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Executives

Blaine Davis – Head, IR

David Holveck – President and CEO

Julie McHugh – EVP and COO

Alan Levin – EVP and CFO

Ivan Gergel – EVP, Research and Development

Analysts

Marc Goodman – UBS

John Boris – Citi

Gregg Gilbert – Bank of America/Merrill Lynch

Ken Cacciatore – Cowen & Company

Corey Davis – Jefferies

Traver Davis – Piper Jaffray

Annabel Samimy – Stifel Nicolaus

Gary Nachman – Susquehanna

Michael Faerm – Credit Suisse

Greg Waterman – Goldman Sachs

David Buck – Buckingham Research

Jimmy Stuttman – JP Morgan

Michael Schmidt – Leerink

Irina Rivkind – Cantor Fitzgerald

Endo Pharmaceuticals Holdings Inc. (ENDP) Q1 2012 Earnings Call May 1, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Endo Pharmaceuticals Earnings Conference Call.

(Operator Instructions)

I’d now like to turn the call over to Mr. Blaine Davis, Senior Vice President of Corporate Affairs. Please go ahead sir.

Blaine Davis

Good morning everyone. Thanks for joining us. With me on this morning’s call are Dave Holveck, President and CEO; Julie McHugh, Chief Operating Officer; Dr. Ivan Gergel, Chief Scientific Officer; and Alan Levin, Chief Financial Officer. After our prepared remarks, we’ll open the call to your questions.

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

In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo’s current report on Form 8-K filed with the SEC for Endo’s reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning.

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

David Holveck

Thank you, Blaine. Endo had a very solid first quarter with revenues of $691 million and adjusted earnings of $0.87 per share. These results were consistent with our previous financial guidance and we believe we are well positioned for a strong full year performance.

We have resolved the short-term supply constraints facing OPANA ER and Voltaren Gel. Our team has done an outstanding job of addressing these supply issues. And Julie will say more about them in a moment.

With regard to the ongoing LIDODERM litigation with Watson, we are continuing to defend our position vigorously and to work to resolve the market uncertainties with respect to the anticipated cash flows from this product. We believe our recent amendment to our Citizen’s Petition to FDA regarding the approval requirements for generic forms of LIDODERM is appropriate and well supported by current clinical practice.

As I have said before, we look to fairly value the interests of all parties achieving certainty about the future of LIDODERM and we are actively engaged to do so. Later this month at our Annual Meeting, our shareholders will vote on our proposed name change from Endo Pharmaceutical Holdings to Endo Health Solutions, a rebranding that reflects the evolution of our Company, our new approach to therapeutic areas and disease states as pathways.

And the brand equity of our four operating companies AMS, a developer of innovative medical devices; Endo Pharmaceuticals, a provider of branded pharmaceuticals; HealthTronics, a provider of medical services, practice management software, laboratory solutions and EHR technology; and Qualitest, a manufacturer of high-quality generic pharmaceuticals. Our focus this year is to complete our synthesis of these businesses and to continue to invest in their long-term growth. This investments includes new intellectual property to protect our franchise as we received recently with respect to OPANA ER and BEMA Buprenorphine and new research initiatives in pain and urology.

We expect product investments such as these to further our ability to serve the customers we have today. At the same time, we expect commercial innovation to enhance existing offerings and create new offerings that will support our goal of engaging new customers.

Our commitments to long-term growth is reflected in our 2012 guidance. We continue to expect 2012 revenues of $3.15 billion to $3.3 billion, adjusted diluted earnings per share of $5.00 to $5.20, and operating cash flows of $750 million to $850 million. That expected record cash flow from operations gives us the flexibility to invest in our business while repaying debt to achieve our target debt-to-EBITDA ratio. Debt reduction remains a top use of our operating cash flow, but it will not be the only use of our free cash.

In summary, I believe we are executing our business plan successfully, addressing our near-term challenges intelligently, and executing an effective business model for sustainable long-term growth.

Now I’d like to turn the call over to Julie to describe in more detail our first quarter performance and what lies ahead for our business. Julie?

Julie McHugh

Thank you, Dave. I’d like to start by recognizing our organization and their ability to dramatically accelerate the manufacturing for the new formulation of OPANA ER designed to be crush-resistant. We are excited to report that we are effectively manufacturing all strengths of the new formulation of OPANA ER, and also announce today that we have returned to promotional activities and have begun to encourage physicians that they can write new prescriptions of OPANA ER for their patients.

We expect to complete the switch of the market to the new formulation of OPANA ER in the second quarter, and expect a strong remainder of 2012 that should produce attractive full-year growth for the franchise. Additionally, we are excited about the long-term prospects for this franchise. As announced during the first quarter, we recently acquired additional patent protection for OPANA ER that covers the product through 2029.

OPANA ER net sales declined 4% in the first quarter as a result of the temporary supply disruption, but again, we remain excited about the prospects for the remainder of 2012 and beyond, driven by excellent formulary access and strong relationships with our customers. We believe earlier-than-expected return to promotional activities for OPANA ER improves our opportunity to exit 2012 on a strong growth trajectory.

With respect to Voltaren Gel, as expected, we did not report any sales in the first quarter; however, we have positive developments to report versus our expectations and remain excited about this franchise, which we expect to retain through at least 2013.

The recent news is that in early second quarter, we started to ship product that was previously manufactured at Novartis’ Lincoln, Nebraska, facility. The release of that inventory was not a part of our prior assumptions. That’s a benefit to 2020 sales of approximately $10 million and it greatly increases our confidence in our supply plants.

Additionally, as expected we received our first shipments in April from an alternative Novartis facility in Germany. As a result of these two factors, I’m excited to announce our decision to return to promotional activities for Voltaren Gel earlier than expected. As with OPANA ER, our earlier than expected return to promotional activities for Voltaren Gel improves our opportunity to exit 2012 on a strong growth trajectory.

LIDODERM for the treatment of PHN reported net sales growth of approximately 11% in the first quarter. That growth is driven by scheduled changes to the contractual royalty obligations for LIDODERM, as previously discussed, as well as continued low single-digit organic growth. Our generic segment had a strong quarter, delivering solid sales growth in the first quarter versus 2011 driven by our commercial portfolio, launch of new products and the continued optimization of our business.

Temporary supply constraints in the market created strong pricing on key products and benefited gross margins this period of Qualitest. And we remain focused on process improvements that we believe will drive increases in manufacturing capacity and provide a platform for sustained double-digit growth in our generics unit.

Longer term, we are excited about the potential for the liquid ointment and cream products to create growth opportunities. These are commonly higher barrier to entry products and provide a competitive advantage.

Moving on to our Devices segment, sales decreased approximately 8% on a pro forma basis versus first quarter 2011. Excluding the Women’s Health business, where surgical mesh procedures appeared to have stabilized, sales grew approximately 1% on a pro forma basis versus the first quarter of 2011.

That concludes my prepared remarks. I’ll now turn the call over to Alan. Alan?

Alan Levin

Thank you, Julie. Endo had a good first quarter 2012, and I’ll focus my prepared remarks on our results. For the first quarter we had total revenue of $691 million, up 23% over the first quarter of 2011. On an adjusted basis, first quarter 2012 gross margin was 17.5% of net sales. This represents an increase versus first quarter 2011, with the improvement driven by the inclusion of AMS and favorable product mix within our generics business.

Total operating expenses for the quarter were $387 million. However, on an adjusted basis total operating expenses for the quarter were $282 million. This increase versus the prior year adjusted total operating expenses of $187 million is driven by the impact of AMS, which we acquired in June of 2011. As a percentage of revenue, total operating expenses increased to 41% from 33% in first quarter 2011. This temporary rise, resulting from the Novartis supply disruptions, was contemplated when we set our expectations for full year 2012 to decrease operating expenses as a percentage of revenues.

Our adjusted effective tax rate for the first quarter of 2011 was 29%; that’s low relative to our annual guidance of 30.5% to 31.5% but aligned with our expectations for first quarter. For the period, the fixed tax rate benefits from net operating losses has a greater effect on our tax rates when they are applied to the lower pre-tax income driven by the Novartis supply disruption.

Adjusted diluted earnings per share decreased 13% to $0.87 versus $1 in the first quarter of 2011. Our reported or GAAP diluted earnings per share decreased to a loss of $0.75 versus earnings of $0.46 in the first quarter of 2011. Reported diluted loss per share was reduced by $110 million pre-tax to reflect the accrual of a onetime payment that is now expected to be made to Impax Labs in 2013 under the terms of Endo’s 2010 settlement with Impact.

We believe we have triggered a liability under the Impax agreement by successfully demonstrating, on an accelerated basis, the ability to manufacture and sell the new formulation of OPANA ER, which occurred in March 2012. In doing so, Endo believes it is now probable that prescription sales of the original formulation of OPANA ER in the quarter prior to the potential generic launch by Impax will be less than a pre-determined contractual threshold, thus triggering a liability to be paid in 2013.

The Company also recognized a pre-tax $40 million non-cash charge in Q1, related to a write-down of an intangible asset related to Sanctura XR royalties. Reflecting these considerations, we now expect recorded diluted earnings per share of between $1.75 and $1.95 for full year 2012 and reaffirm all other previously issued financial guidance.

Overall, despite our supply challenges, we had a good first quarter of 2012 and are poised to return to growth for the remainder of the year. Repayment of debt remains a top use of our strong operating cash flow. During the first quarter, we paid down $220 million in term loans.

To date, we’ve paid down $510 million in terms loans. We remain excited about our sustainable outlook for cash flow from operations and expect to achieve between $750 million and $850 million in cash from operations this year. We remain confident that we will be able to achieve our target leverage ratio of 2 times to 2.5 times debt to EBITDA in 2013. For additional details of our first quarter 2012 financial results, please review today’s earnings press release.

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

Blaine Davis

Thanks very much, Alan. This concludes our prepared remarks. So we’d now like to open the call to your questions. Sandra, can we go to the first question, please?

Question-and-Answer Session

Operator

Definitely. Your first question is from Marc Goodman from UBS. Please go ahead.

Marc Goodman – UBS

A couple questions. First is the Impax payment, is that it payments to Impax, are we done with that, should we expect more? Second, can you talk about just how we should be forecasting LIDODERM with expected ASPs, with this new royalty we’ve had a couple of quarters here and it’s been pretty lumpy. So, maybe you can just help us with some type of guidance there, how much the general change was? And then third can you just dive into the medtech business a little bit more and just give us some more color on what’s going on there? Thanks.

David Holveck

Sure. Good morning, Marc. With regard to your first two questions, I’ll cover those and then I’ll ask Julie to comment on the medtech business. We do believe that the accrual we’ve taken with regard to the Impax 2010 settlement agreement is the last remaining obligation we have under that agreement. With regard to LIDODERM, this is a franchise that continues to perform very well.

The underlining trends of low single-digit organic growth driven by single-digit script growth and pricing benefits continue to remain intact for this year. The ASP is also impacted by the change in royalty obligations, our royalty obligation which was a 10% obligation to Hind Healthcare fell away last November, replaced by a 6% obligation to Teikoku Seiyaku, our manufacturing partner. That latter obligation is reflected in cost of sales as opposed to net sales, but I think that low single-digit organic growth in LIDODERM is the key takeaway for how we expect the franchise to perform this year. Julie, do you want to talk about medtech?

Julie McHugh

Sure, with respect to our AMS business our first quarter, I think belied some of the optimism and enthusiasm we have for the franchise going forward in 2012. We did see some very strong international growth from our AMS business that was somewhat offset by the continuing evolution of the Women’s Health mesh business, but going forward again we’re excited about our prospects for growth internationally across our entire product line.

We’re excited about some of our new product launches that we anticipate this year and some new data that will be coming out on our BPH business in the second half of this year, as well as a new launch for our Women’s Health business and some, again really exciting international launches that we’re anticipating. So, we’re looking to stabilize the business in the first quarter, return to growth and we’re excited across the product line, across the different segments of our medtech business to get to high single-digit growth by the end of the year.

Marc Goodman – UBS

If you just focus on the mesh business, can you give us a sense of how much the delta has been since peak sales of that product to what you’ve done this past quarter and when you said stabilize, do you mean like we’re finally at the bottom of this?

Julie McHugh

We believe, we have found the bottom and that the issues around the Women’s Health business specifically the pelvic organ prolapse mesh-based products are now well characterized in the market and physicians are understanding appropriate patient selection and getting back to treating women who suffer from pelvic organ prolapse. And we saw a knock-on effect with our stress urinary incontinence business, but to a lesser degree and we are really focusing on that particular segment for accelerated growth in the back half of the year.

Blaine Davis

Okay. Thanks, Mark. Can we go to the next question please?

Operator

Certainly. Next question is from John Boris from Citi. Please go ahead.

John Boris – Citi

Thanks for taking the questions. First one just has to do with LIDODERM, seems as though, Watson has clearly indicated that they believe that they’re going to have the ability to launch and implying that they’re beginning to build some launch quantities, which would imply that the FDA could be ruling on the Citizen’s Petition shortly and potentially affording them a tentative approval. And then secondly you have a court decision potentially coming before the end of the 30-month stay on July 30, what’s really causing delay here in potentially settling and then just I have a follow-up question on Voltaren Gel.

David Holveck

Well, Good morning, John. We continue to explore all options in order to maximize the value of this franchise for our shareholders, be it legal, regulatory, or business. We have had discussions with Watson, we continue to have discussions and we are hopeful that we can resolve our dispute in an expeditious fashion, but we do also believe that the legal arguments and the regulatory arguments are quite robust. We think that the revised Citizen’s Petition will take some time for the FDA to thoughtfully evaluate the merits of the arguments that we’ve put forward.

John Boris – Citi

So you believe on the Citizen’s Petition it will go beyond the 30-month stay until they evaluate that?

David Holveck

I wouldn’t want to speculate on the timing of that, but I do believe that the FDA here has a history of treating these matters very seriously and taking considerable time to weigh the arguments.

John Boris – Citi

Okay on Voltaren Gel, at least the timing around getting back to full supply, would anticipate things could be lumpy. Can you maybe just give us an idea of how sales should ramp from here? And then what your promotional strategy will be behind the brand?

Julie McHugh

Well, at this point we are shipping products from the Novartis facility in Germany into the market and that we now anticipate that those shipments will be followed by quantities that will fully support the demand for the product prior – that we saw prior to the supply outage. So our focus is at the moment replenishing trade inventories. We expect that that will be completed late second quarter early third quarter and that we’ll be able to return to the sort of historic levels of Voltaren Gel that we saw prior to the outage. We’re very encouraged by the feedback that we’re hearing, the initial anecdotal feedback that we’re hearing from customers. And again we’re looking forward to getting Voltaren back to a key growth contributing position for our enterprise.

John Boris – Citi

Thanks.

Blaine Davis

Go to the next question please.

Operator

Certainly. Next question is from Gregg Gilbert from Bank of America Merrill Lynch. Please go ahead.

Gregg Gilbert – Bank of America/Merrill Lynch

Thanks. Good morning, first for Julie. Could you give us some more color on Qualitest performance and what will improve growth over the remainder of the year from a base versus new standpoint, and for Alan, on cash flow from operations which were quite low in the quarter, can you talk about what may be a more normalized level would have been there and gives us any helpful color on the performance there? And lastly, for Dave, an AMS question. You clearly laid out the conceptual rationale for doing that deal at the time. You’ve had some time to live with the asset now, so curious now on your quantitative and qualitative assessment of how that’s going and what it’s bringing to the table at Endo? Thanks a lot.

Julie McHugh

Well, I’ll start, Gregg, with your first question with regard to Qualitest performance, we had a solid first quarter with 8% revenue growth on the top line, which even more excited – we’re even more excited about the fact that we were able to take advantage of some market opportunities for pricing and our divisional contribution from Qualitest actually grew by 23.4%.

So we do expect that going forward into the rest of the year that we will be focused more on double-digit growth on the top line, but continued margin expansion on the bottom line. So we’re very optimistic about the business and both the base is growing at a very nice rate, the base business and we are introducing new products as expected, you know, as we’re getting the approvals we’re optimizing those into our commercial portfolio and launching.

Alan Levin

Mark – I’m sorry, Gregg. With respect to your question on cash flow from operations, Q1 was unusually low in cash flow. I think that is primarily driven by the supply disruptions from Novartis. We remain very confident in the $750 million to $850 million in cash flow from operations for full year 2012. The low cash flow from operations in Q1 was certainly contemplated when we provided that guidance. And I think if you were to look at either Q4 2011 or Q1 2011’s cash flow from operations, I think those are more indicative of a more normalized quarter in that regard.

David Holveck

Relative to the AMS, I think appropriately, I think when we made the acquisition, we saw it in a couple ways. One was the international opportunity to be able to expand and build a legitimate urology footprint beyond the U.S. Secondly, I think we saw their reputation as critical to allowing us to establish a strong channel in the urology business given that it is, the urologists are really a surgical subclinical specialty.

And then I think the pipeline aspect, I think we saw again their abilities through the relationships and engineering capabilities to be able to increase. I think in all fronts, the reputation has clearly allowed us to expand our channel influence and bring together the HealthTronics and now with the aspects of the HealthTronics in cryo along with laser, I think we have a greater synergy and critical mass.

I think the addition with HealthTronics on the data side again along with the reputation and the strength in the urology play through AMS, a lot of doors have opened. I think our presence at the AUA this year on May 19, I think, will really bring forward the complete set of assets and the commitment we have to the urology field. So, all-in-all I think it’s working as planned and I do think that the continued growth on a global basis is the next step in our future development.

Gregg Gilbert – Bank of America/Merrill Lynch

Thank you.

Blaine Davis

Thanks, Gregg. Can we go to the next question, please?

Operator

Certainly. Next question, apologies for pronunciation, Ken Cacciatore from Cowen & Company.

Ken Cacciatore – Cowen & Company

That was very good, thank you. Question is on LIDODERM and wondering why you’re not managing this franchise a bit more aggressively in terms of pricing given its mature and what could be the potential upcoming implications, that’s the first question. And then secondly if you could give us some insight into kind of contingency plans, how quickly could they be implemented in the case of a generic LIDODERM, maybe some sense of what kind of battening down the hatches looks like for you all in the worst-case scenario as we try to contemplate different scenarios? Thank you.

Julie McHugh

Sure, well with respect to pricing for LIDODERM we did take a first quarter price increase. And as you probably are aware we enjoy very strong formulary access for that product in managed care and some of the contractual relationships we have mitigate our ability to fully realize the full impact of all of the price increase. So, I think that’s what you’re seeing there in terms of the pricing trend.

With respect to contingency planning obviously, I think you can imagine that we regularly think about how we manage our business from a resource deployment point of view going forward. And we anticipate a number of different scenarios and just over a year ago we made some adjustments to our commercial infrastructure that improves our flexibility and our ability to redeploy resources should we phase into different market conditions for LIDODERM.

David Holveck

Yeah, I think that’s flexibility is a hallmark of our expense structure. We’ve got 220 contract reps that are part of our promotional mix, we got direct expense associated with LIDODERM all of which I think we – gives us flexibility to dial up or dial down the resources as appropriate.

Blaine Davis

Do you have another question, Ken.

Ken Cacciatore – Cowen & Company

No. Thank you very much.

Blaine Davis

Okay. Can we go to the next question please?

Operator

Certainly. Next question from Corey Davis from Jefferies. Please go ahead.

Corey Davis – Jefferies

Thank you. Can you at some point, in the coming months, let me put it this way, we’d all expect to see a generic challenge on the new version of OPANA. So other than what you mentioned as a new license patent, are there other things that you can do to raise the hurdle for generics to be able to prove tamper equivalents at some point down the road?

David Holveck

Well, so we are pretty excited with respect to the OPANA franchise. We now have three patents that protect that franchise going out to 2029, the last of which we acquired from Johnson Matthey earlier this quarter and we believe that any generic challenger would have to certify against all of those patents as part of any challenge. I do think that creates some collective hurdles in terms of both formulation and API with regard to the franchise itself. We’re very confident that we have a franchise that will go out well for many, many years to come and we have successfully converted this franchise now in a very expedient fashion to the new formulation.

Julie McHugh

And I’ll just add that these formulations, these tamper-resistant formulations we believe represent a significant advancement in the treatment of chronic pain and you can imagine, too, that we will continue to work with the FDA to ensure that tamper-resistant formulations of long-acting opioids are – from a regulatory point of view are held out as the treatment standard.

Corey Davis – Jefferies

Okay. And then second, looking at your SG&A, the adjusted figure of $240 million this quarter, you highlighted the return to promotion for both OPANA and V Gel. So should sequentially SG&A go up in the coming quarters, or was there something that was anomalously high in Q1?

Alan Levin

No. I think SG&A as a percentage of revenues is high in Q1 primarily because of lower branded revenues as a result of the supply disruption. I think that, we previously guided to modest year-over-year, actually we guided to a reduction in SG&A as a function of total revenues and I think sequentially we’ll be in line with the Q1 more or less.

Corey Davis – Jefferies

Okay. Thank you.

Blaine Davis

Go to the next question please.

Operator

Certainly. Next one is from David Amsellem from Piper Jaffray. Please go ahead.

Blaine Davis

David?

Traver Davis – Piper Jaffray

Hello, can you hear me?

Blaine Davis

Yeah, we can hear you.

Traver Davis – Piper Jaffray

All right, sorry. This is Traver Davis on for David Amsellem, thanks for taking the questions. Sort of a competitive question on OPANA ER. How do you see an ER version of hydrocodone made without acetaminophen like Lowgenic’s product or Teva’s product having an impact on OPANA if at all? Thanks.

Julie McHugh

Well I’m not sure I understand the question, but OPANA ER does not contain acetaminophen, so I’m not really sure how...

Traver Davis – Piper Jaffray

Just in general, I mean do you see any effect on these potential new products having any effect on the OPANA franchise at all as part, from a competitive perspective?

Julie McHugh

Yeah. We think that with respect to OPANA ER, we are extremely well positioned competitively with the product profile and now with the new crush-resistant formulation. We think we’re extremely competitive and just recall that we exited last year before the supply interruption with a significant build of share over the course of 2011 and we expect that once we’ve stabilized and believe we have stabilized supply we will be in a position to continue to build our market share relative to the competition. I don’t see any reason why any of these other formulations would change the trajectory for the franchise.

Ivan Gergel

Hi, this is Ivan and you have to remember that oxymorphone is a unique product to this point and patients use it because they – because it’s what their doctors specifically prescribe to them because they get the sort of results from a pain standpoint that they want and expect.

Traver Davis – Piper Jaffray

Okay. That’s fair. Thank you. And just a question on AMS, can you talk about some of the key new product and line extension initiatives that you have, I think you mentioned it earlier, but just to be more particular on those that, you think you can drive growth in the business and also which opportunities are you more particularly excited about? Thanks.

Ivan Gergel

Well, thanks again. So, once again, Ivan. There’s quite a few exciting advances in the AMS pipeline.

We have a large clinical study ongoing with Topaz, which is a treatment for fecal incontinence. We’re looking at technology advances in mesh for the treatment of urinary incontinence.

And we’re also working on advances in our GreenLight technology for BPH. And I think we’ve referenced previously, we have a large study called Goliath that is currently ongoing in the EU, comparing GreenLight to traditional TURP. And we expect to see preliminary data from this study towards the latter part of this year.

Julie McHugh

And I just might add that, in our international markets, we continue to roll out our full product line. We’re investing in specialized sales forces in key markets, and we’re very pleased with the initial results of those investments. We’re seeing accelerated growth in markets outside of the U.S.

And one particular highlight in particular is Japan, where we recently launched the GreenLight laser and the AMS-800, which is our artificial urinary sphincter. And again, the initial feedback from the market has been very positive.

Blaine Davis

Okay, thanks. Can we go the next question, please?

Operator

Certainly. Next question is from Annabel Samimy from Stifel, Nicolaus. Please go ahead.

Annabel Samimy – Stifel Nicolaus

Hi. Thanks for taking my questions. I have a few actually. On Qualitest, you mentioned you had a pretty decent quarter with taking advantage of supply constraints to increase pricing. But the growth did drop from double digit to 8%. So that’s single-digit. And you seem to be talking about how it should grow back to double digits. So can you talk about what gives you confidence about going back to that double digit growth?

And then on the commercial innovation, you’ve talked about the commercial innovation on the AMS side. Can you talk a little bit more, if there’s going to be any commercial innovation on the drug side? And building out this whole urology business?

And then finally on OPANA, are there opportunities for you to grow OPANA, now that you’ve got a crush-resistant and doctors may feel more comfortable prescribing a tamper-resistant formulation? Or do you think it might get clipped because you don’t have as much opportunity for abuse unfortunately?

Julie McHugh

Okay, let me start with the first question with respect to Qualitest. We are very confident that we’re going to be able to get back to double-digit growth with Qualitest. We saw the first quarter as really more of an anomaly, relative to some of the market conditions, which we – we took advantage of the opportunity to ship less volume and optimize our profit margins. But again, going forward, we anticipate that we’ll back to double-digit growth in the second quarter and beyond.

With respect to commercial innovation on the drug side, we continue to experiment across our entire urology customer-facing network of professionals. We currently have about 400 people touching the U.S. urologists, and we’re continuing to look at ways that we can create cross-selling and cross-support for our portfolio in urology by deploying and optimizing the use of those – those customer-facing assets. So I think in the back half of the year, you’ll see us move from pilot phase into national programming around really maximizing the power of the integrated portfolio in urology.

With respect to OPANA ER, we believe that the crush-resistant formulation actually provides us with a stronger platform for growth because of the concern – the growing concern – the growing concern around long-acting opioid misuse and abuse.

And we think that when – if given a product that has a formulation that is designed to be crush-resistant, if in fact that successfully cuts back on misuse and abuse, that will create a stronger demand for our business going forward. So we actually think that it positions us more favorably for long-term growth.

Annabel Samimy – Stifel Nicolaus

Thank you.

Blaine Davis

Thanks, Annabel. Can we go to the next question, please?

Operator

Certainly. Apologies for pronunciation on this one. It’s Gary Nachman from Susquehanna. Please go ahead.

Gary Nachman – Susquehanna

Hi, good morning, first question I guess this is for Julie, with OPANA TRF, is there any change in formulary status for the product as you shift over to the TRF? And how do you expect that to change, if at all, when generics for the old form become available?

Julie McHugh

Well, as you know, we have invested significantly in the past several years in building very strong formulary position for OPANA ER. And our contracts allow us to seamlessly convert the market from the old formulation to the new formulation under the pre-existing contract terms. So we don’t – we again have clear air to continue to move forward and aggressively promote the product for appropriate use.

And I don’t anticipate that that would be impacted by generic entries, although we don’t expect them anytime soon, for many of the reasons we previously discussed. Our contracts will remain intact and the terms will remain consistent, even when the market conditions – should they change.

Gary Nachman – Susquehanna

Okay. And then one more, back to the AMS business. I understand the Women’s Health decline, but why is growth in Men’s Health and BPH only flat to up slightly? I’m still struggling with that. Is there a bigger macro issue with procedure volumes across the board? How sensitive is it to the economy? Is that still a major factor? Thanks.

Julie McHugh

Well, we did see a slowing down of procedural growth in the first quarter. We don’t believe that that is a long-term trend, and we don’t believe that we – in fact, we believe the economy and some of the recovery of the economy actually is a potential upside factor for us moving forward.

So I think again, the back half of the year is really where we’re going to be nationalizing some of our cross-selling pilots, rolling out some new products, really accelerating our investment in the international market. So we remain confident that we’ll be able to get to high single-digit growth across the AMS product line throughout the back half of the year.

David Holveck

And I think that’s probably an accelerating trend as the year continues to get under way. We have seen some favorable activity as we’ve looked to put in place our reimbursement mechanisms on the drug side for the Men’s Health business. We’re in the process of a mobilization strategy to more effectively drive fiber growth in the BPH business. And as that conversion gets completed, we would expect to see an uptick in fiber sales, as well.

So the remainder of the year should see a good trajectory.

Gary Nachman – Susquehanna

Okay. Thank you.

Blaine Davis

Go to the next question please.

Operator

Certainly. Next question comes from Michael Faerm from Credit Suisse. Please go ahead.

Michael Faerm – Credit Suisse

Hi, good morning, thanks for taking the question. My question concerns potential generic competition on the non-tamper-resistant form of OPANA ER.

In your 10-K, you state that you expect Impax to launch on January 1, per the settlement. Can you update us on your plans and timing regarding potential removal – entire removal of the older form from the market? And if that happens, your expectation as to what that could mean for Impax’s ability to sell its generic?

Julie McHugh

So, I’ll address the timing of the old formulation and the new crush-resistant formulation, and I’ll ask Alan to comment on some of the legal elements of your question.

So again, we are only shipping the new crush-resistant formulation into the marketplace. We would anticipate that the old formulation will be completely depleted from the market within a matter of weeks. And that again, the only formulation that would be available to patients through their retail pharmacies would be the new crush-resistant formulation.

Alan Levin

And I would say that the bigger picture for us is – is the accelerated conversion of this franchise. We obtained approval. We’ve now got three patents that cover the franchise. We have launched on a very accelerated timeframe and expect the complete conversion of the franchise to the new formulation. All of this puts us now in a very good position to move forward with the potential to discontinue the NDA for the old formulation.

I think the other thing that I would mention is quota. In particular, DEA quota for oxymorphone. As you may recall earlier in Q1, we announced that we did not receive quota for the old formulation of OPANA ER. I think that’s very much reflective of where the DEA mindset is nowadays, in terms of encouraging the utilization of non-tamper-resistant opioids when that formulation is available in the marketplace. And we would expect that trend to continue to unfold.

Michael Faerm – Credit Suisse

Great. Thank you.

Blaine Davis

Can we go to the next question?

Operator

Certainly. Next question is from Greg Waterman from Goldman Sachs. Please go ahead.

Greg Waterman – Goldman Sachs

Thank you very much for taking the question. Three quick ones if I may.

First, I was hoping you’d give us a little more color on gross margin drivers for the quarter, relative to your expectations for the full year.

Second, I was hoping that you could quantify the revenue impact from the electronic medical records addition within the services division?

And then finally on Voltaren Gel, a quick clarification. I believe you said you expect exclusivity through at least 2013. Correct me if my notes are wrong, but I think that points to a longer exclusivity than you previously pointed to.

David Holveck

Yes. So it does – Greg, on the V Gel, you may recall that there was guidance issued for generic of diclofenac gel last year, with what we believe is a 700-patient three-arm control study that’s necessary to prove bioequivalency. We think that’s probably the better part of two-plus years to run that trial effectively. And we believe that kind of guidance is very much on point for how we view bioequivalency for LIDODERM.

With regard to gross margins, margins were higher in Q1, reflecting the segment mix within our business. We had lower branded sales. And once OPANA ER, the new formulation kicks in – and you will see meaningful sales of that in Q2 – there is a royalty obligation to Grunenthal that kicks in, in connection with that, that puts some pressure on gross margin. The old formulation did not have that.

And then we saw some really attractive favorability on pricing in the generics business that’s part of the growth drivers on the business. And it was particularly strong in Q1 and drove some favorable year-over-year comparisons there.

Julie McHugh

With respect to the electronic medical records, we have not been specific with respect to revenues for that particular business. What we have said though was that both of the businesses we acquired last year were profitable businesses and accretive overall to Endo.

And what’s really important about the EMR businesses is that, again, we acquired the two largest urology specific EMR offerings in the marketplace. And combined, we are now interfacing with that product offering with over 2,000 U.S. urologists comprising well over 10 million patient records.

And again, key to this particular – these two acquisitions was our overall channel strategy in urology. And we believe that we have significantly advanced our ability to partner with U.S. urologists and drive – enable revenue across our entire product line, as a result of these acquisitions. So they were very much focused on enabling our strategy and empowering U.S. urologists going forward in the new healthcare environment.

With respect to Voltaren Gel, as you may recall, the data exclusivity for Voltaren Gel expired in October of last year. And shortly – or about midyear last year, the FDA announced guidance relative to establishing bioequivalence for a topical diclofenac gel. And that guidance included needing to perform clinical trials – three-arm clinical trials.

And it’s on the basis of our competitive intelligence relative to that guidance and the time that would be required to execute that type of a trial. We don’t expect that anyone will have started and completed that program and filed their submission with the FDA and be on the market in advance of the end of 2013.

So that’s – those are the assumptions underlying our forecast now to hold the franchise through 2013.

Greg Waterman – Goldman Sachs

Great. Thank you very much.

Blaine Davis

Can we go to the next question?

Operator

Certainly. Next question is from Jimmy Stuttman from JP Morgan. Please go ahead.

Jimmy Stuttman – JP Morgan

Hey, good morning, and thanks for taking my question. Can you give us some color on the feedback you’ve been receiving, now that you’re back in the market with the new formulation of OPANA ER?

And then with Qualitest, can you just talk about your oral contraceptive strategy for Qualitest going forward? And has the transfer of products to Huntsville been largely completed at this point? Thanks.

Julie McHugh

Sure. So with respect to the initial feedback that we’re getting on the new crush-resistant formulation of OPANA ER, again it’s early, but the anecdotal feedback has been universally very positive. Physicians are excited to have this product back on the market; they’re excited that the new formulation is pharmacologically very similar to the old formulation and that patients are responding well. The size and the shape of the tablets is very similar to the old formulation so they’re not encountering any sort of patient dissatisfaction or concern about the change, at least based on the first few weeks of anecdotal feedback.

So again we’re very encouraged by that feedback. It’s consistent with our expectations and consistent with our expectations of building this franchise into a major growth driver for Endo. With respect to Qualitest, and our oral contraceptive strategy, our strategy remains to get back on the market; in fact we have now has reestablished supply on 12 of the 14 OC SKUs that we currently market. Our objective is to get back on the market with all 14 and continue to invest in that franchise. We do see it as a nice growth driver for our Qualitest business and we intend to continue to invest in that particular element of our generics business.

David Holveck

And I think we’ve also seen in Qualitest, insourcing of the manufacturing for Percocet and Endocet earlier in the first quarter of this year, that was an important thesis for us, given the concentration in our generics business on pain medications. We’re also improving processes and investing capital to expand our capacity in the generics business by some 70%. So we look at the generics segment as a very bright and growing opportunity over the next several years for us.

Julie McHugh

And then just on the final part of your question, with respect to transferring of products into the Qualitest manufacturing system, we have successfully completed the transfer of both Percocet and Endocet into Huntsville and that was a – as you recall, an important element of our cost synergies with respect to the Qualitest acquisition, which we continue to be very – very excited about, where we continue to track well ahead of our original expectations.

Jimmy Stuttman – JP Morgan

Okay, thanks.

Blaine Davis

I think we have time for about three more questions.

Operator

And your next question comes from David Buck from Buckingham Research. Please go ahead.

David Buck – Buckingham Research

Yes. Thanks for taking the question. Couple of quick ones. On the Services business, can you talk about the HealthTronics and the 3% growth year-over-year in relation to your full year guidance? It seems like there needs to be a pretty dramatic pickup to hit the $240 million, $260 million. Secondly on AMS, was just curious why you saw the sequential decline in Women’s Health in the first quarter when sales actually held up in the fourth quarter. And again, to make the $530 million to $570 million range, what needs to happen in that business? And then finally, on LIDODERM, what’s the FDA’s requirement to actually address the Citizen’s Petition before approving? Since it’s a supplement to the original, what requirements do they have to actually get back to you before a 30-month waiting period? Thanks.

David Holveck

Well the – thanks for those questions David. With respect to LIDODERM, the Citizen’s Petition and the amendment were filed under the old guidance. And so there is no definitive 180-day period unlike new CPs. We do expect that the FDA would have to resolve our Citizen’s Petition in connection with taking any regulatory action on pending ANDAs and we expect the FDA to be very thoughtful in the way they do that given the robust arguments that we’ve put forward.

With regard to HealthTronics and our guidance, we do continue to expect robust growth in our services segment. We have a meaningful backlog in EHR implementations that we’re currently working through and the electronic health record component is a helpful growth driver for that business this year and so we would expect an uptick as the year continues to unfold. We’ve also seen very attractive growth in lab services and would continue to see that lab services are in part enabled by some of the Endo AMS synergy opportunities that we’ve identified and as we continue to move forward with pilots and scaling in that regard, we would expect labs to have a benefit.

With regard to AMS, again we continue to affirm our guidance with respect to the Women’s Health business. We do – with respect to AMS overall, we do feel that procedural volumes have essentially bottomed out relative to the declines that we saw in Q3 and early Q4 of last year. We would expect a return to growth in Woman’s Health business in the second half of this year and are putting in place a number of promotional activities to drive greater patient awareness. And we would expect as we continue to educate doctors about the current state of play there that we would see procedural volumes respond effectively, so again a second half story unfolding there.

Blaine Davis

Can we go to the next question please?

Operator

Certainly. Next question is from Michael Schmidt from Leerink. Please go ahead.

Michael Schmidt – Leerink

Hi, good morning. Thanks for taking my question. I just have one on the new OPANA ER. I was wondering whether you’re planning to conduct any post-market studies to obtain a true abuse deterrent label which may increase the appeal of the product even more or are you satisfied with the current label status quo of the product? And on AMS I was wondering in the BPH business what market share does the GreenLight laser now have in procedures and how has that developed over the last two quarters?

Ivan Gergel

Hi, Michael thanks for the question on OPANA. Look we’re very much committed to understanding the use of patients on extended release opioids. We have for a considerable time now had a comprehensive data monitoring ongoing and we continue to do that. We have several services that we keep up-to-date with and we scrutinize regularly and it’s very important to us to understand the effect of our new formulation on patient utilization. So we will continue to monitor that very closely.

David Holveck

And I think that that data monitoring activity was exactly what Purdue was looking at and I was able to leverage some very quick results about the impact of the new tamper-resistant formulation, so we would expect, given the accelerated launch for our tamper-resistant formulation of OPANA ER, that we’d be in a similar position.

Julie McHugh

And with respect to your question on the BPH business, our GreenLight system along with the MoXy fiber, we command about two-thirds of all procedures that are conducted in the United States. And again we’re very excited about the broader opportunity for growth versus TURP and we are conducting as I believe Ivan pointed out a significant clinical trial to prove the advantages of the GreenLight laser procedure versus TURP which is currently the standard of care.

We have expanded and gone to a mobilizer strategy with respect to our U.S. business. And that is starting to pay off dividends as we began to focus more exquisitely on selling fiber as opposed to selling consoles, which again is the higher – the higher profit margin piece of that business.

And then finally, we’ve got significant activity underway in the international markets and again all of these items position us to continue to be very bullish about the BPH laser business.

Michael Schmidt – Leerink

Okay, great thanks guys.

Blaine Davis

Thanks. Could we go to the last question please?

Operator

Certainly. Your last question is from Irina Rivkind from Cantor Fitzgerald. Please go ahead.

Irina Rivkind – Cantor Fitzgerald

Hi, thanks for taking the call. I just wanted to explore the M&A component a little bit further. You said you’d be spending your cash to pay down debt, but also that you would be contemplating investing in the business and I was just wondering if you’d be commenting on which segments of the business you think you’d be more focused on, if it’s drug, device, generic and potentially some more color there. Thanks.

Alan Levin

Well I think our top priority is really to pay down debt in 2012 and to take the strong cash flow from operations, the $750 million to $850 million we previously talked about, taking the majority of that cash flow to pay down debt to get back to our target, to 2 times to 2.5 times debt-to-EBITDA ratio. We are making strong progress in that regard. The other key priorities for us is the completion of the integration of Qualitest this year and the continued integration of AMS that certainly doesn’t preclude us from smaller tuck-ins, bolt-on transactions across the business segments. We see attractive opportunities in all four of our business segments and we’ll continue to explore that as part of balancing external and organic growth opportunities over the medium term.

Irina Rivkind – Cantor Fitzgerald

Thank you.

Blaine Davis

Thanks, Irina. So, I’d just like to kind of wrap things up. Thanks everybody for joining us today to report out on earnings. Jonathan Neely and myself, Blaine Davis, will be available this afternoon to answer any additional questions. Thanks again. Take care

Operator

Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect. And enjoy the rest of your day.

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