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Endo Pharmaceuticals Holdings Inc. (NASDAQ:ENDP)

Q3 2007 Earnings Call

November 01, 2007, 11:00 AM ET

Executives

Bill Newbould - VP, Corporate Communications

Peter A. Lankau - President and CEO

David A. H. Lee - EVP and Chief Scientific Officer

Charles A. Rowland, Jr. - EVP, CFO, and Treasurer

Analysts

David Windley - Jefferies and Co.

Gilbert Gregg - Merrill Lynch

Ian Sanderson - Cowen & Company

James Kelly - Goldman Sachs

Scott Henry - Oppenheimer & Co

Robert Uhl - Friedman, Billings, and Ramsey

Gary Nachman - Leerink Swann

Annabel Samimy - UBS

Richard Silver - Lehman Brothers

James Dawson - Buckingham Research Group

David Lickrish - Broadpoint Capital

Ken Trbovich - RBC Capital Markets

Timothy Chiang - FTN Midwest Securities

Lei Huang - Summer Street Research Partners

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2007 Endo Pharmaceuticals Earnings Conference Call. My name is Cindy and I will be your coordinator for today. At this time, all, participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference call. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference. Mr. Bill Newbould, Vice President of Corporate Communications. Please proceed sir.

Bill Newbould - Vice President, Corporate Communications

Thank you, Cindy. Good morning and welcome everyone.

With us on the call this morning are Peter Lankau, our President and Chief Executive Officer; Charlie Rowland, Chief Financial Officer; and David Lee, Chief Scientific Officer.

I would like to begin by reminding you that during the course of this call, Peter, Charlie, and David may make forward-looking statements concerning such topics as future results, product performance, anticipated timing of FDA approvals of certain of the Company's drugs or generics thereof, and possible timing of the commercial launch of certain of the Company's products as well as other non-historical facts that reflect Endo's current perspective on existing trends and information. By their nature, these forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from any future results expressed or implied by these forward-looking statements.

Listeners should not rely on any forward-looking statement and the Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that may affect Endo's future results include, but are not limited to, those factors discussed under the heading forward-looking statements in Endo's SEC filings and under the heading risk factors in Endo's 2007 Annual Report on Form 10-K filed with the SEC on March 1, 2007. We urge you to review these factors.

In addition, during the course of this call, Peter, Charlie, or David may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that maybe different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Endo's earnings press release issued earlier today for Endo's reasons for including these non-GAAP financial measures in its earnings announcements and to see the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

Now, I would like to turn the call over to Peter Lankau.

Peter A. Lankau - President and Chief Executive Officer

Thank you Bill and good morning everyone and thank you for joining us today.

Earlier today, we announced our financial results for the third quarter and nine months ending September 30, 2007. I am pleased to report that we had another excellent quarter, driven by continued strong growth across our branded portfolio.

Net sales for the third quarter of 2007 grew 24% to a record $269.5 million compared with $217.1 million in the third quarter of 2006. Net income was $59.1 million compared with $44.9 million in the year ago third quarter. As detailed in the supplemental financial information in today’s press release, adjusted net income for the three months ended September 30, 2007, was $61.6 million compared with $47.2 million in the same period in 2006. Diluted earnings per share for the three months ended September 30, 2007, were $0.44 compared with $0.33 in the comparable 2006 period. Adjusted diluted earnings per share for the three months ended September 30, 2007, were $0.46 compared with $0.35 in the same period in 2006, an increase of 31%.

These outstanding results were driven primarily by the continued growth of LIDODERM, which maintains its strong performance in the quarter. Prescriptions grew by 13% in the quarter and 15% year-to-date 2007. Combined net sales of OPANA ER and OPANA were $24 million for the quarter, reflecting the increased level of promotional effort behind the OPANA franchise, estimated prescription demand grew to $20.4 million from $16.5 million in the prior quarter. We continue to be encouraged by the market acceptance and prescription growth we are seeing and expect that the OPANA franchise will benefit from the addition to our Specialty Force II of 95 sales representatives, who began their detailing efforts on October 1.

We also continue to see our overall increased promotional efforts, generating healthy growth in net sales and prescription demand for FROVA, which had net sales of $13.5 million in the third quarter of 2007. FROVA prescriptions continue to grow at a healthy pace as well, up 15% for the quarter and the 11% year-to-date in 2007 versus the comparable prior year periods.

Now before I turn over the call to David Lee for the update on recent developments regarding our R&D pipeline and to Charlie Rowland for detailed review of our financial results, I would like to discuss several recent developments. As announced in September 30, the FDA issued a non-approval letter for the supplemental new drug application for FROVA for the additional indication of short-term prevention for menstrual migraine. They are acknowledging that the two pivotal efficacy trials that have been admitted as part of this sNDA had met their primary end points and significantly improving the number of headache free perimenstrual periods. The FDA questions whether the benefit demonstrated was clinically meaningful. But no serious adverse vascular events were absorbed in the clinical development program, the agency also expressed concern about the potential for increased risk of these adverse events with the new endorsing regiment.

Now we and our partner Vernalis with the assistance of external consultants are continuing to evaluate the letter to fully asses each of the points the FDA raised to determine how we might address them. We also expect to request the meeting with the FDA to review their concerns with them. In the awake of the FDA decision on FROVA, we have seized all pre-launched activities for the menstrual migraine prophylaxis indication. The cost of which were included in our previous earnings guidance for fiscal year 2007.

Due to lower than expected SG&A cost therefore, we are revising our adjusted diluted EPS guidance from $1.75 to $1.80 to $1.79 to $1.84. On October 2, our partner on OPANA ER, Penwest Pharmaceuticals announced that its 250 patent covering the formulation of OPANA ER has been issued by the patent in the trademark office and on the same day, Endo filed the 250 patent with the FDA for listing in its Orange book. On October 3, we and Penwest were notified by Impax Laboratories that they had filed an abbreviated new drug application including Paragraph IV Certification against OPANA ER, referencing TIMERx formulation patent that was issued the previous day.

On October 4, Impax issued a press release that acknowledged that it has been notified by the FDA that the agency had resented its application for its acceptance to file. We continue to evaluate Impax’s Paragraph IV Certification and will provide an update on this situation once we determine the appropriate course of action.

Now additionally last week, we lifted in the Orange book two other Penwest patents, license to Endo and expiring in 2013. These patents bring the total number of Orange book listed patents for OPANA ER to four. We believe that these patents will need to be certified against by any future Endo filing.

Finally, we have a very active and ongoing life cycle management strategy for the OPANA franchise, which includes not only intellectual property efforts, but also product development and regulatory initiatives.

Next, I would like to update you on some of the activities in support of OPANA franchises as follows. Our expanded managed market strategy has resulted in continuing growth in formulary access this year. That has resulted in multiple national and regional healthcare plans with Tier II status for OPANA ER and OPANA. To-date approximately 69% of covered lives have either Tier II or Tier III unrestricted access.

During the third quarter, we expanded our Specialty Sales Force II with the addition of 95 sales representatives, who began their detailing efforts on October 1. This latest expansion creates two identifiably… identically sized Specialty Sales Forces at approximately 160 reps each. And we expect this will produce an additional 45,000 sales calls in the fourth quarter 2007. Having two Specialty Sales Forces that marry each other allows us to double cover the highest prescribing specialty physicians in our core plan. In total, our sales force now numbers approximately 690 and OPANA ER and OPANA are the primary detailed emphasis and approximately 80% of our physician cost. Now these efforts have produced some notably results.

Prescription trends continue to show steady growth at about 6,500 scripts per week and growing. Our rate that has us on track to achieve our financial guidance for the OPANA franchise for the year. While approximately 54% of the OPANA ER prescriptions are being written by Pain Management specialists, the percentage of experience primary care physicians, who are prescribing OPANA, our biggest growth opportunity for the product continues to increase and as now at 35%. Our market research also indicates that 66% of physicians who have been detailed on OPANA ER anticipate increasing their prescribing. This is statistically significantly higher than those MDs detailed on other long acting multi year products, and is a strong predictor of continued prescription growth for OPANA ER.

Now before I turn the call over to David for the pipeline review, I would like to mention one very other noteworthy development during the third quarter. On September 6, we announced the appointment of Nancy Wysenski as Chief Operating Officer. Nancy comes to Endo with an impressive track record and extensive background across the wide spectrum of the pharmaceutical business including startups, specialty, and big pharma. Most recently, she was President of EMD Pharmaceuticals the U.S. subsidiary of Merck KGaA. Nancy is playing a key role in developing and implementing our growth strategy, while continuing to drive the growth of our existing business. We look forward to benefiting from her considerable organizational skills and operational expertise as we move toward our goal of becoming the leading pain Company.

Now towards that end, following the completion of a comprehensive strategic review by management and the Board of Directors, we have embarked upon a growth strategy that will seek to maximize shareholder value by acquiring growth assets that will diversify our revenue base in the near-term and strengthen our pipeline over the long-term. We continue to evaluate acquisition of companies that are closely align with a specialty physician focus in high growth therapeutic areas such CNS disorders, rheumatology, specialty secretary, gastroenterology, and supported care as well as therapeutic oncology. And of course, we intend to deepen our penetration in the pain market by pursuing earlier stage opportunities that are clinically differentiated and offer long-term patent protection. This effort will primarily intake product licensing, but also Company acquisitions as well. In addition, we will continue pursue selective development of high barrier to entry generic products. Finally, we will continue to focus our organization on driving the growth of our existing business by maximizing the potential of our key on markets and our pipeline.

So now, I would like to turn to David Lee, to have him bring us up-to-date on recent developments with our R&D pipeline. David?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Thanks Peter. As Peter mentioned a few moments ago, the FDA issued a non-approvable letter on FROVA for the indication of the short-term prevention of menstrual migraine. We were surprised by the FDA’s response given what we believed was a robust and comprehensive clinical data set, that included two positive Phase III safety and efficacy trials along with long-term safety study.

In total, the clinical development program had involved approximately 1,500 patients. Peter mentioned the FDA raised a number of contact issues in the letter and together with our partner Vernalis and our outside consultants, we are continuing to analyze the agency’s response to fully access how might address each point. We are going through the process of requesting and meeting with FDA to reviewing date… detail the agency is concerned and then determine what’s kind of the information is needed, before we decide on the most appropriate course of action.

And rolling to now Phase III clinical trials for RAPINYL, our sublingual fentanyl tablet for breakthrough cancer pain is continued to be challenging. We probably did underestimate the difficulty of recruiting cancer patients many of whom at end stage and placebo-controlled clinical trial. And in a therapeutic area with many ongoing clinical trials, this have resulted in intense competition for suitable patients. As a result, we have decided to conduct an interims statistical analysis of this trial. We intend to conduct this analysis as soon as possible, once a predetermined number of patients with evaluable data have completed the trial. That number will be based upon an appropriate power calculation.

The purpose of this interim analysis is to determine whether or not the trials should be allowed to continue to its intended completion. Once we have completed that interim analysis, we will provide further updates. Though we are disappointed, the patient enrollment is not progressed as we had anticipated it would. We continue to believe that RAPINYL quick-dissolution and rapid absorption profile make it a potentially attractive treatment for breakthrough cancer pain.

In July, we reported the two Phase III trials for our Topical Ketoprofen Patch, patients with ankle sprains and strains and in patients with tendonitis or bursitis of the shoulder, elbow or knee did meet their primary endpoints. Since that time, we have been evaluating and analyzing these results, which we believe may have been due to such factors as insufficient severity of pain on entry into the studies and the use of oral ibuprofen and anti-inflammatory drugs similar to ketoprofen as rescue medication.

Based on this findings, we have amended our third Phase III study, which is ongoing and evaluating the ketoprofen patch in the treatment of pain associated with tendonitis or bursitis of the shoulder, elbow or knee. We are pleased today to announce the positive outcome of a perspective full week double-blind, placebo-controlled efficacy trial and 309 patients that represents the first part of three months open label safety study and patients with osteoarthritis flare of the knee. The final, two months of the study were in open label extension. But the double-blind placebo-controlled portion of the study showed statically significant difference from placebo at day 14 on the primary outcome measure with the P-value equal to 0.014. Significant treatment differences were also absorb between the treated group and placebo patients at all measurements point in this parameter during the entire double-blind phase.

Secondary outcomes also demonstrated statistically significant differences from placebo. The topical ketoprofen patch was generally safe and well tolerated after three months when applied to the knee area and patients with osteoarthritis. And then frequently reported adverse event during the both phases of the study that is double-bland phase and in the open label extension phase was application site reactions, which were generally described as mild. The positive outcome observed in the efficacy portion of the osteoarthritis long-term safety study provides further information that could contribute to the design of additional clinical trials and we will be meeting of the FDA to discuss our revised clinical development plans for this product. We continue to believe the topical ketoprofen patch is an effective product that could potentially offer significant clinical benefits and we remain hopeful about its future prospects.

We also announced today that we will very soon initiate a Phase III clinical development program for EN 3285, the topical oral-rinse product for the prevention or delay of oral mucositis. We have agreed to a trial design with the FDA under their special protocol assessment process. And we intend to initiate a multi center double-blind placebo-controlled trial in approximately 240 patients with oral mucositis undergoing chemoradiation therapy for head and neck cancer. The patients will be treated for the 8 week radio therapy treatment period and would then be followed for an additional 12 months. The primary endpoint will be total radiation dosed onset of severe oral mucositis. We believe that the FDA will require 2 Phase III double-blind placebo-controlled trials as the basis of the NDA for this indication. And we expect to begin the second of Phase III study in the coming months. We are currently projecting a 2010 NDA fighting date for this product, we will continue to provide future update as appropriate.

Now, I will turn the call over to Charlie for an in-depth discussion of our financial results.

Charles A. Rowland, Jr. - Executive Vice President, Chief Financial Officer, and Treasurer

Thanks David and good morning everyone. As Peter mentioned earlier, Endo’ net sales for the third quarter of 2007 were record $269.5 million prepared with $217.1 million in the third quarter of 2006. For the nine months ended 12/30 or 9/30 2007, net sales totaled and a record $781 million versus $650.2 million in 2006, which represents 20% growth. This quarterly and year-to-date performance was achieved while estimated trade inventories have decreased from 1.3 months supply to 0.6 months supply. Once again the growth in our net sales is led by LIDODERM, our topical analgesic patch indicated for the pain associated with PHN, at $174.3 million compared with $127.4 million for this 2006 third quarter.

Year-to-date, net sales of LIDODERM were $496.9 million versus $393.3 million for the prior year period. We estimate that prescription growth was up 13% and dispense unit growth was up 14% in the third quarter versus the comparable 2006 period. Prescription growth for LIDODERM was up 15% and dispense unit growth was up 17% for the nine months ended September 30, 2007, over the comparable 2006 period. We estimate that prescription demand for LIDODERM in the third quarter of 2007 was approximately $188.5 million. The inventory drawdown that we have seen provided on this year reflect increased efficiency in the distribution channel and should begin to stabilize in the fourth quarter. And looking ahead, we should see closer correlation between factory sales and demand sales in 2008.

Combined net sales for the OPANA franchise were $24 million for the third quarter and were $78.3 million for the first nine month of 2007. The year-to-date results include the recognition of $13.8 million in deferred revenue for commercial shipments of OPANA ER and OPANA made to customers in 2006. We estimate the prescription demand for OPAMA ER and OPANA in the third quarter was approximately $20.4 million.

Net sales of FROVA were $13.5 million for the three months ended September 30, 2007, and $38.4 million year-to-date versus $9.1 million and $29.1 million for the respective 2006 period. Prescription growth was 15% for the quarter and 11% for the year-to-date in 2007 versus the comparable period in 2006. We estimate that the third quarter 2007 prescription demand for FROVA was $12.8 million. The growth we have seen for FROVA reflect the impact of increased detailing and promotional activities for this product following the expansion of our sales force in mid 2006.

Net sales of PERCOCET were $31.6 million for the three months ended September 30, 2007, versus $25.3 million in the same period in 2006. For the first nine months of 2007, net sales of PERCOCET were $91.2 million compared with $74.9 million in the year ago nine months. We estimate the prescription demand to PERCOCET in the third quarter of 2007 was approximately $28.2 million.

Net sales from our generic products were $23.3 million for the third quarter and $68.4 million year-to-date versus $52.6 million and $142.1 million in the comparable period to 2006, which included net sales from oxycodone extended-release tablets.

Gross profit for the third quarter of 2007 was $219.7 million compared with $172.7 million in the same period a year ago. For the nine months, gross profit was $629.4 million in 2007 versus $506.6 million in 2006. Gross profit margins were $81.5% for the quarter and $80.5% for the nine months respectively versus 79.5% in a year ago third quarter and 77.9% for the nine months ended September 30, 2006.

Margin improvement in 2007 is primarily driven by higher average selling prices that we have anticipated as our medicated utilization… as our medicate utilization continue to decline and the ramp up of rebate has been slower than expected. Also contributing to improve margins is favorable mix of higher margin branded products and lower cost of goods sold versus the prior year.

Selling, general and administrative expenses for the third quarter of 2007 were $107.4 million versus $87.9 million for 2006. For the nine months, SG&A expenses were $287.2 million compared with $252.3 million in 2006. The year-over-year comparisons reflect increased promotional support behind our key on market products, including the full year impact of the expansion of our sales force that occurred in the second half of 2006, combined with continuing investments in infrastructure to support our long-term growth, and the addition of approximately 100 representatives during the second half of 2007. For the fourth we expect SG&A spending to increase based on incremental clinical and promotional expenses including those associated with the expansion of our field force.

Research and development expenses for the third quarter 2007 were $26.9 million versus $14.5 million in the year ago quarter. For year-to-date, R&D expenses were $79.6 million versus $59.4 million in 2006. This increase is primarily attributable to the ongoing clinical development of RAPINYL, our topical ketoprofen patch, our transdermal sufentanil patch, and EN 3285. We’ll continue to make substantial investments in R&D to support the ongoing advancement of our development pipeline. We anticipate that our R&D spending will continue to rise over the next several quarters as we initiate a number Phase III trials for the topical ketoprofen patch and EN 3285.

Net income for the third quarter 2007 was $59.1 million versus $44.9 million in the comparable 2006 period. Diluted earnings per share for the third quarter 2007 were $0.44 compared with $0.33 in the third quarter of 2006. As detailed in the supplemental financial information in today’s press release, adjusted diluted earnings per share for the three months end in September 30, 2007, were $0.46 versus $0.35 for the comparable period in 2006, an increase of 31%.

Year-to-date net income was $176.8 million compared to $123.1 million in 2006. Diluted earnings per share for the nine month end in September 30, 2007, was at $1.31 compared with $0.92 in the same period of 2006. As detailed in the supplemental financial information in today’s press release, adjusted EPS for the nine months was $1.40 per diluted share in 2007 compared with $1.22 per diluted share in 2006, an increase of 15%.

We generated cash flows from operating activities of $287.4 million in the nine months ended September 30, 2007, versus $275.5 million in the same period of 2006. Our cash and cash equivalents and current marketable securities totaled to $882.9 million as of September 30, 2007. And it is our intention to leverage our financial strength to the licensing and acquisition of assets, it will build shareholder value by diversifying our revenue base and building out our pipeline.

Now, this concludes our financial update. And now Peter, David, and I will open up the call for questions.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. Your first question will come from the line of Dave Windley of Jefferies and Co. Please proceed.

David Windley - Jefferies and Co.

Hi thanks. Taking which one of you I want to ask, Peter, on OPANA, you have previously said that you were targeting… exiting this year at 10,000 script rate… run rate I suppose. Is that still a target? I think in today’s call you just said you felt comfortable with guidance.

Peter A. Lankau - President and Chief Executive Officer

Yes Dave, we are certainly very comfortable with the guidance as you conceive the sales through the three quarter are certainly on track to achieve that guidance number. On the prescription side, we certainly expect that some of the Tier II access win that I described earlier are going to result in the beginning of acceleration of prescriptions. So, frankly, through the first half of 2008. So, we have certainly believed that the financial guidance is well within our sites. The prescription trends we have been fortunate enough to have a favorable mix of prescription trends that allow us to achieve that number based more higher strengths being dispensed than what we had originally forecasted, and of course, we are benefiting from the average selling price during the first three quarters of the year being higher than originally anticipated. But we would expect that that would start to decline over the next several quarters as some of these managed care contracts come into play.

David Windley - Jefferies and Co.

Okay. Thank you.

Peter A. Lankau - President and Chief Executive Officer

You are welcome.

Operator

Thank you. And your next question will come from the line of Greg Frazier of Merrill Lynch. Please proceed.

Gilbert Gregg – Merrill Lynch

Hey, it’s Greg Gilbert. On RAPINYL, can you tell us how many patients have been enrolled in the Phase III studies so far and how many have completed treatment? And have you already determined the number of patients that you want for the interim analysis? Thanks.

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Yes. We have determined that under the interim analysis, but we are not going to provide at this stage an update of the number of patients that had been involved. All I’ll say is that the trial was of the size that is standard for this indication and as I’ve made clear in the prepared remarks. We are disappointed in the enrollment rate but nevertheless we will go forward with this interim analysis at the appropriate time.

Operator

Thank you. Your next question will come from the line of Ian Sanderson of Cowen & Company. Please proceed.

Ian Sanderson - Cowen & Company

Question. On the LIDODERM inventory changes. So the difference between what your estimated demand number and the reported sales in the quarter implies an inventory reduction of roughly 6 to 7 days in the quarter. Is that consistent with your thinking and if so… you mentioned that the wholesalers are becoming more efficient but I… as I recall we are down to two to three weeks on LIDODERM coming out of Q2. So, why the continued reduction in inventory here?

Charles A. Rowland, Jr. - Executive Vice President, Chief Financial Officer and Treasurer

Hi, This is Charlie. The inventory at the end of the third quarter was at three weeks or so. It came down from there. However, you have to remember there is also some seasonality with the inventory and we do expect inventory levels to come back a little bit in the fourth quarter as you head into the winter season and the wholesalers carry slightly higher amount of inventory in case of snow storms or what have you to avoid temporary stocks out across the country. So, we think that’s a sort of a temporary blip down in the third quarter and then in the fourth quarter we probably benefit somewhat from the going the other way.

Ian Sanderson - Cowen & Company

All right. Thank you.

Operator

And your next question will come from the line of James Kelly of Goldman Sachs. Please proceed.

James Kelly - Goldman Sachs

Thank you. The question has to do with PERCOCET and I think, we’ve seen three quarters, were we’ve had some PERCOCET trends or revenues ahead of trends. Just wondering, if we should be thinking about a potential reversal of that either in the fourth quarter into 2008.

Peter A. Lankau - President and Chief Executive Officer

Well, James, we haven’t provided any going forward the guidance on PERCOCET but clearly… we have been the beneficiary of two factors here. One is that we have continued to have the opportunity for taking price increases at appropriate point in time. We’ve also seen that the oxycodone-acetaminophen market has continued to grow at rates that are quite substantial compared to the fact that 98% of the market is generic. So doctors are clearly continuing to prescribe PERCOCET both in written and dispensed fashions in increasing amounts. And the decline in share that we have seen has been pretty much offset by price increases. So, on a go-forward basis we’d say that those trends would undoubtedly continue.

Operator

Thank you. Ladies and gentlemen, your next question will come from the line of Scott Henry of Oppenheimer. Please proceed.

Scott Henry – Oppenheimer & Co

Thank you. I guess, just a question for Peter. FROVA has been gaining share throughout the year as we led into the PDUFA date for the expanded indication. Now that you have not or will not have that expanded indication. Do you expect that these trends that you can… can you gain share with FROVA or should we start to see it flatten out here? And also just for clarification, there was a comment that SG&A should be up in Q4. Is that sequentially or year-over-year? Thank you.

Peter A. Lankau - President and Chief Executive Officer

On the FROVA front we certainly see that the share has continued to increase over the first three quarters of this year. And I think it would be fairly, common to assume that physicians are prescribing FROVA not just for acute indications but for whatever other indications they deem appropriate. We think that the primary growth factor here has been the expansion of our sales force coverage. As you recall back in the spring we redeployed a sales force into what was the beginning of our Specialty II sales force. That expanded sales force double covered almost 100% of the neurologists in the headache and pain centers and so we believe that the increased frequency of coverage of those high-prescribing physicians has resulted in, obviously increased awareness and utility of the drug. And we would see that that will continue as we have increased to mirror of the size of Specialty I here in the fourth quarter and into 2008. So, I think the primary beneficiary of FROVA’s growth has been the increased awareness and ultimate utilization based on frequency of call time.

Charles A. Rowland, Jr. - Executive Vice President, Chief Financial Officer, and Treasurer

And in terms of your second question on SG&A that was basically giving you sort of a heads up on sequential over the third quarter.

Operator

Thank you. Your next question will come form the line of Robert Uhl of Friedman, Billings, and Ramsey. Please proceed.

Robert Uhl – Friedman, Billings, and Ramsey

Hi, just to get back to that LIDODERM estimate of the market demand, could you just explain how you calculate that and is it possible that maybe something you are using there is causing you to overestimate? It has been higher for three quarters now in a row I think than the actual shipment.

Charles A. Rowland, Jr. - Executive Vice President, Chief Financial Officer, and Treasurer

Correct. So we use Walters Clore data and the way that we are comfortable with it is, we actually get from the top wholesalers, actual inventory reports by DC and we’ve been able to validate their inventory work down versus what we see is the discrepancy between dollarized prescription data versus our factory sales.

Peter A. Lankau - President and Chief Executive Officer

And I think I’ll really add to that, that clearly with the advent of these distribution service agreements that we’ve entered into not only in 2006 but also in 2007. The net effect of inventory reductions has really been continuous and as Charlie indicated earlier at point 6 months of inventory in the tree we believe that that’s about as low as most of these wholesalers can go. Two reasons there, one is practicality on the potential out-of-stocks and of course secondly we also have minimum levels of inventory that is necessary to be carried and we will not fall from that at this stage. So we don’t see… not a lot of differential between demand sales and factory sales on a going forward basis due to inventory reduction. Though we certainly will see fluctuations based on just normal demand variances from the month to month and of course inventory variances based on seasonality as Charlie mentioned.

Robert Uhl – Friedman, Billings, and Ramsey

Thank you.

Operator

Thank you. Your next question will come from the line of Gary Nachman of Leerink Swann. Please Proceed.

Gary Nachman – Leerink Swann

Hi. David, on the ketoprofen patch. How did you amend the third study and when will you have data on that and do you need that data before you meet with the FDA as far as how you are going to proceed with the whole clinical program? Thanks.

David A. H. Lee - Executive Vice President and Chief Scientific Officer

We amended that study taking into account the analysis and evaluation that we conducted on the first two studies. The first two soft-tissue injury studies that we conducted where we saw… we thought a better effect in patients with a higher pain score of entry into the study and potentially also some impact on competent use which was required by the FDA of Advil, Ibuprofen as rescue medication which we believe blunted the sensitivity of the study so we have amended the ongoing study to somewhat take account of those observations particularly on the entry of patients with higher pain scores. We haven’t provided any projection as to when that study will complete. As far as meeting with the FDA is concerned that will I think depend upon our ongoing analysis of our, lets say going forward decisions on whether we want to add in, osteoarthritis indication which of course is a long term indication and has some other developmental plan implications and then of course it’s a question of negotiating a time for a meeting with the FDA which is never as soon as one would like. So how about all will work out in relation to the completion of the ongoing soft issue injury study, I can’t say at the moment.

Gary Nachman – Leerink Swann

Okay. But you increased the size of the third study, in terms of patients?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Yes. We did yes.

Gary Nachman – Leerink Swann

Okay, thanks.

Operator

And your next question will come from the line of Annabel Samimy of UBS. Please proceed.

Annabel Samimy - UBS

Hi, thanks for taking my question. On Ketoprofen again we noticed that the study that you just announced it was, it was… there was one month of efficacy and two months of additional safety net and you did an analysis the day 14. Is there a reason why you did analysis the day 14 as opposed to one month. The full one month of the efficacy.

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Well to be with you, the study had been primarily set up as a safety study, a three month duration safety study to support the soft tissue injury indications which were short term frequent indications so again three months safety data was required. We decided that we would add in the one month to see if we could control efficacy portion to give us at least a feel for how the product may perform in patients with acute osteoarthritis at the meeting. The FDA requires for registration as such an indication, study is of three months duration so this was not intended, we haven’t described it as a Phase III efficacy study. I think it’s best to look at it as a Phase II type study and from that of course we wanted to make sure that we had the ability to actually show that we could distinguish the product from our placebo so we set 14 days as the primary end point now I think I also pointed out in my prepared remarks that we continued to show efficacy through 28 days as a double blind portion of the study and indeed you have to take this for what it’s worth, but for the two month of the open label portion we also continued to see sustained efficacy. So even though the primary endpoint was set at 14 days, again look at this is a Phase II study. We certainly, we believe how strong indication that efficacy is sustained up throughout the frequent period and if we proceed with this indication of course this will have to be confirmed in a three month efficacy, so…

Annabel Samimy - UBS

And where there background meds on this one?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

There always have to be but in an indication that’s a chronic indication which is relatively stable, that potentially has less impact than in the acute soft tissue indication where patients are, of course they are inherently getting better any way.

Annabel Samimy - UBS

Okay, thank you.

Operator

Thank you. Your next question will come from the line of Rich Silver of Lehman Brothers. Please proceed.

Richard Silver - Lehman Brothers

Yes, Just cited a couple of reasons for the improvement in the gross margin one of them being less Medicaid usage. Can you give us some sense to these factors going forward and whether you expect them to continue?

Peter A. Lankau - President and Chief Executive Officer

In terms of our margins going forward I would expect said to get it right… I said this on the previous call if they would come down from where we reported this quarter but we would still remain above prior year. We haven’t really given… we don’t give annual guidance on margins but I would expect to see that the trend that you saw in this quarter continue.

Richard Silver - Lehman Brothers

Thank you.

Operator

Thank you ladies and gentlemen, your next question will come from the line of David Beck of Buckingham Research Group, please proceed.

James Dawson - Buckingham Research Group

Yes, Hi, it’s Jim Dawson for David Beck. Where is the discounting for OPANA and LIDODERM versus expectations? Do you expect further price discounting to large customers in 4Q and we are in ended 2008?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Well, when you look at both of those products, the one thing is this for the shift from Medicaid to Medicare Part D. The increased discounts that people have negotiated go into effect January 1, so I will expect our ASPs to decrease, next year from where they are currently this year and that is consistent with our thought and with what we will provide for guidance for next year at a later date.

Operator

And your next question will come from the line of David Lickrish of Broadpoint Capital, please proceed.

David Lickrish - Broadpoint Capital

Good morning guys. Thanks very much for taking the call. Just a quick question for you. In your commentary you talked about doing some near term acquisitions that would diversify the revenue stream away from LIDODERM. Are you talking about acquiring a company or products that are already on the market or late Stage III. How should we be thinking about that in terms of what type of products you are targeting and in line with that if the results from the RAPINYL come back and are a little bit disappointing from what you anticipate, how does that change your approach given that that’s one of the late stage programs currently under development?

Peter A. Lankau - President and Chief Executive Officer

Sure David. Certainly all of the above what you mentioned with regards to the acquisitions are on our radar screen. We clearly believe that the opportunity for us to look at pain assets at any stage of development including the earlier stage of programs that might be several years away or something that we certainly believe as a leading pain company that we should be on the leading edge of. On the other hand as we look at acquisitions for company assets that would help to build a platform into one or perhaps two other therapeutic areas of… that are aligned to the pain field we believe that could include products on market with a platform for development. It could include certainly later stage development programs that are soon to be on market but clearly the value proposition for where we believe these assets to reside for us over the coming years are some of the key drivers there and perhaps David you want to address the RAPINYL question.

David A. H. Lee - Executive Vice President and Chief Scientific Officer

Our pipeline has always been and will continue to be designed to have, let’s say multiple shots on goal and of course there’s no certainty that any product is actually going to make it out or even if it does make it out that we believe that it should be commercialized. With respect to also to RAPINYL in this interim analysis, you obviously will have to see how it comes out. But it certainly… though it doesn’t preclude whatever the results are… us going forward with the product be it due to registration or NDA submission, if the results are positive or potentially additional trials if the results don’t come out exactly as we would like.

David Lickrish - Broadpoint Capital

Okay. Thanks I was just trying to focus a little bit more on the comments of… you are trying to diversify the revenue in the near term I guess are there specific targets that you have identified that you are currently on having ongoing discussions about?

Peter A. Lankau - President and Chief Executive Officer

Certainly, David, there are multiple targets that we have had in various stages of evaluation and assessment and we are constantly having conversations that some… early stage some later stage of discussion, but clearly, we wouldn't be in a position to disclose any of that at this stage.

Operator

Thank you. Your next question will come from the line of Ken Trbovich of RBC Capital Markets. Please proceed.

Ken Trbovich - RBC Capital Markets

Thanks for taking the question. I was just curious about the tax rate in the quarter and any implications for the Vernalis loan as a result of the FROVA decision.

Charles A. Rowland, Jr. - Executive Vice President, Chief Financial Officer, and Treasurer

Okay. Tax rate… we are better… we have lowered the tax rate. That's primarily driven by the fact that we have… our interest income is tax free and that's been driving the rate. So, as we redeploy that cash, I would see our rate come back to more historic level. In terms of our loan with Vernalis, we do an analysis when any market events happen with any of our partners and we are very comfortable with the loan is either collectable or the underlying collateral that secures it, is more than enough value to satisfy the loan. So, I don't see any issue with our loan with Vernalis.

Ken Trbovich RBC Capital Markets.

Okay. Thank you.

Operator

And your next question will come from the line of Tim Chiang of FTN Midwest Securities. Please proceed.

Timothy Chiang - FTN Midwest Securities

Hi. Thanks. I just had one question about OPANA ER, the IP, how comfortable are you with it at this point? Due you expect additional patents to be issued by next year for it?

Peter A. Lankau - President and Chief Executive Officer

Sure, Tim, the IP that already exists on OPANA ER and that has just recently been listed is formulation patents that are centered around claims that obviously cover the mechanism by which the product is formulated, and obviously, the results that are produced from that. We continue to have patents that are being prosecuted in the patent and trademark office. So, we are very comfortable that not just the existing patents are providing levels of protection, but also that we are continuing to explore the other options for patent issuances to bolster that patent state. So, we certainly are very confident as we go forward. That will continue to develop the lifecycle management of this product through the avenues that I identified earlier, not just on the patent front, but also in terms of product development and in terms of other regulatory initiatives that will attempt to keep our franchise continuing to grow.

Timothy Chiang - FTN Midwest Securities

Okay, great. Thanks.

Operator

And your next question will come from the line of Michael Tong of Wachovia Securities. Please proceed.

Michael Tong - Wachovia Securities

Hi. I’m just wondering if you can provide an update on sufentanil patch in the status?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

The sufentanil patch continues to proceed through both its Phase I characterization and Phase II clinical trial that we've mentioned earlier. There are no other updates that we can provide on that at the present time, but once again, we continue to be very excited about the prospects of this product and we're very much looking forward to… continuing to progress through the developmental chain.

Operator

And your next question will come from the line of Christi Wong of Summer Street Research. Please proceed.

Lei Huang - Summer Street Research Partners

Thanks. This is actually Lei Huang from Summer Street. My questions is on, RAPINYL. David, can you just provide a little more clarity in terms of how to think about the interim Analysis i.e. if you do like what you see with after that analysis. Does that mean you would continue enrollment despite how long its taking and maybe just file the NDA later. Or even if you like the data, but enrollment is slow, you might have to take a different pathway? And related to that have you talked to the FDA regarding doing this interim analysis? And how the FDA may feel about it?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

To just address the second question first. We… the FDA through the correspondence that we are require to submit is aware all the interim analysis. And this has been setup in a very carefully, predefined, fashion that defines a number of rules to have to be met and followed posted the timing and execution of the analysis. And any decision that can be or is taken, subsequent to that analysis is being conducted. We… as I think, I said in my earlier remarks, the results do justify it, and again, based upon the predetermined criteria that we have laid out, we could potentially stop the study, determining that won't meet its primary endpoint, or obviously, and what we would like is that the study can be terminated because it has already met a predefined endpoints and definition of positivity. So, those are the sort of broad possibilities of the outcome of this analysis and in between, of course, we may come to the conclusion. So, there is no decision to be taken at this time other than to continue the study to its earlier predefined endpoint. I don’t want to go into rules themselves, but you can be you can be assured that these have all been very carefully defined in advance, and the FDA has been informed.

Lei Huang - Summer Street Research Partners

If I just may ask quickly on… the predefined endpoints of interim analysis, are they vary different from that primary endpoints you specified for the entire Phase III program?

David A. H. Lee - Executive Vice President and Chief Scientific Officer

No, it’s the same endpoint.

Lei Huang - Summer Street Research Partners

It’s the same, okay. Thank you.

Operator

And your next question is a follow up question coming from the line of Dave Windley. Please proceed.

David Windley – Jefferies & Co

Hi. I think my question’s been answered. Thank you.

Operator

And your next question is also a follow up coming from the line of Ian Sanderson. Please proceed.

Ian Sanderson – Cowen & Co

Yes. Just a question on the sales force allocation. Did you say that 80% of the total sales force says OPANA is the primary detail and if that is the case, do you perceive that LIDODERM growth may be suffering a little bit from the redistribution of the primary detail?

Peter A. Lankau - President and Chief Executive Officer

No, Ian, it was that 80% of the details that are given by sales representatives have OPANA in the first position. The remaining 20% is predominantly LIDODERM but we average better than one detail per call so we get LIDODERM detailing activity continuing to happen in the second position. And depending upon the specialty and the prescribing tendency of physicians, LDODERM often is in the primary detail position so over the balance of the portfolio the detailing schedule has been derived in order for us to be able to optimize all three products.

Ian Sanderson – Cowen & Co

Okay, if I could quickly ask on the depreciation and amortization number that jumped in the absence of any sort of transactions this year. Can you explain why that is?

Peter A. Lankau - President and Chief Executive Officer

This indicates you are referring to the quarter?

Ian Sanderson – Cowen & Co

Yes.

Peter A. Lankau - President and Chief Executive Officer

The increase, it is unfavorable versus prior year, it’s just a normal amortization, off the top of my head, I am not sure of anything specific that’s driving that.

Ian Sanderson – Cowen & Co

Okay.

Peter A. Lankau - President and Chief Executive Officer

It’s a modest increase.

Ian Sanderson – Cowen & Co

Thanks.

Operator

And your next question is a follow up coming from the line of Rich Silver. Please proceed

Richard Silver - Lehman Brothers

Yes, you may have already mentioned this on the call but just on FROVA for MRM, on have you in fact met with the FDA?

Peter A. Lankau - President and Chief Executive Officer

No, not yet. We are going through the process at this time of requesting a meeting and that will happen we hope as soon as possible but it’s very hard to predict exactly when.

Richard Silver - Lehman Brothers

Okay. Thanks.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. I will now turn the call back to Peter Lankau for any closing remarks.

Peter A. Lankau - President and Chief Executive Officer

Well, thank you, Cindy. And I certainly want to thank everyone for joining us on the call today. We certainly do appreciate your continued interest and support of Endo as we continue on to the balance of 2007 and we’ll see you next quarter. Thanks again.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today’s presentation and you may now all disconnect your lines. Please have a wonderful day.

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Source: Endo Pharmaceuticals Holdings Inc. Q3 2007 Earnings Call Transcript
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