Endo International Plc (ENDP) Rajiv De Silva on Q2 2016 Results - Earnings Call Transcript

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Endo International Plc (NASDAQ:ENDP)

Q2 2016 Earnings Call

August 08, 2016 4:30 pm ET

Executives

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Rajiv De Silva - President, Chief Executive Officer & Director

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Analysts

Louise Chen - Guggenheim Securities LLC

Gregg Gilbert - Deutsche Bank Securities, Inc.

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

Stephan Stewart - Goldman Sachs & Co.

Gary Nachman - BMO Capital Markets (United States)

Liav Abraham - Citigroup Global Markets, Inc. (Broker)

David A. Amsellem - Piper Jaffray & Co. (Broker)

David R. Risinger - Morgan Stanley & Co. LLC

Christopher Schott - JPMorgan Securities LLC

Douglas Tsao - Barclays Capital, Inc.

Marc Goodman - UBS Securities LLC

Randall S. Stanicky - RBC Capital Markets LLC

Andrew Finkelstein - Susquehanna Financial Group LLLP

Jason M. Gerberry - Leerink Partners LLC

David G. Buck - Northland Capital Markets

Donald Bruce Ellis - JMP Securities LLC

Elliot Wilbur - Raymond James & Associates, Inc.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Irina R. Koffler - Mizuho Securities USA, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2016 Endo International PLC Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Ms. Keri Mattox, Senior Vice President of Investor Relations and Corporate Affairs. You may begin.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thank you. Good afternoon, and thank you for joining us to discuss our second quarter 2016 financial results. With me on today's call are Rajiv De Silva, President and CEO of Endo; Suky Upadhyay, Chief Financial Officer; and Paul Campanelli, President of Par Pharmaceuticals. We have prepared a slide presentation to accompany today's webcast, and that presentation as well as other materials including our frequently asked questions document are posted online in the Investors section at endo.com.

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 Canadian Securities Litigation Act and are subject to the changes, risks, and uncertainties described in today's press release and in our U.S. and Canadian Securities filings.

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 we are furnishing with the SEC today for Endo's reasons for including those non-GAAP financial measures in today's earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our earnings press release issued prior to today's call.

With that, I would now like to turn the call over to Rajiv.

Rajiv De Silva - President, Chief Executive Officer & Director

Thank you, Keri. Good afternoon, everyone, and thank you for joining us for today's call. I hope that you have all had a chance to review the company's earnings press release that we issued earlier today.

Let me now turn to our second quarter 2016 earnings presentation. To start, here is a brief agenda for today's call.

Moving to slide three, the second quarter was a busy and productive one for us at Endo. I'm pleased that we delivered solid revenue and adjusted earnings per share results in the second quarter, with revenue performance across all business units, broadly in line or ahead of company expectations. We also made substantial progress on our continued focus on operational execution and enhancing flexibility for our business. We have made an important addition to the management team, made good progress on key growth drivers, and progressed our ongoing legal entity reorganization, which provides us with operational flexibility and benefits. Suky will talk about this reorganization in more detail later in the call. Against the backdrop of this progress, we are taking steps to increase investments in our future organic growth drivers, Branded and Generics R&D as well as BELBUCA and XIAFLEX promotional efforts. Importantly, we are pleased to affirm our full year 2016 revenue and adjusted EPS guidance despite these additional investments.

On slide four, you will see a snapshot of our solid segment results for the second quarter. Moving to slide five, let me discuss in further detail how we remain focused on operational execution and achieving our key milestones. We announced the appointment of Joe Ciaffoni, as our new President of the U.S. Branded business. We are delighted that Joe has joined Endo, bringing his proven expertise in launching and growing branded products and look forward to his contributions when he assumes his new post later this month. We continue to drive growth in our generic sterile injectables products and our Generics Base business is performing right in line with the expectations we communicated to you in May of this year. We secured a patent for our largest product Vasostrict and continued to launch differentiated generics products and filed new ANDAs with the FDA.

In our international business, we've filed our BELBUCA submission and secured rights to XIAFLEX in Canada. And we have also advanced our branded R&D pipeline and have recently opted into another new potential indication for XIAFLEX Human Lipoma.

So on slide six, let's discuss our Branded business. Our Branded performance in the second quarter was broadly in line with our expectations, which underlie our segment revenue and margin guidance provided in May. We drove continued XIAFLEX demand vials growth, particularly in Peyronie's disease. We are advancing our BELBUCA launch efforts, increasing the total prescriptions to-date and growing the number of repeat prescriptions. In the quarter, we also saw better than expected results driven by contracting for the brand Voltaren Gel and performance across some of our other products, such as LIDODERM, Nascobal and Supprelin LA.

Moving to slide seven, let's take a closer look at XIAFLEX performance. We are making good progress with this key growth asset and that is translating into continued growth. In Peyronie's disease, a market that we think has considerable growth and expansion potential, we delivered nearly 20% demand growth in the second quarter versus the same period last year. We continue to expand our physician/injector base and our Disease Awareness campaign Ask About the Curve has shown early signs of successfully engaging PD patients.

In Dupuytren's contracture, a more mature market and one where XIAFLEX launched more than five years ago, we still drove 5% demand growth in the quarter over the second quarter last year. Revenues for the quarter were impacted by greater than expected destocking. For the full year 2016, we now expect low double digit pro forma revenue growth for XIAFLEX.

On slide eight, let's move next to International Pharmaceuticals. We continue to drive performance in line with expectation that underlie our revenue and margin guidance provided in May for Paladin, Litha and Somar. At Paladin, we filed our BELBUCA submission and acquired the Canadian rights for XIAFLEX last quarter. Both products are potential long-term growth drivers for the business, and the addition could provide longer-term growth as we manage the expected loss of exclusivity on select products in the Canadian market this year. In our Litha and Somar businesses, our underlying revenue growth is outpacing market growth rates, largely driven by volume. And we continue to improve our operating margins.

Now, to talk about our U.S. Generics performance, let me turn the call over to Paul. Paul?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Thank you, Rajiv, and thank you all for joining us on the call.

Turning to slide nine, we remain focused on the continued integration of Par and Qualitest, advancing our pipeline and restructuring our manufacturing footprint for improved margins, all while delivering performance in line with our expectations. Our Sterile Injectables business continues to grow, led by Vasostrict. Importantly, we also secured a patent for that product that does not expire until 2035, and which we believe further strengthens our market position.

And our new launches in Alternative Doses segment, we've launched 11 products since the beginning of the year and continued to file new ANDAs with the FDA while replenishing our R&D pipeline. As we expected, and in line with trends consistent across the broader generic industry, our Base business declined by approximately 5% sequentially from first quarter 2016, driven by consortium pricing pressures and competitive generic entrants.

Finally, our adjusted gross margin for the Generics business remained in line with expectations. I would like to note that second quarter revenues benefited modestly from some favorable timing between Q2 and Q3, driven by customers advancing some of their orders, ahead of the 4th of July holiday.

Moving on to slide 10, I'd like to provide you with an update on the action plan that we outlined last quarter to drive long-term growth across our Generics portfolio. While I won't go into the detail on each of these items, I do think it's important to note that we are in progress, on track or have already completed all the core components of our action plan.

For example, we continue to make progress on key growth drivers like our 505(b)(2) and sterile injectable programs, as well as launching a steady stream of new differentiated products this year. We're also reprioritizing and accelerating our R&D pipeline. We've already rationalized numerous lower value projects as part of our restructuring and are on track to file approximately 25 to 30 new ANDA submissions in 2016.

We made progress on our accelerated restructuring plan for the Generics manufacturing network and continued to project approximately $60 million in annual net run rate savings to be fully realized by fourth quarter of 2017. We have largely completed the transition of the legacy Qualitest business onto the Par platform, including commercial insight, forecasting, wholesaler data management and other capabilities. And finally, we are executing on our operational plan. We have delivered a second quarter that is in line with the expectations that underline our guidance for revenue and adjusted margins previously communicated in May.

So let me talk briefly about our product launch to-date and those anticipated for the remainder of the year. On slide 11, you'll see a familiar chart. We have updated it to show all the products we have successfully launched so far in 2016. You can also see those projects that we expect to launch into the marketplace in the second half of the year. Importantly, we are on track for our November and December 2016 launches of generic Seroquel XR and generic Zetia.

With that let me turn the call over to Suky to discuss the financial performance of the company in the quarter and our projected outlook. Suky?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Thank you, Paul. And good afternoon everyone.

Let's start on slide 13, where we've outlined finance updates around the recent SEC guidelines and our adjusted effective tax rate policy moving forward. As you're aware, the SEC issued non-GAAP compliance and disclosure interpretations or C&DI guidance in May. Endo has adopted these guidelines and, as a result, is no longer excluding the noncash deferred tax expense associated with acquired attributes in our adjusted effective tax rate. This policy has no impact on Endo's historic or forward-looking GAAP tax or cash tax profile. Also the initiation of a legal entity reorganization in the first quarter has limited the impact of this change on our adjusted effective tax rate for the year and moving forward.

Moving to slide 14, we provided more detail about the legal entity reorganization that I just mentioned. As part of the continued integration of our Qualitest and Par businesses, we initiated a legal entity reorganization that moved the Generics business to a new U.S. holding company structure that is separate from the legacy branded business structure.

The reorganization provides operating flexibility and benefits while also reducing the potential impact related to future limits on the use of tax attributes by utilizing most of our attributes to offset an intercompany gain. As a result of this reorganization, the tax basis of U.S. Generics business assets have been stepped up to their fair value which will provide ongoing cash tax benefits and flexibility in moving assets with limited tax leakage.

The utilization of acquired attributes that I mentioned earlier would have had an unfavorable impact of approximately $160 million on our full year adjusted tax expense under Endo's non-GAAP policy, prior to the adoption of the SEC's C&DI. The elimination of this acquired attribute benefit was offset by an improved mix of jurisdictional adjusted pre-tax income, resulting primarily from the reorganization.

This reorg also gave rise to a discrete net GAAP tax benefit of approximately $450 million in the second quarter from outside basis differences. This benefit has been excluded from our adjusted effective tax rate in accordance with our policy. As I talked about earlier, as a result of the SEC's C&DI, Endo is no longer excluding the noncash deferred tax expense associated with acquired attributes in our adjusted effective tax rate.

However, since we utilized almost all of our tax attributes through the legal entity reorganization, the implementation of the updated C&DI guidance is not expected to have a material impact on our 2016 and forward-looking adjusted tax rate. Endo continues to project an adjusted effective tax rate of 0% to 2% as guided in our first quarter 2016 earnings announcement. We expect to have a GAAP tax benefit and a negative cash tax rate for 2016.

Importantly, for our outlook for 2017 and future years, we expect our adjusted effective tax rate to be in the high single-digits to low double-digits and our average cash tax rate to be below 5% over the next five years.

Next on slide 15, you will see a snapshot of the second quarter GAAP and non-GAAP financial results. Rajiv covered company and segment revenues earlier, so I will not review that here. On a GAAP basis, we delivered earnings per share of $1.75 in the quarter versus a loss of $0.49 in the second quarter of 2015. 2016 second quarter GAAP results were driven by an operating loss of $48 million, offset by the tax benefit that I discussed earlier. Tax benefit also offset the impact of a higher share count in 2016.

Our GAAP operating loss was largely impacted by a decrease in our gross margins due to a higher mix of generic revenue in the second quarter compared to 2015 and due to incremental amortization expense associated with the stepped-up value of intangible assets from Par.

On an adjusted basis, overall Q2 results are slightly better than previously guided. To summarize the points Rajiv and Paul made, revenue was better than expected due to sterile injectables, stronger than expected performance from a number of branded products and a modest timing benefit related to quarter-end buying pattern. Adjusted net income and EPS are better than guided as a result of higher revenues discussed earlier.

On slide 16, while the second quarter was ahead of our guided expectations, we are maintaining our guidance ranges, as some of the upside in the second quarter was driven by favorable timing. As Rajiv mentioned, we are also going to invest at a higher level than originally planned in our key growth drivers in the second half of the year through reallocation of operating expenses and a modest step-up in spending.

Regarding the cadence of revenues and adjusted earnings in the second half of the year, we continue to project the fourth quarter to be disproportionally larger than the rest of the year's quarters due to the launch of the generic Seroquel and Zetia. For third quarter 2016, we expect revenues in the range of $830 million to $870 million, and adjusted earnings per share of $0.77 to $0.82. This implies a sequential step-down in third quarter 2016.

The anticipated decline is driven by the product order timing benefits in second quarter that we expect to reverse in third quarter, lower U.S.-branded sales related to generic competition for Voltaren Gel, continued slowing in the testosterone market, continued declines in legacy pain products and an increased investment in R&D, as well as XIAFLEX and BELBUCA promotional efforts.

Moving to cash and liquidity on slide 17, on a year-to-date basis, GAAP cash flow from operations totaled approximately $555 million. We have also highlighted some of the material moving parts that have impacted our reported or GAAP cash flows for the year.

On slide 18, we are reiterating our view on cash available to pay down debt in 2016. We continue to project debt pay-down of approximately $250 million in 2016 and to exit the year at a mid to high four times net debt to pro forma adjusted EBITDA leverage ratio. As noted in our press release, we ended the quarter with approximately $670 million in unrestricted cash, approximately $390 million in restricted cash, and a net debt to leverage ratio of approximately 4.6 times.

To summarize, we are encouraged by our second quarter financial results and pleased to affirm our full year outlook while increasing investment in key growth drivers.

Now, to close out the call, let me turn it back over to Rajiv. Rajiv?

Rajiv De Silva - President, Chief Executive Officer & Director

Thank you, Suky.

Moving to slide 20, in summary, there are a number of key growth drivers that position our U.S. Branded business for long-term growth. We believe strongly in the significant in-market growth opportunities of both XIAFLEX and BELBUCA. We are continuing to optimize our team and our business to achieve that growth potential while also managing our diversified portfolio of other products. We are also accelerating our R&D pipeline to advance those programs and the timelines for their potential market entry. We continue to execute on these growth drivers in the second quarter and expect to achieve additional key milestones through the end of this year and beyond.

On slide 21, let's recap the key achievements in our U.S. Generics business. We are focused on driving growth through our differentiated, higher barrier to entry products like sterile injectables and our robust pipeline of more than 250 programs post-restructuring.

We have a diversified, reset base business and a robust highly compliant manufacturing network. In 2016 and beyond, our success will be driven by Paul and his proven team as they continue to execute on these opportunities.

Let's briefly summarize our call today on slide 22. In Q2, we delivered solid top and adjusted bottom line results, beating our Q2 adjusted results guidance. We made substantial progress on our continued focus on operational execution and enhancing flexibility for our business, and we are affirming our full year 2016 revenue and adjusted EPS guidance while increasing our investment in branded and generic R&D and BELBUCA and XIAFLEX promotions.

Endo is executing on our strategic priorities and we continue to believe that this is a time of significant opportunity for the company, our employees, the patients we serve and our shareholders.

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

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thank you, Rajiv. We'd like now to open the lines to your questions. In the interest of time, if you could limit your initial questions to allow us to get in as many as possible within the hour, we would appreciate it. Operator, may we have the first question, please?

Question-and-Answer Session

Operator

And our first question comes from the line of Louise Chen with Guggenheim. Your line is now open.

Louise Chen - Guggenheim Securities LLC

Hi. Thanks for taking my questions. Quite a few here. First question I had was on XIAFLEX, if you could give us more color on how you get to the double-digit growth for the year, and also what was going on with the customer de-stocking this quarter? Second thing is, I wonder if you've any update on the divesting of the non-core assets to pay down debt. And the last thing is, are you seeing any stabilization in your Qualitest business? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Sure. Louise, let me address the first two questions and I will have Paul address the third one. So, in XIAFLEX, as we have commented in the past, the growth profile does tend to be a little bit lumpy and has some seasonal fluctuations to it. So as you might recall, we had very robust growth in the first quarter. We have seen a little bit of a slowdown in Dupuytren's contracture in the second quarter. But as we look out over the remainder of the year, we do feel confident in the double-digit growth trajectory that we have talked about.

Now in terms of the revenue profile, as you know, customer stocking is largely out of our control, though typically XIAFLEX stocking in the specialty distributors and the specialty pharmacies in general is around 14 days, about two weeks. But from time to time, we do see some unusual changes to it, which is what happened in the second quarter; our stocking is around one week, so approximately half of what it typically is.

Now, we have seen this behavior in the past. And typically over the course of a year, it tends to normalize, but, by and large, it is out of our control. So, what we look to is demand vials growth. And that's where when we look at the 19% growth in Peyronie's, we do feel very good about the indication given that from a longer-term perspective for our on-market indications, the biggest opportunity is in Peyronie's.

In terms of divestments of non-core assets, I just wanted to be clear that, from a company perspective, we don't feel compelled to divest any assets. We are confident in our business and the natural delevering nature of the business given our substantial cash flows, particularly as we look beyond the non-mesh payments in 2016 and 2017. So with that being said, I think we've also been clear that as a company and as a board, we are always – we are shareholder friendly. And given that there are any opportunities that come our way that are value-creating, we will certainly evaluate them on an as-needed basis. Paul, maybe you can comment on the Qualitest business.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Yeah, sure. So, Louise, I would say that we're really not separating out the Qualitest and the Par businesses too much any longer but maybe high level when you look at the Qualitest business for the most part, it's really known as a base business play. When you look at our base business play, we define that as the pain control substances as well as the oral extended release and immediate release products. That also includes some of the Par portfolio.

When you look at that on a quarter-over-quarter basis, we communicated this at our last earnings call that we were anticipating about 5% erosion quarter-over-quarter. And that's exactly where we landed. So it's in line with our expectations and how we communicated. So generally, our base business is falling in line and we're not seeing the heavy erosion that we realized in Q1.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we have the next question please?

Operator

And our next question comes from the line of Gregg Gilbert with Deutsche Bank. Your line is now open.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Thanks. I have a few. First for Rajiv, can you comment on whether the company is considering any business combinations right now. I know you're open and shareholder friendly in general, but maybe if you can comment specifically whether there is anything being considered at this point? And Paul, can you confirm that there have been no P IV certifications on Vasostrict since you got that patent issued? Can you quantify the stocking benefit for your business? And can you comment on whether you have an ephedrine filing or a program in the networks? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Thank you, Gregg. So as you know, the company doesn't comment on any ongoing business development. Though, I would continue to stress that our priority for this year is operational execution. And hopefully, what you've seen from us is a quarter of delivery around that and again – but as I've said in the past, our board is always open to shareholder friendly strategic opportunities. And we will remain open to such opportunities as they come our way but really our focus now is on the operations of the business.

So let me just turn to Paul. I think there were three parts of that question Paul, with our stocking and ephedrine.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So I'll be brief. I think in case of Vasostrict, to his answer, we have not noticed of any Paragraph IV filing. In terms of stocking, I think we're at normal course right now. We believe that we are – basically, our run rate is – we have converted all the unapproved product to approved products. So we're really normalized in that regard. And then Gregg, I think your last question was on ephedrine, and I think all we can say right now is in the case of any product that we are essentially not our policy to discuss any product that we don't already disclose into our corporate presentations at this point in time, Gregg.

Gregg Gilbert - Deutsche Bank Securities, Inc.

And sorry on the stocking, I meant for you to quantify the stocking – the wholesaler buying pattern benefit in the quarter for the overall portfolio, sorry?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah. So Gregg, this is Suky, that's always been inexact science when you're trying to measure exactly when an order comes in from one period to the next especially around a holiday weekend, but where we are now we would estimate that to be around $15 million to $20 million in revenue.

Gregg Gilbert - Deutsche Bank Securities, Inc.

Thanks.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yep.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we have the next question, please?

Operator

And our next comes from the line of Annabel Samimy with Stifel. Your line is now open.

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

Hi. Thanks for taking my question. I was just curious to know last quarter you talked about some, I guess, paring down of the commoditized portion of the base business. And so I was just wondering from that perspective on top of your balance sheet, how can we think about the way that's shaping up for 2017 in terms of reaching your delevering goals of being under 4x in 2017? And can you still satisfy that with some of the mesh payments that you're still seeing? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Annabel, let me just have Paul to address the portfolio rationalization question you had. And then Suky will talk about the delevering profile expectations.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Sure. So, regarding really what we referred to as restructuring the operations, there is about 70 or so products that we've discontinued or in progress of discontinuing, so we're right on track. And that goes back to the $60 million annual net run rate that we anticipate for fourth quarter 2017.

We've made some difficult decisions that we've talked about regarding the Charlotte and the Huntsville facilities with respect to – in terms of employees and synergies. Those decisions have had essentially three waves to them. We've executed on wave number one and we are on track to meet the expectations that we've communicated. So, so far we are executing on the plan.

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

Is that having...

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

And then...

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

Sorry. Is that having a revenue and EBITDA impact right now?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Nothing about what we've already talked about on our first quarter call part of the restructuring, Annabel.

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

Okay, sorry.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Already baked into our guidance.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah.

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

And then if you can just talk about the leverage, sorry?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Sure. Yeah. So as I said, we're about 4.6x now. We expect to exit the year somewhere between mid to high 4s times. A key component of that going into 2017 is we remain committed to delevering below 4x over the mid-term is how we characterized it back on the first quarter call. So we're not putting specific timing around that.

And then I think the offshoot to your question was something around mesh. What I would say there is as of the second quarter, we had just below $1.6 billion accrued on the balance sheet, with just below $400 million in restricted cash. So that's essentially money that's already out the door for funding of mesh which leads an incremental or remaining $1.2 billion on a pre-tax basis. We'd expect that $1.2 billion to be serviced as another $300 million to $400 million in the second half of this year, and then somewhere around $600 million to $700 million on a pre-tax basis in 2017.

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

Okay. Thank you.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

You're welcome.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we have the next question, please?

Operator

And our next question comes from the line of Stephan Stewart with Goldman Sachs. Your line is now open.

Stephan Stewart - Goldman Sachs & Co.

Good afternoon, guys. Thanks for the questions. Just a follow-up on the Generic business, wondering how much of the performance this quarter was volume versus price, if you exclude the Base business and the benefit from the wholesaler buying patterns?

Rajiv De Silva - President, Chief Executive Officer & Director

Suky, do you want to...

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Sure. So, I'd say first of all, overall on a total generics portfolio basis, we're seeing more pricing pressure than pricing opportunity. And overall, our growth for this year on a pro forma and underlying basis which we said in the low single-digits will be primarily volume-driven.

Stephan Stewart - Goldman Sachs & Co.

Great. And just one quick follow-up on the CDC opioid prescribing guidelines. I know you guys did include something in the full year guidance last quarter, has there been any meaningful change to how you guys were thinking about it then?

Rajiv De Silva - President, Chief Executive Officer & Director

The trends continue, Stephan. So they have – we see a continued pressure in terms of prescription volumes in the opioid space. If you look at the brand space alone, new prescriptions in the branded, well, are down double-digit, since the announcement of the CDC guidelines but that is all incorporated. It was incorporated into our forward-looking guidance in May. And we don't have a different view in terms of the full year. We will of course take stock when we think about 2017 later on this year or early in 2017.

Stephan Stewart - Goldman Sachs & Co.

Great. Thanks for the questions.

Rajiv De Silva - President, Chief Executive Officer & Director

Sure.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thank you. Operator, can we move onto the next question, please?

Operator

And our next question comes from the line of Gary Nachman with BMO Capital Markets. Your line is now open.

Gary Nachman - BMO Capital Markets (United States)

Hi, guys. Rajiv, you've mentioned improved contracting for some of the branded products in slide six. Could you explain this a little bit more? How did this help you in 2Q and is that sustainable? And also, specifically what are you planning to do to accelerate BELBUCA going forward? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Sure. So, Gary, in terms of the improved contracting, I think you might be referring to the statement that we made about Voltaren Gel, if I'm not mistaken, but certainly in terms of our defense of the branded product, we've had better than expected success, with contracting that we have done with commercial plans and that's largely speaking, what's helped us in the first half of the year. As you know, we have authorized the launch of Voltaren Gel AG through Par and that is taking place as we speak. And over the course of the year, we do expect the authorized generic to take more share of the overall molecule. And then, Gary, your second question, just – can you again repeat that probably?

Unknown Speaker

BELBUCA?

Gary Nachman - BMO Capital Markets (United States)

Yes. BELBUCA, you said you're increasing promotions behind it. I'm just curious what your plans are?

Rajiv De Silva - President, Chief Executive Officer & Director

Sure. So, in BELBUCA, the feedback continues to be similar to what we've talked about on the first quarter which is positive feedback from physicians, positive feedback from the patient experience, the two areas which are leading to slow uptake of the product beyond just the overall environment, the opioids, one is the process of getting physician community comfortable with the tapering and titrating requirements in terms of switching patients between different opioids and on to BELBUCA. And secondly, it's around the payer environment and how they see the Schedule III products.

So on the latter, we've made good progress. At this point, we have contracted roughly around 85% of commercial lives and about 70% of that without any restrictions beyond the label. We expect to continue to improve that over the course of the year but of course, at this point in launch of a product like this, we don't yet have government reimbursement but what we see as being the real opportunity is the pharmacoeconomic and public health argument for why a Schedule III product like BELBUCA is preferable to other opioids such as Scheduled II products in terms of where it is introduced in the treatment algorithm. And a lot of the investments that we are now making is around improving our fact base in terms of making those market access arguments.

Clearly, we still continue to have a large investment from a P IV standpoint and that continues. We also are increasing our investment around physician education, particularly around the tapering and titrating of the product. But really the upside benefit and the longer-term growth of the product is really predicated on us being able to really anchor buprenorphine as a effective and safe alternative in the opioid space, both from a payer standpoint as well as from a physician standpoint.

Gary Nachman - BMO Capital Markets (United States)

Okay. Thanks a lot.

Rajiv De Silva - President, Chief Executive Officer & Director

Okay.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, I think, we can move on to the next call, please?

Operator

And our next question comes from the line of Liav Abraham from Citi. Your line is now open.

Liav Abraham - Citigroup Global Markets, Inc. (Broker)

Good afternoon. First question is just a broader question on the generics environment. Well, I'd be curious if you anticipate any change in the environment given that Teva, Allergan Generics deal closed last week? And then secondly a question on XIAFLEX, I'd be interested in your thoughts and how you see the growth trajectory evolving post 2016 if possible and perhaps you can touch on any updates on reimbursement and physician training? And how you feel about ongoing double-digit vial growth post 2016? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Paul, do you want to talk about the Generics environment question?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Yeah. Sure. So, it's Paul here. I don't anticipate any major changes for Par-Endo with respect to the Teva deal closing. And I think, we've stated before in terms of competition and how we feel about the consortiums. At the end of day, we've got ourselves four large consortiums. They're representing around 90% and we're going to have to still compete with Teva head-on as we would, in any case. And typically you want to just to be very careful about trying to go after too much share; you just have got to take a balanced approach.

So, I envision that we're a strong competitor, that we're a strong competitor. Even with the portfolio getting larger, we need to execute on our plan of bringing new products into the marketplace. And I don't think the fact that they've got Actavis portfolio as a negative impact to Endo-Par, if that, in fact, is your question that you're trying to allude to.

Rajiv De Silva - President, Chief Executive Officer & Director

Liav, going to your XIAFLEX question, we continue to believe that there's a real long-term opportunity with the XIAFLEX as a poor old platform for the company, given the fact that it's a biologic, given the multitude of potential indications that we have, as well as potentials in the on-market indications. That being said, we're not making any particular prediction around 2017 and beyond. But I would say that we are very optimistic when we look at the current results that we are seeing in Peyronie's disease which we think has the great opportunity of the two on-market indications. And there are three areas in which we have made promotional investments and we expect to step up for the reminder of the year as well as going to 2017. And they will be the following. One is an area which we already talked about which is that we continue to make the lives of patients who currently prescribe the product easier and then that's mostly around reimbursement support. We've substantially increased the level of internal resourcing around that as well as targeted third-parties to support that.

The second is a longer-term opportunity around Disease Awareness building, and we have began to do piloting an early investment particularly in Peyronie's through our online campaign, Ask About the Curve. And it's of course too early to fully realize the benefit from it or fully conclude what the benefits will look like but the early signs of Web click-throughs and patient interest in going on to our site or physician selector for example. This is – substantial uptick in that. Right now, clearly for a product like this, the cycle from the time you get a patient interest in the product, or interest in going to a physician, to the time that he would have first injection, could be six to nine months, right, which is why we always pointed to the back half of this year 2017 before we really begin to see the benefits from it.

The third thing I would say is, and this is probably more sort of true for Dupuytren's contracture than Peyronie's is the need to make a compelling argument around the pharmacoeconomic benefits of a intervention like XIAFLEX versus surgery. And that's more of a opportunity for us in Dupuytren's contracture where the hand surgeons and others who treat the condition often see surgical option as the first option. And we of course have very good success with the product, with these physicians. But getting to the next level is going to require making an even stronger argument around why this is in the best interest of patients.

Liav Abraham - Citigroup Global Markets, Inc. (Broker)

Great. Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

Thanks, Liav.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we have the next question please?

Operator

And our next question comes from the line of David Amsellem with Piper Jaffray. Your line is now open.

David A. Amsellem - Piper Jaffray & Co. (Broker)

Thanks. So on Vasostrict, now with the patent in place – it's a question for Paul – maybe talk about how you're thinking about the longer-term durability of the product? I think you had said that competition could be a couple years away and is that still your latest thinking or does the patent give you some more wiggle room?

And then secondly, on the Generics pipeline and it may be premature to ask this but beyond the bigger launches for later this year, maybe talk about some potentially significant launches that you think could happen in 2017? Thanks.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Yeah, sure. So regarding Vasostrict, I would tell you it's still a little bit early. We do in fact feel better. Obviously, we got the Orange Book patent listed in June, I think it was June 28. The way we kind of look at this product right now simply is from two different views. There was always the possibility that there could be a file that was issued with the FDA pre-Orange Book patent listing. And that's something where maybe we feel a little bit better about. And typically what happens is that an application was in at the FDA for several months prior to the Orange Book listing, what you would expect is for generic competitor to file a Paragraph IV very quickly and then we would have been noticed. That didn't happen. From that standpoint, we feel a little bit better.

If an application went on file a month or two pre-June 28, or shortly thereafter, that's where we're not going to have that visibility. But if we were to get a Paragraph IV, say, today, it would take about 60 to 90 days for an application to be accepted for filing. So, we would probably look to be in a 30-month stay, taking somewhere late fourth quarter. That's the way I would start looking at it. So from that standpoint, we had originally said that we felt good through 2017. We probably will be in the position to say that we feel a little bit good through 2018 but we'll have better visibility around fourth quarter.

In terms of the Generic pipeline, from a standpoint of where we feel real good about, I think we'd like to focus a little bit on the 505(b)(2) side. I think that's an area of strength of the company, right? So, while we haven't disclosed specifics, we do have a series of 505(b)(2)s that are starting to come through fruition.

And frankly maybe we can talk a little bit more in terms of products that we feel a little bit better about. We had previously talked about two 505(b)(2)s that we did not shed a lot of light on. We feel a little bit better about them now. They are two forms of potassium, one is a liquid and one is a powder form. We have started to receive positive feedback from the FDA in terms of removing unapproved sources. That's going to come to an end whereby these unapproved sources will have the remainder of 2016 or so to have product into the market. These types of products will show benefit to Par and Endo in 2017. So, that's an area that we like to focus in on.

David A. Amsellem - Piper Jaffray & Co. (Broker)

Thank you.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we move to the next question, please?

Operator

And our next question comes from David Risinger with Morgan Stanley. Your line is now open.

David R. Risinger - Morgan Stanley & Co. LLC

Yes. Thanks very much. I may have missed it, but could you just remind us what the BELBUCA sales were in the first and second quarter of this year and how much you think it can ramp over the next couple of quarters? Second, you mentioned that Generics was reassessed to fair value. I haven't had a chance to look at the numbers there. Could you just talk about that? How it was valued and what it was determined to be worth? And then third, in terms of Vasostrict, we saw that you took a recent price increase at the end of July of 20%, just wanted to get a sense for how much upward potential you have for pricing? It seems like you have a lot of flexibility to raise price but then again there may be push-back, I don't really know, and maybe you could also comment on how much of that we'll be able to flow through should we just assume that, that 20% largely flows through to pre-tax income or not? Thank you.

Rajiv De Silva - President, Chief Executive Officer & Director

David, let me answer the BELBUCA question and touch on Vaso, and I will – sorry, on the pricing philosophy, I'll have Suky and Paul build on the answer. So, for BELBUCA in the first couple of quarters, we've been clear that I think we're using a pull through method to recognize revenue, so it has minimal revenue recognition in the first half of the year. So, single-digit all-in. And we've also been clear that given our launch ramp expectations that we expect the contributions in 2016 in total to be relatively modest. So, we would look for 2017 really as the first year of revenue contributions of BELBUCA and then we'll be clear about what expectations are at the appropriate time.

In terms of pricing, and I'll let Paul answer the specific question on Vasostrict but I would point out the following which is, from an overall perspective, the Endo business benefits from volume, not price. And in particular, Generics business has predominantly more price pressure than upward price potential. And any price increase that we might be able to take on the two generics products with us this is overwhelmed by the price erosion that we see on the Base business.

Now products like Vasostrict are a little different in that they are sold on the basis of NDA, although they're sold within Par. But even in those cases we take a responsible approach to price increases. And just because we have flexibility does not mean that we will take a price increase. In the case of Vasostrict, Par has been very thoughtful about how to price the product as an NDA. If we're a life-saving product, it is still in the low $100s in terms – sorry, about $125 plus or minus in terms of per unit cost. And a substantial amount of investment has also gone into our Rochester, Michigan facility to support this product and CapEx in excess of $100 million. And from a forward-looking standpoint, our philosophy on price increases will not change which is that we will be responsible about how we think about it but, Paul, maybe you have some specific commentary on Vasostrict?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Well, I think, Rajiv captured it very well. And at the end of the day, we look at this life-saving drug and when we got the NDA approved, we do have to make commitments to the FDA, and we have to ensure that there is not going to be any drug shortages and that we're going to be able to continue to supply the market. And to Rajiv's point, we have to make investments in raw materials and components, and specific equipment for this particular product. We have the CapEx that Rajiv is referring to. And in essence, 20% of our overall CapEx goes into the Rochester facility to keep it compliant. So, it's a big commitment, specifically on this injectable product that's a life-saving product.

And then in terms of general price increases and what-not, I think again, when you look at the total Generics business, in essence, we are a volume-driven company, to Rajiv's point. When you want to look at it as a one-off on a product specific in the case of this one product, it's true that we have taken some price increases but we have been responsible. So, with that I'll turn it over to Suky to talk about the pre-tax question.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Sure. So we would expect that price increase to fall to pre-tax operating income as any other price movement either up or down would fall to the bottom line and through margin. And then, David, to your question on the Generics fair value, you're correct, ultimately the restructuring or the reorganization that we implemented ultimately steps up the fair value of many of the assets within our Generics business. That is the tax basis of those assets, which provides ongoing and durable cash tax benefit and also provides flexibility in our ability to move those assets throughout our legal entities without residual tax leakage.

It is our policy and we don't talk to specific asset values but directionally the way to think about how we value them on the future value based on discounted cash flows of our outlook for each of the products. And that goes into all of our intangible testing as well as our goodwill testing, et cetera. It's the same analysis that underpins the valuation and ultimately the step-up.

David R. Risinger - Morgan Stanley & Co. LLC

Thanks very much.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

You're welcome.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we have the next question, please?

Operator

And our next question comes from the line of Chris Schott with JPMorgan. Your line is now open.

Christopher Schott - JPMorgan Securities LLC

Great. Thanks for the questions. Just two here. First, Paul, broadening out on, I think, Liav's question earlier, and as you move past this reset of your Generic Base business, do you inherently see a more competitive generic industry than we've seen in the past when we factor in a higher level of new product approvals from FDA behavior we're seeing from some of your larger and smaller competitors, et cetera, or is this kind of similar competitive dynamics we've previously experienced in the space?

And the second question was on the comments on those potassium products. Can you maybe just give us a sense of the size of those opportunities as we think out to 2017? How attractive are these? How large of an end market can we think about? And finally, are there any other 505(b)(2)s not necessarily the names but should we think about additional approvals in 2017 that could help revenue? Thank you.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So, the first part, in terms of the market competitive nature, I mean clearly with the consortiums getting larger and we're seeing it now with Walmart now being part of the McKesson OneStop. The consolidation does put more pressure back on us. But I think from where we stand, we feel good about how we reset the Base business. We talked a lot about that in terms of – and I hate referring back to Qualitest versus Par but when you look at our total business, we've made our decisions.

Right now, it gets down to operational execution. And the way that we compete is to execute flawlessly on our R&D pipeline. That's where we're focused right now, R&D execution and quality. These are things that are going to set us apart because, clearly, consortiums are getting bigger and that is going to create some more pressure on all the generic manufacturers. The companies that are going to outperform are going to be the companies that are strong in compliance, strong in service levels, and have a pipeline. And those are three components that we feel that we're very well positioned on a go-forward basis.

Regarding the question on potassium, if I recall and help me out here, I think we had shown a waterfall bridge about some – maybe the last quarter or so that we were referring to some unapproved product – products that were delayed.

Rajiv De Silva - President, Chief Executive Officer & Director

Yeah. I think what I would say, Paul, is that we had referred to it and then, Chris, if you referred to our Q1 presentation, we had identified although we did not identify that as potassium but now we can, the demand of revenues associated with those products that was pushed out of 2016, I would hasten to add though that as the removal of the FDA – sorry, of the products gets pushed out, the possibility of new generic competition for the product is there at some point, right. So there is a portfolio finite life for potassium chloride. We don't quite know what that is. So I would not automatically assume that the same upside that we moved out of 2016 will be there 2017. But clearly a substantial component of that will materialize in 2017.

Christopher Schott - JPMorgan Securities LLC

Thank you. One last question just on the 505(b)(2)s, are there other ones we should think about in 2017, or we should just think about potassium at this point?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

I think right now we're just prepared to talk about the two potassium products.

Christopher Schott - JPMorgan Securities LLC

Thank you.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thank you. Operator, can we have the next question, please?

Operator

And our next question comes from the line of Douglas Tsao with Barclays. Your line is now open.

Douglas Tsao - Barclays Capital, Inc.

Hi. Good afternoon. Thanks for taking the questions. Just first maybe, Paul, if you could help us understand in terms of your comment around 505(b)(2)s in terms of the pipeline, I mean, are you suggesting that the bulk of the growth we see from the Generics business will come from the 505(b)(2) program through 2017, and does that last into 2018? And then just also I was hoping you could provide some additional color in terms of the comment in the slides that sort of Generics business is going through some of the same dynamics they were in 2008, 2009, if you provide a little color in terms of what exactly those dynamics were.

And then just in terms of the controlled substances, Generics business, one of your competitors sort of had a better quarter similar to you in terms of the near term, but they did suggest that may be some of the headwinds will persist into 2017, are you expecting to see that same dynamic play out? Thank you very much.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Okay. So there is a lot there. Let's see if we can tackle them one by one, okay. So in terms of how we're looking at – now, we're not going into great detail about 2017. I think that's something we have avoided providing guidance but maybe generally high level, we are launching somewhere between 25 to 30 ANDAs in 2016. I would say that, that's probably a normal run rate for an ANDA standpoint.

On top of that, you're going to see some potassium products start to gain some traction, but I would tell you that, there's not like a blockbuster Zetia that I'm pointing to right now for 2017, but we have 25 to 30 launches that are going to make up a good part of 2017. They're all important. And that's the way that we are building out ourselves. So you got to look at the ANDAs, you've got to look at the 505(b)(2)s. And then on top of that, we have a very successful and growing Injectables business, that is still big part of our future and we'll start to see more benefit of that particular segment and our alternative dosage forms all coming into play. So new launches are important but we're also still driving value through some of our launches that we've seen in 2015 and 2016 on the injectables side. So, that was the first question, and...

Rajiv De Silva - President, Chief Executive Officer & Director

I think I would just add one thing, Doug, and obviously I think what you see from us is that the 505(b)(2) strategy is important one for Par and there is obviously multiple ideas that Paul is and team will progress any given time but we are not going to specifically talk about anything beyond the ones that we have, simply from a competitive standpoint. Paul, I think the remaining questions are on the dynamics in the market in the 2008 timeframe and on the controlled substances outlook.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Yeah, so 2008, some of the challenges that we all had is, that we all went through the economic crisis and we had to make some difficult decisions back in 2008, 2009. I think Par, Par was fairly hard because of the type of portfolio that we had which was, for the most part, a commoditized business. And we had to make certain and tough decisions based upon how we started looking products on a go forward basis. And we were also a little bit on the volume side versus value side and we made a conscious decision to start to look towards more difficult to make products. Now that's something that we've executed very, very well on. And that's where we're looking at our total portfolio.

Now immediate release products are always going to be important to Par, right, and that's going to help build volumes [and improve] wholesalers but we're looking for longevity. And that's why you're going to see us move more towards the alternative dosage forms, the injectable forms and continue with the Paragraph IV side. That is a key difference from today versus where we were back in 2008. The challenge that we have today is the consortiums. The consortiums have gotten bigger and stronger. And that goes right back to having to execute on, on the earlier statement that I made, the companies that are going to survive and do well are the companies that are going to have compliance across the board, something that we've done very, very well, we spent enormous amount of resources and CapEx into compliance, service levels and execution on the R&D side. And there was a question on controlled substances?

Rajiv De Silva - President, Chief Executive Officer & Director

Controlled substances outlook.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So controlled substances, again an important part of the overall portfolio but it's not the barrier that it once was. And I think with the consortiums getting larger, they have allowed some new players to come into market and get – we've talked about this in the past, still important part of our business, but it is more of a base business play as I see it, right, so it's important, but it's not the growth drivers that it had been previously for a number of years, but again for Par, every product is important. Just doesn't have the barrier that it once had.

Douglas Tsao - Barclays Capital, Inc.

Do you expect some of the headwinds to persist into next year?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Specifically in pain?

Douglas Tsao - Barclays Capital, Inc.

Yeah, controlled substances.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Again, so, we're starting to see the challenges that we're just seeing on the opioids from the sheer nature of these types of products being somewhat out of favor right now, you're seeing erosion – that natural erosion across the board, right. Now, what you're going to see is an uptick in other pain medications, right. Those are things that we also have to take into consideration. So, I'm not going to say it's an even trade-off but the scripts have to go some place. So maybe they're going to be moving away from opioids, we have to look at our entire portfolio and we have other products in our portfolio in pain that are outside of opioids. So that's pretty much the way we're looking at it today.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

The other thing we would say is we don't to expect to see a major reset as we saw in Q1 against our pain portfolio as most of that impact is already behind us.

Douglas Tsao - Barclays Capital, Inc.

Great. Thank you very much.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks Doug. Operator, can we move to the next question, please?

Operator

And our next question comes from the line of Marc Goodman with UBS. Your line is now open.

Marc Goodman - UBS Securities LLC

Yes. Hi, Paul. Just to confirm, so on these 505(b)(2)s, you have had the conservations with the FDA, you're comfortable that the FDA is actually comfortable with you with those supply issues and now, the guidance is, hey we thought these products were going to launch next year, but now we have a lot of certainly and we will be launching these products next year. So, I just want to make sure that, that's what I'm hearing?

Second, when you talked about the $15 million to $20 million of buying patterns in Generics that 2Q pulled out of 3Q, can you just tell us which area it was in, you break out the business and based on the injectables or the new launch alternatives, so which one was that in?

And then third, can you just tell us what the gross margin was for Generics for the quarter? Thanks.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Regarding the potassium products, I think the safest way to address the question is, what the FDA is telling us is that we need to be prepared to produce product and that is what we're doing. So, in essence our understanding is, there's been a communication to the unapproved sources of liquid and powder that there is a specific timeline that they have to finish up certain amounts of manufacturing and the ability to sell through at a certain point in time. That's going come to an end in 2016.

Now, there's going to be a product that will be in the market, what we don't know exactly is the number of units that these unapproved sources will be making both forms of potassium. That will carry into some period of time. What we're saying now though is, that we have, with reasonable confidence, that we are going to get the benefit in 2017, likely we'll see the benefit in Q1 or Q2.

Marc Goodman - UBS Securities LLC

And just to be clear, so what's new here is that actual communication from the FDA to the Generics is already going out?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

That's our understanding.

Marc Goodman - UBS Securities LLC

And that just went out like in the past month or this is new news?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

This has gone out over the last several weeks.

Marc Goodman - UBS Securities LLC

Okay.

Rajiv De Silva - President, Chief Executive Officer & Director

Your question, I think, on the buying.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah, so Marc, it's Suky. On the customer stocking and the advancement of the orders we characterized about $15 million to $20 million, it's really across the entire portfolio. It's not a specific customer nor a specific product or segment. So, I kind of allocated proportionally to our different business units within Generics. So, Base business is roughly around 50% of the total revenue, so I would account for maybe 50% of that $15 million to $20 million in Base and the rest of it across the other portions of our business.

And then I think there was another question around the gross margin, sorry. Yes, the gross margin held up right in line with the expectations. So, we set guidance for full year, Generics gross margin in the low 50s% and that's where we ended in Q2 and our outlook remains consistent for the full year.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, can we move on to the next question, please?

Operator

And our next question comes from the line of Randall Stanicky with RBC Capital Markets. Your line is now open.

Randall S. Stanicky - RBC Capital Markets LLC

Great. Thanks. I just have another Generics question and then a mesh question, but Paul, just approach the same topic from maybe another angle. As you think about the Generics space environmentally 2Q versus 1Q, should we think about this as a reset and move forward with things improving, or do you still view this as, I'll call it, cyclical uncertainty that's going to linger as FDA continues to ramp approvals or a combination of the both?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So, Randall, I don't think anything has really changed in terms of what we've communicated on the sequential erosion, right. So, the important thing is that we dealt with the consortium bid cycle and we all know what that impact was. The important thing is that the portfolio has been reset, resized and we had 5% erosion sequentially between Q2 to Q1. And while the major consortium hit is behind us, we still have the right of first refusal. Those are normal course. That's still going to come at us from a Base business play. So I think we're going to stay with that 5% sequential base erosion quarter-over-quarter throughout 2016.

After that happens, and we still feel good, we communicate it as we get to 2017 that base erosion should normalize, and normalize was defined as historical Par base erosion. And that's where we were getting to that 10% number, maybe even a point or two higher but about 10% is where we're looking at on a go forward basis as we enter into 2017.

Randall S. Stanicky - RBC Capital Markets LLC

But stable beyond.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

I feel that, that is – it will be stable. I don't see a large consortium hit that we experienced with the McKesson OneStop. So, from that standpoint, yes it will normalize. Now, I'd like to see what happens with Walmart as it enters OneStop. That's also something that we need to think about. But at this point in time, taking that into consideration, we still feel that, that 10% will be the right erosion in fact on a go-forward basis.

Randall S. Stanicky - RBC Capital Markets LLC

Okay, great. And then, Suky, just a quick question for you on mesh, on the after-tax mesh liability for next year. Has that changed from the number you gave us in early March? And then the lingering 8,000 cases, any change in how you guys are thinking about those?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Sure. I'll talk to the numbers and then maybe, Rajiv, you'll talk to the sort of where we are on the...

Rajiv De Silva - President, Chief Executive Officer & Director

Sure.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

...rest of the cases. So, on a pre-tax basis, consistently around $600 million to $700 million next year and then there is a tax shield on that which is ultimately embodied in a low-single digit tax rate over 2017. So, we do expect to see a cash tax rate for 2017, so we do still expect to see a post tax mesh cash fall which is significantly lower than $600 million to $700 million. So nothing has changed on that front. And then on the remaining 8,000 cases...

Rajiv De Silva - President, Chief Executive Officer & Director

Yeah. So Randall, you're referring to the commentary that we made earlier this year when we entered into a set of settlements around some high value cases. At that time, we said that there were another purported 8,000 or so cases out there which, largely speaking, did not – very largely speaking, did not have much information about these cases. And that has not changed. And the incidence of new claims coming in has trickled down to the low single digits on a weekly basis and has been fairly consistent for the last several months.

The other thing we pointed out with those 8,000 cases was that there was a potential fraudulent scheme that was running through some components of that. And our priority was driving that to ground and figuring out what the impact there was for perpetrators. So we have a series of subpoenas that have been issued. We are in litigation mode around those subpoenas, but as we pointed out back in the beginning of the year, this process could take a month, if not several quarters to solve. And we continue to defend ourselves through this process. So, in other words, no new news in terms of mesh.

Randall S. Stanicky - RBC Capital Markets LLC

Okay. That's great. Thank you, guys.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks, Randall. Operator, can we have the next question, please?

Operator

And our next question comes from the line of Andrew Finkelstein with Susquehanna. Your line is now open.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Great. Thanks for the taking the question. I was hoping to go back to Vasostrict. There was a suit filed by a potential competitor, and I was wondering if there are any statements you can make about your contractual relationships with API suppliers for vasopressin? And then as we look at the run rates for some for the branded products in the quarter, is there anything else to point out? You talked about the destocking on XIAFLEX but some products like LIDODERM and OPANA, how would you characterize the sales for those in the quarter relative to what you might consider a run rate based on where the scripts are? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

So, Paul, do you want to...

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So on Vasostrict, obviously we're not going to be speculating on any ongoing litigation. And I think what we can do is just really reaffirm some of the facts that we've discussed on some of the other earnings call. It is true that we do have an exclusive arrangement with a single API source. And it is understood that there are multiple API sources available. And ultimately, we are prepared to vigorously defend our intellectual property and also our position with respect to this particular case. So, that's probably as far as we can go at this point in time.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Is that to say that you do not have exclusive arrangements with the others?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

I think what we said is that we do have a single exclusive arrangement with an API source.

Rajiv De Silva - President, Chief Executive Officer & Director

And, Andrew, just on your question about the branded products, we have the benefit of a pretty diverse portfolio of products beyond BELBUCA and XIAFLEX that obviously funded those are our future growth drivers. And from quarter to quarter, we're able to benefit from the performance in those brands. So there are brands like LIDODERM, which as a branded product has now clearly being reduced to a small component because the product, as far as we're concerned, fully genericized with three generic competitors in the market including our own authorized generic. But from a contracting standpoint, we still hold some proportion of the markets in our branded products but clearly subject to generic pressures.

OPANA, we pointed to OPANA as one of the products that was impacted by the CDC guidelines and the general slowdown in the opioid market. And I think that trend is continuing along the lines that we expected. But we also have a series of smaller products that we don't talk much about that are also doing quite well that are promoted. Supprelin LA has been a very sticky and very good performer for us for a long period time. Nascobal, which is a product that came over with the Par transaction and is a branded product that's promoted by our field force, is also doing quite well, right. So as we look across the portfolio in the Branded business beyond the ones that we actually talked about, we do see points of good performance which helped us in Q2 and we expect to help us over the course remainder of the year as well.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Thanks very much.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks, Andrew. Operator, can we move on to the next question, please?

Operator

And our next question comes from the line of Jason Gerberry with Leerink Partners. Your line is now open.

Jason M. Gerberry - Leerink Partners LLC

Hey, great. Thanks for taking my question. Most have been asked, but maybe, Paul, I didn't hear you mention adrenaline as a 505(b)(2) opportunity. There was a big pick-up in price in June IMS sales. Just curious if there's a potential opportunity there? How do you think about the market? Is the market competition mainly in compounding pharmacies, just kind of curious if you have any thoughts there, that would be great?

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Well, adrenaline is very similar to Vasostrict with the exception that adrenaline is typically first-line therapy when you go into an emergency room with respect to cardiac resuscitation or anaphylactic shock followed by Vasostrict. So they are basically sold and promoted exactly the same way which is one is first line and one is second line.

With respect to the uptick, right now we took an appropriate price increase. It is an ANDA. We follow the same practice associated with being an unapproved product. It is now an approved 505(b)(2). So it's similar in nature into what we've done with Vasostrict but for the fact that there are unapproved sources of adrenaline on the market today.

Jason M. Gerberry - Leerink Partners LLC

Okay. Thanks.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks. And operator, can we move on to the next question, please?

Operator

And our next question comes from the line of David Buck with Northland Capital Markets. Your line is now open.

David G. Buck - Northland Capital Markets

Hi, yes, thanks for taking the questions. One for Paul and one for Suky. Paul, in your commentary on Vasostrict, you talked about converting the unapproved product and talked a little bit about the price increase that you recently took. Is it fair to say that you've gotten most of the volume opportunities that you're expecting, and that there'll be more even volume and you're just benefiting from that recent price increase?

And for Suky, can you talk a little bit about what you see as some of the key detractors sequentially with the guidance of the third quarter revenues, looks like a fairly strong downtick. I know that the wholesale volume has not yet occurred but what other items you're expecting to go the other way, to go negative? Thanks.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

So, Dave, I think, you understand the Vasostrict situation pretty well. We launched the product probably about a year-and-a-half ago. And the way we see it right now is that we do not believe that there's any more unapproved drug in the market. So maybe the last quarter or two, you're seeing standard run rate for Vasostrict. So I think we've met our max on the volume side of Vasostrict. So that's where we are now. As Rajiv indicated, we took a modest price increase, and that's the way this product is going to behave on a go-forward basis. So, I think we've maxed out on the volume side, and it's just being able to navigate with the market, and if we are to take appropriate price increases on a go-forward basis, but we haven't made any determinations yet.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah, David, and it's Suky, on your question around third quarter sequential reduction, the first thing I would say is generally as a default, we tend to prefer not to give quarterly guidance because there are a lot of things that can affect a quarter, specifically around timing that could be material to the quarter but on a whole-year basis, they're not meaningful. But having said that given our reset in Q1, and given the launches that we've gotten in the fourth quarter, we are providing quarterly guidance at least for this year.

For the third quarter, the way to think about the step-down is one, you talked about already which is the stocking that we saw on the second quarter. Our assumption is that reverses in the third quarter. Also what underpins our assumption of the step-down is continued erosion in V Gel, as that continues to face competition from a generic standpoint.

We would expect LIDODERM to step down modestly. Our testosterone products continue to decline quarter-over-quarter particularly because of the market. And then again, we also expect to see some modest decline in our pain products. All of those declines are partially offset by growth in XIAFLEX and BELBUCA, as well as our launches but net-net our assumptions lead us to a decline on revenue into the third quarter. From an investment standpoint, that's all coming in the backdrop as we increase our investments, against generics R&D as well as branded R&D and BELBUCA and XIAFLEX as Rajiv has talked about earlier. So, those are the moving parts that lead us through the third quarter. Again, what we're doing is taking a very prudent approach to applying quarterly guidance given the lumpiness of the year.

David G. Buck - Northland Capital Markets

That's helpful. And is there any change in assumptions for branded growth [to net] that's negative sequentially?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

At this point, we wouldn't see anything material sequentially. Again, there can always be lumpiness from quarter to quarter, but for the full year, our gross margin profile for the brand remains.

David G. Buck - Northland Capital Markets

Okay. Thank you.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thank you. Operator, can we move to the next question, please?

Operator

And our next question comes from the line of Donald Ellis with JMP Securities. Your line is now open.

Donald Bruce Ellis - JMP Securities LLC

Thank you very much. Most of my questions have been answered. But since you guys traffic in the opioid market pretty significantly, what can you tell us about your current thoughts about, when, how and if there will be a meaningful transition to the opioid-deterrent versions of narcotics?

Rajiv De Silva - President, Chief Executive Officer & Director

As we pointed out, we have had a lot of experience and heritage in the pain market including in opioids. And we ourselves have done a lot of work around OPANA's reformulation in fact to make the abuse of the product more difficult. That being said, I think the public health environment debate around this, FDA dialogue around this, while encouraging abuse-deterrent formulations, it's still unclear at what point the entire market will shift to products that are "abuse deterrent," right.

So in terms of FDA's own determination of what constitutes it, there's been a lot of debate. We don't have a crystal ball and we'd be speculating. But certainly as we look forward, longer-term perspective one would think that the long-acting products would transition to more abuse-deterrent formulations but is that going to happen in the short-term – that is anyone's guess.

Donald Bruce Ellis - JMP Securities LLC

How'd you think if they're going to deal with the push-back from the PBMs reimbursing for likely more expensive abuse-deterrent versions?

Rajiv De Silva - President, Chief Executive Officer & Director

Again, look, I'd be speculating but I would also say the following, which is while there is a lot of debate in the public health environment about this and certainly from the payer environment as well, in the end, chronic pain is one of the most unmet needs in the country. There are 100 million patients suffering from chronic pain and there are certain categories of pain such as cancer pain that you are going to need an opioid in order to survive and manage that kind of pain, right.

So I think in the end from a pure patient-need standpoint, we do believe that the opioid and Schedule II opioids will have a place in the market for that. Now from a pricing standpoint and how PBMs view it versus regulators, that I really can't answer.

Donald Bruce Ellis - JMP Securities LLC

Great. Thank you very much.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks, Donald. Operator, we have time for maybe one or two more questions.

Operator

And our next question comes from the line of Elliot Wilbur with Raymond James. Your line is now open.

Elliot Wilbur - Raymond James & Associates, Inc.

Thanks. Good afternoon. Real quickly. Maybe just a point of clarification for Paul. Paul, earlier when you talked about 2017 returning to more of a normalized erosion environment for the Generics business, you mentioned essentially a 10% erosion rate, maybe a couple of percentage points more. But just wanted to make sure that applies to the entire generic book of business, or my assumption would be that the injectable piece of course would be much more stable and that rate would sort of apply to the solid dose business, but I wanted to confirm that.

And then for Suky, question earlier was asked about sort of the ability to realize price increases on Vasostrict, and just trying to get a better sense of how we should be thinking about the company's ability to sort of realize those price increases whether or not there's been any change in the relative realization rate in terms of what's actually dropping to the pre-tax line?

And then the last question for Rajiv, you talked several times now about accelerating investments and continuing to invest both the additional resources on the R&D and to selling to market inside drive some of your future high-growth assets. And, obviously, the message has been heard loud and clear with respect to 2016, but I guess in sort of thinking about external expectations in 2017 and 2018 and kind of beyond, it seems like the anticipation at this point is that spend levels remain relatively flat. I'm just kind of wondering how you're thinking about that maybe just in general terms at least directionally. Thanks.

Paul V. Campanelli - President, Par Pharmaceutical, Endo International Plc

Okay. So, Elliot, this is Paul. And to the first question, I apologize if I wasn't clear. In terms of that 10% range on base erosion that is as we define the collective Par and Qualitest business as we look at how we define Base business and that includes our extended release solid oral dosage, our immediate release solid oral dosage and our pain controlled substances group. So, it excludes injectables. It excludes the alternative dosage forms and of course new products. So that's the way we're defining it. And maybe you can just help me out on your Vasostrict question. I want to make sure I understand it. I know it went to Suky but maybe you can just repeat that for us?

Elliot Wilbur - Raymond James & Associates, Inc.

The long and short of it is, the list price goes up 20%, has there been any dramatic change in terms of sort of what the company could actually realize...

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

No, no.

Elliot Wilbur - Raymond James & Associates, Inc.

...on that level of increase. Let me get a sense to how much falls to the pre-tax line.

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah, sorry, Elliot, and I guess this goes back to question that David asked. Well, we don't see any major changes in the complexion of gross to net on Vasostrict than where we are now.

Rajiv De Silva - President, Chief Executive Officer & Director

And then, Elliot, in terms of your question on investment, if I just step back for a second here, over the course of the last three years, we've made some major steps, major progress in reshaping the company. And I think we find ourselves now in a very good position where we have some great assets across all of our businesses. And as we transition our business to really being organic growth story, it's a very important imperative for us that we begin to really invest for future sustainable organic growth. And so, hence the investment step-up that we're talking about in R&D, hence the investment behind XIAFLEX and BELBUCA that we think are going to be real growth drivers for the course of the next five years.

At this point, we can't make any comment on investment levels in 2017 or 2018 but I would point to the fact that what we're talking about is investing in long-term growth assets, right. So long-term growth assets require long-term investments, and that's our philosophy. And obviously, we'll take a more specific view on what that means for 2017 and beyond when we get there.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Great. Operator, can we move to the next question, please?

Operator

And our next question comes from the line of Rohit Vanjani with Oppenheimer. Your line is now open.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Great. Thanks for taking the questions. One, did you notice any favorable share shift in OPANA after the District Court ruling in May? Two and then, I think you've had prices increases of at the beginning of 3Q on a series of products, LIDODERM, PERCOCET, Supprelin and then we mentioned Vasostrict. Are you wholesaler contract structure pretty typically where they have a 30-day buy-in, so you'll see two-thirds of the price increase in 3Q and then the full amount in 4Q? And then could you actually give the XIAFLEX vial shift and the breakdown in Peyronie's and Dupuytren's for 1Q and 2Q?

And then lastly the strength in well – so for the guidance where you maintain the guidance but you have this added expense in BELBUCA and XIAFLEX. So, what's making – I was a little bit confused about how you're maintaining, is it from the strength in the quarter and the surprise in V Gel and other products that's allowing you to maintain the guidance, or where is that offsetting strength coming from?

Rajiv De Silva - President, Chief Executive Officer & Director

Okay. So, there were a lot of questions, Rohit. I'll see if I can hit all of them and I'll ask Suky to help me with that. In terms of OPANA, just to clarify your question, you're talking what the patent case is the ruling and our path forward there, is that accurate?

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

I was just asking, yeah, if you saw a share shift because of the, I think...

Rajiv De Silva - President, Chief Executive Officer & Director

Oh, share shift.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Yeah, right, because...

Rajiv De Silva - President, Chief Executive Officer & Director

I'm sorry, so, yeah look, we've seen a modest share shift but as we had always indicated, with the majority of the prescriptions we expected to go to the impacts of Generics, which it did.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Yeah. I was just wondering if there was any upside from whatever you thought kind of...

Rajiv De Silva - President, Chief Executive Officer & Director

Look, there are puts and takes in OPANA, right, so there's a little bit of modest uptick in share and possibly continued uptick because of our increased promotion, because the product is [P-2] position behind BELBUCA and our pain field force. On the other hand, you have the declining opioid market effect, right, so net-net it is not a product where we expect to see any substantial uptick.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Okay.

Rajiv De Silva - President, Chief Executive Officer & Director

You had a question on XIAFLEX. So in terms of the XIAFLEX vials, I'm happy to go through them, but they are for the first quarter as well as second quarter.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

We can do it offline if – sorry, go ahead.

Rajiv De Silva - President, Chief Executive Officer & Director

Yeah, we can – it's already in there. If you want to take a glance through it. It's identified between the two indications. In terms of your question about investment, the increased investment in R&D and sales and marketing, so some of it, as Suky mentioned in his script, is simply reallocation, and some of it is a modest uptick in our investment level, particularly in the third quarter which is one of the other contributing factors to how we guided this third quarter.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Well, I was asking for- well, I was asking for the offset. So you have – what's new is you have the added expenses in BELBUCA and XIAFLEX. Now, you're still maintaining your EPS guidance, right. So I was wondering what is – what changed for you that was positive to make you keep that? Was it the strong quarter, or you got strong V Gel and other products, or is there something else going on where you're allowed to maintain your guidance?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

Yeah, so part of it is the upside coming from the second quarter. Part of it is that we do feel good about how the gross margin profile is trending in the second half as well.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Okay. And then the last one I have was the bit about your price increases, where you take some price increases on LIDODERM, PERCOCET and Supprelin, do you have typical wholesaler contracts whereas they get a 30-day buy-in, so you see maybe two-thirds of the price increase in the quarter, you take the price and then the full amount in 4Q?

Suketu P. Upadhyay - Chief Financial Officer & Executive Vice President

No. We don't have that phenomenon in our wholesale agreements. What I would say is that much of our branded portfolio is contracted. So this price increases don't automatically translate into gross margin improvements. We've kind of internally pointed to the overall – the price increase benefit generally is in the mid single-digits for our branded portfolio on a full year basis.

Rohit Vanjani - Oppenheimer & Co., Inc. (Broker)

Okay, great. Thanks for taking my question.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Thanks, Rohit. And operator, I think, we have time for just one more question.

Operator

And our last question comes from the line of Irina Koffler with Mizuho. Your line is now open.

Irina R. Koffler - Mizuho Securities USA, Inc.

Thank you for taking the question. It seems like XIAFLEX is doing really well and it's a very durable asset, and same thing with Supprelin LA, you guys are doing a great job with those two products, but are you really the best owners of these assets? Do you have the right synergies, and would someone else potentially value these assets more? Thanks.

Rajiv De Silva - President, Chief Executive Officer & Director

So Irina, I can't speak to how someone else would value the assets, but I would say that these assets fall squarely into the type of assets that make sense for a company like us. They require relatively small sales or marketing footprint. The type of support in terms of advertising and promotion that is required around the brand even with the step-up is well within the means of a company like us. And also when you look at the R&D pipeline and the investments that are required to develop XIAFLEX, which is already a well-characterized molecule from a safety and effectiveness standpoint, we do think we are the right owner of these assets.

Keri P. Mattox - Senior Vice President, Investor Relations & Corporate Affairs

Operator, I think that wraps up the call. We'd like to thank everyone for joining us this afternoon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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