Endo Health Solutions Management Discusses Q1 2013 Results - Earnings Call Transcript

 |  About: Endo International plc (ENDP)
by: SA Transcripts


Good day, ladies and gentlemen, and welcome to the Q1 2013 Endo Health Solutions Inc. Earnings Conference Call. My name is Gary, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for audio replay purposes. I would now like to turn the call over to Blaine Davis, Senior Vice President. Over to you.

Blaine T. Davis

Great. Good morning, everyone, and thanks very much for joining us today. With me on today's call are Rajiv De Silva, President and CEO of Endo; and Alan Levin, Chief Financial Officer. After our prepared remarks, we'll open the call to take your questions.

I'd like to remind everyone 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 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 prior to today's call.

With that, I'd like to turn the call over to Rajiv.

Rajiv De Silva

Thank you, Blaine, and good morning, everyone. I'm happy to have the opportunity to address all of you this morning. Since I joined Endo about 2 months ago, I have spent most of my time reviewing the company's operations, speaking with shareholders and getting to know the people who run our major businesses and functions.

My goal has been to understand our strengths and weaknesses, identify our best opportunities for growth, areas of streamlining our cost base and to determine how to best position Endo for this next phase of its corporate evolution. This review is ongoing, and I expect to communicate its outcome before the end of the summer.

Based on the early phases of this assessment, I do have some observations that I can share. First, I am excited about the businesses we are in. For example, I'm particularly impressed with our generics business and see multiple opportunities for growth by expanding our capabilities at Qualitest. We have a strong presence and market share in controlled substances and liquids, which I believe will be a source of future growth for us in the segment.

Second, in our pharmaceutical business, we must continue to prepare for a future without LIDODERM, which is losing its exclusivity this year. This means that our remaining business must be made stronger and more efficient. I firmly believe we can improve our operating efficiencies significantly. While I have not reached any particular conclusions or decisions, I believe that we have the opportunity to operate in a more nimble and lean fashion.

Third, in urology, our AMS affiliate continues to be in a state of transition, as we overcome the headwinds created by the FDA advisory related to the use of mesh implants as an intervention for vaginal prolapse. However, AMS continues to have great strength in the urology channel that we look to further leverage.

And finally, Endo is well diversified, which I believe is a point of great strength for the company. I believe our best new opportunities for revenue growth will come from better execution within our current businesses, supplemented by selective, accretive acquisitions of new assets.

In addition to learning about Endo, I have also had a chance to get to know many of you. In recent weeks, I have met with a number of our shareholders, whose candor and support have been extremely valuable and encouraging. I appreciate your feedback. I share your desire to see Endo succeed, and I am wholly committed to creating sustainable value for you and all of our stakeholders for the longer term.

Looking ahead, we are waiting for an important FDA ruling on the 10th of May, at which time, the agency is inspected to determine whether the old formulation of OPANA ER was discontinued for safety reasons. It is our firmly held believe that the best interest of patients, physicians and other stakeholders is served by a strong -- by a show of strong support by FDA for the abuse-deterrent formulation of OPANA ER through the removal of products that rely on non-abuse-deterrent formulations. The FDA's decision will determine how we compete in the extended-release opioid market, so we are watching and preparing for this news accordingly. We have seen encouraging comments from FDA supporting the position we have taken on the issue, but we await their decision.

In summary, I am optimistic about our company's future, committed to making us more efficient and returning Endo to growth through efforts to enhance organic growth, supplemented with accretive acquisitions. We expect to create growth for products such as OPANA ER and Voltaren Gel. And we are focused on returning AMS to its historical rates of profitability and growth. I appreciate your support, and we'll have more to say about our plans in the months ahead.

And now let me shift my focus towards some of our first quarter performance highlights. In short, the first quarter illustrates many of the observations I just made. Our performance highlights the impact of our supply agreement with Actavis for LIDODERM, as well as the need for further improvements in our business. In total, Endo reported $709 million in revenues and adjusted diluted earnings per share of $1.09.

First quarter 2013 sales for our Qualitest business grew by 23% versus first quarter 2012 to $178 million. That is a record high for net sales for our generics business and is a solid first step towards our year-over-year growth objective for Qualitest. We expect low double-digit net sales growth versus 2012 from this business.

Within branded pharmaceuticals, our #1 priority is the support of the long-term opportunity for OPANA ER. OPANA ER, with net sales of $56 million, performed to our expectations in the first quarter. Clearly, though, there is a major decision by FDA pending that will strongly influence the future opportunity of OPANA ER.

Improved formulary access drove strong growth for FORTESTA Gel in the first quarter. Prescription volumes are more than double what they were in the prior year period, and net sales increased significantly to $15 million for the quarter. FORTESTA Gel has outperformed our expectations, thus far, this year. And as a result, we now expect double-digit net sales growth for this product in 2013.

Sales in our AMS segment declined 6% in first quarter 2013 versus first quarter 2012. Women's Health drove the decline, with a year-over-year 16% decrease in sales. U.S.-based procedural volumes within the Women's Health business are still declining on a year-over-year basis. We remain committed to returning AMS to growth while looking for ways to improve margins.

With that, I will now turn the call over to Alan to review more of the financial details. Alan?

Alan G. Levin

Thanks, Rajiv. I'll focus my initial remarks on our first quarter results and then comment on our full year 2013 financial guidance.

For the first quarter of 2013, we had total revenue of $709 million, up 3% over the first quarter of 2012. Our revenues reflect a number of changes to our business at the start of 2013. Net sales of LIDODERM were approximately $25 million lower during the first quarter as a result of our supply agreement with Actavis, pursuant to which Endo provided an amount of branded LIDODERM as free goods for their wholesale affiliates distribution. And as Rajiv discussed, OPANA ER faced additional competition in the extended-release opioid category.

On an adjusted basis, first quarter gross margin for the company as a whole was 66% of net sales versus 70.5% of net sales during first quarter 2012. Segment revenue mix, which is a product of higher growth rates in our generics business, is the major driver for this change and the first quarter was in line with our expectations for the full year.

Total operating expenses for the quarter were $349 million. However, on an adjusted basis, total operating expenses for the quarter were $250 million. This decrease versus the prior year adjusted total operating expenses of $282 million is driven by a number of changes that we made to our organization in 2012 to increase our efficiency. On an adjusted basis, total operating expenses as a percentage of revenue decreased to 35% as compared to 41% during the first quarter of 2012.

Our adjusted effective tax rate for the first quarter of 2013 was 26.5%. Our tax rate for the first quarter benefited from the full year effect of the 2012 R&D tax credit that was passed retroactively in early 2013. That effect was assumed in our initial guidance of 28.5% to 29.5% for the full year of 2013. And so we would expect marginally higher adjusted effective tax rates for the remainder of 2013.

Adjusted diluted earnings per share increased 25% to $1.09 versus $0.87 in the first quarter of 2012. Our reported or GAAP diluted earnings per share increased to $0.14 versus a loss of $0.75 in the first quarter of 2012. As a reminder, the reported loss in first quarter 2012 was primarily a result of establishing a liability of approximately $100 million related to our settlement agreement with Impax.

Our reported earnings for first quarter 2013 include a charge in the amount of $68 million for the period, reflecting accruals for certain legal contingencies. As a reminder, at the time of our fourth quarter earnings report, we accrued $92 million as an estimate for these matters. The incremental accrual for the period results in a total balance sheet liability of about $160 million for legal contingencies.

Maintaining a strong balance sheet remains an important focus for Endo. To this end, we have also revised our credit agreement during the first quarter, and the resulting new agreement significantly enhances our future flexibility. I'll be happy to discuss the new terms in further detail, but one key item is that, although we are currently at 2.5x, we have a new ceiling of 3.7x for our maximum permitted leverage ratio throughout the life of this agreement.

We reported a use of cash flow from operations of $59 million in first quarter 2013. As discussed on our fourth quarter 2012 results call, we believe that the timing of certain working capital items helped to drive a strong performance last year and that they have reversed in the first quarter, consistent with our expectations.

We updated our 2013 financial guidance in our press release this morning. We continue to expect 2013 revenues of $2.8 billion to $2.95 billion, and we continue to expect our adjusted diluted earnings per share to be in the range of $4.40 to $4.70. And as a result of updates to certain liabilities, we now expect reported or GAAP earnings per share to be in the range of $2.10 to $2.40. 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 Rajiv. Rajiv?

Rajiv De Silva

Thank you, Alan. In summary, we look at 2013 as a year of transition for the company. As I mentioned, we are in the midst of a full strategic and operational review of the company and all its businesses. We should be in a position to conclude that review in the first half of 2013. And I look forward to communicating its outcome internally and externally latest by the end of the summer.

Let me conclude by thanking all of those shareholders who very generously provided their time and feedback to me over the last few weeks. This input is very valuable to us as we go through our assessment.

That concludes our prepared remarks. Let me now turn the call back over to Blaine to manage our question-and-answer period. Blaine?

Blaine T. Davis

Great. Thanks, Rajiv. This includes our prepared remarks. I would now like to open the line to take your questions. So operator, can we go to the first question, please?

Question-and-Answer Session


Certainly. So the first question comes from the line of Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

First, on Qualitest. Can you talk about the first quarter and how much it takes away from the rest of the year given that you really didn't change your low-double-digit guidance? I'm curious whether you knew there were going to be some big launches? If so, could you call them out and why they won't be sustainable kind of going forward?

And then second, on AMS. Can you talk about what's changed in that business with respect to driving profitability, since we have new management there for the past 6 months? That's probably long enough to at least start to talk about the changes and what's been done.

Rajiv De Silva

Terrific. So on your -- on the question, let me take Qualitest first. As you can imagine in a generic business, things do tend to be a little lumpy, and the competitive dynamics change quite rapidly. We have a very large portfolio of products and SKUs. So we had a pretty good [indiscernible] for example, in the first quarter that drove those results. That being said, we want to be prudent that we don't assume that we will continue that level of trajectory over the course of the year. So we expect some ups and downs, and we are quite comfortable with the low-double-digit guidance we put forward. And we can obviously get more granular and clear on that as the year progresses. But we are certainly quite happy with our Qualitest business.

With AMS, as you pointed out, we've had a new general manager in charge of that business for 6 months now. And a lot of what has happened is that we've essentially turned over the management team. So we have a new management team across most key functions and business -- sub-businesses within AMS. We've also restructured in terms of -- particularly in terms of our support functions. But what I would say is that it's not yet completed. We are -- that is still ongoing. And as you can imagine, as part of my own strategic and operation review, AMS is part of that review as well. And we expect to continue to make changes with respect to improving the margin structure. And I expect to be able to provide a bit more clarity on that when we can talk about it towards the back end of the summer.

Marc Goodman - UBS Investment Bank, Research Division

Have costs already started to come out of that business pretty significantly? I mean, obviously, expenses were pretty under control in the first quarter. So was AMS a big part of that?

Rajiv De Silva

Well, let me have Alan answer that question.

Alan G. Levin

Yes, they were, Mark. We had done some restructuring on G&A support for the business toward the tail end of last year and some restructuring and field force realignment earlier this year. And so the first quarter results reflect our target to get back to at least the high-20s, low-30s contribution margin from that business that it enjoyed prior to our acquisition.


The next question comes from the line of Greg Gilbert of Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

2 strategic questions for you, Rajiv, and hopefully, you can touch on them at least preliminarily. My first one is on the brand side. If OPANA doesn't work out the way you hope in generics, destroy the franchise, and I know you're not saying it will. But can a case be made that Endo shouldn't have significant commercial presence for brands? Or is it important in your mind to maintain some sense of franchise due to where your pipeline is and where BD opportunities might be?

And on the generic side, with the very large companies becoming bigger, more global, et cetera, do you see an opportunity for a company like Qualitest to play a more active role in consolidating the smaller and medium-sized players?

Rajiv De Silva

So yes, so both good questions. On OPANA, as you might imagine, we don't expect to make any commentary as to outcome until we've heard what the FDA response is, which we will hopefully get this Friday -- by this Friday. But suffice it to say that, in our view, our cost structure is a flexible cost structure, which needs to be managed to fit business realities. So depending on the outcome, we will continue to move to make changes. And obviously by the time that we make some announcement with respect to the strategy and cost structure, the FDA action will be known. And that will be incorporated into whatever we roll out in a few weeks to come.

With respect to the question on Qualitest, absolutely, I view generics as a strategic area for us. I think frankly, there's a lot of potential within the Qualitest business itself that we can further unleash in terms of building our ANDA pipeline, in terms of increasing manufacturing efficiency and some of the things that can kind of fall in the category of operational improvements. But certainly, if there are opportunities for us to acquire other smaller players, particularly businesses that give us complementary products to what we already have, we would be very open to that.


Our next question comes from the line of Chris Schott of JPMorgan.

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

Just a couple ones here. First, as you think about just Endo's overall positioning, as we can say, about business development, how important is improving the company's tax rate as you think about the longer-term evolution of the company?

The second question was just coming back to the mesh liability. I know -- just can you talk a little bit about that in more detail, now that you've had time to consider the issue? How much of a challenge do you think this is for Endo? How much of our -- does this factor into your long-term vision of the company?

Rajiv De Silva

So on the issue of the tax rate, and obviously, we have a relatively high tax rate. That being said, I believe there are a lot of opportunities for us to create value with our existing business. That is not dependent on finding a lower tax structure. Obviously, we will continue to make changes in our business such that it optimizes tax structure. And certainly, if there is a transaction that allows us to move to a preferred tax structure, we're very open to that. But certainly, our strategy, as I see it, is not dependent on being able to do that.

Alan G. Levin

I think the only other thing I'd add to that is we do have a history, through our acquisitions, of taking on some tax attributes in terms of net operating losses and other attributes of acquisitions that have allowed us to racket down the tax rate over time by 7 percentage points. And I suspect that other BD activity will likely continue to provide opportunities in that regard.

Rajiv De Silva

And then on to your next question on mesh. So my view on mesh is that obviously, first of all, it is still early days. We are still beginning to understand the nature of the potential claims that are being filed against the company. And we, obviously, as the months and weeks progress, we have a better and better handle on the magnitude. Then, as you know, we already have a reserve on the books that reflect our current understanding of the liability and we've just taken an increase on that reserve as well in this quarter. And the way that we will manage this is in a prudent way, which is, as we progress and as we get to know more about some of the trials and cases, where it makes good business sense, we will settle certain cases. At the same time, we're not going to rush into anything either because our expectation is that this is an issue that will evolve over time and potentially, over years. And as such, I am not predicting that this is a challenge that will hinder the execution of whatever strategy we come up with. But certainly, it is a factor that we need to keep in mind as we plan for the future.


Okay, the next question comes from the line of Corey Davis of Jefferies.

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

Can you say whether or not you've submitted anything formal to the FDA for a label change on OPANA, similar to what Perdue had submitted in anticipation of a similar positive ruling like Purdue had?

Rajiv De Silva

Yes, Corey. So we have submitted a request for labeling change. And obviously, we will let the FDA run its course in terms of how they respond to our Citizen Petition. But yes, we have submitted a request for a label change.

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

Second question is, if you get a positive outcome and even if Impax comes off the market in generics, they're never there or not there for a long time, I'm not convinced that the presence of Impax is kind of impeding OPANA's growth. So even if they do come off, what's the key to returning OPANA to a more acceptable trajectory? Is this just simple blocking and tackling? Is there something that's going on that we're not really aware of?

Rajiv De Silva

No, I think a lot of it, Corey, will fall in the category of blocking and tackling and commercial strategy. As you can imagine, over the course of the last few years, we had a -- we've made a lot of efforts on LIDODERM, which is a much bigger product. As we look forward to the future, OPANA is going to be the primary product for our field organization, so we can structure it and optimize it with a view to maximizing that brand's potential.

As you also know, we've been through a very tough year on OPANA with the supply disruption, the launch of the abuse-deterrent formulation now with impacts to the markets. So there have been many shots to the system. But my belief is after the FDA response, assuming it's a positive one, that we will have a clear path to really focusing commercially on the brand.

But that being said, and I don't expect that we will change the trajectory dramatically in the very near term because there's a prescriber base that is very broad. And it will take time to -- for the brand to regain its growth trajectory. But we do feel very positively about it, particularly, given the strong intellectual property estate that we have that could take it through 2029.

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

Okay. And last question, how much visibility, if any, do you have on whether and/or when Voltaren generics may appear?

Rajiv De Silva

We don't have a specific view on it, though, as you know, this is a product that is partnered with Novartis. And that particular supply agreement will have a decision point in 2014. But this is something that we continue to work with Novartis.

Alan G. Levin

And that would be consistent with the provision of product guidance that the FDA provided in 2012. And the lead time to do the kind of clinical work that's implicit in bringing a generic formulation to market, which we believe also puts us into a mid-2014 time frame before that's likely.


The next question comes from the line of David Buck of Buckingham Research Group.

David G. Buck - The Buckingham Research Group Incorporated

A couple of questions for Rajiv. Rajiv, if I look at the changing mix of the company from '13 to '14, you obviously had some expense control year-over-year in keeping a combined adjusted operating expenses to about 35% of sales. What's the right number to look at? Or what's sort of the amount of cost savings that you might be able to achieve as LIDODERM goes generic? Have you spent any thoughts on that in terms of what the right percentage of sales is for SG&A and R&D combined as we look at a more generic and more medical-device-type company for next year?

And then secondly, as you looked at the OPANA issue and the decision on May 10, can you talk about whether you have any type of contingency plans or profit protection plans to allow you to reaffirm the guidance ahead of Friday's decision?

Rajiv De Silva

So on the issue of the cost base, as you can imagine, this is one of the main pieces of work that's currently ongoing with the assessment of the company. So I'm not in a position to opine on exactly what our target margin structure would be. But certainly, we are looking at all different avenues to control costs in the company. So we will be in a position to answer this question once the assessment is completed. But certainly, I can assure you that it is an area of clear focus for us.

With respect to OPANA, again, we have a lot of work that's gone in assessing how we will respond to different outcomes based on what the FDA says. Again, at this point, as you've seen, we have reaffirmed guidance for the year. We will -- so we will not say anything further with respect to what we may or may not do depending the outcome of the FDA response. Obviously, we're hoping for the best. And if that does not turn out to be the case, then we will come back with another announcement.

Alan G. Levin

I would just add that while our guidance does contemplate the assumption that a generic will come off the market in the second half of the year, as Rajiv alluded to earlier in the call, we do have a flexible cost base. And we do have a history of adjusting that cost base consistent with our revenue trajectory. And I would expect that as we move forward, we'd continue to manage in a financially disciplined manner.


Our next question comes from line of Annabel Samimy of Stifel.

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

Just a couple here. One on AMS. You're obviously going through a strategic review here, and you're doing a lot to improve the operating efficiencies of the business. But you said that you want to return the segment to growth. So have you identified those areas that you can sort of target as a return to growth? And will that require further investment in the future?

Rajiv De Silva

Good question, Annabel. I actually think that there's a lot of possible -- there's a lot of possibilities within the AMS business as it stands even without additional investment. So let me pick a couple of areas. So we've been very encouraged by the performance in our international markets. So those businesses are actually growing. So as we continue to put more efforts behind those businesses, we would hopefully begin to see an overall impact on the AMS growth rate from the international business.

The other areas, Men's Health and BPH. We just had a -- we just announced a pretty positive outcome from our goliath trial, which we expect to have some positive result on our BPH business. And then obviously, at some point, the negative implications or negative impact of the FDA advisory on mesh implants would also begin to work its way out because fundamentally, our belief is that our products make a big difference in the lives of patients. And for the appropriate patient in the hands of a well-trained physician, we have very, very good product interventions. In most cases, patients have few options by the time they come to the point of needing one of our products. Demographics in our favor because these are all diseases of aging. So we think there are strong fundamentals that drive the business once we get over this -- the challenges that we've had over the last 12 months.

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

What stage is the vaginal mesh declines in the process of working its way out in terms of it declining?

Rajiv De Silva

It is honestly difficult to tell because one would've thought by now, it would begin to flatten out. We have not yet seen it. So I can't make a clear prediction, but we would expect, and hopefully sometime in the next 12 months, to begin to see a flattening out of the trajectory.

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

Okay. And then on OPANA, you had mentioned that I guess some of the pressure you're seeing is competitive pressure, but we haven't really seen that much impact from the generics. So can you characterize that competitive pressure on OPANA?

Rajiv De Silva

Not quite sure what you mean by competitive pressure. What I was referring to was the challenges the product had last year because of the supply disruption. And then obviously, with Impax coming on the market, there's been some impact. You're right, it's not been dramatic but it it's still early days, as you can imagine. I think with the product, we have -- we continue to sell competitively versus MSER and OxyContin. And we, in general, get more business than we lose to those 2 products. But in the first quarter, with Impax coming on the market and taking some share away, some of those positive implications have been negated because of Impax, right? Obviously, as we expect, the FDA rules in favor of our Citizen's Petition and Impax is no longer on the market, that issue will go away and the positive dynamic that we see in terms of taking share from the competitive products should continue to be -- to work in our favor.


Next question is from the line of Elliot Wilbur of Needham & Company.

Elliot Wilbur - Needham & Company, LLC, Research Division

Just first, with respect to FORTESTA Gel and the strength in the quarter. In the press release, you referenced or you attributed the strength to a change in formulary status that resulted in increased uptake and, obviously, a small product with fairly impressive sequential gain. I'm just wondering if the level sales reported in the quarter represents sort of a new baseline resulting from the change in formulary positioning for the product?

And then as just a follow-up, the most recent correspondence with FDA regarding OPANA ER, I believe was submitted by the company on April 23. And it looks like there's just extensive reference to the recent development around FDA's decision on OxyContin. And I'm just wondering if there's anything really new in there in terms of quantitative metrics or surveillance data related to oxymorphone that you think is directly tied to the FDA's recent decision on oxycodone? Or if you're just basically citing a somewhat similar development?

Rajiv De Silva

So on FORTESTA, first of all, we are quite delighted with the performance of that brand. I think the commercial team has done a great job with that product. We've moved to contract that brand in a more comprehensive way than we've done in the past and what you see reflected in the first quarter is 2 major contract wins that we had. So we do expect to see a good full year performance on the product. Obviously, there's been a very sharp uptick based on contract wins, so that particular percent growth may or may not be sustained. But certainly, we see a strong trajectory for the product, and it's one of the products that we are quite excited about.

With respect to the supplement to the Citizen's Petition that we submitted, as you pointed out, the main gist of that supplement was to point out the similarities between the OPANA ER situation and OxyContin with respect to the recent decision that FDA took. We believe that we have very strong facts on our side. If you look at our filings over the course of the last year, surveillance data alone shows that there's been a very sharp decrease in abuse of the brand, with the launch of the abuse-deterrent product. And depending on which time period you look at, it could be an almost 60% reduction. So we do believe that we have very strong data on our side. Obviously, every company has a slightly different twist on it, but I do think that the way that the FDA looked at OxyContin, we certainly applaud that decision. And we merely wanted to point out one more time the similarities between the two situations to the FDA as they deliberated on our own product.


Our next question is from the line of David Amsellem of Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

I have just a couple. First, on Voltaren Gel. Rajiv, in your review in the business, what are your thoughts on the risks around potential generics for that product over the medium to long term? Realistically, how long do you think you'll get to keep exclusivity on it?

And then my second question is on your presence in the urology space, particularly from a brand pharmaceutical perspective. Rajiv, is this an area that you'd like to continue to have a real presence in? And maybe just high level, what do you think are some of the aspects of that business that you like and don't like?

Rajiv De Silva

Sure. So on Voltaren Gel, as we've just mentioned, it is a product that's partnered with Novartis, and that particular arrangement will come to an end sometime in 2014, probably in the early part of the second quarter. That's our operating plan. But obviously, we continue to discuss this with Novartis since this is a brand that is doing quite well. But from our own planning standpoint, we don't expect to have the brand beyond the second quarter 2014. So therefore, if there are generic or other competitive actions beyond that, it doesn't particularly factor into our plan at this point. If we do change the nature of our agreement with Novartis, obviously, that will impact to it and at that time, we can opine on it.

Now with respect to the urology channel, with respect to our pharmaceutical business, I mean, the short answer to this is that I do like the urology pharmaceutical business because this, again, lends itself to the kind of business that I think is great for a company like Endo, which basically specialty areas where with a relatively small footprint you can commercialize brands. I also like smaller brands, and I'd much rather have a collection of smaller brands than one big blockbuster that drives the company for obvious reasons. So FORTESTA and VALSTAR, for example, I think, certainly fall in that category. And as you've seen our results on FORTESTA, it continues to show why urology is a good category for us. So certainly, I'd be -- I am certainly very committed to it. But again, I don't want to opine on what areas of focus will be until we completed our strategic review. But early indicators are, certainly, that the urology business is a strong one and one that's here to stay.


Next question comes from the line of Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just a couple of questions, one on vaginal mesh. I was wondering if you could update us on the actual number of cases that accumulated? And then maybe discuss a little bit of how we're arriving at those numbers? I know last time, we talked about a little bit of art and science. But maybe should we be expecting another charge this quarter? And then lastly, Rajiv, it sounds as if there's potential here to be expanding into generics. So just wondering if you could help us get a better understanding of your background in generics, kind of what's informing you of these decisions to maybe push into an industry that is often found to be quite difficult?

Rajiv De Silva

So let me start with mesh. So as of the end of April, we had just a little bit shy of 7,700 cases. And with respect to how we are managing and how we're making our estimates, as I said, we know relatively little about these particular allegations. Until and unless things get to the point where we are able to look at the medical records and other factors, which is the case when you typically get trials-set cases. And the approach that we're taking is we make a business judgment as to the merits of settling cases as we come closer, which is what we've done. If you look at the increase in the accrual that Alan referred to, that reflects a business decision that we made to settle certain trial-set cases, plus a broad inventory of cases that the same plaintiffs' attorneys have. Again, let me stress this is tentative settlement, it is not completed yet. And that's how we're going to manage it. So in certain quarters, as we have certain settlements that come up, we will be reflect those as we move forward. In certain cases, we will have none. Obviously, some parts of our increase in accrual also reflects the higher number of cases that we now have versus what we had at the end of the fourth quarter as well.

Alan G. Levin

And I would just say that from a quarter-to-quarter basis, you wouldn't necessarily see increases in the mesh-related liability every quarter going forward. We obviously have to think about, not only the increase in the number of cases filed, but potential future cases. But the primary driver for the increase this quarter is, as Rajiv said, the tentative agreement that we've reached. And so it's a discrete event that drives the increases forward.

Rajiv De Silva

With respect to -- and one final comment on mesh, and obviously, we intend to vigorously defend ourselves. So any settlements that we make would be only ones where we think there is business logic that drives it.

With respect to generics, it clearly is a segment that is important from an industry standpoint. The importance of lower-cost medications is only going to grow, certainly in the U.S. but certainly outside the U.S. as well. And in the different companies that I have spent time in over the course of my career, there have been very important generic businesses. And I have a clear appreciation for it. As pointed out, there are certain aspects of the generic business, which requires very careful management. You also ought to keep in mind that we are in certain segments of generics right now, which are actually quite attractive, like controlled substances and liquids. So as we continue to expand, we will look to stay in niche areas, as opposed to broadening out in the more classic, traditional, solid oral dosage form generics. Obviously, one of the things that we will continue to work on over the course of the next little while is also to supplement our capabilities in generics. We have a very good team in Qualitest but we are constantly looking for ways to supplement that team. And I'm hopeful that as the months progress, that we can update you on some of those things that we are working on.


Next question is from the line of Michael Tong of Wells Fargo.

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

2 quick questions for you, Rajiv. As you think about acquisitions in the branded pharmaceutical segment, are you thinking more along the lines of pain management or urology? Or will you entertain thoughts about entering into a new therapeutic category in order to further broaden out Endo's therapeutic reach?

And then secondly, with respect to generics, the commentary you just made in terms of expansion of capabilities, are you referring both to management capability and/or generic assets in terms of dosage form capability?

Rajiv De Silva

With respect to the 2 questions, on acquisitions, I look at things fairly simplistically, which is that I think what our shareholders, at this point, would value accretive -- near-term accretive transactions, which -- one way of doing that, obviously, is to make sure that there's a reasonable and material amount of cost synergies in transactions that we do. So obviously, if those transactions are come in areas that we're already present, the chances that we can find material cost synergies is much higher, right? So those are logical areas for us to look.

That being said, I don't believe we are going to be constrained by therapeutic areas. If there are good acquisition opportunities that come up, that allow us the opportunity to move into a new area and are able to do that on the basis of a financially attractive transaction, that is near-term accretive, we will certainly look at it. So I would not rule out anything.

Now with respect to Qualitest, I think our capability enhancements are going to come in multiple areas. So first of all, in -- one of the things that we need to spend more time is building our own internal Endo pipeline. We already have a reasonable pipeline, but we recently hired a Head of R&D. We're just in the process of qualifying a pilot plant down in Huntsville, and we're building a formulation group to help create the future for us from Endo pipeline standpoint. Commercially, we will continue to look for additional talent. We, again, as I said, we have a very, very good team in Qualitest, but we would love to supplement that team. We have a very active business deal open effort ongoing looking at the purchase of new ANDAs or other complimentary products. And there's a whole host of improvements that we can make in the manufacturing footprint that we have in Huntsville and in Charlotte to essentially create more efficiency in the plant and get more capacity out of our existing footprint and equipment.


The next question comes from the line of, is it Shibani of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Yes, it is. So a quick question on OPANA, Rajiv. Assuming that the FDA decision goes in your favor, I guess you made 2 comments. One, was that you believe you could grow the brand given that you can return to taking share from OxyContin. I just wanted to understand how that dynamic would work given that it's likely their abuse-deterrent label will be stronger than that of OPANA's?

And then second, you also mentioned the importance of generics in terms of having the availability of low-cost generics for consumers. So how does that play in with keeping OPANA branded? And especially in light of OxyContin's -- or Purdue's decision to settle on OxyContin with Actavis, and we understand this was driven in part by political pressure.

And then just a question for Alan on the DSOs. We noticed these were a bit higher than usual this quarter. Anything we should look out for? Or is it just a timing situation?

Rajiv De Silva

So let me just start with the OPANA question. So with respect to label, we don't have a new label yet, so I'm not going to enter into a hypothetical discussion as to any label differences. But what I can say is right now, we have more switches to OPANA ER from OxyContin than switches away. And so that was the dynamic that I was referring to. And our expectation is that we will continue to focus our commercial efforts to maximize that trend, right? And again, if there are different labeling decisions that are made, we will deal with those at that time.

With respect to lower-cost medications, so again, clearly, from a health care industry structure standpoint, generics are -- as a broad category, are here to stay. I was not referring in particular to generics of extended-release opioids. When I made that comment, I was making a more macro comment. But at any given time, we obviously need to balance the patient-safety factor, along with our commitment to low-cost medications. I think in the case of OPANA ER, we have a very clear fact base and a very firm point of view that what is in the best interest of patients and society in general is a continued reliance, abuse-deterrent formulations of extended-release opioids in a way that is protective to the broader population in terms of reducing abuse. So that is our point of view, and it will continue to be our point of view. I think in other categories where the FDA is permissive of generics, we would love to compete in those because with that capability, we think we can provide very competitive offerings when it comes to generics in the areas that we compete in.

Alan, you want to address the other question?

Alan G. Levin

Sure. And on the question of days sales outstanding, we have seen a modest increase into the end of the year by about 2 days. And I really think it's a function of the product mix and the top line. As you look at either the international side of the AMS business, which is growing faster than AMS overall or the generics business, which is growing faster, those are segments that can tend to have slightly longer DSOs.


Next question comes from the line of Andrew Finkelstein of Susquehanna Financial Group.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

I was hoping you could just talk a little bit about the outlook for the rest of the year. If you look at the business x LIDODERM, what areas should we be looking at for revenue run rates to increase sequentially so that we can think about what the right level for the business is, for the current business x LIDODERM, and where that might put you relative to your range for the year? How we can get closer to the higher end, if possible?

Rajiv De Silva

So I think I would -- let me take a crack at the question, then I'll ask Alan to add to it, as well. First of all, we've just reaffirmed our revenue guidance for the year, right? We're not in particular opining on which end of the range we'll be, but rather committing to that range. As LIDODERM begins to have competition from Actavis, pretty much all other aspects of our portfolio are going to become important. Qualitest, we've already seen the early part of the year. We are, on the basis of our core business and our oral contraceptive business, we've actually done quite well. We will expect to see good results on Qualitest for the rest of the year. With OPANA ER, with our assumption that Impax will be withdrawn from the market based on a decision by the FDA, you would expect to see some improvements in that trajectory. FORTESTA Gel, as you saw, is on a very good run for the first bit of the year, Voltaren Gel. We would also expect to see some positive impact on our Men's Health business in AMS from the goliath trial. And overall, I think in AMS, we would expect that a lot of the turnaround efforts that are put in place over the course of the last 6 months, they should begin to start showing positive results. So those are some of the positive factors that we expect. And again, we'll have a better sense, obviously, once we have another quarter under our belt as to how all of that is going. But as of this point, we are comfortable with the guidance range that we have put forward.

Alan G. Levin

Yes, and I would add to that. If you step back and look at the full year picture, we've been guiding to low-single-digit growth rates in AMS over the course of the year. So we would expect the AMS performance to strengthen year-over-year as the year unfolds. We've guided to a low-double-digit growth in Qualitest, so we would expect continued strong performance from that business going forward. And then within branded, we talked about it being year-over-year down on LIDO given the loss of exclusivity this year, coupled with OPANA given the pace of recovery from the supply disruption, coupled with generics. That being said, we're seeing some very attractive growth in the double-digit range in FORTESTA year-over-year. And V Gel is performing quite well. So branded side, I think you've got very product-specific performances. But net-net, we're pretty pleased with where things have unfolded so far.

Rajiv De Silva

And I think the only other comment I would make is, obviously, a big part of the ongoing assessment of the business is also taking a full look at the P&L, not only for this year, but the P&L going forward. So we will continue to really understand the dynamics of how the brands are performing. And as we make announcements about our strategy and cost structure going forward in the next few months, we will have a much better sense of how we see the near- to medium-term trajectory of the business evolving.


Our next question comes from the line of Kevin Kedra of Gabelli & Company.

Kevin Kedra - Gabelli & Company, Inc.

2 quick ones. First, on Voltaren Gel. Just wondering since you've said, Rajiv, that you expect to not have that product by the end of 2014, will you be managing that as sort of a late-in-life-cycle product from a standpoint of pricing or from the sales force effort that you'll put behind that?

And then secondly, on the Women's Health business and AMS, what sort of studies are you guys doing right now to reaffirm the safety of the mesh products? And can you maybe give us some sense of timelines and whether or not that's going to play any role in your strategy from a legal standpoint going forward?

Rajiv De Silva

Sure. So with respect to Voltaren Gel, to be clear, what I was talking about was the fact that our current arrangement with Novartis will come to an end in 2014. That was not so much a statement on the end of the life cycle of the brand. It is a product that is both important to us and is meaningful to Novartis, our partner, as well. So we will continue to maximize our commercial efforts on that brand until that partnership is no longer in effect. And as I said, if the partnership continues, obviously, we'll continue to invest behind the brand. Again, as we continue to tweak the sales and marketing model of the business, we would be reoptimize resources, but it will continue to have resourcing behind it.

With respect to your question on the Women's Health product, first of all, we believe -- we strongly believe in the safety and efficacy of the mesh products. We have a number of -- 522 studies that are currently ongoing, and we would expect those studies to read out over the course of the next several years. So it is an ongoing effort. And I think, again, the fact that we are undertaking a number of these studies should reflect our belief in the product, as well as the importance that they play in the lives of our patients.


Our last question comes from the line of Tim Chiang of CRT Capital.

Timothy Chiang - CRT Capital Group LLC, Research Division

Rajiv, how much focus are you planning to put on reducing operating costs this year? I mean, is it more focused on growing the business, on the top line or is it going to be more focused on cutting costs?

Rajiv De Silva

My personal view is we're taking a longer-term view of Endo. We want Endo to be a growth company and therefore, finding avenues for growing the company is our primary priority.

That being said, I believe there's an opportunity to move the company to a leaner, more effective operating cost base. I can't opine on what that means in terms of specific numbers. That's a question that I know that many of you have, but I will be in a position to clarify that once this assessment is done. But I would say it will be a meaningful contributor to our near-term plan. But certainly, it's not a -- cost cutting is not a long-term growth plan, right, as you can imagine. So there, our focus is on returning aspects of our business to a more robust growth trajectory and doing some accretive transactions. But that will be on the back of a cost base that is going to be more competitive for us.

Blaine T. Davis

I just want to take the opportunity to thank everybody for joining us today. This completes the conference call. Jonathan Neely and myself will be available today for additional follow-up questions. Thanks very much.


Thank you very much. Ladies and gentlemen, that now concludes your conference call for today. You may now disconnect. Thank you.

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