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Endo Pharmaceuticals Holdings Inc. (NASDAQ:ENDP)

Q1 2009 Earnings Call

April 29, 2009 10:30 am ET

Executives

Dave Holveck - President and Chief Executive Officer

Ivan Gergel - Executive Vice President, Research and Development.

Nancy Wysenski - Chief Operating Officer

Ed Sweeney - Vice President, Controller

Karen Adler - Vice President Finance and Treasurer

Blaine Davis - Vice President, Corporate Affairs

Analysts

David Windley - Jefferies & Co.

Gary Nachman - Leerink Swann

Greg Gilbert - Bank of America-Merrill

Adam Greene - RBC Capital Markets

Ian Sanderson - Cowen & Co.

Rick Silver - Barclays Capital

Corey Davis - Natixis

Jim Malloy - Caris

Jim Dawson - Buckingham Research Group

Shibani Malhotra - Goldman Sachs

Gene Mack - Lazard Capital Markets

David Amsellem - Piper Jaffray

Scott Hirsch - Credit Suisse

Elliot Wilbur - Needham & Company

Patti Bank - Wedbush Securities

Scott Henry - Roth Capital

Michael Tong - Wachovia Capital Markets

Tim Chiang - FTN Equity Capitals

Operator

Good day, ladies and gentlemen and welcome to the first quarter Endo Pharmaceuticals earnings conference call. My name is Kamra, and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a remainder, ladies and gentlemen, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today Mr. Blaine Davis, Vice President of Corporate Affairs. Please proceed.

Blaine Davis

Good morning, everyone and thank you for joining us. With me on today’s call are Dave Holveck, President and CEO of Endo, Ivan Gergel, Executive Vice President of R&D and Nancy Wysenski, our Chief Operating Officer. After our prepared remarks, we will open the call for your questions, with Ed Sweeney and Karen Adler from our finance team group will help to answer.

I will 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 this call, we may refer to non-GAAP financial measures that are not prepared in accordance with the accounting principles, generally accepted in the United States and that may different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Endo’s current report on Form 8-K filed with the SEC earlier today for Endo’s reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning.

Now I’ll turn the call over to Dave.

Dave Holveck

Thanks, Blaine. I’m very excited about how far Endo has come since I’ve joined the company last year. Now, that may sound like a self-serving statement, but when you look at what has been accomplished year-over-year, it is truly a credit to our management team and the support of our board.

We’ve diversified our commercial business and pipeline beyond pain management and repositioned the business for solid future growth. We developed a new business model, a broader therapeutic focus and a more capable, specialty infrastructure to meet our growth objectives and respond to the changes of our industry that is likely to see major change over the broad-based healthcare reform agendas that’s in front of the legislative today.

We’ve made a major move into urology and oncology, with our acquisition of Indevus and are now generating new product sales and preparing to launch two new products in the next six months. We’ve shifted strategies to become a provider of integrated healthcare solutions to patients in multiple disease areas and I believe we now have a diverse commercial organization with broader capabilities to help realize that vision.

We’ve also undertaken an entirely new approach to R&D, which Ivan will describe in a moment. Our diversification strategy is paying dividends and creating new business opportunities for Endo. I believe we’re on the right path to achieve our long-term growth targets and that the company is in a much better shape to get there.

Our financial results show we had a strong first quarter, with solid cash flow from operations to support the future growth of our organization as we continue to build the business. We remain focused on business development activities and I expect to see us execute additional deals that support our strategy to diversify our business and support future sustainable growth. Our strategic use of cash and our future investments will remain focused on opportunities that provide the best return for our shareholders.

In summary, we’re building a new company that we believe can prosper in challenging times and across multiple therapeutic areas by maintaining our leadership in pain management, offering new products in urology and oncology, providing viable medical solutions to all of our customers and taking on exciting new R&D opportunities. I’m confident that we have the resource and the talent to do all of these things.

Now, I’d like to turn the call over to Dr. Ivan Gergel, to describe in more detail the capabilities of the R&D organization, he has built over the past nine months. Ivan.

Ivan Gergel

Thanks, Dave. Both the changing healthcare environment and the company’s new business model have required that we create a broader R&D architecture to support Endo’s products and future business plans. We’ve responded to this challenge in a number of ways. First and most importantly, we’ve acquired the expertise we need to support a larger and more diversified business.

We now have new senior staff in place to manage pharmacoeconomics, clinical operations and biostatistics. Pharmacoeconomics is a clinical area for us that we’re in the process of expanding. This team is currently focused on the upcoming launches of Nebido and Valstar and will be a critical component as we prepare to communicate the value of these products to pairs. I believe our capabilities in this area are essential to demonstrate the value of our products and to support our commercial business as pairs have increasing influence over prescribing behavior.

Second we’ve reorganized our medical affairs group to focus on each of our therapeutic interests in pain urology oncology and we created a field-based group that will be dedicated to pharmacoeconomics and health outcomes and third we’ve shifted our generic strategy to focus not just on ANDAs, but also on 505(b)(2) filings that we believe will help drive our future growth.

With recent senior level additions to our R&D staff, the reorganization of Endo’s R&D group is largely complete. We now have the capabilities to pursue discovery and about development across a much broader therapeutic spectrum. We’re also much better organized to support our business development team.

Over the past year, we’ve reconfigured R&D to be much more flexible and scalable to take our multiple projects into oversee and then in efficient and cost effective manner. Our team has the experience and talent to manage multiple discovery and development programs such as the collaborations we announced recently with urology and oncology and with Harvard University and Grunenthal in pain management.

At the same time, we also have the capability to evaluate our new technologies such as the HYDRON drug delivery systems can expand our product portfolio. The integration of the Indevus development team with our R&D organization is proceeding extremely well and together we are aggressively exploring therapeutic options for HYDRON.

At this point it will be premature to comment more specifically, except to say that we are very excited about the therapeutic options for this unique drug delivery technology and the platform it represents for future growth.

We’ve done a lot to strengthen our approach to R&D and I believe we now have the expanded skill sets and leadership team to manage our programs internally to make decisions quickly, to manage vendors and risk affectively and to undertake new products successfully.

Now, I’ll turn the call over to Nancy, for her review of Endo’s first quarter commercial performance. Nancy.

Nancy Wysenski

Thanks, Ivan. We had a good first quarter with a 16% increase in net sales over last year’s first quarter. A number of market dynamics affected our first quarter results. Sales of our generic and non-promoted products were very strong in the first quarter due to a shortage of other opioids and new support we’ve put behind Percocet. The strong performance of our generics and non-promoted brands was not only encouraging, it also speaks to the value of having a diverse product portfolio and selling both branded and generic specialty products.

Lidoderm remains a strong product for us as the brand continues to generate good cash flow to support our future business growth. The decline in Lidoderm sales year-over-year was mostly a result of a first quarter inventory work down by wholesalers and a change in formulary access with New York Medicaid. As well as other shifts in regional managed-care coverage that occurs each year’s contracts are renegotiated.

We’ve taken a number of steps to strengthen the Lidoderm franchise, including refining our physician targeting and introducing new professional efforts to support the brand. We’re also continuing to redirect our managed care efforts regionally, as I’ve discussed on previous calls and increase our caregiver and patient education activities and post-herpetic neuralgia as part of our communities of care initiative.

We’re partnering with the National Pain Foundation, the National Council on Aging and The Visiting Nurse Associations of America to launch the Patchwork for Hope Network. This program targets older Americans and caregivers and is designed to raise awareness of PHN symptoms and the treatment options. We believe these activities will be successful in maintaining Lidoderm’s leadership in the PHN market.

The Opana franchise had a strong quarter, as the product continues to steadily gain market share in a competitive class. We’ve heightened up our physician targeting for Opana and these efforts are beginning to pay-off. In addition, our strategy to aggressively contract with managed-care continues to produce solid increases in volume, as we broadened our access for the brand.

Voltaren Gel sales were $12.3 million for the quarter and prescription trends were good and on track with our forecast. We recently modified our packaging, with the product now being offered in boxes of three or five tubes. We believe this effort will improve our tubes per prescription.

Last month, we also announced our support of a new national osteoarthritis disease awareness campaign, to educate the nearly 27 million Americans, who suffer from osteoarthritis and how they might manage joint pain and maintain their physical fitness.

Sales of the newly acquired products, Vantas and Supprelin were also strong during the quarter, reflecting high satisfaction among patients and physicians and the effectiveness of our sales and marketing teams for those brands. With the integration of Indevus complete, we’re now beginning and will continue to shift some of our sales and marketing resources to put additional reps and dollars behind those products to continue their positive momentum and solid growth trends.

We’ve also extended for six months, our co-promotion agreement with Allergan for Sanctura XR, which will run through the third quarter of 2009 and very pleased to announce that all of the Indevus urology and endocrinology sales reps have agreed to join Endo, which is exciting and creates new opportunities for all of our sales teams, especially as we prepare for the launches of Nebido and Valstar.

We’ve been able to reorganize our entire sales team and marketing organizations into therapeutic areas and put in place new leadership of these commercial business units. These adjustments are enabling our commercial organization to support a much broader product pipeline in multiple therapeutic categories, all of which of course also bodes well for future product sales and our ability to acquire and support additional products.

That concludes my remarks. So, I’ll turn the call back to Blaine to provide a brief review of our first quarter financials.

Blaine Davis

Thanks, Nancy. Just like to take the opportunity to remind everybody that our first quarter financial results include the integration costs associated with the acquisition of Indevus as well as sales of Indevus products and our operating expenses as of February 23.

For the first quarter of 2009, we had net sales of $335 million, up 16% over the first quarter of 2008. Selling, general and administrative expenses were $120 million for the quarter, while R&D expenses were $28 million. First quarter adjusted net income was $79 million, up 16% over the first quarter of 2008. Our diluted earnings per share declined to $0.33 versus $0.44 in the first quarter of 2008. While our adjusted diluted earnings per share rose 31% to $0.67 in 2008.

As mentioned previously, our generics in Opana franchises helped drive our solid top line performance for the quarter. In addition, we affectively managed operating expenses as we focused on completing the acquisition and integration Indevus and where we also evaluated opportunities or additional investments in our newly acquired products Supprelin and Vantas.

This concludes our prepared remarks. We now like the operator to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Windley - Jefferies & Co.

David Windley - Jefferies & Co.

Can you talked about the reorganization of commercial resources around therapeutic groups. I think in the process of evaluating the effectiveness or usefulness of the contract sales force and I wondered if you could elaborate a little bit on how that may or may not fit into your plans going forward?

Nancy Wysenski

Well, as you know the contract sales force was seen as an extension to our generalist sales force, at the point that we licensed and launched Voltaren Gel. That was effort is now just about one year underway has been very successful, we’re pleased with the results and we’ve also been able to assess what the broader group of targets that we started with, where we have really successfully impacted the marketplace and where we can pull some of that effort away.

So, we are actively reconsidering the size of the contract sales force as we feel that we are really right size in terms the not only our generalist and pain specialty forces, but now our urology and endocrinology sales forces and we are likely to be able to actually make some decreases in the number of contract sales reps needs as we’ve gotten through that launch phase of Voltaren Gel.

Operator

Your next question comes from Gary Nachman - Leerink Swann

Gary Nachman - Leerink Swann

On the weaknesses in prescriptions for Lidoderm, could you just describe what the dynamics are in that market? I’m actually losing share to Voltaren Gel and have there been any changes in promotions efforts on Lidoderm and also we expect some of those declines to turnaround and then how much pricing pressure if any, are you seeing from formularies?

Nancy Wysenski

As you know, probably the TRX growth for Lidoderm was down 1.6% and yes, the net sales declined 4.5% and I want to reiterate that of course we don’t give product specific guidance, but I would like to talk to some of the various factors that have or can likely affect product performance quarter-over-quarter.

We believe that the changes in inventory during the first quarter reflected a network down and that maybe one of the larger factors. We do expect those inventory levels to rise again overtime and consistent with the DSA agreements that we have, the distribution service agreements with wholesalers.

However, the economic environment has had an impact on prescription trends. I think across the board, probably had some affects on Lidoderm as it is an add-on therapy in many cases used in combination with other drug that are prescribed to treating post-herpetic neuralgia.

With all of that said, we also have had some affects from the loss of Medicaid in New York as we spoke to last year. As you know, that state put us on a prior off and we think we’ve seen the vast majority of the impact on that. As you would imagine, when these accounts are lost, you actually give us some volume, but you pickup on price and that’s why I mentioned in the script that we are continuing to focus on our regional managed-care efforts. So, that we can promote the drug actively, where we know there are opportunities.

Gary Nachman - Leerink Swann

Just I guess, you didn’t address, are you losing any shares or the other products in the category and it sounds like, you won’t really see more pricing pressure from those going forward from there.

Nancy Wysenski

Yes, we don’t expect in 2009 to see a lot of additional pricing pressure and as Lidoderm is one of few drugs indicated for post-herpetic neuralgia. I can’t really speak to other indication that Flector would be used for, but we are seeing net gains in our prescriptions for PHN.

Operator

Your next question comes from Greg Gilbert - Bank of America-Merrill.

Greg Gilbert - Bank of America-Merrill

Thanks, a follow up on Lidoderm. Nancy, aside from prescription demand and things that affect that, how should the net sales per prescription change in ‘09 versus ‘08. You mentioned inventory change, which obviously impacted things, but that aside, should net sales per prescription be up, down or flat in ‘09 versus ‘08?

Nancy Wysenski

We don’t expect significant changes. Those numbers will bounce around over the course of time, but we don’t expect a significant change in that trend.

Operator

Your next question comes from Adam Greene - RBC Capital Markets.

Adam Greene - RBC Capital Markets

I was hoping you could update us on the Opana ER litigation with impacts. I believe your trial had been scheduled for November. Is that still accurate? The next step in the case, if you would and also I think about a year ago you had explored settlement talks with impacts, if there’s any update regarding that would be great.

Dave Holveck

So, getting to the latter part of the question first, we wouldn’t comment on any discussions that we would have with any of the Paragraph IV challengers that we have. I think as we talked about last quarter, we did execute a settlement with Actavis, with two of the dosage forms for Opana ER. Relative to your question on the timing of the litigation, it’s on going and I think we don’t have any specific dates that we’re in a position to discuss at this point in time.

Adam Greene - RBC Capital Markets

So, is the trial still scheduled for November or not?

Dave Holveck

At this point, I can actually get back to you relative to the exact scheduling of that.

Operator

Your next question comes from Ian Sanderson - Cowen & Co.

Ian Sanderson - Cowen & Co.

Another Lidoderm question and could you update us on the number of reps, who currently have Lidoderm as their primary detail and how that has changed over the past couple of quarters and if I could sneak in a quick factual one on Voltaren Gel, the current tubes per prescription there? Thanks.

Nancy Wysenski

Sure, let me see if I can hit both of those for you. Lidoderm is promoted by of course our generalist sales force of 360 reps, which has historically been dedicated to supporting our pain products, but in the future will also provide generalist support for our newly acquired products in urology and endocrinology.

In addition, Lidoderm is supported by an additional 160 of our pain specialists and during the second half essentially of 2008, we had some additional calls coming out of the contract sales organization. So, we believe that Lidoderm has good support and in fact the research shows that we do own the vast majority of the share voice in that marketplace for PHN.

On Voltaren Gel, we’re actually doing quite well there. Even though, the three and five packs are really just beginning to hit the market. We had achieved the 2.24 tubes per script average and that’s right in line with what we were predicting for this year. So again, we’re hoping, we’re going to see some additional upside from the launch of the new packages and we’re pleased with the way both the total prescription as well as the growth in tubes per prescription are moving for Voltaren Gel.

Ian Sanderson - Cowen & Co.

Could I quickly, follow-up on the Lidoderm numbers. How would you expect that to change in 2009, especially if CSO gets whittled down?

Nancy Wysenski

The CSO essentially has always promoted Voltaren Gel in its first position. So, I want to be very clear, that the reason that we’re considering pulling back on the contract sales organization is because we’ve had a successful launch for Voltaren Gel and we wouldn’t require that amount of effort moving forward and again we’ve learned, where it was effective and not as effective.

So now, we can really hone our targeting. Lidoderm was a secondary call to really share some of the overhead across the cost of that sales force. Now we’ve just completed a new analysis and we are very confident that we can actually increase the number of Lidoderm calls for the remainder of 2009 and then later launch Nebido by using the sales forces that we currently have and achieving actually levels that are even greater than the total PDEs that we’re delivering right now for Lidoderm.

Operator

Your next question comes from Gregg Gilbert - Bank of America-Merrill.

Gregg Gilbert - Bank of America-Merrill

Blaine or someone else, can you describe the market shortfall in the generic market that you alluded to and why should we not continue you to expect it to benefit from that on a more permanent basis?

Blaine Davis

I think the disruption that was related to a couple of different factors. We did see some manufacturer shortfalls from some of the competitive elements in that space. So, that was one of the pieces. I think some of that is likely not to be sustained, kind of beyond the second quarter. It’s a little bit too early to really say exactly, how long it’s going to last and how long the shortages will potentially last on the manufacturing front.

I think the other piece to some of the performance in generics business in the quarter, also associated with some of the other third parties that supply generic opioid. So, we’re able to capture some of the benefit of those two factors in the market. Again I think, the sustainability of that at this point, we do expect it to continue through some period of the second quarter.

I think it’s again a little bit unclear, as to how long that will last, but certainly it was a strong upside performance in the first quarter that we were able to benefit from. I think, again, going back to Nancy’s comments that she made in her script. I think it does speak to the value of having a diversified business. Both on the branded and generic side and I think the upside benefit that we saw in that business, while it was unexpected, it was certainly supportive of the strategy that we have for the business.

Gregg Gilbert - Bank of America-Merrill

Would it be fair to conclude that the quarterly sales level for generics ought to be higher than and it had been for many quarters in the past, but not quite as high as it was in Q1, is that a good way to think about it?

Blaine Davis

Yes, I think that’s a reasonable way to think about it. It’s always tough to partial out what it would have been in the events didn’t happened Gregg, but I think it’s safe to assume that the sales would have been higher. I think, again another point to make, we have put some additional support if our generics business.

More specifically around the development side in that area, but we’ve also initiated some campaigns around Percocet as well to increase awareness there. So, those are some strategies that we think have provided some benefit to that area of the business.

Gregg Gilbert - Bank of America-Merrill

One for Dave, if I could; Dave, what are your most burning priorities right now in terms of external activity business development priorities? I know that you painted the picture of what you’d like Endo to look like down the road, but how are you thinking about the order of things, the order in which things occur from here? Thanks.

Dave Holveck

Again the direction that we said is that, strategically with the addition of Indevus both infrastructure as well as the products. I think, when you look at the products that we have there notably that focus in urology space as well as endocrinology and then more specifically against the specialty of urology and the urologist, what I want to be able to see us do is fill that out, if you would with the ability to add more products to give a more complete solution and a more efficient call point relative to our reps that are in that franchise.

Don’t take me wrong in a sense that we’re not looking at how to advance the pain. We certainly have opportunities there, but your question, “How do we see our prioritization?” I think, first thing is to be able to fill out more products in the urology sector, where we have now a position and then equally, continue to source where possible opportunities in the pain franchise.

Operator

Your next question comes from Rick Silver - Barclays Capital.

Rick Silver - Barclays Capital

Given the importance of the inventory shift on Lidoderm, it sounded like that was the number one reason in the quarter, regarding the trend, can you tell us when you would expect the inventories to rise again and at sort of what level relative to what we’ve seen in the past and then just on SG&A, can you give us any sense of trend line there, how we should be thinking of it on a quarterly progression?

Nancy Wysenski

Yes Rick, I’ll take the first half of that question. I think that, you can expect Lidoderm inventories to shift slowly throughout the next quarter and even the rest of the year. I’ll turn the other half over to Blaine.

Blaine Davis

So Rick, on the SG&A line, I think as we had talked about, we did have some cost containment in the first quarter, some of that activity was associated with making sure that we integrated and executed against the Indevus transaction. I think the other element in the first quarter that you saw was evaluating potential investments that we could put behind products that we inherited from Indevus including suppose Supprelin and Vantas.

So we’d expect an increase in SG&A over the year. Again, as we talked about on the last quarter call that we would anticipate a year-over-year increase in SG&A albeit that increase would be slight, remember also that the increase in our operating expense line broadly both R&D and SG&A, what’s going to be offset by the $40 million in cost savings that we are well in route to execute against during the year. So, again an increase in SG&A throughout the year, but again, offset by the cost savings that we are in the process of executing again.

Operator

Your next question comes from Corey Davis - Natixis.

Corey Davis - Natixis

Just a couple of questions, first, on the logistics of implementing the new REMS program for Opana. What’s it like interacting with the other 16 companies out there? Do you have direct interaction, because I can imagine the competitive dynamic would be a little bit weird talking to them about this or is it just more of a passive role waiting for the FDA to tell you more about what to do?

Dave Holveck

Obviously, we do have a REMS in place already for Opana, that’s something and that what something that we worked very closely with FDA to put in place. Clearly, we feel it’s very important to work with the FDA to ensure that the clot and specifically Opana ER remains available for the appropriate patients and we are working collectively with other companies and the agency to try and optimize the REMS program.

Corey Davis - Natixis

I don’t suppose you’d want to offer a timeframe at this point for when something would actually…

Dave Holveck

I can’t do that, now.

Corey Davis - Natixis

I guess, well I’ve got you. Another question, I know you’ve been very secretive about your pain project with Grunenthal, we understand that, but at what point do you think you would be able to talk more about the attributes of that product especially as J&J starts to makes a bigger push with axomadol?

Dave Holveck

So, that the product of course the axomadol and we’ll going to Phase II B studies as well as and Grunenthal going to Phase II B studies at the end of this year. These will be significant programs. So, I think the best time to talk about those more extensively, when we have some outcome from those studies.

Corey Davis - Natixis

Sometime in 2010 or would it take longer than that?

Dave Holveck

It may be the end of 2010, beginning of 2011.

Corey Davis - Natixis

Last question on Voltaren Gel, well first question is how long do you think it’ll take for the one tube inventory to work its way through the system and should we think of it as we’ll probably see a drop in prescription volume from IMS, but that will be more than made up for in the value per script from the number of tubes per script?

Nancy Wysenski

We believe that the majority of the single tubes have worked through the system now, and we’re seeing pickup on the there and five. Even though, of course we’ll have to deal with revenue recognition issues about, how quickly those are pulled through, but your assumption is absolutely correct.

As you’re aware our wreck costs as of January of this year is 2309 and although we’ll take some slight discounts in order to get those new packages stocked, we expect that price to carry forward in prescriptions that will be either three or five times, the average that we’ve had and therefore, less frequently written, you’re absolutely right. We do not expect that all single tube prescriptions will vanish, but we do expect them to decline.

Corey Davis - Natixis

Last question, probably for Dave; any update on your search for a new number to CFO?

Dave Holveck

That’s correct and that search is I think going along very successfully. I’d look for a special set of qualities, which I think I found and we’ll see an announcement imminent on that aspect.

Operator

Your next question comes from David Buck - Buckingham Research Group.

Jim Dawson - Buckingham Research Group

It’s Jim Dawson for David Buck. You did talk to the Lidoderm inventory and tractions during the March quarter, what about your other branded drugs, any other inventory movements or shift there?

Nancy Wysenski

Yes, it was an interesting quarter because we had inventory impacts on really three out of the four. So, we’ve talked about the one on Lidoderm. We also had some interesting shifts, if you will, with Opana because we had introduced new strengths in the middle of last year and so that’s still sort of playing through and how they manage inventory and then also we think we had a little bit of an inventory worked down on Frova as well.

Jim Dawson - Buckingham Research Group

As far as, you talked about your strength of the generics in the first quarter and the second quarter. Any sort of guidance for that, does it include a new version of immediate release Opana?

Dave Holveck

So again, not giving or product line guidance, I think you’re asking about an authorized generic on the authorized Opana, IR piece. Again at this point, we wouldn’t be in a position to say whether we would introduce an authorized generic in the event generics come to the market for the IR version of Opana at the middle of this year. Again, keep in mind we do have a generics business, so we would evaluate kind of the best approach to doing or not doing an authorized generic in the middle this year.

Operator

Your next question comes from Shibani Malhotra - Goldman Sachs.

Shibani Malhotra - Goldman Sachs

This is a question for Blaine. On gross margin, you guys came well ahead of at least where we had modeled. Can you just talk about, what drove the strong gross margin and then give us guidance on how to think about this going forward. Is it a shift in products or is it something else that we should be aware of?

Blaine Davis

Relative to the gross margin, again as we spoke about in the previous quarter, we did expect on an adjusted basis to see a decrease in the gross margin. The decrease of that gross margin was largely driven by the full year impact to the Opana ER royalty stream that we payout to kind of works with that come out of the cost of goods.

I think the other impact on the gross margin line for the full year will be the impact of the Indevus products being brought in, although that’s a fairly minor impact to the gross margin. So overall again, the first quarter gross margin that you did see on an adjusted basis, we would see that as continuing to decline slightly throughout the year. Again, as a result of those two factors.

Operator

Your next question comes from Gene Mack - Lazard Capital Markets.

Gene Mack - Lazard Capital Markets

You can just tell us for Lidoderm, where inventories were at the beginning of the quarter versus where they stood at the end of the quarter? Thanks.

Nancy Wysenski

We can’t really get into sharing information quite that specific. Sorry.

Operator

Your next question comes from Irina Bozin - UBS.

Irina Bozin - UBS

I’m calling on behalf of Marc Goodman. Yesterday some long-term data came out on Nebido and there was a side affect for elevated PSA. Is this something that is seen in the other testosterone products and are you concerned that this may cause a hiccup in the approval again for the product?

Ivan Gergel

No. Especially, we believe it’s seen in other products and we don’t believe this is will be an issue with the approval for this product.

Operator

Your next question comes from David Amsellem - Piper Jaffray.

David Amsellem - Piper Jaffray

Just a question on Nebido, can you remind us what is the status of the U.S. IP for the product?

Nancy Wysenski

We currently have one patent that has been allowed, but not issued. Should it be that patent will provide coverage until 2024; and we have a second patent pending and we will continue to actively prosecute these patents.

David Amsellem - Piper Jaffray

Do you still expect Phase III data for Octreotide implant in the second half of this year?

Ivan Gergel

The study is ongoing at this point. It’s an open label study, so we’re looking at data from that study on an ongoing base. So we continue to collect data, as the patients are entered into the study and they continue to be enrolled and ongoing in the study. When the study will complete, however, we can’t be specific about that just now.

David Amsellem - Piper Jaffray

Just to be clear, it doesn’t sound like you’re planning to add any new reps to support the launches of Nebido and Valstar, rather than reallocating reps, I just want to make sure that’s still indeed the case?

Nancy Wysenski

Yes, that’s generally a correct assumption.

Operator

You next question comes from the line of Scott Hirsch - Credit Suisse.

Scott Hirsch - Credit Suisse

You guys mentioned you’re preparing for the two product launches and that you’ve extended the Sanctura co-promotion through the third quarter. Can you just give us an update on what the launch plans are for Nebido and Valstar and then what the plans are for Sanctura as opposed third quarter?

Nancy Wysenski

We can’t really speculate first of all on Sanctura because those agreements are negotiated and we’re not at a point where we’d be entering into the next round of discussion. So, we can’t comment on that, but we’re very, very excited about the two launches that will have the opportunity to drive, one, in the third quarter and one in the fourth quarter, secondary to the acquisition of Indevus.

The first one, Valstar is a very interesting product. It has much less risk associated with it because it truly is not a launch; it’s a reintroduction of the product. So, we won’t have, some of the challenges you normally expect around DDMAC approvals of materials and so forth.

That drug has also been on the FDA’s drug shortages list for quite some period of time and for patients who are suffering from bladder cancer, following first line treatment with BCG therapy, there is absolutely nothing else for physicians to use now within a drugs labeling.

As we go out and do add boards and prepare for that launch, we are hearing a huge amount of pent-up demand. We have reallocated some resources from both financially as well as personnel. We’ve moved a new product manager over there to support that product full time and having just returned from the AUA, he was quite impressed with the volume of questions that are coming up and physicians are actively asking when will be able to launch this.

Nebido, as you know is a much larger audience will likely be a far larger product. We’re very excited about Nebido because it’s introducing innovation into a growing market. On top of the approximately 20% growth year-over-year, the patients who are currently identified and treated for hypogonadism really only represent, we believe about 10% of the market potential.

So, there is a lot of opportunity there, since it’s very much under diagnosed and we think that we’re really going to be well positioned, because we’ve already got representatives calling on all of the specialties with the exception of adult endocrinology and we’ll be able to leverage our strong managed-care infrastructure and also our pharmacoeconomics team which Ivan mentioned has just been put in place. So that’s one of their first focuses as they build out this good function here at Endo.

Scott Hirsch - Credit Suisse

Then just real quickly on the R&D. You guys spent roughly a little over $90 million last year and Indevus spent almost $25 million, but some of their products have graduated as we just talked about it and will be kind of coming to market and may of the historical R&D products in your pipeline have been canceled. Where is the real focus of R&D spending right now, the bulk of it?

Ivan Gergel

Clearly, there’s some focus on the octreotide program. We’re ramping up sort of the axomadol program as we spoke about previously. We’re doing some work on pagoclone. We’re doing some life cycle management work and we’ve got some earlier phase work, but we haven’t been specific about, it’s bit early to sort of to talk about that at this point.

Operator

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

Elliot Wilbur - Needham & Company

Maybe just follow up on Nancy’s commentary around Valstar. I think that the target patient population is something around 15,000, but we don’t really have any information on treatment costs associated with the product and sort of what our realistic penetration expectations of that eligible population. Just trying to get a sense of, your thinking in terms of the rough parameters around the market opportunity for this product?

Then a question for Blaine, as well, you mentioned the settlement with Actavis on the two strengths of Opana, but the I just want to make sure that I understand this correctly, the settlement basically allows in to launch across all strengths. I want to make sure I understand that? Thanks.

Nancy Wysenski

So first of all on Valstar, I don’t think it would be appropriate for me to comment on pricing at this time, but you’re right, this is not a huge market. I think the way that you can look at it is if you look at the total number of diagnosed cases of bladder cancer, understanding that this drug will be indicated for BCG failure in those patients, about 40% of them do fail on BCG. So, you can sort of use that as a model to think about what potential might be.

Dave Holveck

The question relative to the settlement with Actavis, again just to remind you, impact was the first to file on a number of other dosage strengths. The settlement that we actually sign with Actavis, it was associated with a 17.5 and 15 milligram dosage strengths, which were the first to file on. It does allow them to come to market with those two dosage strength in the middle of 2011. However, they can come to market with the other dosage strengths provided others come to market prior to that point.

So the six months of exclusivity that impacts has a result of first to file, does need to expire for Actavis to come to market for all of the other dosage strengths. So, again Actavis was the first to file in 17.5 and 15, while the settlement was for all of the dosage strengths it only allows them to come to market with 7.5 and 15 in the middle of 2011 unless others have come to market prior to that point and expired six months of that exclusivity.

Operator

Your next question comes from Patti Bank - Wedbush Securities.

Patti Bank - Wedbush Securities

A couple of questions, one on generic side; I’m wondering Ivan, if you can talk a little bit about the portfolio there. Last I heard there were six ANDAs under review, so I guess if you could confirm that and maybe just any color you can add on, how big those potential opportunities are, maybe how big the brand products are they address? Also on the HYDRON technology, you can give us some guidance as to when we’ll hear about the R&D programs there?

Ivan Gergel

Sure. On the first one, you’re correct on the six ANDAs, we can’t give more specific information on that and regarding HYDRON clearly was that as Blaine mentioned, we’re very excited about HYDRON. We see it has broad applicability particularly in areas where compliance is important and areas where one wants to give long term sustained levels of drugs and therefore, there is a lot of potential applications of this platform.

We started to undertake within R&D a thorough review of where we might utilize the HYDRON technology and that’s both across the areas we’re strategically interested in sort of oncology, urology and the pain space, but in addition we may also consider actually partnering or out-licensing HYDRON at a certain point in the life cycle to.

Dave Holveck

Ivan, one other element that relative to the HYDRON is second generation of this delivery platform and again, you’d may want to put a little bit more color commentary behind that, but at this point, we do have a second generation that we’re also in development with and this I think and I’ll let Ivan give a little bit more maybe specificity on it, but we think it gives a bigger dynamic range and will accommodate more drugs.

Ivan Gergel

Yes, that’s right, Dave. We’re excited about sort of generation two at this point. Certainly it has a potential broader applicability than generation one and there are other advantages to it at this point, but it will be, but it will be profile anti-inflammatory to sort of going to specifics on those other advantages now.

Dave Holveck

I think we will be able, that in terms of information more in the first quarter of ‘10. We’ll have more information there.

Patti Bank - Wedbush Securities

On the royalty on Nebido, can you just confirm, is that 25% and does that come out of the gross margin line?

Blaine Davis

That’s correct.

Operator

Your next question comes from Jim Malloy - Caris.

Jim Malloy - Caris

I just have two quick questions. On Lidoderm, could you talk a little bit, I thought with the wholesale management agreements, there was the ability to de-stock was kind of limited. Can you talk about the type of wiggle room of de-stocking that can happen even with this agreement in place?

Then the question was asked and I don’t think it was answered about the price in increase for the Lidoderm and then just a final point on our in the past I think you guys have been toward the end of ‘09 early 2010 for the data. Is that being pushed out to later in 2010 or is the end of the year still kind of a timeframe we should be thinking about?

Nancy Wysenski

So on Lidoderm, you’re absolutely right. We do have the service agreements with wholesalers in place. We obviously were at the high end of the range in some cases and that was where the work down came from. I can’t be any more specific than that, unfortunately.

Pricing on Lidoderm, the lack price following our 4.5% increase in January is 183.7 and $0.79. So, we don’t see any changes there and if perhaps what you were referencing Jim, that I didn’t take up was ASP, I think again there is always a little bit of fluctuation depending on which rate rebates we see when, from which customer and what their current rebate levels are, but we don’t expect huge changes there.

Dave Holveck

The acromegaly studies actually recruiting very, very well. It’s probably actually ahead of schedule for the Phase III study and I said, we’re looking at data on an ongoing basis. It’s really slightly early to predict if this study will be complete in 2009 at this point. We’ll have more information than the sort of later on this year, but at this point, it’s difficult to be more specific than that. As I said, we’re looking at the data as it comes in.

Operator

Your next question comes from Scott Henry - Roth Capital.

Scott Henry - Roth Capital

Going back to the opening remarks, there are a lot of positive comments on the pipeline and my question is really, if we can get any kind of quantifiable numbers to that enthusiasm. Just so, I can better understand the way you’re thinking about it. Really, if you could prioritize in the pipeline, what it is that drives your enthusiasm and at least if you can put a kind a bucket around potential revenues for these products and a timeframe to reach those. I don’t know that you’ll answer these questions, but I think it would be helpful to try to understand your tone.

Dave Holveck

I have used on it and I appreciate the question because, again the opportunity and where the enthusiasm comes from is again, year-over-year. We really didn’t have any new launches that were going to be proposed in ‘09, and from the standpoint of how we wanted to quickly diversify the business, and add new revenue streams on to the business, we’re unable to do that in ‘09.

Now the enthusiasm behind that, which I think Nancy reinforced, but let me put a little bit sharper point on it, is that we have roughly 700 sales people out there, and again, those individuals, and we said this, can be looked at as we look at these launches as opportunities to really shift and put more personal selling against these new models and again, that is really I think a prerequisite as you start to introduce new innovation. So in the standpoint of the first element of enthusiasm, is being able to have incremental new revenues and the ability for a very strong sales team to be put against that for ‘09.

Then you go forward into ‘10 and beyond. I think Ivan talked about the octreotide. Again, two opportunities there acromegaly and carcinoid syndrome, and those are again very definable in process. So again the pipeline is not something we may have, but we’re actively moving there. You go farther out and you obviously have the [Inaudible].

Coming back to our generics business, we put a fairly aggressive plan in place to license in new APIs, which we did. We bolstered that organization, both with some capital and skill sets, which by the way really do coincide very nicely with the bill that Ivan put into the development side. As I mentioned, it’s a generics business; it’s not just ANDA’s, Ivan brought this forward, ANDA’s, but 505 B2 developments right. So the infrastructure that backstops that investment is in place.

Then lastly to the topic is, we have a new platform for drug delivery, which is clearly safe and affective and on the market with hydro, so we can expand that and then the second generation. Could I sit here today and look at the path forward, while I do see the importance and the sustainability of our base business, which by the way I feel very strongly about in moving in the right direction.

Then back again in looking at the relevant strength of both near and mid-term pipeline, and the people to support it, both Ivan has brought forth, as well as the sustainable plays that support our base business that can be expanded against the new, I’m pretty positive about it all. I think it’s a great model, and in this plan that we have, it’s a great place to be at this point relative to all of the other changes going on in the environment. I think we’re truly a growth business.

Scott Henry - Roth Capital

Okay. Well I appreciate that color. I guess at some point it would be nice to get some numbers to put around that enthusiasm, but we can certainly wait for that. Just one follow-up question as well with regards to the pipeline; when you think about R&D as a percentage of sales, it has declined significantly in the past year. Where would your target rate be if you have an idea about that? Over 10% at some point or do you like it where it is right now? I mean obviously opportunity is available as a factor as well.

Blaine Davis

Yes, this is Blaine. I think it’s always a little bit challenging to put targets on percentage of sales of R&D spend, because I think you have to time it relative to programs and investments that you want to bring into the R&D organization. I think some of the comments that Ivan made and the structure that he’s created, in being cost affective, in managing external partnerships, that gives us more flexibility to manage multiple programs in a cost affective way.

I think that the percent of R&D spend versus sales at this point is low. We do expect that to increase as we continue to do business development deals and bring in additional compounds into that organization. I think you’ll definitely see an increase over time, but at this point, I don’t think we want to put a longer term target on it, other than to say that we add programs, which will then translate into commercial opportunities, R&D spend will clearly increase.

Operator

Your next question comes from Michael Tong - Wachovia Capital Markets.

Michael Tong - Wachovia Capital Markets

I just want to clarify the SG&A outlook going forward. Blaine, you mentioned that SG&A is going to increase lightly year-over-year, ‘09 relative to 08 and that includes the launch expenses associated with Nebido and Valstar, correct.

Blaine Davis

Yes. That’s correct Mike.

Michael Tong - Wachovia Capital Markets

And I think you also mentioned about reallocation of sales force resources with respect to those two launches. From what products are you going to be pulling back as far as promotional effort is concerned in order to drive the Nebido and the Valstar launch?

Nancy Wysenski

This is Nancy. Good question. There are going to be a number of shifts that are going on. First of all, we’re setting up a non-personal promotion, sort of center of excellent if you will in our marketing department, along with the other shared services of managed markets, market research, etc. They will find more cost affective and expansive ways to support brands as they mature.

In addition, we’ve really been refining our targeting over the last six months, and particularly since we were quite excited and hopeful that we would acquire Indevus, knew that we really had to look for the greatest return on investment. So as an example, we now have, although at a very competitive level and almost equivalent to the market leader, we have less effort put against Opana in personal promotion and yet we continue to generate very strong results and that trend hasn’t broken at all.

So I think we’re just learning how to refine the placement of each of the different types of resources and another example is Frova. That marketplace is under fire right now, with the first authorized generic out. It’s going it get crazier in the migraine market later this year, as more generic entrants enter and we’re starting to proactively predict, how we can shift resource resources that might be less affective in a situation like that, to the new launches and our solid brands that we expect to continue to deliver, like Lidoderm.

Operator

Your final question comes from Tim Chiang - FTN Equity Capitals.

Tim Chiang - FTN Equity Capitals

Just one last question on your generic drug business; you sort of highlighted that second quarter might show some positive returns from some of the dislocations out in the marketplace and opioids. Do you expect more competitors to come back into that market in the second half of the year or is it just really a function of prices coming down in the second half year, just from the dislocation sort of going away?

Nancy Wysenski

Yes Mike, this is Nancy. I think you’re thinking about it the right way. We expect and obviously we have some early feedback in April. We expect that is going to continue for some period of time, but that other players will reenter the market.

To talk a little bit about the characterization of our specialty generics business, we’re not producing products that are part of the commodity generics efforts and therefore we try to be mindful of our pricing. So as others come in and want to play that game, our participation in that market will probably pull back a little.

Tim Chiang - FTN Equity Capitals

Do you expect also to bear some of the grout fruits of your generic pipeline this year or is it more of a 2010 and beyond time frame?

Nancy Wysenski

Yes, in terms of the product development that we’re doing, those results will be seen in 2010 and beyond. The results that we’re talking about right now are because of this unique market situation and also a little extra oomph that’s coming out of Percocet; thanks to the non-personal promotional offer.

Operator

This concludes the Q-and-A for today. I would now like to turn the call back over to David Holveck for closing remarks.

David Holveck

Yes, thank you. Again, I appreciate the interest and the questions. I think it has allowed us to really better position where we are in our plan, both to accelerate the growth of Endo’s business as well as expand the business model. We’re well on plan; we’re where I saw the opportunities and where I saw the actions would take us. I think we’re where we want to be and we have to continue on.

I think that the basis of our success will be the continuation of supporting our base business, but more importantly as you’ve heard from Nancy and Ivan, is bringing on new lines of revenue. I think we’re all painfully aware that as we look at our industry and looking at the future of our industry, it can’t be denied that we will see changes in healthcare reform and we have to have a more diversified business model, which I think we’re well on the roads to developing.

So I appreciate your support, your interest and look forward to reporting on this throughout the year.

Blaine Davis

I think that’s it. If anybody has additional questions, feel free to contact me directly. Thank you.

Operator

This concludes the presentation for today, ladies and gentlemen and you may now disconnect. Have a wonderful day.

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Source: Endo Pharmaceuticals Holdings Inc. Q1 2009 Earnings Call Transcript
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