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Endo Pharmaceuticals Holdings (NASDAQ:ENDP)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

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

Julie H. McHugh - Chief Operating Officer

Ivan P. Gergel - Executive Vice President of Research & Development

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

David P. Holveck - Chief Executive Officer, President, Director, Chief Executive Officer of Endo Pharmaceuticals Inc and President of Endo Pharmaceuticals Inc

Analysts

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

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

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Marc Goodman - UBS Investment Bank, Research Division

Michael Faerm - Crédit Suisse AG, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

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

John T. Boris - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Three 2011 Endo Pharmaceuticals Earnings Conference Call. My name is Laura, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Mr. Blaine Davis, Vice President of Corporate Affairs. Please proceed, sir.

Blaine T. Davis

Thanks, Laura. Good morning, everyone, and thank you 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 of American Medical Systems. After our prepared remarks, we'll open the call and take 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 earlier this morning.

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

David P. Holveck

Thank you, and good morning. Endo had a strong third quarter, with record revenues of $759 million and adjusted diluted earnings per share of $1.25. These results reflect our continued focus on integration of our newly acquired businesses, solid demand for our products and our commitment to financial discipline and debt reduction.

Our core business has continued to grow and perform well, with strong contributions from OPANA ER, Voltaren Gel and LIDODERM. Sales of branded and non-promoted drugs in our legacy business rose 17% year-over-year. Our acquisitions have added growth and created substantial diversification for our company.

In the third quarter, the Generics and Devices and Services segments contributed 44% of company revenues. You may recall that we significantly increased our financial guidance during our August earning call. Reflecting on our continued focus on robust operational execution this year, we are reaffirming that guidance for 2011 of $2.72 billion to $2.8 billion in revenue and adjusted diluted earnings per share of $4.55 to $4.65.

But consistent with our strategic objectives, the primary use of our free cash is to pay down debt. During the quarter, we made payments of $151 million to reduce term loan debt associated with our recent acquisition of American Medical Systems. Over the last several months, we solidified our expectations for the range of revenue and costs synergies associated with the AMS transaction.

We've taken steps to solidify our relationships with urologists and urogynecologists. Those relationships are an important driver of growth in our urology franchise. We are now calling on a majority of urologists in the United States, up significantly from last year. Importantly, there is relatively minimal overlap across the different components of our commercial organization. This, we believe, will ultimately lead to a larger number of more comprehensive relationships with providers and a higher return on our promotional investments.

We've identified potential cross-selling opportunities for the AMS Men's Health franchise and FORTESTA Gel. In addition, the company is exploring opportunities to expand the utilization of Endocare cryoablation therapy and the AMS GreenLight laser through our HealthTronics franchise. These and other initiatives are now being piloted by our commercial organization, and we expect to see the results of this pilot effort early next year, at which time, we will assess whether these efforts should be scaled nationally.

Looking forward, we believe that having good data is critical to enhancing the organic growth potential of our urology franchise. Data gives us unique insights into our customers, both providers and payers, and helps us chart the path forward in urology.

In order to support this strategy, our HealthTronics business recently made 2 strategic investments in UroChart and meridian, 2 profitable providers of electronic medical records software for urologists. These investments will enhance HealthTronics service offerings in the urology practice management and further solidify Endo's contractual relationship with approximately 1,800 practicing urologists, many of whom are new to Endo.

Over time, we believe this will give us additional insights into the kinds of best-practiced urology solutions, and outcomes that are most desirable and meaningful to patients, providers and payers.

In summary, our outlook for 2011 and 2012 is very positive, as we continue to build our brands and growth. Our Generics business is outperforming our expectations, and we see significant new business opportunities for that business in the year ahead.

We believe the combined HealthTronics-AMS platform of devices and services should have a record year in 2012, and our Pain group is very excited about the potential introduction of crush-resistant OPANA ER next year.

Now I appreciate all the hard work that is reflected in today's financial results. And I'm confident that we have the right vision, strategy and talent to achieve even greater success next year.

Now I'll turn the call over to Alan, to describe our financial results in more detail, and then ask Julie to review our commercial highlights. Al?

Alan G. Levin

Thanks, Dave. Today, we reported our third quarter 2011 results, which as Dave noted, have shown the strength of our business with outstanding top line growth.

I want to provide clarity on some of our P&L items. For the third quarter of 2011, we reported total revenue of $759 million, up 71% over the third quarter of 2010. Our adjusted diluted earnings per share of $1.25 is an increase of 45% over the third quarter of 2010. Our reported diluted earnings per share of $0.34 is a decrease over the third quarter of 2010, reflecting a charge for impairment of an intangible asset, as well as the effects of purchase accounting with respect to our recent acquisitions.

Our gross margin percentage for the third quarter was 71%, reflecting the segment mix in our revenues.

On a year-to-date basis, our gross margin percentage was 70%, consistent with our full year financial guidance of between 69% and 70%, as outlined during our second quarter earnings call in August.

Adjusted operating expenses increased to $271 million in the third quarter 2011, compared with $162 million in the third quarter of 2010. The year-over-year increase is driven by the addition of Qualitest and AMS in our operating results, following their respective acquisitions.

As a percent of revenue, adjusted operating expenses remained constant at 36% in the third quarter 2011 compared with the same period in 2010. We continue to expect that adjusted operating expenses, as a percentage of revenues, will decline for full year 2011, marking the fourth consecutive year of operating expense margin improvement for Endo.

Adjusted net income expense increased to $48 million in the third quarter from $21 million in the second quarter of 2011. The increase is driven by the financing we completed in June, which was associated with our purchase of AMS. With the full year of 2011, we expect approximately $130 million of adjusted interest expense.

During the quarter, we paid down $151 million in term loans. Our debt-to-EBITDA ratio now stands at 3.5x. And we expect a further reduction in the fourth quarter, reflecting our focus on cash flow generation and balance sheet management.

Cash flow from operations was just over $200 million for the third quarter. The strength and sustainability of those cash flows supports the paydown of debt, which remains a top priority. We remain on track to achieve our target debt-to-EBITDA ratio of 2 to 2.5x in 2013.

Our adjusted effective tax rate for third quarter of 2011 was 26%, which benefited from the favorable resolution of certain outstanding audit items. For the full year, we continue to expect an adjusted effective tax rate of approximately 28%, as outlined during our second quarter earnings call in August.

Our diverse generics business had a strong third quarter, utilizing its core capabilities and taking advantage of product shortages and disruptions in the market, particularly in pain products, where we have a strong focus and concentration. Our Generics business provides sustainable and growing cash flows, and we continue to invest in this segment to further enhance margins and profitability.

We remain excited about the growth prospects of this business, which currently has approximately 50 ANDAs under review at the FDA.

Third quarter sales of Device and Services were also strong, driven by the return of our male incontinence product, the AUS 800, in the third quarter and the solid performance in BPH therapy, driven by an increase in demand for laser procedures.

In Women's Health, we expect the return to growth, as we work with physicians to educate them on the outcomes of the recent FDA Advisory Committee meeting on transvaginal mesh products, as well as on the efficacy and safety of our products and appropriate patients selection.

We are reaffirming our financial guidance for full year 2011. Our guidance includes the acquisition of AMS, as well as a strong outlook for our core business. We estimate total revenues to be between $2.72 billion and $2.8 billion. Additionally, we estimate adjusted diluted earnings per share in a range of $4.55 to $4.65.

We now expect reported or GAAP diluted earnings per share in a range of $1.87 to $1.97. Please refer to our earnings press release for additional details on the assumptions contemplated in our full year 2011 guidance.

Looking to the fourth quarter, there are a few items I'd like to highlight. On a pro forma basis, we expect to see the top line grows sequentially from the third quarter to the fourth quarter of this year, much as we saw in the same period last year. On an adjusted basis, I would note that the fourth quarter is traditionally our strongest quarter, and we expect solid growth in adjusted diluted EPS sequentially from the third to the fourth quarter.

Our guidance reflects the flexibility that we've built into our operating model, as well as the recognition of synergies identified to the continued integration of Qualitest and AMS.

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

Julie H. McHugh

Thanks, Alan. Our commercial performance continued to be exceptionally strong, particularly within branded pain pharmaceuticals. OPANA ER net sales grew 66% on prescription growth of 56%, driven by good formulary access, attractive market growth and continued growth in our market share.

From a strategic perspective, we remain on track with our plans to convert our OPANA ER franchise to a new crush-resistant formulation in 2012, subject to FDA approval on December 13, which is our to-do to date.

Voltaren Gel net sales grew 35%. The combination of favorable formulary access and successful promotional programs continue to drive demand for Voltaren Gel. LIDODERM, for the treatment of PHN, had net sales growth of 3% year-to-date versus 2010. Consistent with the expectation that we set, LIDODERM's growth is driven by a combination of modest prescription growth and a modest pricing benefit. The steady performance from LIDODERM, coupled with the outstanding growth in OPANA ER and Voltaren Gel in the third quarter, has combined to lead our branded pharmaceuticals segment to top line growth of 17% versus last year. Now that's 17% organic revenue growth year-over-year in our legacy branded pharma business, absent the impact of any acquisitions. And the strong cash flow from this core business enable us to pay down our debt, while selectively reinvesting across our diversified business to further enhance our operating performance.

Today, that diversified business includes our Generic Pharmaceuticals segment, where operating trends remain very strong. For the third quarter of 2011, we reported pro forma sales growth of 17% in Generics. This growth was driven by the continued optimization of our commercial portfolio, favorable economics for generic products, as well as our ability to continually capitalize on market disruptions facing other manufactures.

In addition, we continue to explore opportunities to create upside from a consolidated approach with key customers for our branded and generic pain drug, in particular.

Moving on to Devices and Services segment. We had a solid 6% sales growth on a pro forma basis from the combined HealthTronics and AMS businesses in the third quarter of 2011, versus the prior year. HealthTronics had a fine quarter and is becoming an increasingly important channel for value creation in neurology. Dave has already touched on that this morning, so I'll focus instead on results within AMS for our Men's Health and Women's Health business lines.

Men's Health posted strong results after the AMS Artificial Urinary Sphincter 800 device used to treat severe urinary incontinence in men, returned to the market following a brief voluntary recall in the second quarter. As a result, Men's Health grew net sales on a pro forma basis by 21% in the third quarter of 2011 versus the prior year.

Net sales for the Women's Health business declined by approximately $3 million, or 7% on a pro forma basis versus the third quarter of 2010. This followed recent questions by the FDA about the use of surgical mesh products, which we believe were addressed at our September Advisory Committee meeting. We remain very confident in the long-term prospects for this business.

Finally, we're well underway with 2 major integration efforts with Qualitest and AMS. We're optimistic that the Qualitest integration will outperform our initial estimates, not only in terms of top line growth for the reasons I discussed earlier, but also in terms of costs synergies that are being driven by improvements within manufacturing and procurement.

For the AMS integration, Dave already touched on some of our pilot initiatives. I look forward to updating you on our progress with this portfolio of new programs. We're starting to track their performance and are confident in our ability to generate incremental sales growth from the set of unique touch points that we have in urology with our AMS, HealthTronics and branded pharmaceuticals sales team. These pilots are now launched, and our teams are enthusiastic about their prospects. This concludes my prepared remarks. Now I'll turn the call over to Blaine.

Blaine T. Davis

Thanks, Julie. This concludes our prepared remarks. Now we'd like to go ahead and open the call to take your questions. Laura?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Marc Goodman, UBS.

Marc Goodman - UBS Investment Bank, Research Division

A couple of questions. First, on the GreenLight and laser and that whole marketplace, can you just give us a flavor what's going on there? The penetration still seems pretty low relative to TERP. And so I'm curious what's happening behind the scenes? How good of a growth driver has that become? And what you're expecting there? And what kind of resources have you put behind it? And so that's kind of the first thing. And then, as you move to the Women's Health, can you talk about -- are we going to get a bounce-back or you're already seeing a bounce-back? Is this revenue number you put up -- I think, it was a $38 million, this is pretty low, right, for what you'd expect on a quarterly basis? And then on SG&A, I'm just curious about your comment about your flexibility and how EPS is going to be much better in the fourth quarter than the third. So are you saying that the SG&A run rate is not the new run rate, that you had extra expenses in the quarter and there's going to be some synergies, so SG&A will come down in the fourth quarter?

David P. Holveck

Yes, Mark, it's Dave Holveck. Let me just give a little top side, and then I think both Julie and Tony can add a little bit more of the specific color. The other areas that I mentioned in the pilot opportunities that we're working, I think, are opportunities that are going to better give us opportunity across the network with HealthTronics on the mobilization area. I think the big area is in terms of how we look at sales evolving, not so much the box sales, as much as it is the fiber sales. And I think, again, we have a greater opportunity now with both companies coming together to take a, I guess, a better focus on the development, if you would, of the procedure in the use of the fiber. On the Women's Health, again, I think we're in a little bit of a watchful waiting. I think, at this point, we see opportunities still in Women's Health and certainly in our pipeline. But again, it is one that we're going to have to work through, both relative to the market and dealing with the FDA. Tony, if you could maybe take a little deeper dive on some of the specifics relative to laser and Women's Health?

Anthony P. Bihl

Yes, very good, Dave. Yes, I think if you look at the important measure on GreenLight laser, we were pleased to see that we saw double-digit growth in fiber usage, and that's really the measure of health long term in that business is can you place enough consuls and then get fiber usage. Going one fiber per procedure really tells whether you’re driving transition from TERP. And so we were encouraged by double-digit growth in that area in the third quarter. Year-over-year, consul placements were maybe a little lower than they were last year, primarily because last year, we launched the Greenlight XPS system, and there was a certain amount of pent up demand for those consuls. So we're not -- I think we're feeling encouraged by the trend that we're on in the GreenLight business, and we're doing some things at our European sales organization to get a different kind of specialized focus in that area. So I think it's been a long pull to convert from TERP, but I think we're seeing very, very positive signs. And as Dave said, the partnership with HealthTronics, we've already begun to place some of the XPS consuls in HealthTronics partnerships to get them mobilized in a way that we haven't had access to before. So I'm encouraged by that as well. Dave commented, I think, I'll support his comment on Women's Health. It is watchful. What we saw was in the pelvic floor prolapse area, a decline in sales that occurred after the FDA safety notice. But that had flattened. So we haven't seen a continued decline. It dropped and found a new plateau. And we're watching carefully as that goes. We're focusing very much on making sure physicians are comfortable with their trending level, comfortable with the proper patient selection. And those who are doing the procedure, the indications we see are those who are comfortable with mesh are continuing to do it and we just not going to find a lot of new doctors at this point in time who want to start up mesh. So we're watching that closely. Positively, though, outside the U.S., we're still seeing double-digit growth in our pelvic floor repair products. So it's really a U.S. phenomenon. And so we're focusing -- lots of attention on that outside the U.S. market, we're again, we continue to see positive messages.

Alan G. Levin

And I would add to Tony's comments with regard to the GreenLight laser. As between fibers and consuls, fibers have a much higher gross margin for us. And so at gross margin, the contribution from the GreenLight business is stronger than at net sales. With regard to your question on SG&A flexibility, one of the things I would point out, if you look at Q2 SG&A expenditures versus Q3 SG&A expenditures is we do have in Q3 of this year, the first full quarter of AMS revenues and expenses in our P&L. And so sequentially, from Q2 to Q3, you do see an uptick. The best barometer of SG&A sales, as we move forward into Q4, is really the OpEx spend as a percentage of revenues. We're focused on margin improvement. We're very focused on the efficiency of our spend. And we expect that we'll see OpEx as a percentage of revenues decline quarter-over-quarter in Q4 and for the full year 2011.

Marc Goodman - UBS Investment Bank, Research Division

And just one quick follow-up and that is, are you expecting in your guidance, for the numbers in the fourth quarter, are you expecting much of a bounce-back in Women's Health, or you're pretty conservative in the quarter?

Alan G. Levin

I think, I'll ask Tony to comment on that.

Anthony P. Bihl

Yes, we've assumed that the current plateau level is where we continue through the rest of this year. And we watch for promising signs as we get further into 2012. But we've been cautious about the rest of 2011.

Julie H. McHugh

I just might add that when you look at our third quarter performance and the strength of the performance across all of the major segments, this really speaks to the efficacy of our strategy to diversify our business, and we've now created a much more resilient business overall. And our ability to weather these storms is such that we're just much better positioned today than we were a year ago. So I'm confident that we'll get the Women's Health business back on track. I'm very excited about the prospects of the GreenLight laser. And I'm really excited about the strength of our base business in both branded pharmaceuticals and generics.

David P. Holveck

And that also played out in our Device and Services segment with 6% quarter-over-quarter growth, and a big piece of that was the Men's Health business. So there's diversification across our segments and then even within in existing segment among the business lines.

Operator

Your next question comes from the line of Greg Gilbert, Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

I have a few. I'll start off on -- so I wanted to ask you what are your level of confidence in the final proof on December on TRF is -- or a new OPANA ER, if I can call it that? And Julie, what commercial steps are being taken now based on that confidence?

Ivan P. Gergel

Greg, it's Ivan Gergel. We are confident in our NDA filing and we are very excited about our upcoming PDUFA date. So yes, highly confident.

Julie H. McHugh

And Greg, we're planning for an approval. We are very actively working with DEA. We have explained our strategy and intention to swap out the old formulation for the new crush-resistant formulation. We're working through a number of scenarios right now in terms of getting our allocation of the oxymorphone quote have solidified. Our intention would be to build large quantities in the first part of 2012. And at the time that we have adequate quantities to completely and swiftly switch out the old formulation for the new formulation, we would initiate the launch. And we have the utmost confidence in our ability to launch and convert the market to the new formulation by the end of 2012.

David P. Holveck

It's also been a great quarter for Opana, up 66%, we see a lot of momentum in this brand. We enjoy a great formulary access and very attractive market growth in the long-acting opioid space, and we continue to take market share from competitors. So this is the part of what's driven the 17% growth in our branded pharmaceuticals business year-over-year.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Great. If I could shift gears real quick on Qualitest, which is clearly been a bright spot. There have been some recalls. So could you give us some comfort to have a good handle on the quality issues that may exist there and that things are getting better overall with quality?

Julie H. McHugh

Sure. Yes, it's an important question. And of course, Greg, quality remains and has always been at the forefront as a major priority for our enterprise. And we take these recall issues very seriously. And we have identified in each case what the root cause of the issues are. If we haven't yet finalized that, we're in the process of finalizing that. We've corrected the underlying problems. We continue to invest in our operational and quality systems. And we believe that we're in a good place, that we resolve the issues underlying the recent recalls and are prepared to move forward and put those behind us. I would add again that despite the recalls, our Qualitest business grew at a 17% pro forma growth level. And we believe that, that level of growth is sustainable. We believe our model is solid. And again, we look forward to continuing to invest in this business, both in terms of our operations as well as our quality systems, and continue the track record into the future.

Alan G. Levin

And the margins on the generic business unit for us are also an area of focus. We continue to expect margin improvement over time. We've done a lot of work in looking at procurement savings from API this year, as well as efficiencies in our manufacturing process. We continue to invest behind that for a good margin improvement, which generates the kind of steady, sustainable cash flows that we find so attractive about this component of our business model.

David P. Holveck

And again, the Generics business, strategically is important relative to another critical piece on our pain franchise, and again, in the control substance area. So again, all of what we're seeing here relative to the boost and the significance of growth relative to generics environmentally, industry-wise, coupled with the unique features of the franchise we have in Pain. And also, as a controlled substance, we avoid the importation pressure. So we really do feel long term that this is a valuable growth element of our business.

Operator

Your next question comes from the line of John Boris, Citigroup.

John T. Boris - Citigroup Inc, Research Division

I think you mentioned in your release that the AMS integration efforts, you're developing plans for delivering revenue and costs synergies associated with the transaction. Can you maybe provide us with an update quantitatively as to what you expect to get on the top line and also in costs synergies? And then secondly, can you potentially provide us with an update on some of your cross-selling initiatives that you have ongoing between AMS, the pharma business and also with that of HealthTronics?

Alan G. Levin

Sure. John, why don't I take the financial guidance component and then I'll ask Julie to comment more about the new initiatives. With regard to costs synergies, we've previously talked about approximately $50 million in synergies from this transaction. We remain on track with that expectation. We've now gone through a planning process that's been quite extensive to identify the specifics around that, and we've begun implementing that plan of action. With regard to the top line, we alluded to these pilot programs, which are the next important step in our moving-forward. We've previously talked about mid-single-digit volume growth in our Device segment, low single-digit pricing growth and low single-digit growth from synergies. I think the plans that we've got in place as we look to evaluate pilots and scale will very nicely address our expectations in that regard. Julie?

Julie H. McHugh

Great question, John. And let me -- we have a number of pilots that we've identified in the context of integrating AMS with the legacy Endo business. But what I'll do is I'll focus on the cross-selling pilots that are currently ongoing. We have cross-trained our AMS Men's Health division on FORTESTA Gel, and they are discussing FORTESTA Gel with their customers as part of their overall product portfolio presentation. We have cross-trained our pharma urology representatives on the AMS Men's Health and Women's Health businesses. Now we've done that on a limited basis. We're still piloting these initiatives. But the cross-training and the identification of targeted customers has been completed, and we are starting to feel those pilots now in the fourth quarter. Our expectation would be to take a readout on how those pilots are performing early 2012 and make some decisions about whether or not to scale them nationally. But I'm hopeful, based on some of the early anecdotal feedback that we've heard from the field. The other cross-selling pilot that we have is working with our BPH laser sales organization and our cryoablation sales organization to cross-sell those technologies. And again, that initiative is in the planning phases. And we're hopeful to get that up and running by the end of the year with the readout early next year. So that's just a flavor of some of the pilots. There's a number of other initiatives, where we're trying to leverage our core capabilities within the legacy business and within AMS to drive additional upside. But I'll be able to report out in a more holistic way as we get some of those pilots off the ground.

David P. Holveck

And John, let me just take another point at what Julie shared, that we talked there about products and cross-selling. But I think the other element that we continue to evolve is a greater presence with the urology community. And so the deeper aspects of those relationships beyond just products are critical. And you heard me mention the electronic medical record now as a part of HealthTronics, takes that partnership deeper into almost a 24/7 relationship. And again, these pilots that Julie framed out are really going to be predicated on the understanding of how the continuing care is given in the products that interrelate with that care. So we feel, again, our position, product diversity, along with the element of now-data and our ability to really add even more valued content back to that practice is much enhanced in urology from what it was.

Operator

Your next question comes from the line of Corey Davis, Jefferies & Company.

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

A couple of questions on OPANA. In the current quarter, if I do the math correctly, it looks like the value per script dropped from 307 in Q2 to 302. Is that trend likely to continue in Q4? Is there anything obvious that was driving that, or was it just natural quarter-to-quarter fluctuation?

Julie H. McHugh

Corey, it's Julie. Yes, the big shift there was essentially a burn-down of some inventories that were built up in the second quarter. So we do think it is a transitory trend and that it will get that back to a more even sales trend moving forward.

Alan G. Levin

I think the other consideration is very, very robust script growth in OPANA that continues. We're also seeing a shift in the mix of dosage forms with the migration that continues from prior quarters towards the higher dosage forms that's valuable to us. And that's partially offset by our contracting strategy.

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

And as you shift to TRF next year with the inherently lower gross margin on that product, is that something that we're going to notice in the context of your overall corporate gross margins? Or are the improvements that you've talked about with the integrations going to kind of mask that effect?

Alan G. Levin

I think there is just extraordinary flexibility in our business model. When we look at gross margins, going forward, you have the full year impact of AMS that has very attractive gross margins and is additive as enough driver next year. We are continuing to see robust growth in our Generics business, but we're also capturing bigger synergies from that business. So we'll continue to see margin improvement in that regard. It's just a very diversified business. As we pick up a royalty obligation on TRF, we'll see some modest impact. But I think you've got a lot of offsets there in the mix of the segments and products.

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

Okay. Last question, the REMS program that will be associated with TRF, any chance for any kind of hiccup there? And can you update us as to where the class-wide extended-release opioid REMS program is, and is that something that would likely get implemented onto TRF?

David P. Holveck

Yes, Corey, we don't expect a delay because of REMS. We've been working closely with FDA through this process. I believe the class-wide program will come out some time in the middle of next year. But once again, we don't expect that to be a delay to our TRF.

Operator

Your next question comes from the line of Annabel Samimy. And that's Stifel, Nicolaus.

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

Just a follow-on on the topic of OPANA. Can you talk about your pricing plan for the crush-resistance. Is it going to be similar pricing to the ER formulation?

Julie H. McHugh

Annabel, I think that what we can say about our pricing strategy for the crush-resistant formulation is that it will be on par with our pricing strategy for OPANA ER.

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

Okay, great. And then just moving more to the urology business. Can you talk about some of the diagnostics -- products that you're going to have from HealthTronics and whether you've been able to use the urology salesforce from AMS to start cross-selling those products?

Julie H. McHugh

Yes. Well, we have, as you know, a small but growing anatomical pathology lab solutions business that we came into possession, as a result of the HealthTronics acquisition. And the business is continuing to grow at a nice pace. And we will evaluate moving forward opportunities to cross sell lab solutions as a potential lever for us in the future. I will say that right now, the lab solutions team is highly engaged with the recent strategic investments that we made in health information technology and looking for opportunities to leverage the power of that presence to bring a greater presence for lab solutions. So I'll have more to say specifically on the prospects for lab solutions, moving forward, but we're in a nice position right now in terms of the trajectory for that business.

Alan G. Levin

And I'd say the other thing, I would add is, just to go back to Dave's comments about the importance of relationships with urologists and how that drives the growth in our urology franchise. What you're really seeing play out in our channel strategy is multiple touch points with urologists. Whether it's contractual relationships that we have with HealthTronics or the lab services components in HealthTronics business, or even the new IT investments that we're making. Ultimately, we see a greater number of urologists with more comprehensive relationships. That's a big piece of how we see growth enabled in that urology franchise. And that strategy is beginning to play out very nicely, whether it's in some of the early pilots we've got on upside and revenues in AMS, or some of the organic growth potential that we're seeing in HealthTronics.

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

Okay. And on the AMS business, again, can we talk -- can you talk a little bit about the reimbursement for the GreenLight technology? Just given physician sensitivity to the level of reimbursement, how does reimbursement for GreenLight compare to some other technologies out there? Is there any initiatives to improve that reimbursement?

David P. Holveck

Tony?

Anthony P. Bihl

Yes, the physician portion of reimbursement for GreenLight is slightly less than for the reimbursement for TERP, but rather strong. It's around 700 -- I don't know the exact number here, but $750-ish and TERP is roughly $100 more than that. And those have tracked fairly closely together with each other. And what we've done with the GreenLight XPS system is basically to reduce the procedure time to the GreenLight laser in half from the former procedure. So physicians could take -- in the range of an hour to do a GreenLight procedure, now we've cut that in half. So physician thinks from that rate, not only from a standpoint of how much it is, but also from a value perspective we've really reduced their procedure time. So I think we move to the right direction.

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

Okay. But in terms of other technologies outside of TERP like, say, the button technology, is there some kind of benefit that other technologies may have over you in terms of the reimbursement they get?

Anthony P. Bihl

Well, from a physician-component perspective, not dramatically. I believe the button is reimbursed the same as the TERP, but essentially as a TERP procedure that uses a little bit of a vaporization process. But from a physician-component perspective, not a significant difference there. And overall, from a hospital perspective, there's not a dramatic difference in terms of the reimbursement. The GreenLight laser, again, offers -- if you look at the total system, the GreenLight laser offers an opportunity to essentially do a procedure that's an outpatient procedure. Patient comes in this morning, goes home this evening versus a TERP where frequently, a TERP patient remains in the hospital for longer than one day due to bleeding, et cetera. So what we look at is obviously is the total cost to care. And if you look the GreenLight laser, it's a pretty dramatic story. In fact, we're doing a number of clinical studies to prove that. But that's how we look at it. So separate the physician component from the total cost of reimbursement, total reimbursement is rather comparable. But again, we want to get very, very focused on how GreenLight is much more efficient, much more effective and cost-effective for the healthcare system.

Alan G. Levin

And I would say more broadly across the company, reimbursement is something that we are very well positioned on. Branded portfolio, we enjoy very strong formulary positions for Voltaren Gel, LIDODERM and OPANA ER, among other brands. It's a part of what's driven our 17% growth, quarter-on-quarter. In the Generics business, obviously, the generics growth plays very nicely into some of the costs pressures that managed care we're seeing. And one of the things that we found very attractive about AMS during our diligence process was the high level of reimbursement that they enjoy for products and services across Men's Health, Women's Health and BPH therapy, as well as some pricing flexibility that's available.

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

Okay. And if I just may ask one more. Are there any further investments that you need to conduct to fill any gaps that you have, are there any gaps that you feel that you have that you need to fill at this point?

David P. Holveck

The first thing, Annabel, is, again, in paying down the debt, I think as you see, where we have these franchises, both in the pain and urology, there are always these opportunities where we can strategically enhance again that position in the practice or within the clinical care setting. And so whether it's again, licensing, or some investments relative to some of the long-term opportunities, it is always that option. But it's execution, pay down the debt, and again, put ourselves in a strong position for -- in a very changing environment in the healthcare world. So I think again, we're on the execution paydown with opportunities, and again, to enhance.

Alan G. Levin

And we see ourselves in more of an opportunistic mode for our investments. We really don't see gaps as we knit together these different components of business, rather we're looking at further enablers to accelerate the growth trajectory. And we're funding all of that at a very strong operating cash flows that still provide, to Dave's point, the ability to -- to me, we've paid down our debt. I think we paid down about $150 million in debt this quarter using about 75% of our cash flow from operations.

Operator

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

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just a couple. First, on OPANA TR. Can you -- we've recently seen some state guidance talking about how insurance companies must provide access to TR formulations of products. And also, should not -- these are not going to be automatically substitutable for the non-tamper-resistant formulation. So can you comment on how this could change the strategy with OPANA TR? And what impact do you think this is going to have on the franchise? And then the second point is on Voltaren Gel. Again, we've seen that some of the generics are conducting long-term clinical studies for the drug. Do you have any plans for a follow on for Voltaren Gel? And if so, would this be something that would be shared with Novartis, or would this be Endo's alone?

Julie H. McHugh

Okay. Well, let me start by commenting on the evolving environment for tamper-resistant formulation. We believe that these state actions that you referenced, Shibani, are right in line with what our thesis is for the importance of crush-resistant formulations. And we believe that what we're seeing is that the government is clear about the challenges with opioid long-term use, and that they see crush-resistant formulation as a step in the right direction to ensuring appropriate use. So we believe that our crush-resistant formulation is an innovation that is with the grain of what society is calling for. I don't want to say that in terms of how we're building now our generics portfolio, we are looking at tamper-resistant formulations of any long-acting opioids. We believe that this will be a cost of entry in the future. And we believe it's the right thing for patients, the right thing for society and completely consistent with our TRF strategy. With respect to Voltaren Gel and generics, we're very encouraged by the recent FDA guidance, regulatory guidance that requires clinical trial, head-to-head clinical trials involving the innovator product, the generic product and placebo. We think that, that's an extremely high bar toward a generic entry. And as a consequence, we believe that we're looking forward to retaining exclusivity without a generic competitor on Voltaren Gel through 2012, and quite honestly, beyond. So we're encouraged by that. And we are continuing our investment in V Gel and believe that we've got some real nice growth potential in the asset in the years ahead.

Ivan P. Gergel

Shibani, I'm Ivan. Just to echo some of Julie's sentiments, some of the these data are out now looking at some of the new CRF-type formulations, it's showing benefit. We believe the benefit of these products, it's aligned with what we've been saying from day one. So -- and we think that certainly, FDA feels that way about these products too, based on some of the comments they've made in the past, that incremental benefit. Regarding the Voltaren Gel, we think it's entirely appropriate, this sort of studies that are being extra topical agent. This is entirely consistent with what we've said for many years regarding how you need to bring generics through the market for agents. And we believe it's entirely appropriate. That type of study where you need clinical efficacy is exactly the sort of study that should be done to generic side, something like LIDODERM as well.

Alan G. Levin

And I think that's the kind of guidance that provides for good, sustainable cash flow generation from this franchise going forward. All of the trends on OPANA ER are very bright in terms of increasing market recognition of the value and importance of tamper-resistant formulations. And some of the early data that's coming out elsewhere that talks about the ability to reduce abuse and misuse, which is a key suicidal benefit.

Operator

Your next question comes from the line of David Amsellem, and that's from Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Just a couple. Coming back to the Qualitest business, obviously, a big part is controlled substances. Now should we think of the ANDA pipeline and approvals as diversifying the business away from controlled substances? And also, just generally, can you give us a sense of how many approvals we should be thinking about over the next 12 months or so?

Julie H. McHugh

Dave, it's Julie here. Yes, I think the -- we do have a very strong presence, as Dave pointed out, in pain and controlled substances. We also have a market-leading position in liquid-based products. But I would emphasize that in addition to that market leadership position and concentration in those 2 areas, we also have a broad commercial portfolio. And that's essential to effectively competing in the generic segment. Our ANDA portfolio consists of products not only in pain, but also in CNS, immunosuppression and other therapeutic areas. So while we will continue to build out our strengths in our core therapeutic areas of focus, i.e., urology and pain, we also are building a broad therapeutically based portfolio so that we have lots of levers to pull in the future. So this is a business, our pipeline reflects, again, both ability to strengthen our core therapeutic area of focus, but also to diversify and broaden our base. And we believe this positions us very well for the future.

Alan G. Levin

I think the interesting thing also about our Qualitest business is the strong inline product performance relative to new product performance. We continue to see that trend play out. Qualitest is not the kind of generic house that is subject to the variability in cash-flown profit generation associated with P4s. It's steady, sustainable, dependable, growing cash flows, quarter-after-quarter, year-after-year. And we expect that model to continue to play out. We're also playing into an environment now where you're seeing a lot of branded products go off-patent. That, in turn, is causing other generic houses to reallocate production for products where beneficiaries of that for some of our in-line products. The business is growing faster than the overall generics industry for the quarter. And we expect a good robust growth as we move forward into the fourth quarter and then beyond that in 2012.

David Amsellem - Piper Jaffray Companies, Research Division

And just can you quickly comment on the relative age of the ANDA pipeline and the quantity of approvals we should be thinking about over the next year or so?

Julie H. McHugh

Again, it varies across the board, David. And I think that what we are projecting for this year is a total of 12 ANDA approvals. And our objective would be to have a steady state of new products going into R&D and that we would continue to work with the FDA to work on the backlog of the ANDAs that are currently at FDA, so that we would be able to keep that pace, plus or minus, of new ANDAs every year.

David Amsellem - Piper Jaffray Companies, Research Division

Okay. And then one last question, if I may, on LIDODERM. Can you provide some depth of the extent to which it's actively promoted? And what point do you consider pulling back or stopping promotion, given its maturity? And is that something that could happen, say, well ahead of the generic entrance?

Julie H. McHugh

So we continue to support LIDODERM for the treatment of PHN. And we do have a personal promotional focus behind the brands, as well as a nonpersonal promotion effort behind the brand. As you said, it is a mature product. And as we look forward to launching the new formulation for OPANA, we are going to continue to look at the limit our resources to appropriately support our core products like LIDODERM, while also increasing our investment and our growth assets like the new crush-resistant formulation of OPANA ER. So we do have flexibility within our sales and marketing infrastructure to be able to flex our resources to focus on our high growth assets and dial back where appropriate on more mature product. So that's something we're constantly looking at, always looking to optimize the deployment of our resources to drive the top line and to drive the possibility to franchise.

Alan G. Levin

And I would add that we believe that this franchise could remain exclusive into 2015 before any potential generic challenger has clear air to launch a generic. We're confident in that legal and the regulatory hurdles associated with bringing the generic to market, pose a significant challenge for any company in that regard. So good, steady, dependable product for us with sustainable cash flows, grows low single-digit year-after-year. We continue to believe that we should support it for PHN as we move forward with our operating model.

Operator

Your next question comes from the line of Michael Faerm, and that's from Crédit Suisse.

Michael Faerm - Crédit Suisse AG, Research Division

One on FORTESTA. Are you satisfied with the pace of the prescription uptake thus far? And what are your expectations for the product going forward? And then secondly, on R&D expense. It looked like the expense level for the combined companies was maybe a bit lighter than expected. Just wondering if that indicates any reduction in any investment, in any specific areas or synergies or otherwise?

Julie H. McHugh

This is Julie. I'll take the first part of the question on FORTESTA Gel. I'm not satisfied with the current prescription trends on FORTESTA Gel. We are, obviously, competing in a very competitive market with the testosterone replacement category. And as you can expect, we have taken a look at what we are currently doing. We have made some adjustments. And our expectation is to get that asset back on a growth trajectory and to more aggressively capture market shares going forward. So we continue to invest in the business. We've had some early learnings about the nature of competition in this particular class. We've processed those learnings into a new approach and are in the process of getting the product back on track. But I'll also just emphasize that we're looking to unleash the power of our broad urology network to provide air cover for FORTESTA. And it's a $1.2 billion class growing at a compounded annual growth rate of 20%. We believe it's a category where we can compete and win, and we need to make some adjustments and we will be competitive in the future.

Alan G. Levin

It also plays into some of our key core capabilities. On the contracting side, as I've said before, we enjoy very strong formulary positioning for our branded pharmaceutical products. We're very pleased with the way we see formulary acceptance of FORTESTA. That positions us nicely for good growth as we go forward. And, of course, it plays in the sweet spot in our urology franchise, which is a key focus for us therapeutically.

David P. Holveck

And Mike, can you repeat the second part of your question there?

Michael Faerm - Crédit Suisse AG, Research Division

Sure, it was on R&D expense. The R&D expense this quarter appeared to be a bit lighter than might have been expected for the combined companies, with AMS, that is. So just wondering if that is indicative of any reduced investment in any areas or of synergies or other factors?

Alan G. Levin

I think that in any quarter, there's always some variability as we move forward. I think we're tracking very consistently with our guidance with respect to R&D expenditures. We've got very attractive generics pipeline. We've got some really interesting opportunities in the device space through AMS and we continue to move forward with our branded pipeline, particularly with the recruitment of patients for Urocidins. So I think R&D full year thesis continues to remain intact.

Operator

And your last question comes from the line of Gary Nachman, and that's Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Al and Julie, there is a big step up going from 3Q to 4Q to get to your revenue guidance. So could you just give a little bit more -- what are the key drivers to get you there? And do you think it's more likely to get to the upper or the lower end of the range? What are some of the big variables that we should think about?

Julie H. McHugh

Well, again, I think going into the third quarter, we're coming -- I mean, into the fourth quarter, we're coming off of a very solid third quarter and have lots of momentum in both our branded pharmaceuticals and generics businesses. And we are also, historically, have performed particularly strong in the fourth quarter. So I think that ramp up is not inconsistent with our historical performance. But also, it's consistent with our current growth trajectory across our core businesses.

Alan G. Levin

I think the third quarter is very indicative of strong operating performance across all 3 segments in our business. I think that's where we're moving as we move into Q4 and then beyond that into 2012. It's sustainable, diversified performance. If you just look at top line growth in branded pharmaceuticals of 17%, we're seeing extraordinarily robust growth for Voltaren and for OPANA ER. I would expect that to continue as we move into Q4. LIDODERM usually has its best quarter in Q4. And so as we continue to promote that for PHN, we'll see value in that regard. Generics growing 17% year-over-year, and we have steadily seen an increase in our generic expectations. And so we're very encouraged by what we're seeing on the top line there. And in the AMS business, again, you've got diversity within the product lines, but the AUS 800 on Men's Health coming back on fuel, 21% revenue growth. So we're very pleased with the resiliency in our portfolio there. So net-net, we're very comfortable with the range of guidance that we provided.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just a couple of more quick ones. So specifically on generics, what were the market conditions you were able to capitalize on? Is that something that will be ongoing, or is it more temporary in nature? And then with HealthTronics, have you guys been able to add new partnerships? And just a little bit more on what drove the sequential growth in that business?

Julie H. McHugh

So in terms of the trends in the generic industry that we're capitalizing on, it involves a number of things. We have certain competitors that are retooling and redirecting capacity from older lines of business to new product launches. Some of our competitors are encountering API shortages, some of them are encountering manufacturing issues. All of that nets out to a very dynamic generic industry. And because we are a very efficient, low-cost-high-quality manufacturer, we're able to pick up some of those business lines. And as each of those business lines -- the nature of competition changes with people coming in and coming out, we're able to capitalize on that in terms of building market share and taking price where we're able to do that. So we do believe that the generic industry will continue to be in the state of flux over the next several years, and that will be an opportunity for us to continue to grow our business and build our market share. And that's why we're bullish about this business.

Alan G. Levin

And I would say on the HealthTronics side, cryoablation therapy is a really fast-growing component of our HealthTronics business model. It's also one of the highest margin components in that model itself. During the quarter, we picked up another partnership in cryoablation therapy. And that's helped to fuel some growth in the quarter. But more importantly, it also positions us very well to continue to further drive growth in [indiscernible]. As Julie alluded to a little earlier, we've got a pilot initiative as part of our AMS synergies to look at cross-selling opportunities directly in that space.

David P. Holveck

I think the other area, HealthTronics, has also its seasonality as third quarter being one of the hotter areas across the U.S. especially now in the Southwest, kidney stones are a big issue. So that's been another area which influenced their business, which, it's again, we normally see in the third quarter.

Blaine T. Davis

So I just like to kind of close things out. I'd like to thank everybody for joining us to go through the operating results. I hope the strength of those diversified business model has come through in these operating results and the excitement that we have for the future of this business. Jonathan Neeley and myself will be available for the rest of the afternoon to take additional questions. Thanks very much for joining us.

Operator

Okay. Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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