Michael Faerm – Credit Suisse
Good morning, I’m Mike Faerm, Specialty Pharma Analyst with Credit Suisse. We’re really excited to have with us this morning, Endo Pharmaceuticals. Presenting for Endo will be Alan Levin, Chief Financial Officer. Alan?
Alan G. Levin
Thanks, Mike. Before I begin, I’ll remind you of our forward-looking statements. In that during the course of today’s presentation, I may refer to non-GAAP financial measures. You can read more about these items in the 8-K that we filed in conjunction with today’s presentation.
Well, good morning and thank you for the opportunity to speak to you at this conference. Today, I’d like to review the state of our business, how we’re executing our strategy for growth and creating value with a diversified company, our commitment to R&D innovation, and I’ll close with our financial outlook.
This is a very exciting time for Endo, not just in terms of our recent financial performance, but also because of the significant transformation of our business over the past two years, which is translated into our current 2011 financial guidance, $2.72 billion to $2.8 billion in revenues, and $4.55 to $4.65 in adjusted diluted earnings per share.
What was once a company focused solely on products to treat pain is now a diversified healthcare company focused in multiple therapeutic areas with the ability to sell drugs, devices and services to an array of medical specialties including urology, oncology, endocrinology, and pain management.
The numbers reflect the success of our diversification strategy. Endo had a terrific third quarter 2011 with strong performance across every segment of our business. We reported revenue of $759 million for the third quarter of 2011, an increase of 71% compared with $444 million in the same quarter of 2010. We reported adjusted diluted earnings per share of $1.25 in the third quarter 2011, an increase of 45% compared with $0.86 in the same quarter of 2010.
During the third quarter, we paid down a $151 million in term loans. Our debt-to-EBITDA ratio now stands at 3.5 times 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 2.5 times in 2013.
With the acquisition of HealthTronics, Penwest, Qualitest and AMS, we believe Endo is poised for continued long-term growth. The presence we have built in urology includes a broad network of partnerships and relationships with the overwhelming majority of US based oncologist or urologists. The addition of Qualitest to our own robust generics business created substantial scale in generics and will help us achieve $550 million to $575 million in generics sales this year.
We believe that sales from our combined generics business are poised to grow at a compound annual growth rate of at least 15% through 2012 and with strong prospects beyond that. Our acquisition of American medical systems or AMS furthers Endo’s evolution from a product driven company to a healthcare solutions provider. We believe that AMS will strengthen Endo’s leading core urology franchise while diversifying revenue, earnings and cash flow.
With pro forma revenues approaching $3 billion and pro forma adjusted EBITDA of $1 billion, these transactions collectively coupled with robust organic growth in our core business now result in lidoderm’s contributing less than 30% of our revenues this year, down substantially from more than 60% in 2008.
Now, as you can see from this slide, we have three key business segments in which we will invest to sustain our growth, branded pharmaceuticals, generics and device and services. These businesses provide therapeutic solutions primarily in the pain and urology areas with an emerging presence in the oncology and endocrinology space. Endo now sells more than 175 products in the fields of oncology, urology and pain management and through HealthTronics we have device and service partnerships with approximately one-third of the urologists in the US.
Pain products remain a significant and core part of our business, although they will represent a smaller percentage of our revenues and earnings as we continue to grow in other areas as well. What’s important is that pain products are an attractive business that produces significant cash flows that enabled our strategic diversification and now can be focused toward the repayment of debt.
Our base business has continued to grow, in the third quarter of 2011 sales of branded drugs rose 17% year-over-year, that’s double-digit organic growth in our legacy business. We’ve transformed our commercial business model to focus more on customer centric marketing and deployment of our sales force. This allows us to take advantage of the changing healthcare landscape and to be more effective and efficient.
This progress is reflected in the third quarter performance for Opana ER, Voltaren Gel and lidoderm. Opana ER net sales grew 66% on prescription growth of 56%. Voltaren Gel net sales grew 35% and finally lidoderm for the treatment of PHN delivered solid sales growth with year-to-date revenues up 3% year-over-year. These are strong results for established brands and we expect that performance to continue and are guiding for low double-digit growth in the branded pharmaceuticals segment for the full year.
That performance reinforces the importance of our branded pain franchise in the cash flows it produces. We continue to remain excited about one of those investments, Fortesta Gel our topical to testosterone replacement therapy for the treatment of hypogonadism. We believe the product has been received positively by patients, payers and physicians and we continue to optimize the combination of the right incentives and the right access strategy, so that we can create sustainable growth for this product because we believe it addresses a large under diagnosed and under treated patient population. By some estimates only around 9% of men who suffer from low testosterone or Low T are treated.
Prescription growth trends in this market are strong with a CAGR of over 20% during the last five years and annual sales of testosterone products of more than $1.2 billion per year. The acquisition of Qualitest has diversified our robust generics business expanded our ANDA pipeline and added a solid portfolio of manufacturing assets to build on.
As a result, our generic segment had a strong third quarter with pro forma growth in net sales of 17% versus prior year. That growth is driven by continued optimization of our current commercial portfolio by favorable economics for generic products as well as by our ability to take advantage of market disruptions facing other manufacturers particularly in pain products where we have a strong focus and are continuing to explore growth opportunities. We recently received approval of three new ANDAs that will enhance the breadth of our generic offerings and we believe the outlook for this business is very bright which is why we are investing in this segment to build out manufacturing capacity.
With the completion of our acquisition of American Medical Systems or AMS, we have a unique opportunity to build our medical device and services business and create value for our customers and shareholders.
Our share review in the following slides how AMS transforms our growing urology business. AMS is a leading provider of devices in the pelvic health space. It has three-business segments Men’s Health, which offers solutions for erectile dysfunction and male incontinence, Women’s Health, which provides solutions for female incontinence and pelvic flow repair and benign prostatic hyperplasia or BPH using our GreenLight laser. The key to AMSs success is its strong product portfolio supported by a robust schedule of planned product innovations and introductions.
For example AMS is very excited about the growth potential of its GreenLight XPS laser console and the related MoXy fiber used in prostate procedures. AMS also has an outstanding management group with the senior team averaging more than 15 years in the industry and AMS brings a global presence to Endo with four main global sites two located in the US, a facility in Breukelen, in the Netherlands and the manufacturing operation in Athlone, in Ireland.
On this slide, you’ll see a comprehensive list of AMSs existing product portfolio. In Men’s Health there are two major product lines. AMS offers erectile restoration products featuring penile prosthesis in their male continence product line that features AMS’s Artificial Urinary Sphincter.
In Women’s Health, there are two major product lines AMS offers slings for female stress urinary incontinence and products for the repair of pelvic organ prolapse. AMS remains committed in Women’s Health to delivering innovative approaches to minimally invasive procedures reducing procedure and recovery time for growing number of patients.
In BPH, there is the GreenLight XPS console and the accompanying MoXy fiber that allows for more efficient removal of prostatic tissue. In the third quarter 2011, AMS experienced double-digit growth in fiber sales associated with increased procedural volumes. That volume growth is attractive as the consumables have better margins than the consoles.
Over the last several months, we’ve solidified our expectations for a range of revenue and cost synergies associated with the AMS acquisition. We’ve taken steps to solidify the relationships with urologists and urogynecologists. Those relationships are an important driver of growth in our urology franchise.
Importantly, there is relatively minimal overlap across the different components of our commercial organization. As part of our integration efforts, we studied nearly 3,000 urology practices with which we have at least one relationship through AMS HealthTronics or branded pharmaceuticals.
What we found was that approximately four out of every five of these relationships were unique to just one offering and therefore represent opportunities for our other lines of business. And this is very good news as we believe it will ultimately lead to a larger in number of more comprehensive relationships with providers and higher return on our promotional investments.
As a first step in exploring the opportunity to expand relationships, 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.
We believe that more comprehensive relationships will create incremental value within lines of business that are attractive on their own today. And then, having good data is critical to enhancing the organic growth potential of our urology franchise. It gives us unique insights into our customers, both providers and payers, and helps us chart the path forward in urology.
We recently made two strategic investments in UroChart and Meridian to profitable providers of electronic health data to urologists. These investments will enhance HealthTronics service offerings in urology practice management and further solidify our relationships with approximately 1,800 practicing urologists, many of whom are new to Endo. As a result, we are now calling on the overwhelming majority of urologist in the US, up very significantly from last year.
Now I'd like to discuss how we think about innovation across our business segments. In branded pharmaceuticals our focus is on expanding our portfolio of products; that includes key therapeutic areas like pain and urology and oncology. We work to enhance that pipeline through partnerships, through virtual discovery efforts, as well as some early development.
Within the pipeline today, we’re extremely excited about the new crush-resistant formulation of Opana ER. We are confident in our NDA submission to FDA and are making plans to convert our Opana ER franchise to the new crush-resistant formulation next year, subject to FDA approval on December 13, which is our PDUFA date. We also have Aveed, Urocidin and other branded products, which we’ll then cover during Q&A.
Our generics portfolio is very strong and growing and includes approximately 50 ANDAs currently under review by FDA. ANDA approvals supplement the strong growth in our existing generic portfolio and we expect a balance set of filings and approvals to continue to create those opportunities. This is a healthy well-diversified and growing business in which we will continue to invest.
In devices and services, we have a number of new product introductions to support the growth of this business. Some recent advances include the Greenlight XPS laser system and the MoXy Fiber which were recently introduced to the market. We’re seeing a strong uptick in BPH procedures as a result of those two new innovations and they announced recently launched the AdVance XP treatment for male incontinence within the Men’s Health business line.
We are reaffirming our 2011 financial guidance of $2.72 billion to $2.8 billion in revenues and $4.55 to $4.65 in adjusted diluted earnings per share. We also estimate reported or GAAP diluted earnings per share to be between $1.87 and $1.97 per share following the AMS acquisition.
Our guidance reflects the flexibility that we built into our operating model as well as the recognition of synergies identified through the continued integration of Qualitest and AMS. So I’ve given you only a brief overview of our recent accomplishments and business outlook, but I think that you can see that our diversification strategy has been successful and gives us a much stronger business platform and enables Endo’s sustainable long-term growth.
So thank you again for the opportunity to speak with you today, I’ll be happy to answer any questions you may have.
Michael Faerm – Credit Suisse
Thanks Alan. We’ll open up to Q&A. we have a microphone in the back, so if you’d like to ask a question, please raise your hand. I’ll start it off with a question. So regarding the theme of diversification and continuing the transformation to a solutions company, as you think about future initiatives, where do you see it going? Do you see yourself going even more broadly from where you are right now, or sort of building out the areas that you are currently in, how should we think about that?
Alan G. Levin
I think that right now, we as a company have good critical mass in our three primary segments, branded pharmaceuticals, generics and device and services. We’ve got good critical mass in our two primary therapeutic areas, which are pain solutions and urology. I think you’ll continue to see us grow those segments individually and knit together some of the components particularly in urology. As we think about future growth opportunities outside of those areas, and I think that’s still a ways off, because we are very focused on bedding down the Qualitest and AMS integrations and paying down our debt. But as we think beyond that, we are very excited by the international growth prospects from the AMS transaction and we’ll continue to explore adjacencies around that, and we’re very excited about what we’re seeing in the women’s health business and we’ll continue to explore adjacencies around that.
Michael Faerm – Credit Suisse
Okay. Any questions from the audience? May be you could talk a little bit about the Voltaren Gel FDA guidance and the implication of that as for potential generic competition and how that has any implications for lidoderm?
Alan G. Levin
Sure. So, in Voltaren Gel the active ingredient is diclofenac. It’s a topical application of diclofenac gel for osteoarthritis. And in February of this year FDA issued guidance calling not only for PK blood work, but also a three on comparative trial between, placebo, the ANDA and the innovative drug Voltaren Gel as part of a body of clinical work that would be necessary to bring a generic for Voltaren Gel to the market.
Voltaren Gel is very indicative of how we see this topical bio-equivalent space. That clinical work that FDA has guided to is probably at least two years in the development. It’s probably six months to agree a protocol with FDA, a year to run the trial and then it will take some time to get the data in front of the FDA for approval. So you’re looking at two plus years in an area where it was a pretty significant (inaudible) patient in osteoarthritis.
Topical bioequivalency is very key for FDA right now. This whole class of local acting drugs are front and center for FDA, and the real question there is whether or not PK blood levels alone are dispositive for the amount of active ingredient at the local side of application. Clearly, FDA has said in the case of Voltaren Gel that is not sufficient, and we’re very encouraged by that, because we think that lidoderm falls into that same class and should be viewed that same way that has always been the thrust of us as it is in petition in front of FDA. And if FDA where to provide similar guidance with respect to lidoderm, it would be in my view at least two years, because to recruit patients for postherpetic neuralgia which is the indication for lidoderm it’s a much smaller end in osteoarthritis.
Michael Faerm – Credit Suisse
Any questions from the audience? Okay. I think we’ll wrap it up there. We’ll head to the break out down the hall in the Canyon Room. Thank you.
Alan G. Levin
Thank you everyone.
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