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Endo Health Solutions (NASDAQ:ENDP)

Q4 2012 Earnings Call

February 28, 2013 4:30 pm ET

Executives

Blaine T. Davis - Vice President of Investor Relations & Corporate Communications

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

Julie H. McHugh - Chief Operating Officer

Alan G. Levin - Chief Financial Officer and Executive Vice President

Ivan P. Gergel - Chief Scientific Officer and Executive Vice President of Research & Development

Analysts

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Corey B. Davis - Jefferies & Company, Inc., Research Division

David G. Buck - The Buckingham Research Group Incorporated

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Traver A. Davis - Piper Jaffray Companies, Research Division

Elliot Wilbur - Needham & Company, LLC, Research Division

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Endo Health Solutions Earnings Conference Call. My name is Darcel, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Blaine Davis, Senior Vice President of Corporate Affairs. Please proceed, sir.

Blaine T. Davis

Thanks, Darcel. Good afternoon, everyone, and thanks very much for joining us. With me on today's call are Dave Holveck, President and CEO of Endo; Julie McHugh, Chief Operating Officer; Dr. Ivan Gergel, Chief Scientific Officer; and Alan Levin, Chief Financial Officer. Following our prepared remarks, we'll open the call to take your questions.

I'd like to remind everyone that every -- 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 this call, we may refer to non-GAAP financial measures that are not prepared in accordance with 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 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 earnings press release issued just a short time ago.

Now with that, I'd like to turn the call over to Dave. Dave?

David P. Holveck

Thanks, Blaine. I'm happy to have the opportunity to address all of you this afternoon. 2012 was a challenging year for Endo, and we believe that our investors are aware of that. And so we remain focused on improved execution in 2013.

We are prepared for leadership transition as well. Earlier this week, we announced the appointment of Rajiv De Silva as the next President and CEO of Endo Health Solutions. I'm excited to move on to my next chapter, and I believe that Rajiv is as well. When he takes the lead in a few weeks, I believe he will do so for an organization that is aligned around the objectives of continuing to improve the efficiency and performance of Endo.

But for the fourth quarter 2012, we reported revenues of $801 million and adjusted earnings of $1.62 per share. These results reflect a number of variables affecting our business, including solid growth in our Qualitest segment and steady sequential performances for OPANA ER and Voltaren Gel after disruptions in the -- to the supply chain of these products earlier last year.

Our reported or GAAP financial results reflect current estimates in terms of the evaluation of certain of the company's assets, including AMS, as well as some of the other potential liabilities associated with the legal matters and other related contingencies. Alan will discuss in further detail the effect of those items in a few minutes.

2012 exposed fragility in certain aspects of our supply chain, and, at times, we found it difficult to reestablish momentum for some of our key growth drivers. Our fragility affected the performance of OPANA ER and Voltaren Gel in early 2012. Voltaren Gel rebounded well, and we expect strong growth for this franchise in 2013. OPANA ER has stabilized, and we are focused on the long-term potential for the abuse-deterrent formulation.

Our Qualitest business had a solid year with 12% net sales growth despite some [indiscernible] bumps that we expanded capacity and achieved 7% net sales growth in the fourth quarter. First quarter 2013 sales are off to a good start, and we continue to expect low double-digit growth from this business as demand increases and we continue to invest in new production capacity. Qualitest has increased output significantly in the last 2 years from 10 billion doses in 2010 to 14.5 billion doses in 2012. And we believe strong demand for our products will continue to provide a volume-driven growth opportunity for our generics business.

Across all of our business, we were focused on delivering an improved performance in 2013. In branded pharmaceuticals, we are focused on growing all of our key franchises. Foremost, we are collecting an increasing body of data, and it supports our position that abuse-deterrent formulations can reduce abuse and misuse of an extended-release opioids. We believe it is important for clear regulatory and market boundaries to be drawn between the current abuse-deterrent formulations of products, such as OPANA ER and OxyContin, and the generic versions of their discontinued formulations that do not have abuse-deterrent formulations. And we're encouraged by the draft guidance FDA issued in early January that proposes a pathway for abuse-deterrent formulations to follow.

Now other top priorities include, as I discussed within Qualitest, we are focused on improving our operating efficiency and capitalizing on more of our volume opportunities. Our AMS and HealthTronics businesses are engaging with physicians and patients to raise awareness of our products and services in both domestic and international markets. When we invest efficiently in research and development to support our generics medical device and branded pharmaceutical business with new products that fit the commercial strengths of each of those businesses. And throughout the organization, we are sizing our infrastructure and prioritizing our investments in order to deliver the expectations we've set.

Now I would like to turn the call over to Julie McHugh to review our operations during the quarter. Julie?

Julie H. McHugh

Thank you, Dave, and good

[Audio Gap]

mentioned, my commercial team is focused on improving performance for 2013 and supporting [indiscernible] drivers for Endo. We're also committed to driving greater efficiency as we prepare for the first generic competitor for LIDODERM to launch in September.

Within branded pharmaceuticals, our #1 priority is the support of the long-term growth opportunity for OPANA ER. We will continue to advocate regulatory support of abuse-deterrent formulations. We believe that these formulations are an important part of an overall strategy in support of appropriate use. We have an additional quarter of surveillance data that indicates our abuse-deterrent formulation of OPANA ER is abused or misused at a rate that is 80% lower than the generic version of extended-release oxymorphone that were on the market in 2012.

We're encouraged that there has been solid commercial support for the abuse-deterrent formulation of OPANA ER. We continue to enjoy broad formulary access, and pharmacies have supported changes that reflect the lack of therapeutic equivalent between the abuse-deterrent formulation of OPANA ER and the generics of the old formulation. The result is a performance for the brand after the launch of generics of the old formulation that is in line with our current expectations.

Voltaren Gel performed well in the fourth quarter, as prescription volume grew sequentially and versus fourth quarter 2011. Comparisons will be easy in the first half of 2013, given the closure of the Novartis facility in Lincoln, Nebraska in early 2012 and the result in supply disruptions for this franchise. More importantly, we believe that we will grow Voltaren Gel throughout 2013, and that we have the ability to do so more profitably after revising our license and supply agreement with Novartis in late 2012.

We have also been more aggressive in creating access for FORTESTA Gel. Prescription volumes in the early part of 2013 are approximately double what they were during the comparable period in 2012. Most of the volume increase can be attributed to improved formulary positioning within a major commercial provider and a key government contract win. Not all of the incremental volume growth will translate to growth in net sales, but we expect strong double-digit net sales growth for FORTESTA Gel in 2013.

Net sales within our Qualitest business grew 12% for the full year of 2012 versus the prior year. Fourth quarter net sales were lower than we had previously expected, but we believe there will be an opportunity to recover some of that fourth quarter underperformance in 2013.

Fourth quarter's underperformance was driven by our announced recall of Hydrocodone products and an end of the year maintenance shutdown that resulted in a significant build of back orders of approximately $15 million worth of potential sales. We believe that there is a good opportunity to recapture a significant portion of those back orders in 2013.

Moreover, we remain confident in the ability to deliver sustained double-digit year-over-year growth within the Qualitest business. We have a number of recently approved but not yet launched products that have strong sales potential, and we have the opportunity to return to the manufacturing sale of MSER and immediate-release oxymorphone during 2013.

The range of year-over-year quarterly growth rates for Qualitest net sales from 7% in the fourth quarter of 2012 to 20% in the second quarter of 2012 largely reflects transient production interruptions as we expanded plant capacity. We expect to continue to invest in the expansion of our manufacturing capacity in 2013, and we believe we can do so with fewer supply disruptions as we will reduce some of the demand on our manufacturing footprint through selective use of outsourcing to help meet demand.

Nevertheless, it is likely in 2013 there will be variability in the quarterly results, but we believe continuing to invest in capacity growth for Qualitest is the right exchange for some near-term variability. We are confident in the full year projection of low double-digit growth in net sales, and we're off to a solid start in 2013.

Qualitest continued to experience strong adjusted growth margins and finished the full year 2012 in the low 40s as a percentage of net sales. We believe this reflects relative pricing stability in key product lines. And we haven't relied upon a continuation of these [indiscernible] opportunities in developing our 2013 financial guidance and believe that Qualitest's adjusted gross margins are more likely to be in the range from the high 30s to the low 40s as a percentage of revenues.

Sales in our AMS segment declined 6% in the fourth quarter 2012 versus fourth quarter 2011. Women's Health drove the decline with a year-over-year 18% decrease in sales. Net sales declines in Women's Health were driven by year-over-year declines in procedural volumes, reflecting industry shifts following the FDA's September 2011 advisory committee meeting regarding the use of surgical mesh in pelvic organ prolapse. We expect growth rates to improve in 2013 within Women's Health and, as a result, for all of AMS.

Full year 2012 sales for Men's Health increased 3% on a pro forma basis. We believe that basis is the best way to view organic growth for the business. On that basis, Men's Health has growth -- has shown growth from all major aspects of its business. We had net sales growth from both the male continence and erectile restoration product lines, and Men's Health grew in both domestic and global markets.

And overall, full year international sales remained strong for AMS and grew 10.7% on a pro forma basis, assuming the acquisition of AMS on January 1, 2011, and using a constant currency basis.

Longer-term, we are focused on returning AMS to growth while driving a revised, more efficient investment process to improve margins. Leadership transition and organizational changes at AMS were in key focus during the fourth quarter, and the result is a team with the right capabilities, organizing a way to support the goal of efficient growth.

That concludes my prepared remarks. Now I'll turn the call over to Alan. Alan?

Alan G. Levin

Thank you, Julie. I'll focus my initial remarks on our actual results, with attention to the detail of a few primarily noncash charges that affect our reported or GAAP financial results.

I'll focus on the fourth quarter results and touch on the full year result for certain measures. For the remainder of our financial results, I would point you to the earnings press release that we distributed before today's conference call. And I'll close with comments regarding our prospects for the full year of 2013.

For the fourth quarter, we had total revenue of $801 million comparable to fourth quarter 2011 revenue of $803 million. For full year of 2012, we had total revenue of $3.03 billion, up 11% over the full year of 2011. As a reminder, the acquisition of AMS was completed in late June of 2011, and thus, the full year reported revenues for Endo in 2011 include only 6 months of revenues from that segment.

On an adjusted basis, fourth quarter gross margin for the company as a whole was 68% of net sales. That result was in line with our full year expectations.

Total operating expenses for the quarter were $1.2 billion. However, on an adjusted basis, total operating expenses for the quarter were $217 million, reflecting a decrease versus the prior year adjusted total operating expenses of $280 million that's driven by the impact of operating efficiencies that we've been focused on delivering since the start of 2012. In addition, we implemented further changes to our infrastructure at the end of the third quarter that further improved operating efficiency in fourth quarter 2012. This significant reduction in expenses has reduced adjusted operating expenses as a percentage of revenues, and on an adjusted basis, total operating expenses as a percentage of revenue decreased to 27% as compared to 35% during the fourth quarter of 2011.

Our adjusted effective tax rate for the fourth quarter of 2012 was 33% and for the full year was 30.6%, consistent with our expected range of 30.5% to 31.5%. As anticipated, the adjusted effective tax rate in fourth quarter 2012 was higher than the full year rate as a result of higher pretax income, which decreases the relative contribution that we enjoy from a fixed amount of net operating losses.

Adjusted diluted earnings per share increased 16% to $1.62 [indiscernible] $1.40 in the fourth quarter of 2011. And for the full year 2012, our adjusted diluted earnings per share increased 7% to $5.02 versus $4.69 for the full year of 2011 and was in line with our previous guidance for the full year.

For the period, we have reported a net loss of $716 million versus earnings of $37 million in the fourth quarter of 2011. On a per share basis, that translated to a reported or GAAP loss of $6.35 in fourth quarter 2012 versus GAAP earnings of $0.30 in fourth quarter 2011. That decrease was driven by a set of one-off charges that are noted in our earnings press release that I'll describe now.

First, consistent with our signaling in early January, there is a material noncash charge in the amount of $714 million for the period reflecting asset impairments. The primary driver for this charge is a $640 million reduction in goodwill and other intangible assets attributable to the company's American Medical Systems business segment.

Second, there is a charge in the amount of $234 million for the period reflecting accruals for certain legal contingencies. The primary driver for this charge is a tentative agreement that we believe would resolve the ongoing investigation by the government that is focused primarily on the sale, marketing and promotion of LIDODERM. As a reminder, at the time of our third quarter earnings report, we accrued $53 million as a minimum estimate for this matter. The revised estimate results in a $141 million incremental accrual for the period and results in a total estimate of $194 million for this matter.

We reported cash flow from operations of $733 million in 2012. Fourth quarter 2012 benefited meaningfully from timing related to the resolution of certain legal contingencies and some transient working capital improvements. These items totaled approximately $80 million in 2012, which would imply a more normalized level of cash flow from operations of approximately $650 million. Repayment of debt and funding of capital expenditures remains an important use of our operating cash flow. Through December 31, we repaid approximately $360 million in term loans during 2012, and that raised our repayment total to approximately $650 million since the acquisition of American Medical Systems.

And with respect to our leverage ratio, we expect to achieve our goal of 2.5x debt to adjusted EBITDA at the end of first quarter 2013.

Moving on to our 2013 financial guidance. We are confirming today all of the details announced in early January. In summary, we continue to expect total revenues of between $2.8 billion and $2.95 billion. On an adjusted basis, we expect our corporate gross margin as a percentage of revenues to be between 64% and 66% in 2013.

We anticipate an adjusted effective tax rate of approximately 28.5% to 29.5%. We assume adjusted interest expense in the range of $155 million to $160 million, and we expect noncontrolling interest expense in the range of $50 million to $55 million.

We estimate adjusted diluted earnings per share in the range of $4.40 to $4.70. And now with improved understanding of the timing of certain GAAP charges, we are in a position to estimate reported or GAAP diluted earnings per share, which we expect to be within the range of $2.22 to $2.52.

Finally, for full year P&L guidance, we've based our per share estimates by assuming a weighted average number of common shares outstanding of approximately 115 million shares for the year ended December 31, 2013.

I'll close with a few thoughts regarding 2013 adjusted operating expenses that I believe will be important for modeling purposes. In first quarter 2013, we expect our adjusted operating expenses to increase sequentially by approximately $40 million to $50 million versus fourth quarter 2012. This increase can be attributed to 2 primary drivers: first, there are normal seasonal factors such as front-loaded annual investments in marketing and promotion that we would expect would increase expenses. Second, fourth quarter 2012 had a timing benefit from expense reimbursements, which offset expenses primarily incurred earlier in the year related to the Novartis supply disruption in early 2012. The timing of this reimbursement reduces actual fourth quarter 2012 operating expenses, and we believe it's important to consider when building a model for the start of 2013.

For the full year, we continue to expect a mid single-digit decline in adjusted operating expenses versus full year 2012, and we've recently completed some adjustments to our corporate infrastructure that should position us to achieve this objective.

For additional details on our 2013 financial results and guidance, please review today's earnings press release.

This concludes my prepared remarks, and now I'll turn the call back over to Blaine. Blaine?

Blaine T. Davis

Great. Thanks, Alan. That concludes the prepared remarks for the call. Operator, we'd like to open the call now to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Greg Gilbert with Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

My first one is about OPANA ER. What makes the company confident that the FDA will remove the non-abuse-deterrent oxymorphone products in May, if you could provide the latest color you have on that?

Ivan P. Gergel

Greg, it's Ivan. We were -- clearly, we were pleased to say they put out a guidance, and, obviously, we continue to work closely with them on the guidance. We think the epidemiological surveillance data that we're getting in is very supportive of what we expect these abuse-deterrent formulations should do it, supporting our original contention in this regard.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. Ivan, are you in the team focused on other abuse-deterrent formulations of oxymorphone? Obviously, generic companies are pretty quick to copy technologies, especially the simpler ones. Is there a program that you can speak to for other forms going forward?

Ivan P. Gergel

Certainly, obviously, we believe very much in the tamper-resistant -- these tamper-resistant formulation, now called abuse-deterrent formulations. We believe they do provide a benefit. And as I said, obviously, the epidemiological data is encouraging. And, as you know, we are a company very much focused in pain. And certainly, if there's something we -- if there's more we can do to help in the sort of the prevention of abuse, then it's certainly something we'll be looking at.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Okay. My last one is for Julie on the Qualitest front. Despite -- or in light of the recalls, are you confident that the facility and facilities are in good shape from an FDA regulatory perspective? And maybe you could talk about when the agency was last there and what any findings were.

Julie H. McHugh

Sure. Yes, I mean, we're obviously very focused on continuous improvement of our manufacturing processes, including our quality systems. And we're making some dramatic improvements in the course of the 2 years that we've owned the Qualitest facility. And we will continue to remain committed to all of those process improvements as we move forward. Our last inspection, we've got a number of different sites, as you know, manufacturing sites, that are focused on Qualitest. The last time we had FDA general GMP inspection was in 2011 in Huntsville and in Charlotte.

Operator

And your next question comes from the line of Chris Schott with JPMorgan.

Christopher T. Schott - JP Morgan Chase & Co, Research Division

Just had a couple of questions here. First, on OPANA, how should we think about realized price for OPANA as we go through this year? Has there been any impact at all from the generic launch on -- versus your rebating strategy? Anything we should think about on that front? And my second question was on mesh liability. What's your latest thinking about how we should be evaluating or how you're evaluating risk on that front? And can you maybe just give us any timing of initial cases we should be watching here?

Julie H. McHugh

So I'll take the first question. And with respect to OPANA and pricing and how to think about that, we do, as I mentioned earlier, have very strong formulary access for OPANA ER. We've been very successful with our initial interactions with payers in that we have extended our contract terms to payers for the new formulation. And we don't anticipate having to offer additional rebates at this time. In fact, many of the payers have been very cooperative and recognizing the value of these tamper-resistant formulations. And a number of major payers have chosen to block the generic -- block access to the generic versions that have been recently approved. So we remain confident as long as the FDA does, in fact, uphold our citizen petition and doesn't approve additional generic formulations that we have a growth facet on our hands for the years ahead.

Blaine T. Davis

And Greg, just -- Chris, just one more quick comment on the pricing. Remember when you're doing year-over-year comparisons to the performance last year, because the change in the dose mix overall decreased the overall percentage that 40 mg represented, you'll see, again, a little bit of a price differential there, but we expect that to kind of normalize as we move forward from this point.

David P. Holveck

Yes, let me just say a few words relative to the other question, relative to the AMS and mesh litigation. I think, first of all, in looking forward, we see each case as a very isolated and individual element, and I have the support on the facts. So I think we, again, are very heavy into looking at each one of those cases. I think the other element that is, I think, a step in the right direction in February of 2012, the multi-district litigation in the southern district of West Virginia, has consolidated the cases. And I think this gives us also some continuity because it's all under the same judge. So, again, our belief is that it is an element that is, what I'll call, under, obviously, very close management. And the next, I think, trial that we see is in May. So at this particular point, again, we feel again the number of cases, it should be reminded that the FDA was looking at pelvic organ prolapse. Most of these cases in hypersensitive cases are in stress incontinence. And, again, so these are very different clinical situations and, therefore, cast a very different light on the individual trials themselves.

Operator

Your next question comes from the line of Annabel Samimy with Stifel, Nicolaus.

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Just wanted to go back to the OPANA surveillance data. Are we going to be seeing any of this data updated in a public form? And do you have a sense as to how much the FDA needs to get comfortable before they can potentially change the label for either both OPANA, even OxyContin, because they seem to be lumpy in these 2 together? Because presumably, they have a lot of data for Oxycontin already. So if you can give us a sense of that, that will be great.

Ivan P. Gergel

So what I will say -- I think as I mentioned earlier, Annabel, the -- we've got a couple of data points at [indiscernible] surveillance data. We saw initially -- as you'll probably recall, when the original -- the original formulation of OPANA, there was a significant increase in the abuse after the crush-resistant formulation of Oxycontin was first introduced back in 2010. Then after the crush-resistant formulation of OPANA ER was introduced in early 2012, we saw [indiscernible] the original formulation of OPANA ER. And the other point, as Julie mentioned earlier, we see a dramatic difference in the abuse rates of our current abuse-resistant formulation of OPANA CRF compared to the generic versions of extended-release formulation.

Blaine T. Davis

And just on the front of making a lot of these data public, as you probably know, we did file a citizen petition earlier, which contained this data, making FDA, again, aware of the collection of the surveillance data. The information that we mentioned earlier in the script is actually just an extension of more of that data coming in, which largely reflects the original data set that we established, which is, again, reaffirming through that surveillance work that the reduction of abuse continues. We're currently in the process of evaluating the best way to take that data and ensure that it is communicated appropriately in a variety of different forms but have not made a final decision on that point. And then with regard to your question on the label, I think that the label is something that we are currently evaluating based on the guidance that was issued earlier. And we're taking into account some of the comments that FDA made in that regard.

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. But you still don't have a sense of how much data they need before they'd be willing to change that label to get comfortable with the abuse-deterrent property?

Ivan P. Gergel

I think the more -- obviously, the data is coming in. It's all going in the right [indiscernible] saying what we expected it would say, and it's pretty consistent not just for our product but also for Oxycontin. So -- and I don't think it's a surprise there. I mean, intuitively, one would expect these abuse-deterrent formulations to lower rates of abuse, and that's what we're seeing. From our perspective, as I said, the data, it's very encouraging and it's reasonably robust.

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. If I can move on to AMS for a minute. I mean, I guess, you've now had some leadership in place for a good maybe, I don't know, 6 months. And we can understand that maybe the Women's Health business is stabilizing quarter-to-quarter. It seems like it's coming back to growth. The Men's Health business though still seems to be on a sequential decline. So what are some of the things that you need to do to stem that decline that seemed to have been stabled before the acquisition?

David P. Holveck

Yes, I think the point -- the first point is probably the -- the core of the answer is at new leadership. I think that leadership with Camille coming on board in September, I think, in a period of time between September and now, the leadership team has been pretty much replaced. I think organizational alignments have changed. So I think the elements of the construct is a lot of the more efficiently organized. And, again, I think the leadership equally gives a more accountable direction. I think the elements of the points of consistent growth going forward are really going to be in a couple of areas, one, international, the other is obviously continued innovation. Training, I think, the reputation that AMS has, along with the medical training -- and I think it's appropriate to see, I think, on all of the device, especially in the implant areas. I think physician training is a real element of where their reputation is strong, and we're going to continue to build on that. Again, the other elements that I think take precedence in this sort of new world of health care is the wraparound value proposition. And I think the relationships that we have with HealthTronics, along with AMS, brings a greater presence in the urology practice, in the sense that you have now data, you have services, you have relationships such as the mobile elements. I think all of that creates a bigger dynamic and a more significant force in the urology sector.

Alan G. Levin

Maybe the only other thing I'd add to that is while there may be some quarter-to-quarter variability in the Men's Health, the year-to-date numbers show low single-digit growth for 2012, and we expect that to be a meaningful contributor growth in 2013. To Dave's point on the international side, constant currency terms, the Men's Health -- I'm sorry, all of AMS was up about 11% year-over-year. And we continue to expect that the Men's Health business now, with the advent of a new GM who recently started, should see good growth opportunities this year. We've got preeminent market positions in both erectile restoration, as well as male incontinence.

Operator

Your next question comes from the line of Corey Davis with Jefferies.

Corey B. Davis - Jefferies & Company, Inc., Research Division

I think you kind of answered this already, but maybe I'll ask it in a different way. The -- in your prepared remarks, you referenced 80% reduced abuse. Can you elaborate more on what surveillance system that came from? How robust is that data? And I'll ask it again, how long do you think it takes the FDA to put that kind of EPI data in the label? And does it require a label change for the FDA to make a determination as to whether or not the old NDAs for both OPANA and Oxycontin were removed for safety?

Ivan P. Gergel

Okay. Corey, Ivan. And I'm going to -- I don't know, I've got all the parts of your question, but let me talk to the first part of it, which was the 80% data. That comes from the inflection -- the Navapro [ph] database that we follow. It's based on a comparison of abuse rates, per 100,000 prescriptions from that database. And when we look at the rate for oxymorphone generics, we see a rate of about 250 abuses per 100,000 prescriptions. And we see a rate of about 50 prescriptions -- 50 abuses per 100,000 prescriptions for reformulated OPANA ER. So that's the basis for that data. And the...

Corey B. Davis - Jefferies & Company, Inc., Research Division

Sorry, can I stop you there? So that's not old OPANA versus new OPANA?

Ivan P. Gergel

No, that is a comparison of abuse for generics, current oxymorphone generics compared to the crush-resistant or abuse-deterrent OPANA currently on the market.

Corey B. Davis - Jefferies & Company, Inc., Research Division

Is that extended-release OPANA generics or immediate-release?

Ivan P. Gergel

Yes. That is -- these are both extended-release formulations we're talking about. So that's the 80% difference.

Operator

And your next question comes from the line of David Buck with Buckingham Research Group.

David G. Buck - The Buckingham Research Group Incorporated

Just one quick one for AMS and then a question on OPANA. At the Analyst Day, and I realized the guidance has been revised since then, but one of the goals was getting the operating margin improvement in AMS, I think, up by roughly 900 basis points. Can you talk about -- I know there was some change in management after Camille Farhat came in, but can you talk about what the current thinking is in terms of what the margin capture potential is by 2014? And then secondly, if we look at the FDA's decision, how relevant is the review of your original NDA for the tamper-resistant? Because, obviously, the barricades is that there's a differential between your formulation and the other brand that's being marketed as a tamper-resistant product. And what type of feedback, if any, have you had in terms of what ultimately the FDA is going to be using to make the decision on risk benefit and safety?

Alan G. Levin

David, it's Alan here. I'll take your first question with regard to AMS. We have made very good progress as we start 2013 in restructuring the cost base around AMS to rightsize it in accordance with the revenue trajectory for the company. Our goal has been to get to high 20s, low 30s operating margins by 2014, and we are substantially there. That reflects some restructuring of field force resources that was announced earlier in January of this year and some reductions in SG&A related to the infrastructure in the operating segment that were finalized and implemented in the latter part of 2012.

Ivan P. Gergel

So if I understood your second question, it pertained to sort of data in our original NDA for the tamper-resistant formulation. And what sort of data FDA is looking for when they review these products? And I said a lot of that information is contained in the guidance. They have various peers and various categories that you'll probably be familiar with. Clearly, we generated a considerable amount of back data when we put together our original NDA. But I think an important piece of the requirement is the post-marketing surveillance data or the epidemiological data, which is, I think, Tier 4. And as I've spoken to a couple of times, clearly, we're very encouraged by the data that is coming in. It's reflecting what we believe would be the effect of these agents -- these reformulated abuse-deterrent agents once they became available.

David G. Buck - The Buckingham Research Group Incorporated

Got you. Okay. And just one final one, I guess. If the FDA does, in fact, rule the other way in May, what's the expectation for sort of a Plan B or what the trade's view is on these non-tamper-resistant products? I mean, is there -- I guess, is there going to be -- opening of the floodgates for generics, I guess, is the question.

Alan G. Levin

Well, I don't think it's clear that, that would be the case. Even if the CP went against us in a May time frame, the FDA would still have to take action to approve other generic versions of the classic formulation of OPANA ER. That being said, our financial guidance for the year contemplates a range of outcomes for the totality of our business. And we are very encouraged by what we've seen with the results to date from the Impax formulation. It is a non-AB-rated formulation, so there is no therapeutic substitution at the pharmacy level. We believe, as Julie alluded to, that pharmacies are very much respecting that. And so we've seen very limited inroads from Impax into our market share to date. And we believe that any other formulations of generic OPANA ER classic that could come to market would be similarly non-AB-rated.

Operator

Your next question comes from the line of Shibani Malhotra with RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just a question again on OPANA, and this is more about, I guess, the recent Impax citizen petition where the company is claiming they've seen the actual surveillance data and that it may be abuse-deterrent properties. OPANA may not be what Endo suggests there. Can you comment on that? Because we asked the same question on their call, and they are very adamant. They felt that way. And then second, how should we be thinking about the risk reward? Or how do you think the FDA might be thinking about the risk reward around OPANA ER within some of the issues we've seen with the injectable -- the fact that people do inject the formulation and the side effects can be pretty significant on that front?

Ivan P. Gergel

Shibani, the -- yes, we're familiar, of course. Look, we base our data on both the Navapro and the radar systems, which are established systems, which are clearly recognized by FDA as the go-to bodies, if you like. And our data, I went through it a bit earlier on this call, but I think it's pretty compelling data. We compare -- when we look at comparisons between our current formulation and generic formulations on the market, we see a difference in abuse rates. We saw differences in abuse rates when we first brought our product to [indiscernible]. I think we very much stand by our data. It's robust and compelling.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Can you explain just so that we understand what they are saying? What is their issue with your data? What does that mean in terms of what they're saying you didn't do? It's not clear from the CP.

Blaine T. Davis

Yes, I mean, Shibani, so we're in the process of taking a closer look at the CP and evaluating some of the comments in there. I think that the presentation of the data is something that we have, again, to Ivan's point, aligned with the surveillance databases that collect that data and present that in a form with which FDA have asked of us. So I think that the presentation of that data is something that we've aligned with FDA on and something that they're, again, familiar with, relative to those databases being commonly used in this type of information. So, again, I think that some of the comments that were made in the CP -- and I think, again, it aligns with how FDA asked us to present the data. And to Ivan's point, we stick by it based on the strength of what it's showing in the reductions of abuse.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Okay, great. And then just a point about the risk reward on the injections.

Blaine T. Davis

Can you go ahead and repeat that question, Shibani?

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

This CDC has issued some warnings or reports of the risk side effects with patients who are trying to inject and are able to inject OPANA ER. And the reason I ask is, during the remarks you paneled a few years ago, the FDA seemed to be obsessed with necrosis in dark tissue with some LANOXIN [ph] injections. And their whole focus was on the fact that abuse ultimately will find ways to abuse. So how do you see or how do you think the FDA's views have changed on that, if at all, given the side effects of injecting OPANA ER?

Ivan P. Gergel

Well, so we've designed the OPANA crush-resistant formulation to be crush-resistant, to avoid primarily the nasal root of abuse. And clearly, we are looking into this data, but it's in a very, very distinct area of the country. And obviously, we've had discussions with FDA about it, and we continue to look at the data.

Blaine T. Davis

And, again, just to comment a little further. Remember, some of the most common forms of abuse related to the old formulation are precisely why the development pathway relative to the new formulation or crush-resistant formulation of OPANA were pursued. The data that we've collected in those 2 surveillance databases clearly show a significant reduction in abuse by those methods, which I think is some of the most important characteristics of the data we've generated so far.

Operator

Your next question comes from the line of David Amsellem with Piper Jaffray.

Traver A. Davis - Piper Jaffray Companies, Research Division

This is Traver Davis on for David Amsellem. I just have one. So any new thoughts regarding the approvability of Mylan's LIDODERM product? I know at the Analyst Day, you guys have brought the kind of difference between your aqueous base patch and their nonaqueous base patch. And then also, can you just remind us of the status of the other 2 filers on LIDODERM? I believe it's Noven and another filer that recently submitted applications.

Alan G. Levin

Sure. Trevor, it's Alan. So with regard to Mylan's application, we do continue to believe that a nonaqueous formulation could have some challenges with the FDA with respect to skin sensitization and approvability. That being said, even if Mylan's formulation were approved by the FDA, we believe that Watson, based on statements that they have continued to make, would enjoy first-to-file exclusivity. And so it would not be a 2013 impact with respect to the P&L. We [indiscernible] with 1 generic on the market, we would see a 30% -- we would retain a 30% market share of the product. And with a second generic coming to the market, that could drop to a 20% market share. Noven and TCI are the 2 other filers that stand behind Mylan. They -- we have sued both companies for infringement against the 4 remaining patents that are part of our LIDODERM patent estate. We believe as a result of that, 30-month stays are in effect, which do not expire until [indiscernible] tail end of '14 or the early part of '15.

Operator

Your next question comes from Elliot Wilbur with Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

Just switching gears a little bit, going back to the generic business. Julie, it wasn't clear to me exactly why gross margin in the Qualitest segment is expected to decline year-over-year.

Julie H. McHugh

We had some unique pricing opportunities in 2012 in a couple of key products that while we may realize some unforeseen pricing favorability in other lines of business, we're not anticipating that the pricing favorability that we saw in 2012 will be entirely sustainable in 2013. So it's a conservative, I think, position for us to take, recognizing that in the generics market lines of business and the ability to compete and the [indiscernible] changed lots of variability. So, again, we're really focused more on volume expansion to drive revenue growth than pricing favorability.

Alan G. Levin

And the other thing that I would add is we are expanding capacity in the Qualitest business. We're investing to capture some of the robust demand that we see for our products. We're looking at 15% increases in capacity annually through 2015. And so as we make those investments, that will have an initial impact on gross margin as well.

Elliot Wilbur - Needham & Company, LLC, Research Division

Got it. That's helpful. And then a follow-up question for you, Alan, as well. Obviously, per guidance reflects 1 potential scenario around the outcome with respect to the tamper-resistant formulation of OPANA ER, but you certainly have forecasted other potential scenarios as well. And it sounds, based on your commentary, that given what's occurred in the marketplace to date, that regardless of whether or not Impax stays on the market or we see additional generics, it sounds like you guys don't really expect that significant an impact on the OPANA ER franchise. And I just want to make sure I sort of understood your commentary correctly earlier.

Alan G. Levin

Well, we are very much encouraged by what we've seen so far since Impax has come to the market. We've guided to about $240 million in revenues for OPANA this year, and I think we're tracking in line with that guidance. For a generic to be on the market, we believe that they are non-AB-rated. That's based on the recommendations of 3 distinct compendia. And so the absence of [indiscernible] therapeutic substitution is a meaningful benefit. And we've seen modest erosion in our market share in the short period of time that Impax has been on the market. So worst-case scenario, where other generics came on to the market, we would similarly expect that they would be non-AB-rated. And as a result, it would be that much more challenging to make inroads into market share.

Operator

Your next question comes from the line of Michael Tong with Wells Fargo.

Michael Kallai Tong - Wells Fargo Securities, LLC, Research Division

Maybe just a follow-up quickly on Elliot's question. A different way to ask it is that, given the various scenarios that you've seen, is it fair to say that should additional generic competition materializes in the second half of 2013 on OPANA ER, that your guidance is not likely to change at this juncture? Second question for Ivan. Perhaps as you look at LIDODERM, the scenario is 1 generic. In the case of OPANA ER, the best-case scenario is that you kind of reachieve exclusivity position in the second half of 2013. So that's kind of manning the fort. So what gets investors excited in terms of new product opportunities that you can highlight, that potentially can come to market within the next 2 years?

Alan G. Levin

So with respect to financial guidance for the company, we have guided to $4.40 to $4.70 with respect to this year. So we've got a wide range on EPS, and that's expected to capture a variety of circumstances with regard to the company itself. Our assumptions on OPANA is that Impax comes off the market after the first half of the year. But if that were not to happen, that's certainly not to say that we would absolutely need to adjust guidance. As I said, I think our guidance range would contemplate a range of scenarios, perhaps not all of them but certainly a range of scenarios. And what's important to note is it is not just a function of whether or not generics come to the market but also a function of whether or not they're able to aggressively capture market share. And what we've seen to date would indicate a modest capture of market share at best.

Ivan P. Gergel

Michael, as for your second question, regarding the pipeline, I think, clearly, top of mind has been buprenorphine. We have 2 large Phase III studies ongoing. They are tracking on target, one in opioid-experienced patients, one in opioid-naïve patients. We are hoping to file at the end of 2014, and hopefully, we might see approval in 2015. The other one is our androgen receptor antagonist, which we refer to as ODM-201, which we're developing our finished partners, Orion. That is in Phase II. We have presented some data in the public forums at this point. There's a lot of interest, a lot of excitement. And we should be wrapping up Phase II quite shortly. And we're looking to go into Phase III towards the end of this year or early next year.

Operator

Your last question comes from the line of Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

I just had a couple of questions. Just trying to clarify, I don't know if you did the $92 million product liability. Is that directly related to vaginal mesh? And if it is, can you give us a sense of how you arrived at that number or some of the thinking behind it? Then I had a follow-up.

Alan G. Levin

Sure. So Ken, it's Alan. The $92 million is essentially related to mesh-related product liability. I would note that it is early days in this litigation right now with about 5,100 cases filed currently. We're encouraged that we've seen a multi-district litigation consolidation in West Virginia. So we've got one judge that is looking at the cases that are not only before us but for J&J and Bard as well. And there has been very little by way of either trial activity or settlement activity. So we are in early days, but we think that $92 million reflects an appropriate minimum to put on our books, given the portfolio of cases we currently have.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Okay. And when you make [indiscernible], is that a thought of -- that's your -- going to be your in total final outcome or is that just kind of how we get started and start alerting us to some of the accumulation of the actual cases?

Alan G. Levin

Well, it reflects our best thinking at this point in time, given where we are in the actual case cycle. So in many cases, we do not have yet medical records or confirmed product identification in a number of cases. Cases are filed against multiple plaintiffs. And so it's [indiscernible]. As we learn more information, we would reevaluate our reserves accordingly. But at this point in time, that reflects our best thinking based on what we know today.

Blaine T. Davis

Well, I just want to go ahead and wrap the call at that point. Thanks, everybody, for joining us this afternoon on the call. Jonathan Neeley and myself will be available this evening to answer any additional questions. Thanks very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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