leverage and focus in that area.

As I indicated, we also see some related areas, where pain as a great entrée for us. And again until we get you know, more specific in understandings around those opportunities I am not going to say much more, but that's really where we are looking at right now on the priority. So as I mentioned in my commentary pain will be an immediate short-term focus for us.

Operator

Our next question comes from the line of David Buck from Buckingham Research Group. Please proceed.

James Dawson - Buckingham Research Group

Hi, it's Jim Dawson for David Buck. Just would you explain the inventory changes in the in Opana and Opana ER?

Nancy J. Wysenski - Chief Operating Officer

Sure. Right now, the inventory there is pretty flat. It looks as though there was a little bit of it decline, because we stocked the new strength during the second quarter.

James Dawson - Buckingham Research Group

Okay. Due to the new strengths?

Nancy J. Wysenski - Chief Operating Officer

I am sorry, I couldn't hear.

James Dawson - Buckingham Research Group

Due to the new strength you said?

Nancy J. Wysenski - Chief Operating Officer

In the second quarter we stocked new strength, which actually increased the inventory overall because of the there is a net increase in the total. But in looking at the inline dosage strength, it's pretty flat.

James Dawson - Buckingham Research Group

Okay, thanks. And then just on pricing products for RX, for Opana, Opana ER, Voltaren gel, what should we be using for as a proxy?

Nancy J. Wysenski - Chief Operating Officer

Yes, I can't give you a specific number as we mentioned earlier. Those numbers are fluctuating based upon the contracts that are signed both up and down. Depending upon when you sign the contract and give the price concession versus when the volume comes through. So, it's little tough for me to be anymore specific for you.

James Dawson - Buckingham Research Group

Okay, thanks. And then any price increases in the quarter or just after, or any of your drugs?

Nancy J. Wysenski - Chief Operating Officer

We took a price increase an Opana, IR effective October, 1.

David P. Holveck - President, Chief Executive Officer and Director

Yes, it was 9.9%.

James Dawson - Buckingham Research Group

Okay, thanks. And then when should we expect an update on the pipeline R&D front?

David P. Holveck - President, Chief Executive Officer and Director

Well, I think the... again it's... related with so many other activities on that and I would say you'll get that update in due course again. I just can't give you anymore specific on that.

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

And just to remind you, the comments that we made on the previous quarter relative to two other projects, the oil rents ongoing preclinical work that we expect to have some additional information later this year. And then on the and then on the Fentanyl path we indicated and end of Phase II meeting, which is likely to happen in the early part of 2009.

Operator

Our next question comes from the line of Ken Trbovich from RBC Capital Markets. Please proceed.

Ken Trbovich - RBC Capital Markets

Thanks for taking the question. I guess, I wanted to start obviously with... you guys had a great quarter and yet while you raising the guidance, there are some question in my mind as to the message you are trying to send as to whether the restructuring is complete or if you have some specific plans spending for the fourth quarter that perhaps we are not aware of, do you have specifically maybe on DTC advertising for Voltaren or something of that nature, because it would seem that these expense reductions that we are seeing here in the third quarter really would be something that we carry through more so than implied in the guidance?

David P. Holveck - President, Chief Executive Officer and Director

Well, I think your appropriate question to ask and I'm going let both Nancy and Karen give you little bit more granular. The aspects of again how we looked at their restructuring, which we really completed to the level of the organization, alignments projects as I indicated to relative to R&D. As well as some of the support expenses that were built into the organization, we took in sense of various contracts that we had consultants such along with the Nancy's comments the efficiencies under which she build into the organization from a marketing sales prospective. Now to some extent we are seeing that in the third quarter. But at same point some of that, yes, will start to come back into the fourth quarter. But I'll let Nancy to give you a little bit more specific on how she sees that going.

Nancy J. Wysenski - Chief Operating Officer

Great, thanks Dave. Yes, as you know, when you go through a period, where you restructure, you are moving people around and sometimes that disrupts your spending a little bit. But now folks are in those new roles ready to roll and we therefore expect the SG&A spending for the fourth quarter to increase over what we saw in the third quarter.

We expect to see an increase in medical grants. The initiation of new marketing campaign as I explained for Lidoderm, work on Opana and Voltaren gel, an increase in sales training as we are rolling out these new programs and better preparing our sales force, and also an increase in sampling for Voltaren gel. So, we do think that the general rate will rise in the fourth quarter.

Ken Trbovich - RBC Capital Markets

Okay. And Then just on the...

David P. Holveck - President, Chief Executive Officer and Director

I would just say that the range that we are giving you and again this is built around those caveats or anticipations in that, so... or assumptions in that okay.

Ken Trbovich - RBC Capital Markets

Sure, appreciate it. I guess on the accounting side, just really quickly in terms of the impairment charges along with the assets that we see here in the current quarter. Could you give us some granularity on that? And then help us to understand obviously this is a period of restructuring. At what point did these point did these extra ordinary items sort of discontinue and become a normal course of business?

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

I'll take the first question on the impairment charges during the quarter. That charge related to E-pedigree project that we had initiated. And during the quarter, it was determined that the project is going to move in different direction and the cost we had in curve no longer had any value.

Ken Trbovich - RBC Capital Markets

Okay.

Nancy J. Wysenski - Chief Operating Officer

For a little bit more detail there that was due to decisions that have been taken in the State of California regarding changes in their law. So, there is not the urgency that we had anticipated there. And we would prefer to wait and have the great benefit of what will happen across the industry and not have to bear all of that our cost ourselves. Also, I would say secondary to the restructuring that was here in headquarters. We are done and I think things starting to roll at a pretty normal rate now, most of the changes that I alluded where expenses are growing, are related to these efforts to take our fine Fentanyl [ph] sales force and make them even more effective.

David P. Holveck - President, Chief Executive Officer and Director

Sure, and I guess from my perspective... in terms of the presentation on a quarterly basis that clearly some of these charges and things we would expect, I just think at some point, we'd expect that wrapped up and that we don't see these sort of ongoing charges that get broken out. I mean now with the periods of that process is complete.

David P. Holveck - President, Chief Executive Officer and Director

Yes, I'd say probably. I'd say the answer is yes, and I would also say that we went through this process in a fairly straight forward aggressive way, so that we had the head room to again make some of the future growth decisions that we are working on fit into a model that I think gives us the near term as well as the long-term sustainability. So, from you question, yes, we are through the bulk of it, and now we'll grow from here.

Ken Trbovich - RBC Capital Markets

Okay.

Blaine Davis - Investor Relations

Ken, the only thing that I'd add to that... it's Blaine. Obviously, we don't have a crystal ball or a predictive measure of some of the issues for example related to E-pedigree and changes in the law. So, I think those are things that are just not predictable. That you come up... you saw at this quarter. And you may see it in the future; it's just hard to say.

Ken Trbovich - RBC Capital Markets

Okay. And then final question, just in terms of pipeline, I know you've talked about the two programs in terms of new product opportunities, are you going to give us any insight into lifecycle management, whether it's Lidoderm, Voltaren, anything in that sense and whether these might tie into some of those ANDAs that have been filed?

David P. Holveck - President, Chief Executive Officer and Director

Well, I think that just to generalize your answer is that there is a lot of what I believe this company has is synergies in terms of as I mentioned the pain is a great entrée. And I think the special generics is equally, an ability to get some synergies. So, as you talk about lifecycle management, and as we move forward with decisions, I think you'll get a greater appreciation of how we are thinking and how it fits us better. But to your question to be assure, yes, that we are trying to leverage that those positions we have.

Ken Trbovich - RBC Capital Markets

Okay, thank you.

Operator

Our next question comes from the line of David Windley from Jefferies & Company. Please proceed.

David Windley - Jefferies & Company, Inc.

Hi... excuse me, good morning thanks for taking the questions. A follow up on Annabel's earlier question about environment, and how that affects the flow of your BD opportunities; I wonder Dave, if you could comment about the relative stage that is... that represents your greatest interest. I mean maybe the environment allows you to look a little bit later in the pipeline and get still get better value relative to where things were six months ago or things of that sort. I guess I am just looking for some indications of where in the pipeline you would like to bring products into the fold.

David P. Holveck - President, Chief Executive Officer and Director

Well, okay. Let's take it for... as the company looks, its strength is in the development side. So, in areas, where we can accent that, and I think we will do it. Keenly, I'm aware of the fact that we want to continue to see our revenue growth go. And so priorities are certainly looking at areas in which we can see revenue impacted more near term. I think the mid-term is also an area, where I think our development expertise is going to be an advantage. Again with the environment, there are people, who are sitting out there that don't have the cash in order to take that next step and our expertise along with our cash position enable that, so mid-term. And I think then for the long term is really I haven't worked relative to the virtual R, where we can start to build that in a nice progression sort of the core walk, run progression, under which we can get it started. And build out for what I call more longer sustainable innovation pipeline. So that's how again we're working it and how I am thinking about it.

David Windley - Jefferies & Company, Inc.

On the long term portion of that the virtual R, these situations, where you might be partnering with offshore companies with chemistry capability or something to do some formulation work for you or do some lead optimization for you or and do that at risk or could you delve into that a little bit more.

David P. Holveck - President, Chief Executive Officer and Director

Yes, I think you are correct in that. Certainly utilization of offshore is a source that. And again I don't think it's any surprise relative to Ivan and his background and experience, we are going to leverage that. I mean, certainly a philosophical agreement that we had and I think, which is desired. So those are definitely going to be there. I think that where we can again that leverage along with our capabilities, that's how we are going to look at it. And again, I think we... we've got to have a balance on our position for couple of long-term growth and from the long-term perspective and innovation, we'll go through the leverage and risk management of the off shore opportunities.

David Windley - Jefferies & Company, Inc.

And on the other end of things is acquiring approved products even if they might not be continue of analysis, but even though they might not be particularly novel is acquiring products already in the market or ready to be marketed as in Voltaren gel is that possible or is that an opportunity?

David P. Holveck - President, Chief Executive Officer and Director

I think you are right, yes, sure. Again with our capabilities that we have existing in the infrastructure of our business in the marketplace, anyway we can get more leverage out of that, makes a lot of sense. So, yes, I don't think anything is off the table. We are going for all opportunities against that continue of near-term, mid-term, long-term.

David Windley - Jefferies & Company, Inc.

Okay. On the commercial side, the change in the mix of products carried by the two forces, were those replacements or just additions to the bag?

Nancy J. Wysenski - Chief Operating Officer

They are addition.

David Windley - Jefferies & Company, Inc.

And could you review what each team then is carrying in all physicians?

Nancy J. Wysenski - Chief Operating Officer

Sure, and I know this is something that shifts so much; sometimes when you are not dealing with it everyday, it's a little bit hard to track. So as you know, we have our own pharma, what we call pharma 1, force of 360 reps, who call on physicians. And they now have everything in our line. So, they are carrying Frova, Lidoderm, Opana, and we just added Voltaren gel. As you know, in May, we put a contract sales organization. We sometime refer to them as pharma 2, that's an additional 275 person effort. They began their focus with Voltaren gel, and we have now added Lidoderm, or actually doing that as we speak to their bag. And that I'm sure you're aware we also have two specialty pharma sales forces and the first specialty force carries Frova, Lidoderm, and Opana, and the second specialty force carries Lidoderm, Opana, and Voltaren gel.

David Windley - Jefferies & Company, Inc.

Okay. And on the contract force...

David P. Holveck - President, Chief Executive Officer and Director

David,in the interest of time, can we just go to the next question then?

Unidentified Company Representative

That will be great.

Operator

Our next question comes from the line of Tim Chiang from FTN Midwest. Please proceed.

Tim Chiang - FTN Midwest Securities

Hi thanks. You mentioned 6 ANDAs that you have under development or I don't know if they were filed or not. But the generic market is such a tough market. It's pretty much of commodity market here in the U.S. I mean unless you have some niche or differentiation with your filings, it's tough to sustainably grow a generic business. I am sure you guys have gone through this. But are these very tough to developed type products you are looking at for generic market?

Nancy J. Wysenski - Chief Operating Officer

Yes. Tim, first of all I want to be clear that those six ANDAs have often filed with the FDA. In addition, we've got a growing number of projects back here that we are working to develop, so you hit it. Yes, this is the specialty generic business and that means that we focus on specific segments that we think we can do well, and but for competitive reasons, we obviously don't want to disclose anything too much more specifics on that.

Tim Chiang - FTN Midwest Securities

Okay. And then just one follow up; I know that at some point, you'll need a line extension strategy to Lidoderm. And I know the pharma license then longer acting PHN patch, I mean what are your thoughts on that potentially working on a much longer acting version of Lidoderm, is that something that you think would commercially make sense?

David P. Holveck - President, Chief Executive Officer and Director

Again, I am not going to make a comment on that. Let me... because I don't want to be that specific on that particular part of your questions. I do think the abilities to look at line extension are not always just going to be handled by us by just looking at the topical approach. So, there is other ways to leverage our position in that market. And let's just say that, how we look at that is not a discreet as you'd defined it.

Operator

And our final question comes from the line of Gene Mack from Lazard Capital Markets. Please proceed.

Gene Mack - Lazard Capital Markets

Thanks for taking the question. David, I guess... could you just give us a bit of an idea how you are sort of evaluating opportunities that are out there? In other words, my guess is that... it must be tough for one person to sort of kick the tires on these things. So maybe you can give us a little bit of an idea of how you sort of go about evaluating things. Is there... as Ivan's input been... to what point is Ivan participating and who else at the organization is...

David P. Holveck - President, Chief Executive Officer and Director

Well, first of all there is a team approach here. And certainly as Ivan and myself... I came in also with and experience, if you would or some insights Ivan gained from my days either in the biotech arena or recently with the J&J and the JDDC meaning the venture area. So there were some certainly preconceived ideas of positions that I came in with. And I think the organization is... was very strong relative to the business development area. It's not that the skill sets weren't in place. So from that standpoint, that was a positive and I was able to bring a couple of the players forward, one of which Bob Padduci, [ph] who is a part of the team leading the business development is there. I also brought in another individual from my past life to help some of the technical. So I think we are at a position, where we can do a fairly quick and efficient broad review because of the experienced nature of the players. Ivan's team has grown the business development in internal organization. And then my past experience. So in aggregate, we are able to flip through it pretty quickly and we have, so that's what we said.

Gene Mack - Lazard Capital Markets

I didn't mean to imply your experience of center court, helped out [ph].

David P. Holveck - President, Chief Executive Officer and Director

No, no I didn't want to check it that [ph]. I think that one of the experience aspects was really, the learning experience that I had with J&J, the opportunity to participate in the broad elements of the technology base that JDDC looks across meaning the wise pharma consumer. And I think being able to see that from that position was to me a valuable learning. And again, it's certainly for some ideas and beliefs coming in here. So it's really exciting to be able to take the next step and build off on that experience and maybe some of the hypothesis that experience led me to.

Gene Mack - Lazard Capital Markets

And then quick comment question, with the Penwest royalty, can you just remind us again how that's booked... how you guys recognize that and then has there been any change... incremental over last quarter or so?

Edward J. Sweeney - Vice President, Controller and Principal Accounting Officer

ThePenwest royalty was not significant in Q3. That's when it first started, first it came liability for us. We do expect that it to be around 11% of net sales of Opana ER in the fourth quarter. And we will recognize that in cost of sales.

Gene Mack - Lazard Capital Markets

Okay, great. Thank you.

Operator

Let me return the call over to Dave Holveck for closing remark.

David P. Holveck - President, Chief Executive Officer and Director

I'llclose out by simply saying I hope you are feeling again much the way I feel and hope however we can transmit some of this to you is that the team is really come together in a good short period of time, the functionality, the ability to target, and look at specifics and put together a plan that we can engage and work on through '09 and '10 and ongoing. I think leaving that at this point, I appreciate it again the time, the support; and look forward to our next quarterly call. So, thank you.

Operator

Thank you for your participation and today's conference. This concludes the presentation. You may now disconnect. Have a good day. .

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Source: Endo Pharmaceuticals Holdings Inc. Q3 2008 Earnings Conference Call Transcript
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