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Executives

Blaine Davis – VP, IR and Corporate Communications

Dave Holveck – President and CEO

Alan Levin – EVP and CFO

Julie McHugh – COO

Tony Bihl – Group President, American Medical Systems, Inc.

Ivan Gergel – EVP, Research & Development

Analysts

Marc Goodman – UBS

Annabel Samimy – Stifel Nicolaus

David Ansellem – Piper Jaffray

John Boris – Citi

Corey Davis – Jefferies

Gary Nachman – Susquehanna Financial Group

Shibani Malhotra – RBC Capital

Louise Chen – Collins Stewart

Michael Faerm – Credit Suisse

Michael Tong – Wells Fargo

Endo Pharmaceuticals Holdings Inc. (ENDP) Q2 2011 Earnings Conference Call August 9, 2011 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Endo Pharmaceuticals conference call. My name is Sindia [ph], and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Blaine Davis, Vice President of Corporate Affairs. Please proceed.

Blaine Davis

Thanks. Good morning, everyone, and thanks for joining us. With me on today’s call are Dave Holveck, President and CEO of Endo; Julie McHugh, Chief Operating Officer; Dr. Ivan Gergel, Executive Vice President of R&D; Alan Levin, Executive Vice President and Chief Financial Officer; as well as Tony Bihl, Group President from American Medical Systems. After our prepared remarks, we will open the call to your questions.

I would like to remind you that any forward-looking statements by management are covered under the Private Securities Litigation Reform Act of 1995 and subject to change risks and uncertainties described in today’s press release and in our filings with the SEC. In addition, during the course of 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 this 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 early this morning.

Now I’d like to turn the call over to Dave.

Dave Holveck

Thanks, Blaine. I’m happy to be here this morning and proud of the significant progress that has been made in Endo’s transformation during the past two years. We have significantly diversified our business, acquired multiple growth drivers, enhanced our revenue and earnings growth, and created an engine for long-term sustainability.

The most exciting part lies ahead. We will integrate the assets we have assembled into a healthcare solution company and prepare for an environment that we believe will reward our approach when healthcare reform is fully implemented. We are in the process of evaluating some exciting opportunities to integrate our offering that we believe can enhance our sales and partnerships with our customers. Our aim is for Endo to be viewed by every audience as a provider of healthcare solutions, which delivers value and innovation. That’s a future that I’m excited to lead this company towards.

Now let me turn to the quarter. First, our business has continued to grow and perform well. Sales of branded pain drugs rose 13% year-over-year while revenues from generics are four times what they were in 2010, primarily a result of our acquisition of Qualitest. Sales of OPANA ER were particularly strong during the quarter, and we filed our complete response with the FDA for an application for the new formulation of OPANA ER that is designed to be crush resistant.

Second, our acquisition of American Medical Systems is now complete, and we are raising our 2011 financial guidance to $2.72 billion to $2.80 billion in revenue and $4.55 to $4.65 in adjusted diluted earnings per share. To be clear, our increase in guidance is driven by both the inclusion of AMS and our operating results and the strength of our core business. Combined, we are projecting top-line growth of around 60% and adjusted earnings per share growth of around 30% versus our 2010 results.

Third, we are off to a great start with the integration of AMS. We have assembled teams from both companies, and I’m comfortable that they will deliver appropriate and insightful recommendations on how best to bring the operations and cultures of these two companies together.

Now I’d like to turn the call over to Alan to describe our financial results in more detail and then have Julie review what’s driving our performance and what lies ahead for the rest of the year. Alan?

Alan Levin

Thank you, Dave. I’d like to begin by walking you through our second quarter 2011 financial results, which, as Dave noted, have shown the strength of our business. For the second quarter of 2011, we reported total revenue of $608 million, up 53% over the second quarter of 2010. Our reported diluted earnings per share of $0.44 were the same as the second quarter of 2010. However, our adjusted diluted earnings per share of $1.05 represents an increase of 30% over the second quarter of 2010.

These totals include the operating results of American Medical Systems for the final 12 days of the quarter since we closed on June 19. AMS contributed $27 million of revenue and consistent with the expectations we set. It was immediately accretive, including the incremental interest expense associated with the deal related financing.

As forecast, gross margins improved in the second quarter versus first quarter to 69% of revenues. Going forward, we expect AMS with its higher gross margins will further enhance that metric. Adjusted interest expense net increased to $21 million in the second quarter from $14 million in the first quarter of 2011. The increase is driven by the financing we completed in June, which was associated with the purchase of AMS. For the full year 2011, we expect approximately $130 million of adjusted interest expense.

Our adjusted effective tax rate for the second quarter of 2011 was 26.9% and benefited from a favorable IRS resolution of an outstanding audit item. Accordingly, we continue to expect an adjusted effective tax rate of approximately 28% for the full year.

Our generics business could have had an even stronger performance than it did in the second quarter. However, tornadoes near our Huntsville, Alabama facility affected production and led to a roughly one week disruption in operations with foregone sales of approximately $8 million in the period. Fortunately, demand is very strong in our generics business, and we believe that we will be able to make up for the lost sales in the second half.

Julie is going to focus in on some of the operating highlights in a few moments, but I’ll update our financial guidance for full year 2011 first. We are raising our financial guidance for the full year 2011. The inclusion of AMS contributes to that, but we have a stronger outlook for our core business as well. We now expect revenues to be between $2.72 billion and $2.80 billion. As Dave noted, that’s around 60% growth versus 2010 revenues.

We now estimate adjusted diluted earnings per share in a range of $4.55 to $4.65. And reported or GAAP diluted earnings per share are expected to be within the range of $2.22 to $2.32. That’s a $0.35 raise to both ends of the adjusted range and places the entire range above the current meaningful consensus, which already includes AMS.

On an adjusted basis, we expect our corporate gross margin as a percentage of revenues to improve with the inclusion of AMS and be in a range of 69% to 71%. We now expect adjusted SG&A to grow by a little less than 50% versus full year 2010. And thus, with roughly 60% growth on the top line, SG&A will decline by a few points as a percentage of revenues. The addition of AMS will drive an increase in total R&D expenses. We now expect year-over-year growth of approximately 45% on an adjusted basis. And similar to SG&A, R&D expenditures will decline by a few points as a percentage of revenues.

We thus expect operating expenses on an adjusted basis to decline as a percentage of revenues for the fourth consecutive year. For your models, we believe that the second quarter diluted weighted common shares outstanding of 123 million represents a better assumption than the 121 million previously forecasted. For the second quarter, that difference in share counts was worth approximately $0.02 of earnings per share.

A final important item regarding guidance is that we now believe Voltaren Gel will continue to sell without generic competition not only for the remainder of 2011 but well into 2013. We believe that the FDA guidance on bioequivalence for this product supports our revised expectation.

Finally, I am keenly focused on co-leading the AMS integration along with Tony Bihl. Our integration teams are forging ahead, and by the time we report third quarter earnings, those teams will have made recommendations in six key areas, including the optimization of urology call points, manufacturing synergies, and the partnership between HealthTronics and AMS.

With that, I’ll turn the call over to Julie. Julie?

Julie McHugh

Thanks, Alan. Our commercial performance continued to be exceptionally strong, particularly within branded pain pharmaceuticals. OPANA ER net sales grew 64% on prescription growth of 57%. And Voltaren Gel net sales grew 39%. LIDODERM for the treatment of PHN was stable year-over-year and we continue to expect low-single digit growth rate for the full year. LIDODERM continues to perform well as it nears its 12th year on the market.

Year-to-date revenues are up 2%, and that stability in LIDODERM coupled with the outstanding growth in OPANA ER and Voltaren Gel has combined to produce double-digit growth in 2011 versus the prior year for branded pain pharmaceuticals. We expect that performance to continue, and we are guiding for growth in this segment of 12% to 16% for the full year. Branded pain remains an important franchise, which produces the cash flows that enable us to invest for sustainable growth.

One of those investments, FORTESTA Gel, had a strong start. We believe the product has been received positively by physicians and patients who had experience with topical testosterone replacement therapy. However, it’s competitive therapeutic space with two formidable competitors having entered the market in the second quarter. Even so, we still believe that the success of a product launch in the current healthcare environment is not determined in the first few months, and that with the combination of the right incentives and the right access strategy, we can create sustainable growth for FORTESTA Gel.

Many of you have asked about the FDA safety communication regarding the use of surgical mesh to repair pelvic organ prolapsed. The good news is that numerous clinical studies, including randomized control trials, have been conducted on mesh and non-mesh repairs for prolapsed. And the clinical data demonstrate that trans-vaginal anterior mesh repair for prolapsed, when used appropriately, has higher success rates and remains an important option for patients. You should also keep in mind that the use of surgical mesh for the repair of pelvic organ prolapsed is the smallest of AMS’s five product lines.

Our generics business is performing very well, and we are changing our financial guidance to reflect that we expect to produce over $550 million in sales from our combined generics segment this year. We are now the fifth largest generic manufacturer based on US market prescription volume, up one place from the time of the Qualitest acquisition.

We’ve hit new high marks in production with over 1 billion solid-form doses manufactured in March, May and June of this year. And we continue to make progress against our ANDA pipeline objectives. Through June year-to-date, we filed six ANDAs with the FDA and we’ve received approval for five ANDAs. We strongly believe that there are sufficient numbers of projects in development and applications under review to meet our 2011 objective of 14 filings and 14 approvals.

I’m looking forward to leading our commercial organization and achieving a strong operational performance in the second half, as we focus on integrating our branded pharmaceuticals, devices and services, and generic pharmaceuticals business segments. We are making preparations to the launch of the new formulation of OPANA ER designed to be crush resistant. And my early impression is that when the product is approved, the regulatory environment will be supportive of our efforts to introduce the new formulation while removing the old formulation from the market.

Our generic segment has substantial opportunities for growth in its commercial base of products, and we expect to exceed the synergies we outlined at the time of the Qualitest acquisition. With the close of the AMS acquisition, we have the opportunity to benefit from multiple growth drivers in men’s health, women’s health, and BPH. We believe that the drivers for growth that we assumed at the time of the AMS merger announcement remain intact. And we expect our combined devices and services segment to deliver between $520 million and $550 million in revenues this year.

Finally, I’m guiding the AMS integration team to focus on optimization our call points within urology. It’s early, but that team has developed some extremely interesting data that identifies the broad opportunity that exists in physician practices that have a relationship with only one of our urology-focused businesses, but which could represent opportunity for our other businesses. I’m looking forward to updating you as that effort takes shape.

This concludes my prepared remarks. Now I’ll turn the call over to Blaine. Blaine?

Blaine Davis

Thanks, Julie. If it’s time, this concludes our prepared remarks. I’d like to turn the call back to the operator and begin the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Marc Goodman from UBS. Please proceed.

Marc Goodman – UBS

Yes. Couple of questions. One is, there seems to be a major change in the thoughts of what the economy is going to be doing, and I was curious your thoughts on the new AMS business and the potential in an economic weak time, how procedures and surgeries would be impacted. So maybe you can give us a little flavor of previous history how it’s been and stuff like that. That’s the first question. Second question is, Julie, you had just mentioned in your prepared remarks about the new OPANA and how you believe that the regulators are willing to pull the old and put the new out there. Is that based on your discussions with the FDA? And so just give us a flavor for how much interaction there has been and maybe just give us some more confidence in that comment. Thank you.

Dave Holveck

Yes, Marc, it’s Dave. And I’m going to give you a – give a little perspective. The AMS business continues to look very strong on all segments. There’s no question that the economics globally are going to affect all industries and certainly we’re no exception. However, the elements that really underpin and drive are really the quality of life ANDA age demographics. I think the other elements that AMS brings into the equation for us are not only to domestic market but the international. And Tony is here with us, and he can take a little bit of a more detailed shot at some of the drivers and again the international, domestic outlook.

Tony Bihl

Hi, Marc. Tony Bihl here. You commented about the economic times. I mean, the fact is that our business, as Dave commented, is driven by having physicians talk to their patients about these conditions. And there’s a significant quality of life issue, which sometimes rises above what’s happening in the economy. Realistically though, we do know that there’s some slowing in patient flow into particularly gynecology offices in these times. And so our focus is to work with physicians to help them to build their practice and to address patients who still have these conditions and want them to be addressed. We worked very diligently at that, and what we found in the past is that we bring a new product to market or do a good job of doing good patient outreach programs.

We’re able still to find nice growth in our business even in tough economic times. And in this quarter, we saw growth in every one of our product lines. So I’m encouraged by that message. As Dave said, we focus on the international markets as well. Roughly 30% of our revenue comes outside of the United States. We were delighted in the quarter to have received approval for our GreenLight laser in Japan, and we saw some – if we exclude some individual factors, we saw some nice growth outside the US in our businesses, particularly in Latin America, Asia-Pacific markets. So again, we have a broad base of market to address. We should – that helps us to kind of power through slow times. But granted, there is some headwind there with patient traffic, and we focus on execution of our work at the patient and physician connection to build the physicians’ practices.

Marc Goodman – UBS

Can you help quantify just maybe through the last recession or the last two recessions maybe how much you think that patient traffic slowing down into the OBGYNs office impacted revenues? I mean, was it a slight impact? Was it a – just try to give us a sense of how you expect this to play out.

Tony Bihl

Women’s health in total is only, I think, in numbers, about 35% of our overall business. And so – maybe even 30% of our overall business in the past. And so that’s the one aspect of the business we are talking about here. But what we saw on those times for us, we were fortunate because we were launching new technology into the market. So we brought our Elevate product to market around the time that all this was going on in the past. And what we found was, when you bring in a new product to market, it brings a better solution for the patient, better outcome for the patient, and we’re able to power through that. So we still saw very strong growth in those markets. So it’s a little bit new for us as we look out into the market. But again, we continue to focus on bringing innovation to the marketplace and kind of working our way through those slower times.

Dave Holveck

And from a forward-looking perspective, reflecting on all of those trends, we still believe that this is a business that will have robust growth year-over-year in procedure volumes coupled with some pricing flexibility. That is part of the $520 million to $550 million in device segment revenues that we’ve guided to for the full year. And that of course is implicit in the totality of our revenue raise, which was $2.72 billion to $2.80 billion for the year.

Marc Goodman – UBS

And just one other thing. Tony, you mentioned women’s health. Have you seen any slowdown or do you expect any type of slowdown that we’ve seen in the past in the men’s side?

Tony Bihl

Some of the similar factor happened to urology, and again it kind of goes with the soft economy has people second-guessing whether they should be away from work to have a procedure etc. And again, what we’ve learned from our experience in this business is to continue to create patient awareness programs, patient outreach programs. When you do that, men who decide to deal with these problems still go forward to deal with the problem. And so we think there’s still a huge untouched population.

Our focus in our sales teams is to go out, work with physicians to continue to drive their practice. And those physicians who are doing higher volumes of our procedures continue to do well even in soft economies because they have good conversations with patients and they are talking to patients who want solutions. So again, we’re kind of trying to avoid using the economy as an excuse. We recognize there’s headwind there. But we look at the ways we know how to drive growth in that market. That’s getting physicians and patients talk even in that environment. So again, there’s a little bit slow up there, but we’re working to find ways to power through that.

Marc Goodman – UBS

And the uptake of the GreenLight has been pretty good?

Tony Bihl

I’m sorry?

Marc Goodman – UBS

The uptake of the GreenLight?

Tony Bihl

Yes. The uptake of GreenLight has been very, very positive. We focused since the launch of the GreenLight XPS and MoXy fiber on replacing TURP in the marketplace. So that’s our primary focus. We will now, as we look forward in the coming months, also be look in fact at our existing installed base of products for those physicians who would like the advanced technology and we’re going to get back to them now and upgrade former HPS owners to XPS, our new laser system. So we’re very positive about that as well.

Dave Holveck

And Marc, I think we’re going to move on to the next question.

Operator

Our next question comes from the line of Annabel Samimy from Stifel Nicolaus. Please proceed.

Annabel Samimy – Stifel Nicolaus

Hi. Thanks for taking the call. Just to go on that line and thinking with the GreenLight technology, I guess again, in a tough economic environment, we need such a large capital equipment outlays for the physician practices. To what extent might that be affected? And presumably, you had some kind of GreenLight technology in the last economic downturn. And what kind of impact did the economy have there? And also, to what extent is the 69% to 71% gross margin dependent on the pull-through of consumables specifically for the new GreenLight technology that’s being filled?

Dave Holveck

Annabel, it’s Dave. Again, the elements that Tony will give you a little bit more of a closer cut, but I think one of the elements that bring to bear on growth relative to the laser is the utilization, especially in the economic times of the mobilization aspect – the mobilizer, if you would. And with the HealthTronics franchise, we now have again a linkage there that I think will accept the new technologies they bring forward. But Tony, in terms of the customer relationship and the procedural volume that feeds off of that, you may want to give some comment.

Tony Bihl

Yes. Just to maybe start off with the BPA to large prostates are not something people will hold of and treat even in tough economic times. And so we know the procedure is out there and needs to be done and the condition needs to be treated. You commented about GreenLight. As Dave said, one model certainly is the strength of a mobile provider who acquires the laser from us and then takes it from hospital to hospital, where all the hospital has to do is provide an operating room and a physician and a mobilizer even such as HealthTronics could bring in a technician and help them perform the procedure there without a capital outlay. But further to that, even with our direct businesses, you don’t have to buy a GreenLight laser. We can provide you a GreenLight laser on a basis of use of fibers over time. And so we have many flexible arrangements that allow every urologist to have access to the technology without a big capital outlay. So I think – we think we’ve found our way through that to avoid that that’s an issue for us in that place.

We know that driving utilization of the GreenLight laser is a matter of effective training upfront and then staying with the physician in the first few procedures so that they get a good outcome and are comfortable with the procedure. And we’ve learned that formula over time and I’m really confident that we’ve got that locked on now. So I believe that we want to make the procedure stick. A physician who previously did this very difficult procedure of TURP is now ready to convert to a very sophisticated laser procedure and get a good outcome. And so we’ve learned how to make that occur, how to drive procedure utilization. And as you said, that’s where the business upside is.

Dave Holveck

I think the broader message in terms of our second quarter results is really the resiliency across all segments of our business, whether it’s branded pharmaceuticals that has grown 9% year-over-year on a year-to-date basis in these more challenging economic times where the robust growth that we’ve seen in our Qualitest business for the year or the growth that we’ve seen in our devices and services segment, all portions of our business are performing very well, notwithstanding some of these economic headwinds. And that’s part of what drives the increase in our guidance today.

Annabel Samimy – Stifel Nicolaus

Okay. And if I can ask one more question on the branded drug side, you mentioned you’ve got some pretty good guidance on Voltaren Gel, and it gives you confidence going into 2013 on the whole bioequivalence issue. Is there any update on how the FDA is thinking about the LIDODERM bioequivalence issue? And is there anything from these decisions that can inform how the FDA may act going forward?

Ivan Gergel

Thanks, Annabel. It’s Ivan. Look, we think FDA is making all the right noises. Clearly we very much support the guidance on Voltaren Gel. It’s entirely consistent with what we’ve been saying about topical products for many, many years that you need good science. FDA is talking about good science. This is a clear indicator that you need good science to demonstrate a clinical equivalence of these topical products. And we continue to work and listen and see what FDA is doing, but we are encouraged by what’s happening for LIDODERM. And certainly, the sort of studies that would be required for LIDODERM to demonstrate clinical efficacy in PHN would also take significant time to conduct – they are not straightforward studies. They are difficult studies. But we think that’s a sort of hurdle that needs to be set to demonstrate equivalence for that product.

Dave Holveck

And I think that timeframe that Ivan alludes to is also something that’s playing out on the litigation front with regard to LIDODERM. With respect to that process, we were surprised and a little disappointed. In the Markman hearing, it does – the result does go against established President from the trial court judge as well as judges in other jurisdictions. If we’re not able to prevail on validity and infringement, and by the way, we think we’ve got some very strong defenses in that regard. We think we would have very good grounds for appeal. We accept the clock in motion again and extend the timeline for resolving any of that litigation into a 2015 timeframe.

Annabel Samimy – Stifel Nicolaus

Okay, great. I’ll get back in the queue. Thank you.

Blaine Davis

Thanks, Annabel.

Operator

Our next question comes from the line of David Ansellem from Piper Jaffray. Please proceed.

David Ansellem – Piper Jaffray

Thanks for taking the question. On the generics business, I wanted to get your thoughts not just on your top-line strategy but also your strategy to expand margins for that business. Is there greater emphasis on high value or Paragraph IV filing, or maybe are you looking at expansion into alternative formulations where there are fewer players? Just give us a bit of a color on your strategy there. Thanks.

Julie McHugh

Hi, David, it’s Julie. Thanks for the question. Again, as we discussed in my prepared remarks, we are expecting now revenues for the combined generics business to be in the north of $550 million this year, and we do believe that we’ve got the strength in our commercial portfolio and our R&D portfolio to sustain that type of performance and the 15% year-on-year growth rate for the next couple of years. With respect to margin expansion, that is absolutely a key focus of the generics business unit. We are looking to not only outperform on the revenue line, but we’re also in a perpetual state of optimizing our commercial portfolio and prioritizing our R&D portfolio such that we are selling and developing, relatively speaking, higher margin products.

We haven’t been traditionally dependent on Paragraph IV filings. We don’t rule that out as our future strategy, but right now, our strategy is focused on relatively higher barriers to entry types of products, products that are perhaps more difficult to formulate. And we believe with a focus on that particular strategy combined with continuing to take advantage of market events and the shifting sands within the generics industry in and of itself that we have a business that is very well positioned to not only deliver revenue growth, but margin expansion. So we are optimistic about that.

Alan Levin

And I think what you are really beginning to see play out within the company is a multi-year opportunity at margin expansion across the P&L. And so, whether it is in the segment mix with greater contributions from AMS as we move forward coupled with the synergy capture from Qualitest, which will result in gross margin improvement, this will be the fourth consecutive year that we are reducing SG&A and R&D as a percentage of operating income. We are focused on reducing our tax liabilities, and that reflects itself in the effective tax rate. So all across the board in the P&L, we are very keenly focused on the opportunity for margin expansion across the business.

David Ansellem – Piper Jaffray

And just to be clear, when you talk about higher barrier to entry products in the generic business, in terms of looking at alternative formulations, can you get there or expand your capabilities via acquisition or is that something you think you can do organically?

Julie McHugh

Historically, David, we have – at the – within the Endo legacy generics business, our focus was on developing ANDAs, which had relatively higher barrier to entry based on the technical formulation challenges. And we’ve had tremendous success and have a number of projects that are now under review at FDA. So I think that coupled with our continued focus on commercial optimization – our commercial portfolio optimization will position us very well to continue to both grow our top line and our bottom line for the generics business.

Alan Levin

And I think the strong cash flow from our overall operations of over $1 billion in EBITDA on a pro forma basis going forward gives us the opportunity to pay down some of the debt that we put on in connection with the AMS transaction. Our target is to bring that down fairly rapidly to a 2.0 to 2.5 times debt-to-EBITDA target, and while doing that, continue to bet in Qualitest as well as integrate AMS with a keen focus on operations.

David Ansellem – Piper Jaffray

Okay. And then one last quick one if I may on LIDODERM. Just remind us of the extent to which there is significant heavy lifting promotion. And more specifically, let’s assume that there is a generic at some point. What kind of sales and marketing efficiencies can you extract once the generic – if and when the generic is to market?

Julie McHugh

What I can tell you about our commitment to LIDODERM right now from both a personal promotion and non-personal promotion front is that we have a full promotional campaign behind this brand. It continues to be a very important revenue and profit driver for the company, and we again have a full complement of resources positioned against the brand for the treatment of PHN. And with that said, I would also say that over the course of the past year, we’ve built in some flexibility in terms of our commercial model such that at the time that you would expect the generic, and as Alan pointed out earlier and Ivan’s comments point out, from both a regulatory and legal point of view, we don’t see that happening in the foreseeable future. But at the time if that were to recur, we do have a flexible cost structure in our commercial support behind the brand, which would allow us to make fairly significant and immediate changes behind that brand once it goes generic.

Dave Holveck

Yes. We’re very focused on the flexible cost structure across all segments of our business and giving us the ability to dial up resources or dial them down as necessary. Obviously LIDODERM is an important product for us. And that coupled with the very significant growth in OPANA ER as well as Voltaren Gel is what has led us to guide for an uptick between 12% and 16% in branded pharmaceutical sales. That’s the component of our business that really doesn’t have an acquisition component in year-over-year growth. So that's really indicative of the organic growth in our underlying operations.

Blaine Davis

Thanks, David. If we’d go to the next question, please?

Operator

Our next question comes from the line of John Boris from Citi. Please proceed.

John Boris – Citi

Thanks for taking the question and congratulations on the results. First question just for Julie. You had indicated optimization on some of the call points between HealthTronics and AMS could certainly pay some decent dividends going forward. Can you maybe just give us some color on the overlay of the two businesses and where you see some of that optimization coming from? And then second question just had to do with OPANA TRF. Is it your intention to use the strategy that one of your competitors used, which was just to pull the product sequentially with the launch or immediately with the launch? And will you use a different or – will you use a different trademark for the TRF formulation going forward? Thanks.

Julie McHugh

Thanks, John. With regard to the optimization question, as I mentioned on a previous call, with our combined entities now with AMS in the picture, we have 455 touch points with US urologists across our network. And what we’ve done to-date is we’ve mapped out the degree of overlap of those call points, and what we have discovered is actually something fairly surprising. And that is, there is less overlap than we would have perhaps originally predicted, which we see as actually good news. It means that with some enlightened cross-selling and some referral strategies that we are working on right now, we believe that we can provide broader reach for all of our products as a result of the combined networks. So we do see some real opportunity moving forward. We are moving quickly to put together our action plan. We intend to pilot that plan in the fourth quarter for a rollout in first quarter 2012. So again, I’m very encouraged by what we have found to date. I’m also very encouraged by the spirit of collaboration across the enterprise to really try to create a lifting tide that rises all boats.

With regard to OPANA, our current strategy is in fact at the time that we get approval for the crush-resistant formulation, our intention would be to swap out the new formulation for the old formulation. We do not anticipate at this point introducing a new trademark. We believe that there is tremendous cache behind the OPANA ER trademark right now. It is a rapidly growing brand, as you know, for us. And we believe that that is due to the inherent characteristics of the compound and we believe that the trademark has served us well in terms of that franchise and will continue to serve us well going forward.

John Boris – Citi

Thanks.

Tony Bihl

Yes, maybe – Tony Bihl here. I just want to echo a comment that Julie made around the opportunity for synergy at the call point. So, I mean, AMS has been in the marketplace for about 40 years, has developed great relationship with urologists. That said, there are many urologists who we do not have relationships with. And so we’re really excited about the fact, as Julie said, that whether through HealthTronics or through a legacy Endo that there are some wonderful opportunities to share across the urology call point, many of the products that we have in our broad portfolio. So, from AMS perspective, it’s getting physicians to look at the possibility of doing surgical procedures to address a portion of their patients. We think it’s a wonderful door opener and we are looking forward to the work that comes out of the integration teams.

Operator

Our next question comes from the line of Corey Davis from Jefferies. Please proceed.

Corey Davis – Jefferies

Thanks very much. I want to ask about OPANA. And thanks by the way for all the new detailed reporting numbers and sales figures. It’s very helpful. But directionally, what do you expect to happen to OPANA’s value per script in the next couple quarters? And in Q1, there was a higher gross to net discount due to the government business compared to Q4. So, where are we now in that annual cycle in Q2? And should we expect those discounts to stay the same or get better in Q3 and Q4?

Alan Levin

Well, Corey, it’s Alan. I think you’re seeing a couple of things in the OPANA franchise. From a script perspective, we are very encouraged by the volume growth that we’re seeing. That is the primary driver in the 64% increase year-over-year in OPANA ER sales. What we’re also seeing is a mix change in dosage forms with more of those scripts coming from higher value 40-milligram strengths. And so, that adds as well. Obviously, within our different books of business, we continue to see some modest shift change there in terms of Medicare and Medicaid, and that’s a partial offset to it. But the bigger picture is really volume-driven growth in this franchise, and we would expect volume-driven growth to be the hallmark for the OPANA performance in 2011 and beyond.

Corey Davis – Jefferies

This one is probably for Ivan. Do you need a separate DEA scheduling approval for the new OPANA? And if so, is that going on in parallel to the NDA approval, and is there a potential for any kind of hiccups or delay on the DEA side?

Julie McHugh

We’ve had some very productive conversations with the DEA about our strategy to launch the crush-resistant formulation and switch out that formulation for the old formulation. So I would characterize the DEA discussion as very productive. We – again, the brand continues to grow, and so we are in regular dialog with DEA about quota and expanding our quota for the overall franchise. But we are very optimistic that that will not be a hurdle to introduction and conversion to the new formulation.

Ivan Gergel

Of course, they key news during the quarter was our – the FDA is accepting our complete response to their January action letter, which sets us up for a revised PDUFA date in December on the new formulation and keeps intact our strategy of launching the tamper-resistant formulation in 2012 with a switch-out for the old formulation in that timeframe.

Corey Davis – Jefferies

Great. Thank you.

Operator

Our next question comes from the line of Gary Nachman from Susquehanna Financial Group. Please proceed.

Gary Nachman – Susquehanna Financial Group

Hi, good morning. First question on HealthTronics, it was down a little sequentially after being flat a couple of quarters. Are you guys still optimistic that you can reaccelerate growth in this business? And how are you thinking about that in terms of your second half guidance?

Dave Holveck

Let me say a few things. I think the opportunity of what HealthTronics brought us is, as mentioned earlier, the 30% relationships with the urology franchise. That coupled, as mentioned earlier, with AMS starts to build out some of the synergies that we envisioned as we looked at HealthTronics. And again, the other elements that we see in that business sector that contributes is in the lab business and lab sector, which again creates again another set of the call points that Julie mentioned and opportunities for growth. So the elements of the past for HealthTronics put against the new model with AMS and the additional call point strategy that Julie laid out, I think we start to see how we build out this full solution model in urology. Julie?

Julie McHugh

The only other thing I would just add to that is that with respect to the second quarter performance in HealthTronics is that we were affected, as was the broader diagnostic industry about – with respect to a change in reimbursement on one of our core test, which was the FISH test. There was a 65% reduction in reimbursement. Now, I would say it’s off of a very small base, but – and we are now seeing record numbers of referrals coming into our anatomical pathology lab month-over-month. So we believe that we will recover and continue to build out organically for growth in our diagnostics business.

Alan Levin

I think the broader value of HealthTronics for us is really in the opportunity to optimize the channel in our urological devices focus. Certainly, as Tony alluded to and Julie before, we see some tremendous value in the opportunity to optimize call points across HealthTronics and AMS for our products and services that should play out beginning in the second half of the year and certainly as we move into 2012. The business itself generates very steady revenues and cash flow for us, while facilitating a strategy that we think will be a winning one in that space going forward.

Gary Nachman – Susquehanna Financial Group

Okay. Thanks for that. And then I think this is for Alan. I thought AMS was a little high in the second quarter for the amount of time that you had it. Was there anything unusual in there in terms of adjustments. And I also thought you would be impacted by a recall for one of the AMS products. So, was that the case in 2Q? And is that going to spill over at all into 3Q or 4Q?

Alan Levin

We think that AMS has performed very well in the limited time it was in our P&L in 2Q. It’s part of our enthusiasm for the second half of the year and it’s part of what leads us to the $520 million to $550 million in guidance for the full year in the device and services segment. Certainly the business on a standalone basis was affected by the AUS 800 recall in the men’s health portion of its business in the second quarter. But we are very successful in getting that product back on the market in record time in about 60 days. And we certainly think that that’s an area where patients are more likely to defer procedures as opposed to forgo procedures. So we should enjoy the benefits of that over the second half of the year.

Gary Nachman – Susquehanna Financial Group

Okay.

Blaine Davis

Next question, please.

Operator

Our next question comes from the line of Shibani Malhotra from RBC Capital. Please proceed.

Shibani Malhotra – RBC Capital

Hi, guys. Congratulations on the quarter, and thanks for taking my question. Just to follow up, Julie, on your comments about the panels for the AMS products. You mentioned the POP procedures being a very small portion of the entire franchise. But can you comment on whether the FDA – what the situation would be if the FDA was looking at those and the urinary incontinence procedures, which I think the panel is considering both. And then second, can you also comment on the comments that the FDA had made in their warning letters or kind of their letters saying that that they feel there may not be enough evidence to suggest that mesh products are better in terms of efficacy than non-mesh. I know you have data to show otherwise, but how do you see that playing out with the FDA? And then the final question on that point is related to, I guess, again some comments in the FDA documents that suggested that they may consider putting mesh products into a different class of medical devices and they were talking about category-three devices, in which case, you might be asked to do some more clinical studies or provide additional data. Can you just help us understand what that is and what you think the risk is related to something like those comments that the FDA made? And then finally, this one is for Alan. Again on AMS, I guess given your accretion guidance and your increase in 2011, does this change anyway how you view AMS in ‘12? I know you said $0.60. Are you still standing by the $0.60 or is there something maybe better than what you had originally assumed? Thank you.

Dave Holveck

There’s a series of good questions here, and we’re going to bounce it around the table. If I could, Julie, why don't we take it to Tony because I think the depth and insights on that segment of the business and the relationships that you’ve had with the industry and the FDA. Alan will be able to pick it up a little bit more on the financials going forward. But, Tony?

Tony Bihl

Thanks, Dave. Yes, sure. I think – let me try and address a number of questions there. Number one, I think what the FDA issued was a safety communication, not a warning. And the safety communication followed a public health notice they had issued back in 2008. And they wanted to follow up on some of the continued adverse events kind of reporting. But let me just back up a little bit. First of all, we’re really looking forward to the FDA, the discussion with the FDA, to look at the facts. We are confident that the clinical data on efficacy and safety of mesh for treating pelvic floor prolapse and stress urinary incontinence is going to show the procedures are safe and effective. And we have been committed for a long time to clinical data.

We have today over 4,000 patients in active clinical studies to monitor the outcomes, and we are very, very confident in the data that shows there. There are a number of randomized multi-center studies that can be discussed. And we think that if we talk to the FDA about the balance view, both of these procedures as well as the traditional repairs, I think we’ll get a different outcome in terms of the net effect on safety for the patient. We do agree with the FDA that physicians should be well trained and they should choose their patients very carefully and consent their patients carefully. We don’t disagree on that. But we think that the data needs to be told in a little bit broader form.

We are working with other companies and industry through our trade group AdvaMed to make sure that when we have this advisory committee discussion that we can provide again that balance view of the picture. And we know that a number of physicians will also provide a perspective, as they are convinced that this is a treatment that is important in their tool box of ways that they can treat patients, particularly the pelvic floor prolapse procedures. So again, we’re very optimistic about the outcome.

You mentioned that the – what's the possible outcomes. The FDA will ask the panel three questions; one, should we up-classify? Today these are 510(k) products. Could they become PMA? Well, first of all, if they do become PMA which we believe is not necessary, AMS is a broad base of PMA products, we are very prepared to deal with that and to do the clinical studies that would go with that. So while we believe that it will slow innovation to some degree in the market. We believe that PMA is not anything scary for us. We could deal with that.

Second, the FDA is going to ask whether more clinical studies should be done and what the nature of those should be. And again, we’re highly committed to clinical studies, in fact, have initiated many of our own clinical studies even today with third parties. A final question that they will ask is post-market surveillance, and again not a big concern for us. So, all of the topics, we believe, are going to be a good form to have a discussion. Primary focus, make sure that physicians can get great outcome for their patients. We have the same commitment to that, and we believe the outcome should be a good discussion and lead to very productive results for patients.

Alan Levin

And from the standpoint of the accretion guidance, we are very confident in the guidance that we’ve put forward for 2011. I think the strong operational performance of AMS is very much part of what underpins the increase in revenues and EPS guidance that we have talked about this morning. We are also a company that is committed to meeting or exceeding the targets that we’ve put out externally. And so I remain confident in the accretion guidance that we’ve previously provided on the transaction.

Blaine Davis

Thanks, Shibani.

Shibani Malhotra – RBC Capital

Okay, great. Thank you.

Operator

Our next question comes from the line of Louise Chen from Collins Stewart. Please proceed.

Louise Chen – Collins Stewart

Hi, thanks for taking my question. I just have a few. First question I had was, how do you think about business development post the AMMD transaction, what your balance sheet is going to look like and what is your capacity to do additional deals? Second question I had was, what gives you confidence that you can successfully integrate and grow a hybrid pharma and med device company? What gives you confidence there? And then the last question is, what are you doing to drive the growth of FORTESTA despite competition in the market? Thanks.

Dave Holveck

Yes. Let me first say that the BD continues to be active, and the elements of what we have tried to demonstrate over the last three years is really to be disciplined in the strategic approach of, one, building around the pain franchise and certainly building around the urology franchise. All of the acquisitions, I think, to this point give us the critical mass both in pain scripts, certainly with our branded and our generics, and then the other element of certainly successively building to get an in-depth position in the channel with urology and certainly starting with the Indevus and starting with the HealthTronics and now with the AMS. And we’ve talked relative to the synergies and the call points and the ability to deliver there now.

Going forward, do we see other opportunities? We certainly do, but I think the other opportunities are going to be ones that are going to accent the integration. I think the integration aspect is not as challenging in this new health environment, which is really saying we’ve got to create value for that customer, the payer, the provider and the patient. And that’s not just in only pharmaceutical, but pharmaceutical device and services. I think we have all of that. Can we accent it more? We think we can. I think the ability and the bandwidth financially for us to be able to take on some of these tuck-in investments that accent and give us even stronger value equation are certainly within our capability. But I’ll defer to again Alan. He can put a little bit more of a detail on the capital for ‘11 and how we are looking at what we need in operating dollars.

Alan Levin

Thanks, Dave. So I think the growth trajectory of the company as we move forward is a balance of organic growth as well as external opportunities. We are very excited about all the internal opportunities that we’ve been talking about today and looking at how those will play out over the remainder of the year. We are focused on integrating AMS, we are focused on integrating Qualitest into the fold, and we are focused on paying down our debt to target leverage ratio of 2.0 to 2.5 times, which with a very strong cash flow generating capability of the company, I think we can do in a fairly expeditious fashion.

With respect to integration, we’ve got a great track record in that regard. We integrated Indevus in about six months time and captured about $50 million of cost synergies. We integrated HealthTronics and Penwest and captured about $10 million in synergies there. I think you heard Julie talk about greater than expected synergies on Qualitest. That continues to go well operationally in bringing more of our manufacturing in-house. And we are very excited about what the integration planning teams are coming up with on the AMS-Endo integration and look forward to sharing more of that with you as that work unfolds. But we’re very confident in that regard.

Julie McHugh

And to address your question on FORTESTA Gel, I would just say that, clearly, as I said in my prepared remarks, we are getting very positive feedback from patients and physicians who have tried the product and clearly indicating their intent to stay with the product and expand the usage of the product. We did, as I mentioned, encounter – we have encountered some competitive headwinds. The competition is very aggressive, and we are examining their tactics. We are making mid-course corrections as we believe will be necessary to be even more competitive. But I’ll just remind you, I think we have a product that has the characteristics that position it very well in a large market. This is a $1.2 billion market growing at a compounded annual growth rate of 20%. And by no means, it’s early in the game for FORTESTA, but we are committed to the long run. We’ve got, as we’ve discussed throughout our call today, a very strong focus in urology. We’ve got our pain solutions team completely behind this brand. So we have a lot of optimism for the future of FORTESTA. It’s a competitive category, but we’re going to fight and we’re going to make this a growth driver for Endo.

Louise Chen – Collins Stewart

Great.

Blaine Davis

Thanks, Louise. Just in the interest of time, I think we have time for two more questions.

Operator

Our next question comes from the line of Michael Faerm from Credit Suisse. Please proceed.

Michael Faerm – Credit Suisse

Hi, thanks for taking the question. Could we get an update on the status of AVEED? Have you met with the FDA, and what’s the status of that product?

Dave Holveck

Yes. Thanks, Michael. Yes, in fact, we have met with the FDA. We continue to talk with them. We remain very, very committed to the product. Just as a reminder, this is a product that’s now marketed in 70 countries around the world. There is in excess of 2 million injections have been given with it. We think it’s a terrific asset to supplement our men’s health and particularly FORTESTA. We will certainly be working closely with FDA going forward, but we are very much committed.

Alan Levin

And I think the broader message for us is really around the pipeline across the different business segments. AMS has always been noted as an innovative company, and we certainly see the investments in the pipeline, in the device space, which will generate new product flow and a new product introduction cadence of – that we’ll continue every 18 to 24 months. There are some 49 ANDAs that are currently pending with the FDA, and that is part of what drives our double-digit revenue uptick trajectory over the 2011, 2012 timeframe. And the branded portfolio continues to move forward with of course OPANA tamper-resistant formulation in the next product that’s up for FDA action.

Blaine Davis

Thanks. Can we go to the last question, please?

Operator

Our next question comes from the line of Michael Tong from Wells Fargo. Please proceed.

Michael Tong – Wells Fargo

Hi. Just a couple of questions. One, just follow-up on the FORTESTA. Julie, as you mentioned about competitive dynamics of the product category, where are you seeing competitive headwind? Is that for a scale issue or is that more a pricing and aggressive marketing issue? And then the second question on the generics business, clearly you indicated that you are number five now in the US. As you walk up the market share position, there comes a point where you kind of trade-off profitable or high barrier to entry products and start to get into more commodity products, which may be less profitable for you. Can you give us some color on how you think about the trade-off between market share and profitability going forward, as you continue to grow that business?

Julie McHugh

Sure, Michael. Let me start with your FORTESTA question. What we’ve encountered is a little bit of – I'll just remind you that in terms of the product characteristics for FORTESTA, we believe we are extremely well positioned. This is a clear odorless, small volume of used products. It is extremely well positioned characteristically versus the other products. We really believe that the competitive headwinds that I referred to is a function of two things, primarily share of voice and aggressive marketing tactics as well as some very aggressive patients co-pay tactics, which we’ve examined and have made some corrections to or some improvements to our own program to be even more competitive. We price FORTESTA to be very competitive, and we believe, again, over the long-term this is going to be a successful product for us.

With respect to our generics business, it’s a balance between launching relatively higher margin products and continuing to meet the market demand for what you called commodity products. But again, our strategy is one in which it’s an ongoing optimization of what we are selling today, what we are developing in our pipeline. And again, the overall objective for our generics business is to generate 15% year-on-year growth this year and next year, as we’ve communicated at the time of launch or at the time of the acquisition rather. And we are also committed to margin expansion within this business. So, while it’s wonderful to be number five in terms of total prescriptions written, our overwriting objective is to build a rapidly expanding revenue base as well as expanding our margins.

Alan Levin

And the other inflection point in that business, more than half of the revenues in our generics business are, what you’ve called rightly, Michael, high barrier to entry. They are either controlled substances where DEA doesn’t allow the importation of finished goods or they are liquids where it’s just uneconomical to produce outside the US. As we are making CapEx investments and continuing our integration program, we are expanding capacity in our plant, which allows for additional sales. We are also lowering our overall cost structure, which allows us to continue to compete effectively for revenues. So we’re quite pleased with what we are seeing in the generics business, and obviously that’s reflected in the $550 million to $575 million in segment revenue guidance for the full year.

Michael Tong – Wells Fargo

Thanks. That’s all.

Blaine Davis

Great. And with that, we will just wrap up the call. I just wanted to thank everybody for their interest in Endo. Jonathan Neely and myself will be available for any follow-up questions in our offices. So again, thanks a lot for your interest and look forward to talking to you again soon. Take care.

Operator

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

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