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Endo Pharmaceuticals Holdings, Inc. (NASDAQ:ENDP)

Q4 2008 Earnings Call

February 27, 2009 10:30 am ET

Executives

Blaine Davis – Vice President, Corporate Affairs.

David Holveck – President, Chief Executive Officer.

Ivan Gergel – Executive Vice President, Research & Development.

Nancy Wysenski – Chief Operating Officer

Analysts

Shivani Malhotra – Goldman Sachs

Gregory Gilbert – Bank of America

Gary Nachman – Leerink Swann

Richard Silver - Barclays Capital

Corey Davis – Natixis Bleichroeder

David Buck – Buckingham Research

Ian Sanderson – Cowen & Co., LLC

Ken Trbovich – RBC Capital Markets

Patti Bank – Pacific Growth Equities

Scott Henry – Roth Capital

Michael Tong – Wachovia Capital Markets

John Newman – Oppenheimer

Gene Mack – Lazard Capital Markets

Lei Huang – Summer Street Research

Tim Chiang – FTN Equity Capital

Operator

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

At this time all participants are in listen-only mode we will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Blaine Davis, Vice President, Corporate Affairs. Please proceed.

Blaine Davis

Thanks. Good morning everyone and thank you for joining us. With me today on today’s call are Dave Holveck, President and CEO of Endo, and Ivan Gergel, Executive Vice President of R&D. Dave and Ivan will provide an update on recent business activities and plans for 2009, after which I will summarize our recent financial results and 2009 guidance.

After our remarks, we’ll open the call to your questions. Our Chief Operating Officer, Nancy Wysenski was not available to join us today due to a family emergency, but our General Counsel, Caroline Manogue and Ed Sweeney and Karen Adler from our finance group are here to help answer questions.

I want to remind you 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 described in today's press release and in our filings with the SEC.

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 be 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 turn the call over to Dave.

David Holveck

Thanks Blaine. Endo has taken major strides during the past year and I like to take a few minutes to review our progress and outline our plans for '09. In addition to achieving record revenues and earnings last year, we strengthened our management team with the additions of new leaders in R&D, HR, communications, business development, and other areas of the company.

We also added several industry leaders to our Board and reorganized our sales and marketing groups to make them more nimble and successful. We also reduced spending and identified opportunities for future cost savings. We then undertook a major strategic review of our business to determine how, and where we plan to grow.

We know that pain products are what made Endo successful, but we also realized that to create long-term value for patients and shareholders, we needed to brought our therapeutic footprint and explore new areas that are attractive for especially foreign companies and within pain.

As a result of this review, we determined that specialties related to pelvic health specifically urology, endocrinology and oncology, which complement our current pain franchise and enable us to build a sustainable business beyond pain. These therapeutics specialties were attractive to us because of their favorable demographics, unmet medical needs and opportunities to leverage our experience in specialty sales and drug delivery.

Most important, these areas and our pain business could provide us with near committed and long-term growth opportunities that we can continue to develop on. This assessment led us to the acquisition of Indevus, which we now control. Indevus brings us new marketed products, compounds mid- to late-stage development, and a exciting drug delivery technology, and new specialty sales groups with reach into three new areas for us.

Urology, endocrinology, and oncology. Indevus represents the first step in a building process to grow our revenue base. As part of this process, we have also made choices about Endo's pipeline, which was previously focused only in pain. After careful consideration, we cut several mid-stage Endo programs and under Dr. Ivan Gergel’s leadership, we have opened up a whole new approach to R&D. Ivan is expanding the competencies in R&D, exploring new therapeutic areas consistent with our commercial strategy, and finding new partners for collaboration.

I’d like to turn the call over to Ivan for a few minutes to comment on his team’s progress and the R&D deals we've recently announced. Ivan?

Ivan Gergel

Thanks Dave. The Indevus acquisition has given us a great opportunity to refranchise our development work to focus on later stage product candidate to the direct unmet medical needs and support our growth objectives. We are now working with the Indevus team to develop Pagoclone, a Phase II drug for stuttering, which is covenant with Teva Pharmaceuticals.

And also two products currently in Phase III development, the Octreotide implant for acromegaly and PRO 2000 for the prevention of HIV and other sexually transmitted diseases. We’re also preparing for the upcoming regulatory submission for NEBIDO, which we hope to launch next year as a treatment for hypogonadism. And in addition we are evaluating the HYDRON polymer technology to see delivering and apply this novel drug delivery system that’s got up in our specialty generics business as well as other potential therapeutic areas.

As a result of our acquisition of Indevus and the reprioritization of our research and development programs, we have discontinued the development of EN 3285, the NAC oral rinse for oral mucositis. On EN 3270, the transdermal sufentanil patch. Our shift to development focus has not diminished our interest in pursuing innovative research. We recently announced research agreements with Harvard University, Aurigene Discovery Technologies, and today with Grunenthal to discover and develop novel treatments for pain and cancer.

Both the Harvard and Aurigene agreements represent a launch of the virtual discovery within Endo. With Harvard, we’re exploring a new pain drug delivery method that targets pain-sensing neurons without harming motor neurons

We have exclusive rights for that technology and will be responsible for the development and commercialization of any drug candidate discovered under this agreement. The Aurigene collaboration is focused on a specific targeted oncology. In addition, we have also enhanced our late stage pipeline with the deal announced today with Grunenthal. We have licensed the right to develop a new compound to treat chronic pain and diabetic peripheral neuropathic pain. This compound is currently in Phase II development.

Pain remains the key component of Endo's growth strategy and this agreement along with the Harvard collaboration demonstrates Endo's continued commitment to therapeutic area that has made the company so successful to-date. All of this activity reflects our desire to establish a more competitive position in pain and pelvic health by creating innovative new products that improved patient outcomes and address unmet medical needs. I believe that this is the right way to build our pipeline and that the changes we made in R&D are appropriate and will lead to promising new drugs. Now I will turn the call back to Dave.

David Holveck

Thanks Ivan. With the changes we executed last year, and Indevus now under our control Endo is well positioned to achieve sustainable revenue and earnings growth. Our base business remains strong as we continue to refine our sales and marketing programs to improve our efficiency and effectiveness in the field. Lidoderm, has been one of the foundations of Endo's success and we will continue to support its growth. Our auto pain products such as Opana and Voltaren are also performing well.

PERCOCET and FROVA continue to grow nicely and both products had a strong fourth quarter and will continue to support Endo’s growth in 2009. At the same time, expanding our therapeutic focus and pursuing new collaborations has shifted the momentum of our portfolio from mature pain drugs to new products in urology, endriconology, oncology, and pain management.

The integration of Indevus into Endo reflects the shift and will be a big part of our growth plan this year. We are now varying to put additional marketing muscle behind Aventis and Spirella to support their growth and I am also pleased to report that the amended sNDA for VALSTAR was just approved by the FDA this week, which allows us to re-launch this product in the second half of 2009. We are also planning to launch NEBIDO in 2010 yet it’s approved. We use both Endo’s commercial team and the Endo’s sales force and many market groups to support these brands.

Just to elaborate on integration for a moment. We are maintain the Indevus commercial infrastructure, which includes 75 urology sales reps and 25 endocrinology reps who remain a very valuable asset. We will be combining the R&D teams as Ivan mentioned including NEBIDO development team that is been responsible, refilling the NDA and supporting that product through the FDA review. And to the retaining the Indevus facility and there in New Jersey and a manufacturing team responsible for HYDRON drug delivery systems. To be clear this integration is less about synergies cutting expenses and reducing headcount. We did that on our own last year, which gave us the breathing room to pursue an acquisition like this one. This deal is more about the strategic value that Indevus brings to Endo. Indevus is a apparently lean organization and their people and products really are additive to our organization. I am pleased to reports that we’re well that on the integration path and it’s going extremely well.

Indevus and the research collaborations we did announced represent the first step in our move to broaden Endo’s product portfolio in therapeutic reach. We are continuing to pursue business development opportunities consistent with this strategy. And you should expect to see us announce other acquisitions or collaborations this year.

I won’t be more specific about the timing or the type of deals but you should know that we are committed to an aggressive growth plan. Looking ahead, our objectives for 2009 are fairly straightforward. First, maintain our leadership obtains management through appropriate marketing strategies and sales tactics to increase revenues. Second, intergrade the Indevus team quickly into our organization and pursue new marketing initiatives launch new products and find new applications with a HYDRON polymer drug delivery system. And third, find new products technologies and ideas to build up deals we’ve announced with Indevus forward and are now difficult are great good beginnings for Endo, but they are only the beginning there is much more that we plan to do and expand our product portfolio.

Thanks to a very successful 2008 I believe we are in a strong position to grow our top and bottom lines this year and achieve net sales of $1.39 to $1.44 billion and adjusted diluted earnings per share of $2.59 to $2.67 in 2009. That’s our addition for this year and I am confident we can get there.

Now I will turn the call over to Blaine to review our 2008 financial results and provide more detail to our 2009 financial guidance Blaine.

Blaine Davis

Thanks Dave. Let me begin by pointing out that in today's press release we have presented both GAAP and adjusted financial results as its been our past practice. Going forward and beginning with our results for the first quarter of 2009 our adjusted results will include the impact of stock option expenses. However, we will now exclude the impact of amortization of intangible assets in addition to items that we have previously excluded so it’s estimated upfront milestone aim at the partners asset impairment charges and changes in the fair value of some of our financial instruments.

This change in reporting is consistent with our peers it should clarify our financial reports on the performance of our business. Now let me briefly summarize our 2008 financial results. For the fourth quarter of 2008 we had net sales of $347 million up 14% over the fourth quarter of 2007.

Selling, general and administrative expenses were $130 million and R&D expenses were $28 million. Fourth quarter net income was $74.9 million up 48% over the fourth quarter of 2007. Our diluted earnings per share rose 68% to $0.64 versus $0.38 in the fourth quarter of 2007. And our adjusted diluted earnings per share rose 37% to $0.71 versus $0.52 in 2007. For the full year 2008, we reported net sales of $1.261 billion up 16% over 2007.

SG&A expenses were $488 million, while R&D expense was $110 million. Our net income rose 15% to $261 million. Diluted earnings per share rose 25% in 2008 to $2.12 versus $1.69 in 2007 and our adjusted diluted earnings per share up or rose 25% to $2.40 versus 192 at 2007. The out performance for the fourth quarter and full year was driven primarily by higher than expected sales of our branded products and slightly lower than expected SG&A expenses.

Now, let me run through our 2009 financial guidance. Just as a reminder our 2009 financial guidance reflects the impact of the Indevus acquisition. As Dave stated we expect net sales to be between $1.39 billion and $1.44 billion. Our 2009 adjusted diluted earnings per share are expected to be between $2.59 and $2.67. We expect the gross margins to decline slightly in 2009 as a result of the full year impact of the Opana Royalty payments to Penwest and an increased rebates on our core products.

We anticipate that 2009 adjusted tax rate to be approximately 33.6% due to the tax sets savings expect to be provided by the Indevus’ acquisition. Well we will not provide specific guidance on SG&A expense or R&D we do expect these line items to increase in 2009 primarily as a result of the acquisition of Endo's. However, the increase in operating expenses will be partially offset by the continued rationalization of our cost infrastructure, which we mentioned when we announced the acquisition of Indevus earlier this year.

This concludes our prepared remarks and now I will ask the operator to open the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question will come from the line of Shivani Malhotra from Goldman Sachs. Please proceed.

Shivani Malhotra – Goldman Sachs

Hi sorry, can you hear me?

Blaine Davis

We could hear you.

Shivani Malhotra – Goldman Sachs

Okay, Blaine I was just wondering if you could take us through the guidance again for 2009 I guess is the number of components that you’ve excluded and there is some confusion around the stock option expenses. So could you just take us through that and then can you also just update us on, how things are going with your cost cutting initiatives I know you said that you were looking at $40 million in cost cuts by 2010 but just trying to look at where we are versus that right now.

Blaine Davis

So again just to reiterate the guidance that we provided is 259 to 267 does excludes the impact of the amortization expenses of commercial intangible assets the majority of that is associated with VOLTAREN GEL as well as with the recent acquisitions of Indevus, the guidance that we provided of 259 to 267 does include the impact of stock option expenses so, that is a change from how we characterize things in the past. As it relates to the cost cutting initiatives, I think we have made good progress to-date on that initiative as you saw we terminate to the development program earlier this year with the partner Alexza as well as the cutting of two programs that we announced today all of that is made solid progress for the achievement of the costs savings initiative we announced, earlier this year. We will continue to look at other parts of the costs infrastructure including our marketing spend for ways to continue to generate that costs savings, but I think we’re well in past to the achievement of that

Shivani Malhotra – Goldman Sachs

Can I just have a quick follow up on your revenue guidance I know you don’t breakout the products, but if we just thinking about how to model laid it strict trends have not been as strong as they have been in the past and you consistently mentioned as a company and the management team that you have been – you are seeing pricing pressure how should we be thinking about the future of this product over the next few years? How should we be looking to model this?

David Holveck

Thanks Shivani. So, I think again that the top line guidance that we provided, again does reflect the fact of the additives on products from Indevus and I think, we do expect continued growth from product wide Opana as well as the continued growth of the Opana products specifically related to the question on Latham again it has been that the product that this generated significant growth for the organization in the past as you have indicated the prescription trends around that product has started to decline slightly again most of that few from our standpoint due to the majority of that business, but we will continue to support…

David Holveck

Growth of that product, we have announced – we announced last quarter we initiation of the new marketing campaign. We've seeing some good impact from those marketing campaigns and hope to see continued growth of the product.

Shivani Malhotra – Goldman Sachs

Okay, thank you.

Operator

Your next question will come from the line of Gregg Gilbert from Bank of America.

Gregory Gilbert – Bank of America

Thanks, a couple of first start to cover this side got only how is the CFO search going and what’s your proposed timeline there.

Blaine Davis

Yeah the CFO, search going very well, I think that the for the cyclical market climate opportunity and looking at talent at this point, not going to predict in an exact timing on it, but I would expect that have an individual onside or in place within the next three months I think the only issue is, the on happening of one position to going on to another, but that’s – so, that’s time I am looking at this point.

Gregory Gilbert – Bank of America

Okay thank for that. Blaine can you share if you have the any with the tax rate or to beyond the adjustments the difference between the GAAP and the adjusted guidance for ’09 and see there is a difference tax rate there.

Blaine Davis

Yeah Greg if we utilize the net effective tax rate on those adjustments, which is approximately 38% that’s the tax rate to we use there.

Gregory Gilbert – Bank of America

Okay and can I just confirm that there are no deals that we do not know about in your ’09 guidance.

Blaine Davis

That’s correct. That’s correct.

Gregory Gilbert – Bank of America

And one more for you Dave given that Lidoderm as we sit here today as leg to 20, 15 in change what are your thoughts there on life cycle management initiatives it would seem to me that the return on those could be quite compelling and if there is anything to be done there can you frame that for us?

David Holveck

Well, you’re right. Actually right I think its franchise that in coming in here and looking at our pipeline that certainly with Ivan joining and looking at the competencies…

Blaine Davis

That’s been renewed if you would and then I think looking at the opportunities your point to your questions is certainly on the table plus fixing your power looking at it is broaden in range meaning obviously how we look at it from the market that we have a strong position in what else can we put around that market as well as new technologies easier and mechanism of actions obtained and are other therapeutics. So, I wouldn’t want you to just take away the idea of line extension specifically to an existing configuration that were currently in the market.

Gregory Gilbert – Bank of America

Thanks.

Blaine Davis

Thank you.

Operator

Your next question will come from the line of Gary Nachman from Leerink Swann.

Gary Nachman – Leerink Swann

Hi good morning firstly in a couple of more in the guidance how should we think about the overall contribution from Indevus on the top line in the last quarter I think it was the run rate to do about a $100 million for this year, but it is based on how they recognized some of that revenue but I think you might be changing that can you talk about that.

Blaine Davis

Sure. So we are looking specific about the various contributions of the Indevus products I think you are right Gary we both change how we plan to record the revenue associated with those products. We will basically recorded we will not record the amortization of any milestones in our top line as Indevus as done historically. So, we will just look at basically the net sales of those products and record them in that past accordingly.

Gary Nachman – Leerink Swann

Okay so first thanks so we just record the royalties as they come in, are active in the record the sales of the other products.

Blaine Davis

That’s correct Gary.

Gary Nachman – Leerink Swann

Okay and then could you confirm for us. How much amortization some intangibles is actually included from 2009. And maybe the components of that you mentioned I think 30 million in 2008, for both care and just on if you give us that number that will be helpful?

Unidentified Company Representative

Greg again I dictated that’s a $30.8 million in 2008. As we highlighted in the release, in 2009 I expected to be about $56 million.

Gary Nachman – Leerink Swann

Okay and then a couple for Holveck. First, could you give a little bit more what was behind the decision to divest the expense and cash and – I guess specifically of the patch what came out in the meeting with the FDA?

David Holveck

Greg we yeah, let’s as you know we though it a - that the strategic review some of the – last year and being going on. And with the acquisitions as Indevus clearly we have expanded our late phase credit line and that just to some extent that changed their R&D priorities. And the such we make the decision to discontinue to the we had a good meeting with the FDA it was collaborative, and it was implemented, and it will be very helpful to accomplish going forward with the development-registered patch.

Gregory Gilbert - Bank of America

Okay.

Unidentified Company Representative

Just be able to followup through on that. I think that it is the whole our essence of how we want to guide this company, as a sustainable player both in the industry and for revenue growth. It was very significant as we – we looked at future with use of our dollars and – and that technology obviously the Indevus as I said first step, I think we presume the product pipeline aggressively I think the outcome of that let us decision was an easy one clearly to Ivan's point to the FDA went into that was positive and at the same point we had a make some tough decisions draw to dollars as well as priorities and what we believe will be best serve for our new direction here.

Gary Nachman – Leerink Swann

Okay and just fall in that point I guess that you deal with can you tell us what the terms for that and also how the product is differentiated and when we could see Phase III data thanks.

Blaine Davis

Yeah.

David Holveck

Terms are that we will pay enough upfront payment of approximately $30 million and then we also have the potential development regulatory and commercial markdown payments that less to a $100 million down the road. And the second part of question was.

Gary Nachman – Leerink Swann

Just how is differentiated and when we could see Phase II data.

David Holveck

We are going into Phase II studies this year I thought that sales and Opana we would hope to have I would say that towards the a lot of next year beginning in 2011 we are very intreat by its mechanism of action that size certainly we can we will be saying more about that as time there is no.

Gary Nachman – Leerink Swann

Okay thank you.

Blaine Davis

Thanks Greg.

Operator

Your next question will come from the line of Rich Silver from Barclays Capital

Richard Silver - Barclays Capital

Good morning, just perhaps could you elaborate on the managed care contracting I think we discussed some of the discounting that you saw in ’08 and it looks like maybe there was less impact in the fourth quarter and what kind of base or how should we be looking at going forward on Lidoderm and Opana. And then secondly, in terms of gross margin outlook can you give us some sense of that and then the trend there and then lastly any sorts on 2010 and an expectations for growth in 2010.

Unidentified Company Representative

So, relative to the managed care contracting, on Lidoderm and Opana as we have stated we continue to believe is to have impact on the residing of those products I think for different reasons. Again Lidoderm due to the majority of that products, we will expect to see discounts on that product and we reported to maintain formulary position. Again as we talk about last quarter relative to Opana we now have fairly broad based coverage to that product that was the decision strategically that we made due to those contracts on the managed care side again we hope to see obviously, there is contracting strategy that we – frankly into volume growth in 2009 and beyond. On the gross margin outlook, again as I stated, which we do expect to see a slight decline in the gross margin that is primarily associated with the Opana franchise and the net reality payments that we will be making to Penwest from this point forward. And lastly, to the question that 2010 outlook again we wouldn’t provide any specific guidance relative to 2010 at this point time.

Unidentified Company Representative

Let me just say a little bit I think this element of managed cares important – and we came on board I think there is the opportunities to as we’ve talked in my opening comments. So, that how we want to [Audio Disturbance] look at our organization, marketing organization – I think it was instrumental and bringing – importance of building out and managed care and the managed care or respiration given. What we saw strategically, in the future. And to our credit – here on this call but health credit we are well positioned to today as a result of that both into numbers the levels of the people they are involved and the position we’ve been able to secure and haven’t said that I think although we can forecast 2010 but I would say that we’re well positioned certainly to compete and what I considerate and involving industry trend of contracting.

Richard Silver - Barclays Capital

So that, just back on the gross margin so it’s clear other than the decrease that we would see attributable to the 10 months royalties. Do you expect the gross margin to be stable despite sort of ongoing price negotiations and fairly any aggressive price discussions with managed care?

David Holveck

Again that is correct and again I mean, I think what we, we try to highlight as stated there is a clearly lot of a contracting for 2009 it been complete at this point. So, we have a good – just to the relative rebate to expect, but again I think that’s the unclear at this point in time so your assumptions are correct.

Richard Silver - Barclays Capital

Yeah I think just if we get this chance we are going to get into the future so – as I also trying to indicate where we are not – relatively to were we are today it’s a continuing and build I think we assure you that we have targets for ’10 and it does includes include certainly the growth of these products for the long and beautiful lines growth as result of

Unidentified Company Representative

Okay, and just two quick ones, acquisitions this year, should we expect ones like that the one you have announced today or potentially larger ones and then last thing was just the share count declined 4Q versus 3Q, can you explain that?

Unidentified Company Representative

Well, let me take one. You know how we look at building that business, yes, I think that the strategic plan, and the aggressive aspect of the way I want to this, this company evolved and Bill, this going to be specifically against strong strategic lines. My belief is we are essentially all of what we are doing here, you relative to yes revenue growth and being able to leverage our base business and bottom line but I think you would agree and then in a context that are changing to healthcare systems, we are also positioning this company to be able to a highly respected competitor in this specially field that that we have target meaning pain so, when you talk about the size of deals and the aggressiveness, we want to go – we are going to look at this opportunities and we are going to look at those opportunities in light of, this market environment that creates things on some very good place sales force and I will comment on size but if they fit against this strategy and give us the type of growth that I want to see, we will go after that. I think a good deal can be certainly can be found and the good deal can be financed and put together, so, I mean its just start with the context about what we are trying to do is about building

Unidentified Company Representative

In a strategic area, and just adding revenues for revenue say going by, so with the question around the share count difference still again that was just the essentially that the full quarter impact of the some the share repurchase activity that completed during the third quarter. There was a very small monitory repurchase to beginning at the fourth quarter but that very small impact.

Richard Silver - Barclays Capital

And that’s a good base going forward.

Unidentified Company Representative

Yeah it’s a good base, still going forward.

Richard Silver - Barclays Capital

Thank you,

Unidentified Company Representative

You know, kind of the next question.

Operator

Your next question will come from the line of Corey Davis from Natixis

Corey Davis – Natixis Bleichroeder

Thanks very much and I think I heard all the questions in gross margin and maybe the one more point of clarification if on constructing this correctly if back half of year ’08 amortization it get a 81.2% margin for ’08 so and I know you said it will tick down because of rebidding, but what contribution to the downtick will there being incremental effect down from Indevus?

Unidentified Company Representative

The incremental negative impact for the process on Indevus is a - is really not material most of the decrease is actually related to, consider earlier the Opana royalty.

Corey Davis – Natixis Bleichroeder

Okay great and then, back to the tax rate too, I think you said it for the excluded items use the same is your GAAP rate of 38%, but if your adjusted tax rate is just 33.6% where is the benefit coming from if its not from the excluded items.

Unidentified Company Representative

There the assets, the benefit in the tax rate is primarily associated with the net operating losses that we picked up from Indevus at the driving factor in a difference between a net effective rate and the cash tax rate. that the cost savings associated with those net operating losses.

Corey Davis – Natixis Bleichroeder

Okay great and on the Gruenenthal deal, Dave did I assure you correctly that you are not going to see Phase II data for a while and I guess if some reading some of the old Gruenenthal press releases that looks like this thing was suppose to enter Phase III, filed so our both of those statements correct and if so why is it taking so long.

David Holveck

Ivan we are running with Gruenenthal flow rate of running Phase IIb programs this time which alined with the sort of indications in diabetics neuropathy pain and chronic pain that will actually pursuing with the agent.

Blaine Davis

Yeah but we can comment on the past I would say that as we look at the opportunity and I would again stick to I think clinicals intentions is to look at the U.S. opportunity and what the way we believe we can frame and put our talents against that not going to commit to guidelines but I think the past guidelines are really driven more of their perspective from the European market and again the ----- those trails so they are probably is going to be a doubt but I know that comment or I didn’t comment on break this point.

Corey Davis – Natixis Bleichroeder

I just wanted to make sure that given that's an NCE that there was an some sort of surprising stocks issue that popped up that put it on clinical hold for a while.

David Holveck

Let me tell you Dave when do this deal it wouldn’t be surprising at this point I can tell you that my line of experience in this industry spend a lot of time looking under the wood on this deals and this one was --- executed firms intelligents.

Corey Davis – Natixis Bleichroeder

Great and last can you confirm the pattern that exists on the compound is it a composition pattent.

Nancy Wysenski

Matter of fact expiring 2016 It’s a development timeline support to that factor be turn to up 20 to 21 and now started to filed application and file with the PTR right now, which should extent the light after 20 – 26 for that is just pending at this point.

Corey Davis – Natixis Bleichroeder

Right, thanks Colleen.

Unidentified Company Representative

We got any next question.

Operator

Your next question will come from the line of David Buck from Buckingham Research.

David Buck – Buckingham Research

Yes, thanks for taking the question. First, if I look at Opana in the recent settlement can you talk Dave about strategically whether you are looking at sort of filling that void after 20 – 2011 in terms of your core paying business or you still searching just and to really expand the pelvic pain in course of M&A from the timing of the settlement it look like you are essentially have the different view of Opana’s

Unidentified Company Representative

Again I think the Opana – maybe the back life aspect of the pattern relative to NDR is I think and it is that I’m going to share on your I think its its between all the past issues 2013 or 2015.

Unidentified Company Representative

Okay, 2013 and they are currently issued happen on 2020 – 2022.

David Buck – Buckingham Research

Okay, to that point I think we like again where that product sit in the marketplace in its growth and I speak up features. I’m really focused on new magnitude of action I think that relative to whether expense it all, to average point whether its harder or some of the other areas that we are looking at we think its an attractive market all some of the new mechanism of actions are slower in developing and maybe we are all so our efforts then I have to face are really focused on these new drug interactions that is not to say we wont look at ways to extent with the current drug interactions but at this point I think most of our development dollars and R&D are going to be more into, into the future I think again relatively and where we are today current deals that we announced I think we are – we are in position that is competitive by Mike will – no question.

David Buck – Buckingham Research

Well I guess, just forgetting about the pathway would the settlement I mean we’ll start to go in 2011. I mean that’s the issue I guess the question is what do you look at opioids, in terms of development or M&A and something the answer is

Unidentified Company Representative

At that standpoint okay at that standpoint yes we certainly are looking to be able to back bill from the, to that direction. I though we are targeting more and were strategic future is like.

David Buck – Buckingham Research

Well yeah okay more the question I guess but several.

Unidentified Company Representative

One point of clarification David on that again this is relevant to 7.5 and 15 milligram dosage range.

David Buck – Buckingham Research

Right correct, I guess for OPANA itself would you expect to have an authorized generic if generics come at this year from Endo?

Unidentified Company Representative

I don’t think we would comment at this point in time I mean, relatively to our IR we have the generics business but we would comment further on.

David Buck – Buckingham Research

Okay and just two quick once for the amortization is 56 million I think you said that’s mean good for this year?

Unidentified Company Representative

Yeah correct.

David Buck – Buckingham Research

If I take is that right.

Unidentified Company Representative

Yes right David.

David Buck – Buckingham Research

Okay so is it quite roughly $0.30 per share after tax as it excluded from the guidance, is that correct?

Unidentified Company Representative

That’s correct yeah.

David Buck – Buckingham Research

Okay, and for the Endo's revenues I know you are not giving specific guidance but on January 7 you put up rejections as far the tender are performed so net products sales of $56 million for '09 $138 million for 2010, $240 million for 2011, there also Endo's management prepare but what your current thoughts on those ranges.

Blaine Davis

I mean I think what I say there is for our Endo's for projections I think we are not in that rejections at this point of time everybody specific revenue guidance and our relative level of comfort with those, again through the due diligence of the deal we obviously look at these products and are excited to have them in house as David said we plan to close additional marketing support behind those products to continue to growth trajectory but I think more specific beyond that, relative the level of comfort around the Endo's specific numbers that we are put forth we wouldn’t comment any further.

David Buck – Buckingham Research

Okay would you expect point this year?

Unidentified Company Representative

I think relative to their performance again we will obviously just clearly indicate what their performances and our operating results but I …

David Buck – Buckingham Research

Right.

Unidentified Company Representative

At this point in time we didn’t comment with that we provide future revenue guidance on individual product launch.

David Buck – Buckingham Research

Okay, thank you.

Operator

Your next question will comes from the line of Ian Sanderson - Cowen & Company.

Ian Sanderson – Cowen & Co. LLC

Hi, good morning thanks for taking the questions first can you provide us any update on the discussions with alleging for co-promotion rates SANCTURA if there has any update. Second, just procedural step here what need to actually be completed to formally closed the Indevus acquisition and could you give us a little bit of guidance on what the pro forma balance sheet will look like post close and then finally what do your expectations for next two stage meeting with the FDA on the extended Opioid REMS programs.

Blaine Davis

let me started up on your – the covenants you played around the stage we are already talk about the alleging first yes, which I think Indevus announce with the extended their distribution agreement up to through the September of this year and relative to discussions yes as a result of our acquisitions we have open the dialogue with alleging and again I think we are in a position to add value because of our primary care position that we have and so, it sent it around that enhancement and see if we can – we could find way to move on a very positive existing relation.

Nancy Wysenski

On the vision of Indevus again as you know on Monday of this week we purchased 78% of their outstanding common stock to the our maturity of subsidiary of Endo right now we didn’t extent proper period until 5 o'clock today we are continuing to monitor that we hope to get 90% of the outstanding tenders that we can effect to short for merger and there is a top up option available in the merger agreement though in reality if we get 88% of the share hindered it on we can do it short fall merger if we don’t achieve that by the end of today we made to side to extend the offer for a additional period of time or go to long for merger out its still bit up in the year.

Ian Sanderson – Cowen & Co. LLC

And just with the regard your comments in the balance sheet we assume a specific I think couple of things that we can say tick up approximately $110 million in cash related to Endo's acquisition, right now we were undergoing sort of the fair value process to look at the combined balance sheet I think you can expect to have more clarity on that in the first quarter thank you.

Blaine Davis

Finally on the question said we're very pleased to be involved look forward to working with the FDA on the sort of strategy. We of course that want to predict the outcomes of the discussing to this point because its very early but we do clearly recognize the important initiates to mitigate and minimize the opioid abuse mids use and of course program in place with.

David Holveck

And just time for me go to next question.

Operator

Your next question will come from the line of Ken Trbovich from RBC Capital Markets.

Ken Trbovich – RBC Capital Markets

Thanks for taking the question I guess I wanted to focus on the performance of the contract sales organization. I know you’re not given specific guidance to our product at this point but its certainly seems that though with the product maybe well sort of the $200 million to $300 million it was put forth of time of the aquisition if you are unable to find that product to co-promoted that your intention to eventually eliminate that promotion sale forth?.

Unidentified Company Representative

I think the opportunities that as I again stated with the Indevus with our the current line and again to additional skill sets to be picked up for Indevus in neurology, endriconology area and mainly our plan is hold those lines – the sales people and their focus on those products and when you speak about, our VOLTAREN our primary care force and specifically the VOLTAREN we are going to hold those players in place and evaluate in this first half of then our direct reading on it so there is probably, a point in our ’09 plan so how we look at cost and utilization of those sales people, but it really wont be able to redeployment over mid year.

Ken Trbovich – RBC Capital Markets

Okay and then just with regarding the discussion with alleging if you are going to take on GP promotion for SANCTURA and you’ve already got the urology sales force potentially requiring that asset, this is license in co-promotion right.

Unidentified Company Representative

Yeah quickly get back commentary on that one just get scaling and your pullback and a little bit more reach on this hold up acquisition before I get to you

Ken Trbovich – RBC Capital Markets

Okay thank you.

Unidentified Company Representative

Thanks Ken. – next question please.

Operator

Your next question will comes from the line of Patti Bank with Pacific Growth Equities.

Patti Bank – Pacific Growth Equities

Yeah just on the Hycon technology can you talk a little bit about what your plans on for that I know in the past divest and I think as well look that couple of compound like Risperidone and Naltrexone and maybe talk about which molecules you think might working in that and then also on the R&D side for a clear tied I know in the past you have talked about assuming that you only need one trial is that based on the direct see back from the FDA with Endo's and now we still expecting to see that on that by year-end.

Blaine Davis

Okay so let me start with the talk a little bit about the high grown technology we've set before clearly this we thought this is very exciting and interesting as you know it delivers so a constant levels of drug for a long periods of time and so rather than bankers of course use for long lasting for up a year and then we will clearly the high had a flick in dollar in areas where compliance and stable blood levels are important to clinical care so clearly that have a lot of potential applications do you think about the CNX space for example are emanotherapy we haven’t we are not seeing specific about the direct that we are going to take at this point. Regarding I think the question was its clearly in Phase III study now in after we have had feedback from the FDA and its not inconsistent with what's previously being stated and we will be working with the FDA and getting a greater understanding of and the exhaust coming out of study over the course of this year.

Patti Bank – Pacific Growth Equities

And then just maybe two quick questions for Dave. I guess first, I assuming it about $20 million from the side in terms of cost savings from the G&A line and planning about the other 20 million from the Endo internally is that a safe assumption and then also can you just can give me the how much and idea of how much time you are currently spending on yourself looking at business development opportunities versus kind of running the day-to-day operations is that fully with right now.

David Holveck

Yeah I will let assumption part of it and let me different to we are not spending life time a good portion of by time yes it in the business development because it is so length to the strategic vision that. You know working under my time will be spend predominantly there and then the public policy side. Public policy in this industry at this point as much of driver at this development and so, those are the two areas where well I spend my time Nancy will clearly oversee the integration marketing as well as the – activities while I’m focusing on these areas.

Unidentified Company Representative

Comparing with your third question around the costs saving again, as we have highlighted earlier the majority of the costs savings that we had spoken about in the $40 million did relate to end of the specific activities that we would undertake I think that the $20 million contribution that you indicate around Indevus as a result of teams like high number from my perspective again we talked about continuing – the sales force infrastructure that manufacturing the capabilities which clearly our large components of that business and so again the majority of the costs savings that we would achieve in 2009 at the $40 million again its associated with end of specific program relevant synergies around the deal

Patti Bank – Pacific Growth Equities

Great, thank you.

Unidentified Company Representative

Sure, we go to next question please.

Operator

Your next question will come from the line of Scott Henry from Roth capital.

Scott Henry – Roth Capital

Thank you. I just want to talk a little bit more about Opana ER I mean given the new mechanisms of action in pain is a very challenging area to say believe you have a product which sells about 200 million and is growing. I'm surprised that you are not putting more effort into looking at new formulations or possibly in abuse resistant technology and I just want to get your thoughts on that?

Unidentified Company Representative

Well, I don’t know there, you are not I mean talking about it give me a little – in terms of what we will talk obviously about I think that, it’s just a drug indicated a significant part of our current business. The leverage in our current business provide us to grow our businesses, it’s a big part and how we are looking at again bad feeling to one of the other questions that I addressed on this - and what we are doing I know sure it’s not a abnormal activity here. So, - say in more than that for competitive reasons I know it’s like holding.

Scott Henry – Roth Capital

Okay, now I think that’s fair and that’s really what I was just kind of getting at. One other question if I could and this is more in general terms. If we look at the Lidoderm prescriptions, they have kind of rolled over at the beginning of the year, not dramatically but they’ve turned negative from time to time if you look at the weekly. Do you see any macro reasons for this we could this be somewhat a bit more economically sensitive than other drugs additionally could have been shift in the formulary status.

Unidentified Company Representative

I don’t know that you jump in a formulary status to your latter point I do think that we are still looking at the industry at March I don’t know that at this point we quite ourselves in a typical position relative to the economic impacts. Well I think our initiatives going through - and how that’s certainly through the healthcare industry is still months for waiting and so at this point I would say not up in a data points to close for a trend. I think the areas that I think we are at Lidoderm has that in terms of ’08 is to I don’t think that about - well it’s a contribution relative to looking at a better ways to our pinpoints against Doctors, who are managing PHN and if so doing I think the efficiency gain so, you may see some oxycodone waiting robust but I would generally it's a positive trend the only thing probably I would say is, I had equal data point growth in our industry.

Scott Henry – Roth Capital

Okay, thank you for taking my questions.

Unidentified Company Representative

Okay.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

We will go to next question

Operator

Your next question will come from the line of Michael Tong from Wachovia Capital Markets.

Michael Tong – Wachovia Capital Markets

Hi just a follow up from Corey's earlier question and Blaine you've mentioned gross margin is expected to trend down in '09, trend down from where is it prior to the amortization backing out or not?

Blaine Davis

That the trend down again is especially looking at it from the perspective of having backed out the amortization expense.

Michael Tong – Wachovia Capital Markets

Okay, so it's down from 81.3% and it's not down from 79% of sale?

Blaine Davis

That’s correct, Michael.

Michael Tong – Wachovia Capital Markets

Okay and then – and then secondly, this is the question for Dave or maybe for Ivan. You can systematically perch the R&D pipeline from their prior management and they have gone out and done some inlicensing activities of your own. Can you just talk about to us obviously what you see out a differences between, what do you perch versus what you broad in and is that the way that we have to think about your stock process going forward?

Unidentified Company Representative

Yeah, I think sort of small area usually were perched and I think we – yeah, we've made the strategic discissions against the strategic plan, and then coming into the window from our pass light and it referring to looking at attain from the perspective of, let's say the development product for generic – we were up there of obviously looking at – that franchise pretty early given the it is position, and acknowledged to where the expectations in terms of time that we will take for either new innovation and to our opportunities and that looks like in our near terms. And it's softly very limited. So, I think from the standpoint of the observation is before either - and then looking at the - products and looking at the growth plans and the projections that I wanted to see the company K. It – it dictated that we really needed to broaden our strategic footprint and move in that broader passion. So the decisions that we made on those for products were relevant to the strategic plans that I wanted to pursue, as well as the deliverable, so, when – when those dollars invested would return to the shareholders and I didn't see again that return in a timely passion. And when we saw the opportunities in this excuse me helping health area - we and then I believe these or that space along with the interrelationships with bank and we've just add to make those priority call that’s what we did, and that what we will continue to look at how it allow

Michael Tong – Wachovia Capital Markets

Thank you.

Unidentified Company Representative

Thanks.

Unidentified Company Representative

We will go to next question please.

Operator

Your next question will from the line of John Newman from Oppenheimer.

John Newman – Oppenheimer

Hi guys, thanks for taking the question. Could you tell us, what the value of NOLs, is that you gain from the Indevus acquisition. And then how much of that has been utilized in '09 and what you made use in 2010?

Unidentified Company Representative

Sure so – so that the total value of the NOLs is around $300 million, I think the benefit that we received from that, that as well will be captured over the next five years, so we're slight increase in 2010, and that will be consistent of that three years that, after that.

John Newman – Oppenheimer

Okay, and then I will turn could you talk about potential destocking [ph] that we might see during the first quarter since it appears that may have been an - between the sales and the demand based on the scripts in the fourth quarter?

Unidentified Company Representative

Yeah, I don’t think we comment and it fairly relative to you, but the inventory trends, around the February product

John Newman – Oppenheimer

Okay, thanks.

Unidentified Company Representative

Sure.

Operator

Your next question – Your next question will come from the line of Scott – from Credit Suisse.

Unidentified Analyst

Hi, guys quick question about the budget that came out and some of that Obama's comment. It seems to one our prohibits settlement between innovators and generics. I guess qualitatively speaking this is impact they're expecting anything in your mind and that might take place?

Unidentified Company Representative

You know I'm not up to the it is upside of the topical signed but sound bites that we've got in on that, going to minor comment that by my interest is that put a lot of my comment in Public Policy Agreement and again we're in the formal organization, want to come on that I don’t think the easy way and I have just stated comment at this point other than to say that its high of the schedule they get unite then understand exactly, what put the attention and specifics are that program we announced.

Unidentified Analyst

Fair enough, just we've quickly on a few things do you've anything meaningful in your guidance on the top line for

Unidentified Company Representative

I came the – no I guess I cant give you that what – what we've right now is the priority from the FBI ladder than we can move forward with the plan to start the mandatory process and that again is a gate plan that we have to get a hold on where we are encouraged and I see very positive because the FDA was again our all our operations have needs to look at exactly where and when we can we can launch it and that goes along with the consistency of making sure again your quality of runs in your inventory backed up to your marketing plans and all that just haven’t been done yet.

Unidentified Analyst

Fine. On the inventory further anything notable and stock in fourth quarter that might change for the sequential quarter or nothing vague?

Unidentified Company Representative

No nothing nothing it just watched us in a something like examinal [ph] Sir.

Unidentified Analyst

Okay. And just lastly will you have a full first quarter off [ph] in debris in the numbers or no?

Unidentified Company Representative

The assumption on the from the reporting standpoint, but it still may February 23, so that it will be a partial impact and that would be in the first quarter.

Unidentified Analyst

Okay. Thank you.

Unidentified Company Representative

Good thank you.

Operator

Your next question will come from the line of Gene Mack from Lazard Capital Markets.

Gene Mack – Lazard Capital Markets

Thanks for taking the question. Just quick on the Grant [ph] wall compound. Can you, I mean have in a high time a media deferred finding everybody as you are hard time finally leaping on a compound. Can you just give us a brief description or do you have a formulation how it’s delivered may be why. Is there anything about the formulation or may be how the compound

Unidentified Company Representative

No. It guides our development clearly at and as we said especially we don’t we can’t it’s difficult for us comment on what’s going to on as on optimal as said in the past, so it’s an all of our medication and and it does not have a normal mechanism action that does excite it and it’s or hence we sort of – we have to kind of walk with this.

Gene Mack – Lazard Capital Markets

Okay. Anything like a one to day dosing or multiple day multiple doses per day?

Unidentified Company Representative

Well they can enroll at this point to make that call. Again on a little bit, bringing or maybe more point on that and I don’t bring anything more relevant to the deal because of the competitive aspects on it?

Unidentified Analyst

Fair, and just for clarification. Is it in its final dosage one?

Unidentified Company Representative

At this point I’m not going to make any comments on that again I would like to retain again a little bit behind this, to say this position brought us in our main franchise be able to be brought at the sequential team.

Unidentified Analyst

Okay, thanks.

Unidentified Company Representative

Thanks. But just in the end of the time I think we have opportunities to take about few more questions.

Operator

Your next question will come from the line of Lei Huang from Summer Street Research.

Lei Huang – Summer Street Research.

Hi, thanks. Just a couple of questions to be clear on the Indevus deal closing I know you are incorporating in the guidance closing day of February 23 but I guess in terms of next step to own 100% of the company other than getting all the shares tendered is there is still outstanding SEC component or anything else that need to happen before the formal close.

Unidentified Company Representative

Another SEC waiting at the right waiting period expired is nothing between assignment closing.

Lei Huang – Summer Street Research.

Okay, so its just the tender part that's outstanding.

Unidentified Company Representative

Perhaps.

Lei Huang – Summer Street Research.

Okay and then as far as and how you report that Indevus contribution in the future. Will you have a separate line item for the Indevus related revenue systems or in your P&L when you report.

Unidentified Company Representative

We haven’t made a decision at this point time but I think as we breakout other products I think we would clearly provide transparency but would be specific at this point time as that how we are characterize that?

Lei Huang – Summer Street Research.

Okay, fair enough. And then just last question and you touch on this several times during the Q&A by I want to make sure understand this correctly and you said expectations for more deal announcement and for the rest of these year. Is the focus more on I guess is there more urgency on stage product or do you feel more comfortable with the leader stage pipeline outlook, because of the acquisition therefore you can focus more on early to mid stage. Is there I guess more urgency or waiting to one type of deal versus another in terms of stager development?

Unidentified Company Representative

Yeah, is the question – because you are asking that – we're really focused on a near term marketed products this point. I'd like to be able to add in to that relative to the strategic direction – and now there is near term I think we admit the long term not – enough public but at this point our focus would be marketed in near term oppertunities.

Lei Huang – Summer Street Research

Okay all right thank you.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

We got any last question please.

Operator

Your last question will come from the line of Tim Chiang from FTN Equity Capital.

Tim Chiang – FTN Equity Capital

Hi thanks. I know you can give much detail in terms of the operating expense numbers, but were SG&A and R&D margins change that much from '09 to '08 with the – acquisition?

Unidentified Company Representative

Again I think we don't want to go in to specific relative to the line items again clearly therefore the increase in – are related to be acquisition of indebt again as I stated I think our part of the increase in the operating expense – would be offset relative to the cost stating programs that we spoken. Beyond that I don't think we want to be more specific in that at this point.

Tim Chiang – FTN Equity Capital

Okay just a quick followup then do you have any plans in terms of – debt this year I know they have two pieces of the that I think one you will pay off the other one I don’t estimate it is a pretty high interest rate on. Right

David Holveck

Yeah I think the intention that you stated on the converts that comes to you in July of this year we would go ahead and pay that off relative to the non recorresponds. I think we are going to get too specific around comment of this but the financial aspect of that really are fairly expensive to pay that off in the near term they want don’t to be too specific about our intentions there but I don’t think we have any expectation that headed up at least in 2009.

Tim Chiang – FTN Equity Capital

Okay great thanks a lot.

David Holveck

Sure. Yeah just turn it back to Dave for some closing comments we will first of all I want get that sort of the audiences here as well as in the past and today relative to the question. So I think again when you put a – release with the amount of detail and information we got in it the questions, go a long way and helping clarify those specific point. But also hope the audiences understand what we are trying here – and what team has accomplished in the 10 months to 11 months I guess all be soon up to a year here, but in terms of being able to litigable say that we have a pipeline we have strategic directions. I think we have able to utilize our financial resources – and position ourselves for the future steps in terms of sustainable growth and in all of that I hope that again. We can – straight for you throughout ’09 not only our revenue not only our ability to leverage our base business and our EPS. So that we can position ourselves for the sustainable objective and strong growth of track. So that I will close and again look forward to future calls. And future questions. Thank you very much.

Operator: Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect. Have a wonderful day.

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Source: Endo Pharmaceuticals Holdings, Inc. Q4 2008 Earnings Call Transcript
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