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Executives

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

David P. Holveck - President, CEO, Director

Nancy J. Wysenski - COO

Ivan Gergel M.D. - EVP - Research & Development

Analysts

Ian Sanderson - Cowen and Company

Gregg Gilbert - Merrill Lynch

David Windley - Jefferies & Company

James Kelly - Goldman Sachs

Gary Nachman - Leerink Swann & Company

Larry Neibor - Baird & Company, Inc.

John Boris - Bear, Stearns & Co.

Ken Trbovich - RBC Capital Markets

Annabel Samimy - UBS

Timothy Chiang - FTN Midwest Research

Corey Davis - Natixis Securities

Angela Larson - Susquehanna Financial Group / SIG

Michael Tong - Wachovia Securities

Richard Silver - Lehman brothers

David Buck - Buckingham research

Endo Pharmaceuticals Holdings Inc. (ENDP) Q1 FY08 Earnings Call April 30, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Endo Pharmaceuticals First Quarter Financial Conference call. My name is Erica, 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 this conference. [Operator Instructions].

I would now like to hand the presentation over to your host for today's call, Mr. Charlie Rowland, Chief Financial Officer. Please proceed, sir.

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

Good morning and welcome, everyone. With me on this call today is Dave Holveck, President and Chief Executive Officer, Nancy Wysenski, Chief Operating Officer, and Dr. Ivan Gergel, Executive Vice President-Research and Development.

I would like to begin by reminding you that, during the course of this call, Dave, Nancy, Ivan or I may make forward-looking statements concerning such topics as future results, product performance, anticipated timing of FDA approval of certain of the company's drugs or generics thereof, and the 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 express 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 February 26, 2008. We urge you to review these factors.

In addition, during the course of this call, Dave, Nancy, Ivan or I 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 earnings press release issued earlier today for Endo's reasons for including those non-GAAP measures… financial measures, in its earnings announcement, and to see the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

Before we begin the quarterly review, I'd like to take a few moments to introduce you to Dave Holveck who joined Endo as President and Chief Executive Officer on April 1st, 2008. Dave was most recently President of Johnson & Johnson Development Corporation and Vice President, Corporate Development of Johnson & Johnson. He was formerly President and Chief Executive Officer of Centocor, Inc. until the acquisition of that company by Johnson & Johnson in 1999. Dave joins Endo with a track record of strong performance, successfully managing product development, building great organizations, and creating value. In the short time that I have interactive with David at Endo, I am convinced that he has a unique combination of deep experience and entrepreneurial spirit that could lead Endo to the next level.

Now, I'd like to turn the call over to Dave, who will provide some opening comments, then to Nancy for the review of recent developments, and Ivan for a brief pipeline update, and then back to me to cover our first quarter results. We will then open the open the call for your questions. Dave?

David P. Holveck – President, Chief Executive Officer, Director

Thanks, Charlie. Good morning to everyone. I am pleased to have the opportunity to participate in today's call. I'm excited to join Endo and to get started working with the employees and management team as we build off its success and continue to deliver important pharmaceutical products to patients, most importantly build value for our shareholders.

In a few minutes, Nancy, Ivan, Charlie are going to take you through some recent developments and provide detail on the quarterly results. I would like to start by welcoming Ivan Gergel, M.D., Executive Vice President Research and Development, to the Endo executive team. Dr. Gergel, who will have the responsibility for all of the company's research and development activities was most recently Senior Vice President of Scientific Affairs and President of the Forest Research Institute of Forest Labs Inc. from 2005 to 2008 where he had managed over 900 physicians, scientists and staff at the Research institute.

Dr. Gergel joined Forest in 1998 as a Director of Clinical Affairs and later served as Vice President and Chief Medical officer at Forest and Executive Vice President of the Forest Research Institute. Dr. Gergel, who spent nine years at SmithKline Beecham before going to Forest, received his M.D. from the Royal Free Medical School of the University of London, and MBA from the Wharton School.

At this time, I would like to announce that David Lee, M.D., Ph.D., has resigned his position as Chief Scientific Officer to devote more time to pursue his philanthropic activities. Dr. Lee, who has been working part time for the company over the last year, has agreed to remain with the company as a senior strategic advisor, primarily to continue to support the company's activities in the area of public affairs. On behalf of the Board of Directors and management of the company, I would like to thank Dr. Lee for more than ten years of dedicated service and innumerable contributions he has made to the success of the company. I look forward to his continued support within his new role.

I'd like to take a few moments to give you my view on the healthcare industry and how it impacts a company like Endo. I came to Endo as President and CEO at a time when the healthcare sector is in the midst of an historic transformation. Pharmaceutical companies are beginning to recognize that their business model needs to change radically. To succeed, we now need to pay more attention to innovation, specifically finding and filling the gaps within the whole healthcare continuum. In Endo's case, that means looking at pay management through a broader lens and recognizing and pursuing opportunities that meet patients' needs.

The decision to execute the private offering and share repurchase plans sends a signal that we are prepared to seize these opportunities and reflects the confidence of the Board and management in Endo's future potential and strong cash flow. We are pleased that these programs provided the opportunity for us to return value to the shareholder while maintaining maximum flexibility to continue to invest in the growth of the business. I look forward to working alongside the management team and all of the employees of Endo to help to make a difference in patients' lives and to help the company reach its full business potential.

At this time, I would like to provide an update on a few Board of Directors related matters. First, Michel de Rosen has informed the Board of Directors that he does not intend to stand for reelection upon the expiration of his term at the 2008 Annual Meeting of Stockholders so that he may devote more time to his new CEO responsibilities in France. We would like to thank Mr. de Rosen for this service, advice and guidance. The Board has determined to nominate Joseph C. Scodari, an industry veteran, to fill the vacancy left by Mr. de Rosen's departure.

In other news, the company has entered into an agreement with D.E. Shaw Group who collectively beneficially owns approximately 13.2 million shares of the company's outstanding common stock, under which the Endo Board of Directors will nominate William F. Spengler at the 2008 Annual Meeting of Stockholders to serve as a member of the company's Board of Directors. The Board of Directors is being increased to eight members effectively June 26, 2008.

In addition, the D.E. Shaw Group has agreed not to solicit proxies from the company's stockholders in connection with the election of directors or other matters until and, subject to certain other agreements, through the company's 2009 Annual Meeting of Stockholders. The company's agreement with D.E. Shaw Group will be filed on a Form 8-K and will be publicly available. We welcome the additions of Joe Scodari and Bill Spengler to the Board following our Annual Meeting of Stockholders currently scheduled for June 26.

I will now turn the call over to Nancy who will provide an update on recent business developments.

Nancy J. Wysenski – Chief Operating Officer

Thanks, Dave and good morning, everyone. I'd like to start today with an update on VOLTAREN Gel. As you know, in March of this year, 2008, we licensed the US marketing rights and subsequently launched the prescription medicine VOLTAREN Gel 1% from Novartis. VOLTAREN Gel, which received its FDA approval last October, is the first topical prescription treatment for use in treating pain associated with osteoarthritis and the first new product approved in the U.S. for osteoarthritis since 2001.

VOLTAREN Gel has been granted marketing exclusivity in the U.S. as a prescription medicine until October 2010.The agreement leverages both Endo's sales and marketing expertise in pain and well-established relationships with prescribers with Novartis' R&D expertise and provides Endo entry into the sizable osteoarthritis market. It also expands our presence into the mild-to-moderate pain segment.

We forecast peak U.S. annual sales of $250 million to $300 million and expect market availability and momentum behind this product to build steadily as it is a safe and effective product with minimal systemic absorption versus oral diclofenac. As a gel, it is very well suited for applications to articulating joints, such as the hands and knees.

We began shipping VOLTAREN Gel in mid-March, and as of March 31st, 2008, all of our wholesalers had the product on hand. Over 26,000 retail pharmacies have committed to or already stocked the product. One of our two specialty sales forces, consisting of approximately 160 representatives, began detailing the product on April 7. Although we have only two full weeks of data, we are pleased with the launch results and expect the prescription trend to grow even stronger following the launch of the additional 275 contract sales representatives in late May who will be targeting primary-care physicians who treat osteoarthritis.

In March, we received approval from the U.S. Food and Drug Administration for three new dosage strengths of one of our other products, OPANA ER, extended release tablets C2. The new strengths 7.5 mg, 15 mg, and 30 mg were shipped to the trade in March 2008, followed by an April kickoff of the promotional campaign. These strengths joined the previously approved OPANA ER dosage strengths of 5 mg, 10 mg, 20 mg and 40 mg. As an opioid analgesic, OPANA ER is indicated for the relief of moderate-to-severe pain in patients requiring continuous, around-the-clock opioid treatment for an extended period of time.

The addition of these three new dosage strengths of OPANA ER complements the currently available strengths, and make it easier for physicians to titrate patients to the optimal level of pain relief, and they also facilitate the clinician's ability to convert patients to OPANA ER from other opioid analgesics. Further, the introduction of these new strengths underscores Endo's long-term commitment to the OPANA franchise and to providing physicians with additional treatment options for their appropriate chronic pain patients.

During the first quarter of 2008, we filed a second lawsuit against IMPAX in connection with IMPAX's Abbreviated New Drug Application, or ANDA, for OPANA ER. The suit is based on IMPAX's Paragraph 4 certification notice which refers to certain Penwest patents listed in the FDA's Orange Book, and is a follow-on to the first suit filed in November of 2007, but it is based on the second set of notices from IMPAX served to Endo and Penwest. Additionally, we filed a lawsuit against Actavis South Atlantic LLC alleging infringement of U.S. patent Number 5958456, one of our four Orange Book listed patents for OPANA ER.

OPANA ER has been granted new dosage form regulatory exclusivity that prevents the FDA from approving any ANDA for a generic version of OPANA ER for the launch… I'm sorry, for launch prior to June 22nd, 2009, the date such regulatory exclusivity expires. As we have previously stated, Endo intends to pursue all available legal and regulatory channels in defense of OPANA ER, including enforcement of our intellectual property rights and approved labeling. In addition, we remain enthusiastic about the commercial potential for the OPANA franchise and are committed to a lifecycle management strategy for the OPANA franchise that includes not only intellectual property efforts but also product development and regulatory initiatives.

In other events, in April 2008, we notified the U.S. Food and Drug Administration of the withdrawal of the Supplemental New Drug Application, without prejudice to refilling, for FROVA 2.5 mg tablets. This SNDA was for the additional indication of FROVA for the short-term prevention of menstrual migraine. We are continuing to evaluate development opportunities for FROVA for this indication and other related indications. FROVA is already approved, as you know, and marketed for the acute treatment of migraines, with or without Ora [ph] in adults where a clear diagnosis of migraine has been established.

FROVA continues to deliver strong performance with first quarter prescription growth of 16% versus the comparable period in 2007. Now, I'd like to turn the call over to my new colleague, Dr. Ivan Gergel, who will share a few words.

Ivan Gergel M.D. – Executive Vice President - Research & Development

Thank you, Nancy, and good morning, all. First of all, let me say how excited I am to be joining the Endo team and how pleased I am to be here with you on the call today. As we have previously mentioned, we have initiated an in-depth review of our R&D pipeline and I look forward to working with the executive team on this comprehensive review and evaluation process.

As you are aware, we had previously announced the withdrawal of guidance as to the potential NDA filing dates of two of our Phase III development projects, the Ketoprofen Patch and Rapinyl. At this time, given our ongoing review process, we are not intending to provide any further updates about our pipeline. I would now like to turn the call back to Charlie Rowland, who will take us through the financial results.

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

Thanks, Ivan. I'm pleased to report that we've posted very strong results for the first quarter. For the first three months ended March 31st, 2008, net income was $59.5 million or $0.44 per diluted share on net sales of $290.3 million. This compares with net income of $57.1 million or $0.43 per diluted share, on net sales of $254.4 million in the first quarter of 2007.

On an adjusted basis, as detailed in the supplemental financial information in today's press release, net income was $68.3 million in the first quarter of 2008 versus $62.5 million in Q1 2007. Adjusted diluted earnings per share were $0.51 for the first quarter of 2008, compared with $0.47 in the first quarter of 2007.

Our first quarter top line growth was led by Lidoderm, our topical analgesic patch for postherpetic neuralgia, which had net sales of $180.5 million compared with $154.1 million for the year ago quarter, an increase of 17%. Prescription growth for Lidoderm was up 11%, and dispensed unit growth rose 13% in the first quarter of 2008 versus 2007. We believe the continued growth of Lidoderm is driven by the product's proven clinical effectiveness, combined with our continued promotional activities positioning Lidoderm as the only prescription analgesic patch specifically designed to effectively relieve the localized pain of postherpetic neuralgia with the low risk of systemic side effects and drug-to-drug interactions.

As expected, we have seen the stabilization of trade inventories observed in the fourth quarter of 2007 and discontinued throughout the first quarter of 2008. We estimated the prescription demand for Lidoderm in the first quarter was $201 million. Combined net sales for the OPANA franchise were $40.3 million for the first quarter of 2008, versus $29.2 million for the first quarter of 2007. The 2007 results included the recognition of $13.8 million in deferred revenue for commercial shipments of OPANA ER and OPANA made to the customers in 2006. We estimate that prescription demand for OPANA ER and OPANA in the first quarter was approximately $30.2 million. The difference between prescription demand and net sales can be attributed primarily to the wholesaler stocking of the three new strengths of OPANA ER launched in the first quarter of 2008.

Net sales of FROVA, our Tryptan for the acute treatment of migraine headaches in adults, were $14.1 million for the first three months ended March 31st, 2008, up 17% from $12.1 million in the first quarter of 2007. Prescription growth was up 15.9% for the first quarter versus the comparable 2007 period. We believe this strong growth reflects the impact of increased detailing and promotional activities for this product and growing awareness in the marketplace of FROVA's clinical attributes, particularly as an acute treatment for menstrual migraines driven by our expanded field force.

Gross profit margins for the three months ended March 31st, 2008 and March 31st, 2007 were 81%. We expect our margins to decline slightly over the balance of 2008 as a result of the increased amortization expense resulting from the agreements with Novartis and Vernalis, increased discounts, and royalties we expect to pay on a portion of the 2008 net sales of OPANA ER. Selling, general and administrative expenses for the first quarter of 2008 were $115 million versus $94.1 million for the same period in 2007. The year-over-year comparisons reflect the launch of VOLTAREN Gel, our newly licensed topical treatment for use in treating pain associated with osteoarthritis, the continued investment in our commercial business and infrastructure to support our key on-market products, including the impact of the expansion of the sales force that occurred in the second half of 2007. Selling, general and administrative expenses for 2008 also include the impact of accruals for separation benefits.

Research and development expenses for the first quarter of 2008 were $33.6 million, which includes $6.5 million in upfront and milestone payments to partners, compared with $27.8 million, which included $5.6 million in upfront and milestone payments to partners in the year ago quarter. Our current guidance includes an increase in our 2008 R&D spending to ensure the continuing advancement of our development pipeline. Spending levels will be reevaluated once we have finalized recommendations on our development pipeline, as Ivan had talk about earlier.

Net income for the three months ended March 31st, 2008 was $59.5 million compared with $57.1 million in the comparable 2007 period. Diluted earnings per share for the three months ended March 31st, 2008 were $0.44 compared with $0.43 in Q1, 2007. Adjusted diluted earnings per share for the three months ended March 31st, 2008 were $0.51 compared with $0.47 in the prior year.

In April 2008, our Board of Directors approved a share repurchase program authorizing the company to repurchase, in aggregate, up to $750 million worth of shares of our outstanding common stock. Purchases under the program may be made from time to time in open market purchases, privately negotiated transactions, accelerated stock repurchase transactions, or otherwise as determined by Endo. Also in April, we issued $379.5 million in aggregate principal amount of 1.75% senior subordinated convertible notes in a private offering for resale to qualified institutional buyers due on April 15, 2015.

Currently, with the issuance of the convertible notes, the company also entered into a convertible note hedge to minimize the dilutive effect of the transaction. We also entered into a warrant transaction to further minimize the dilutive effect, up to $40 per share, which is approximately 61% higher than the closing price of Endo's common stock on April 9, 2008 or $24.85 per share. Concurrent with our convertible debt offering, we entered into a privately negotiated $325 million accelerated share repurchase agreement where we purchased approximately 11.9 million shares of our common stock. We may receive additional shares from the accelerated repurchase program, depending on the volume weighted average price during our averaging period. The actual number of shares will be finalized in approximately four months based on the volume weighted average price of our stock during the repurchase period.

The company used approximately $12 million of cash on hand as part of the accelerated share repurchase program. In addition to the accelerated share repurchase in April 2008, we made open market purchases of our common stock as part of our broader share repurchase program. As of April 29, 2008, we purchased approximately 900,000 shares in the open market for a total purchase price of $21.7 million. As a result of this share repurchase program, the company is revising its guidance as adjusted diluted earnings per share, excluding estimated milestone payments to partners, certain severance costs, and the expensing of stock-based compensation charges for 2008, are now expected to be between $2.15 and $2.19, up from the prior adjusted diluted earnings per share guidance of $2.03 to $2.07.

The company reiterates guidance for total 2008 net sales to be between $1.245 billion and $1.280 billion. Of course, there could be no assurance that Endo will achieve these results. As you are aware, we have a number of ongoing business development activities, and this revised guidance does not include the potential impact of future business expansion opportunities, such as company or product acquisitions, product licensing transactions, or collaborative research deals. At such time, we would revise our guidance accordingly. We generated cash flow from operating activities of $75.5 million during the three months ended March 31st, 2008 versus $128.5 million for the comparable quarter in 2007. This decline was due to the collection of receivables in the first quarter of 2007 for 2006 sales of oxycodone ER, our generic oxycodone, which we ceased selling on December 31, 2006.

Our cash and cash equivalents and current marketable securities totaled $590.7 million as of March 31st, 2008, compared with $663.7 million as of December 31, 2007. In addition, we have $311.4 million of long-term marketable securities, $303.3 million of which we have reclassified from current to long-term due to the current conditions in the auction rate securities market. As a result of the temporary declines in fair value for the company's auction rate securities, driven by liquidity concerns, the company attributes… rather than credit issues, we have recorded a pretax $14 million reduction in shareholders equity and accumulated other comprehensive loss.

In closing, we have a clear vision for growth. We intend to leverage our financial strength and seek maximum shareholder value by focusing our investments in areas of innovation and technology. This includes looking at pay management through a broader lens and recognizing and seizing opportunities that meet patient needs. As we look to the future, we need to balance our risk by including both early stage pipeline and later stage opportunities to stay true to our core strength and expertise in pain and fuel the short-term business to ensure our long-term success.

Finally, we will continue to maintain our focus on driving the growth of our existing business by maximizing the potential of our key on market products in our pipeline.

Now Dave, Nancy, Ivan and I will open the call for questions.

Question and Answer

Operator

[Operator Instructions]. Our first question comes from line of Ian Sanderson from Cowen and Company. Please proceed.

Ian Sanderson - Cowen and Company

Good morning, and thanks for taking the question. Charlie, could you talk a little bit about the trade inventory levels for Lidoderm at the end of Q1 and how that compares to the trade inventory at the last... at the end of last year? And then, what you're seeing on the pricing and rebate front for Lidoderm and maybe you have formularies push back more aggressively now that there is a competitor in the market?

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

I'll answer the first part of that question, Ian, and then I'll turn it over to Nancy for the second part. In terms of wholesaler trade inventories, we really have seen no change of any substance from year-end through the end of the quarter on Lidoderm. So...

Ian Sanderson - Cowen and Company

Can you explain into... in Q4 you had about a $6 million over stock or inventory build but I think by your estimate, yet there was about $20 million change versus demand in Q1. So can you explain that a little bit?

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

Well, it can't be explained by changes in inventory levels in the trade. So what we are doing is working with the data provider to see if they had any cut-off issues or what have you with... at this point in time we can't explain the difference.

Ian Sanderson - Cowen and Company

Okay. Thank you.

Nancy J. Wysenski - Chief Operating Officer

Ian, this is Nancy to your question about formularies. As you know Lidoderm really doesn't have any competitors in the marketplace. But the market is always looking at their formularies and we continue to have Lidoderm added to some formularies and removed from others.

Ian Sanderson - Cowen and Company

And any... have you got push back on pricing?

Nancy J. Wysenski - Chief Operating Officer

No, I wouldn't characterize that as push back from pricing. We have disclosed that we will be in a authorized situation for the New York State Medicaid Formulary. But, beyond that I don't think we have anything really material to discuss.

Ian Sanderson - Cowen and Company

Okay. Thank you.

Operator

Our next question comes from the line of Gregg Gilbert from Merrill Lynch. Please proceed.

Gregg Gilbert - Merrill Lynch

Thanks. Good morning, I will spend my initial question on Dave. Welcome Dave. I realize it's early in your tenure, but can you give us some initial color on how you intend to change things at Endo either generally or specifically, and may be put some context around the new Board members and what they bring to the table versus the prior group? And then I'll get back in line for my other questions. Thanks

David P. Holveck - President, Chief Executive Officer, Director

Thank you. Four weeks in... I think it's a 30,000 plus you, but I think the idea as I mentioned earlier is to look more towards innovation. My focus is, and I think consistent with where I believe the CEO should be spending the time is on the future long-term growth and that's where I will be spending my time, working closely with [inaudible] and Ivan. And so, from the standpoint of looking now, my time will be spent building I think the elements that are... that are going to sustain the growth of the company and the technology underpinning, with the company. From the standpoint of the organization as a whole, my... I guess, comfort is that we have certainly a strong group of people. Now I'll speak of internal management. When we look at the Board, I think the additional elements or people I should say, to those Board positions are going to give us again, the vision that we need for long-term and the understanding of what it takes to build a company in this new world that we are in. So this additions to me are critical to have a quick and highly flexible response to this new environment. I think what I have been joining that gives me internal capability and confidence to assess technology. And then again the broad base of confidence is within the organization I think we will be able to execute. So that's where I am at right now.

Ian Sanderson - Cowen and Company

Thanks.

Operator

Our next question comes from the line of Dave Windley from Jefferies & Company. Please proceed.

David Windley – Jefferies & Company

I was hoping you could walk through the sales forces that stands right now where the CSO isn't ramping up and what the individual subgroups of the sales force or the individual forces are carrying relative to their leverage, where do they have room to carry more? Thanks.

Nancy J. Wysenski - Chief Operating Officer

Sure Dave, this is Nancy, I will help you to address that. As we had previously announced, we're right on track with the execution against our plan to launch VOLTAREN Gel and you referenced the contract sales organization. So, on April 7, we had 160 of our pharma specialists, the Specialty II group go out and begin promotion of VOLTAREN Gel. And obviously we are seeing strong results from that now we are quite pleased. In addition, simultaneously we have been very busy contracting with and working to recruit an additional 275 sales reps, who we anticipate will be wanting to be primary care audiences, the VOLTAREN Gel product effective May 27.

What this means is that, our other two in-house sales group both are pharma... are regular pharma group who calls on generalists and our Specialty I group continue to focus on the products that they have been promoting and we expect them to continue to drive results as they have in the first quarter. So, we believe that once we have the new contract sales force up and effectively promoting VOLTAREN Gel, we'll be able to add some additional in-line products to their bag, and that should easily offset the intention that we pulled away during the month of April and beyond for the pharma II to specialty sales force. And we think they will be pretty fully utilized in their capacity to cover those four projects against the four teams.

David Windley - Jefferies & Company

Great. Thanks. So, the pharma group and the Specialty I group are Lidoderm and OPANA?

Nancy J. Wysenski - Chief Operating Officer

Well. They all have a mixture, it isn't quite that simple. But yes, the vast majority of the effort against Lidoderm and OPANA continue through them and obviously our Specialty II sales force isn't only promoting VOLTAREN Gel, of course, that's in their first position and physicians are very interested to hear about it as a new entry. But they continue to promote other products as well.

David Windley - Jefferies & Company

Okay. Thank you.

Operator

Our next question comes from the line of Jim Kelly from Goldman Sachs. Please proceed.

James Kelly - Goldman Sachs

Thank you and good morning. I wanted to ask a quick one about the... about the strategy for VOLTAREN, post the 2010 exclusivity, how do you set plans, are there other ways to potentially extend or extend the product as it is or other modifications? Thank you.

Nancy J. Wysenski - Chief Operating Officer

I can't really comment at this point on any life cycle management strategies. But as we stated in our last conference call, we don't believe that this product will be at the same risk or threat from generics and OTC, because first of all its unique formulation and secondly, because it does contain a black box warning, and the FDA has not been very friendly to looking at OTC presentations for products like that.

Operator

Our next question comes from line of Gary Nachman from Leerink Swann. Please proceed.

Gary Nachman - Leerink Swann & Company

Hi, good morning. Also a question on OPANA, what's the pricing per prescription that we should be using now going forward, how are patients going to be using that product? And how significant will launch cost in the first quarter and how should we think about that for the rest of the year? And also on the similar results stocking of this product in the first quarter, could you just confirm that? Thanks.

Nancy J. Wysenski - Chief Operating Officer

I'll let Charlie handle the financial issues relative to stocking, but as you know we price this product comparable with Celebrex and so the weighted-average cost is 2210. Charlie?

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

Yes, in terms of stocking in the first quarter, we did ship to wholesalers and we had programs to get it out to reach our outlets. However, there was zero revenue recognized in the first quarter. As you know in the pharma industry, when you have a new forum that goes out, given the accounting guidance you cannot recognize revenue until you get more of an experience base, so you can properly estimate the returns rate and so forth. So, the only thing we had in the first quarter actually cost related to the preparing for the launch as well as some discounting and so forth that we had to recognize because you have that liability when the product was shipped.

Gary Nachman - Leerink Swann & Company

Okay. If I could just follow-up. Nancy, you said WAC [ph] is 2210. But how many tubes per patient you think will be used on average when a physician writes a prescription?

Nancy J. Wysenski - Chief Operating Officer

We hope that once prescription trends stabilize, they will use approximately five tubes per patient based upon our indication.

Gary Nachman - Leerink Swann & Company

Okay. Thanks.

Operator

Our next question comes from the line of Larry Neibor from Baird. Please proceed.

Larry Neibor - Baird & Company, Inc.

Thank you. Good morning. Your earlier comments about expanding the lens in the pain management space, does that imply that you will be looking more towards oncology palliative care or other therapeutic categories, and if so, how do you intend to address those categories?

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

Yes. I will respond to that, that was my statement. I think we're ongoing with that is again pain is a big cause to our healthcare system. The management of it, and then the underpinnings of disease now. Having said that, it gives you a... certainly a wide spectrum to look at. First and foremost, I really want to look at innovation that will impact that care pathway in a way that is most meaningful, and that way obviously you're going to get the best return on it. Now, saying that meaning the innovation, I guess comes first staying within the boundaries of where we are currently at, can be pushed again pretty far as I indicated. And as I indicated in the earlier question, now that Ivan has joined and myself compares to experiences with technology and the business development group, it will really be that element that will assess and move forward with it.

Other than that, again we are going to try to make all of this fit within the scheme of what we are as a company really where the healthcare system, once companies like us to be productive and focused. And so I think we have to really look at it from the perspective of the value created for the healthcare system. So, I'm going to look at innovation first and then certainly work within the spectrum of where we are within that pain area. I haven't discounted or designated any specific diseases at this point.

Larry Neibor - Baird & Company, Inc.

Great. Thank you.

Operator

Our next question comes from the line of John Boris from Bear Stearns. Please proceed.

John Boris - Bear, Stearns & Co.

Okay. Thanks for taking the question. I just have a question on competitive threat, just on to your franchises. On Lidoderm, Nancy, if we look at PRX growth back half of '07 who's growing at 19%, our front half of '07 19%, back half 15%, 1Q '08, 13% and then latest weeklies are showing about 10% growth. Can you help us understand or reconcile why we're seeing a deceleration like this when you' re ramping sales forces as you've just laid out. And then in your K, you outlined a technology acquisition that you made where you are working with a collaborative partner for exclusive clinical development and commercialization rights to be utilized across various product development activities in pharmaceutical formulations. I'm just wondering is this an abuse resistant technology that you have to counter or to use that across the PERCOCET line and the Opana ER line. And then just your thoughts on the prospects of or the threat of abuse resistant oxycontin and if that there is a FDA meeting that could take place on that and could be a competitive threat on the Opana ER line. Thanks.

Nancy J. Wysenski - Chief Operating Officer

Well, thank you John. Let me take your second question first related to our technology acquisition. Unfortunately I can't really comment on the specific details of that acquisition. So I'm sorry that I can't give you any more specific information there. But going back to your observations about Lidoderm, as you're well aware Lidoderm is a fairly mature product and the growth rate over time have been flowing. As we mentioned earlier in this call, our sales rate for the first quarter were at 17%. So we think that’s a reasonable rate of growth and it is in line with our expectations for the product. Referring back to on Charlie's comments, we are looking little more intensely at some data irregularities, and once we understand that more fully we'll be happy to share.

John Boris - Bear, Stearns & Co.

Just a follow-up if I may, just on Opana. Ivan, how do you feel it's positioned relative to an abuse resistant oxycontin?

Nancy J. Wysenski - Chief Operating Officer

Well, I think that Opana has gotten a reasonable uptake and again it continues to grow at a fairly nice pace. We are pleased with the launch of our three new dosage strength which are going to give physicians additional options in terms of conversion. And it is the only true twice a day product out there with 12 hour dosing. So, I actually wouldn't be too concerned about any impact from the FDA Advisory Committee early next month.

John Boris - Bear, Stearns & Co.

Thanks.

Operator

[Operator Instructions] Our next question comes from the line of Ken Trbovich from RBC Capital Markets. Please proceed.

Ken Trbovich - RBC Capital Markets

Sure, appreciate the time. Dave or Ivan, I know you've not obviously given us the pipeline update as it relates to progress on the trials or the pipeline. But could you at least shine a light in a dark room as to what assets are there that you think are worth highlighting that investors perhaps ought to focus their attention on?

David P. Holveck - President, Chief Executive Officer, Director

I don't know if the room is dark, but I know whether we're [inaudible]. I think, I'm not going to inflict this question against Ivan, it's only been really with this, maybe 24 hours, if you would. But from my perspective, what I have asked for is a very comprehensive degree of review from really inside and we brought in people from the outside to look at this. I think, as always you can imagine and as I said, I guess from the previous question, innovation is the important element going forward. I only want to maximize our efforts and dollars in the areas that makes the greatest impact. So, this review is really going to be internally where we are at, an external component will be added in this review, so that we understand the impact of this pipeline against our health care system and we will make the call. So I'm giving you a little bit of a process, I'm not making comments on what's there until I have the opportunity with Ivan to really look at it. And then we'll be completely transparent as to where we're going.

Operator

Our next question comes from the line of Annabel Samimy from UBS. Please proceed.

Annabel Samimy - UBS

Hi, thanks for taking my question. Just regarding Lidoderm I guess relating to the question that was asked previously. Are you hearing anything anecdotally of about potential encroachment of [inaudible] into the Lidoderm market at all and I guess for that matter do you sense that in turn may have any impact on Lidoderm growth going forward?

Nancy J. Wysenski - Chief Operating Officer

Thanks for the question Annabel. As we all know Lidoderm, Flector and the VOLTAREN Gel, all has unique and separate indications, and so I'm really not hearing anecdotal evidence and my hope is that the entire topical market is going to grow based upon the success of Lidoderm and the launch of these two new tropical products.

Annabel Samimy - UBS

Okay. And then, really quickly on the Lidoderm inventory. If they are stable, can you just give us a sense of what might have caused the big difference between actual sales in the demand if it was an inventory draw down?

David P. Holveck - President, Chief Executive Officer, Director

Now I'll just reiterate what I said earlier and that, the time to time there were certain data anomalies we are investigating that with the data provider and that's all we really know at this point.

Annabel Samimy - UBS

Okay. Thank you.

Operator

Our next question comes from the line of Tim Chiang from FTN Midwest Securities. Please proceed.

Timothy Chiang - FTN Midwest Research

Hi, thanks. Nancy, I wanted to ask you, you talked about the June 22, 2009, [inaudible] for Opana ER, is it the company's expectation that you will have additional patents outside of the four there in the Orange Book some time by next year to protect this product beyond the middle of 2009?

Nancy J. Wysenski - Chief Operating Officer

Yes Tim, we do hope that we will have additional patents by that point in time. And we are continuing to work with the PTO on a regular basis.

Timothy Chiang - FTN Midwest Research

Have there been any updates recently from the PTO?

Nancy J. Wysenski - Chief Operating Officer

No, sorry.

Timothy Chiang - FTN Midwest Research

Okay, great. Thanks.

Operator

Our next question comes from the line of Corey Davis from Natixis. Please proceed.

Corey Davis - Natixis Securities

Thanks. Nancy, I think you already answered this. But could we conclude from your statements that you expect most of the source of new business for the Voltaren Gel to come from the oral end phase? And then secondly, you said we expect five tubes per prescription, but it's much lower than that now from reading the IMS data correctly. And is that due to very heavy couponing or do you think docs are just prescribing fewer tubes per prescription to start off?

Nancy J. Wysenski - Chief Operating Officer

Yes, thanks for the question, Corey, it's a good one. In terms of the source of prescriptions for Voltaren gel, yes, we absolutely do expect that they are coming out of the oral and fade and COX-2 marketplace. As you know, this is the first or, I'm sorry this is the first topical agent that has ever been launched in the area of osteoarthritis and the first new product in that marketplace since 2001. So we are fairly confident of that. I don't have specific data to describe the number of tubes at this point and I'm sorry, I can't get into that.

Corey Davis - Natixis Securities

Can I ask that are you couponing the product that would show up as a script if it was for like a sample type coupon?

Nancy J. Wysenski - Chief Operating Officer

Didn't gone there yet.

Corey Davis - Natixis Securities

Thanks.

Operator

Our next question comes from the line of Angela Larson from SIG. Please proceed.

Angela Larson - Susquehanna Financial Group / SIG

Good morning, and thanks for taking the question. I was hoping you could give us a little color on the SG&A line. I just wanted to confirm that the stock-based compensation and the separation benefits were in the SG&A this quarter. And then as you look out, should we be assuming additional or continued launch cost for Voltaren in second quarter, and does that mean that in the second half of the year, SG&A might be slightly lighter than the first half of the year?

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

For SG&A, yes, it did include the severance costs or separation cost as you alluded to. In terms of as I look at the quarters, when you're looking at SG&A, remember we are not recognizing revenue at this point in time on Voltaren. So, in the second quarter, you will have the cost of the new CSO, you will have all of marketing spend, the launch cost and so forth in the second quarter, and then you would see those costs start to be offset with revenue in the second half of the year. So, when you're looking at your models, that would factor that in, but the first quarter will not be predictive of the second, third, and fourth quarters in terms of the spend rates.

Angela Larson - Susquehanna Financial Group / SIG

Thank you.

Operator

Our next question comes from the line of Michael Tong from Wachovia . Please proceed.

Michael Tong - Wachovia Securities

Most of my questions have been answered. I just try to gain a better understanding, this may be directed to Dave and Ivan as to how long you might expect actually take to look over your entire R&D portfolio and come up with some type of the results of the review?

David P. Holveck - President, Chief Executive Officer, Director

I'm not going to speculate on the time, but again I think we all understand when you move in to a situation like this, time is the biggest critical factor in making successful transitions and so just leaving it at that, not putting weeks, days around it, I can tell you it's a critical factor in the game plan that I'm operating on there. So we're going to be working in an efficient fashion.

Operator

Our next question comes from the line of Richard Silver from Lehman Brothers. Please proceed.

Richard Silver - Lehman brothers

Just one more, thank you, on R&D. If you could just give us some sense, you said that the spending levels would be re-evaluated when you completed the pipeline review but in the current guidance what assumptions are you making in terms of spending on the current projects.

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

As we talked about on our conference call, where we put out guidance for the year, R&D expenses were up year-over-year as a result of a number of our compounds moving into Phase III, which is the most expensive portion of the development program. And so right now we are still standing packed with that until this review is done because nothing is changed in the development side at this point.

Richard Silver - Lehman brothers

Okay. Thank you.

Operator

Our next question comes from the line of David Buck form Buckingham Research. Please proceed.

David Buck - Buckingham research

Yes, thanks. First question is on Lidoderm, can you just clarify what you said before Nancy. I think you were indicating, you did not feel that Lidoderm was slowing as indicated in the prescription audits? Is that the case and what do you think the growth... the appropriate growth rate is in terms of prescriptions and I guess how do you account for the discrepancy if you can? And just a follow up, what's the current understanding of your requirements for a generic filing?

Nancy J. Wysenski - Chief Operating Officer

So, to your first question, the Lidoderm growth rate has been about 17% as we stated earlier. And that is in line with our expectation. So we don't think there is a problem, I'm not exactly sure what you meant by flow of Lidoderm.

David Buck - Buckingham research

Well if you look at the slowing of Lidoderm, if you look at new prescription growth per IMS it is currently at about 10%.

Nancy J. Wysenski - Chief Operating Officer

Again, it's a mature product, I don't think you can look at week-to-week statements by AIMS, we really need to assess over a longer term. So I wouldn't be too focused on that.

David Buck - Buckingham research

Okay.

Nancy J. Wysenski - Chief Operating Officer

You did also ask about generic filing requirements and by the way those have not changed, they remain the same.

David Buck - Buckingham research

Okay. And just if I could, can you maybe give some of sense of whether these [inaudible] still in active development.

Nancy J. Wysenski - Chief Operating Officer

As Dave has stated repeatedly, we are not announcing any major changes in our pipeline and the review is ongoing.

David Buck - Buckingham research

And if there were any advancement into Phase III from Phase II. Would they be unannounced or would they be announced?

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

As again, we get through this review, we will make announcements as being necessary, that’s it, that's all I can say.

David Buck - Buckingham research

Okay.

Operator

Our next question comes from the line of Lee Ming [ph] from Summer Street Research. Please proceed.

Unidentified Analyst

Hi, if I can just ask two quick questions on the guidance. First on the EPS, the revised EPS guidance what assumption you have included in there on the stock repurchase that is are you assuming... is that including everything that's been repurchased up to this point or are you assuming additional repurchasing there? And the second question on guidance, goes back to Lidoderm, you had reiterated your top line guidance, however, there is that discrepancy in the first quarter with Lidoderm in terms of reported sales versus demand and you don't know why yet. So how do you get confident or comfortable that your guidance is still good, but not knowing why there was that discrepancy in the first quarter. Thanks.

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

Okay. So your first question in terms of the revised guidance on EPS and the impact of the share repurchase, that is purchases up through currently. We did not anticipate or factor in future purchases because we don't know what those are at this point. Second, in terms of our revenue guidance, yes we are very comfortable with the guidance that we have out there, Lidoderm from our perspective is on track and yes there may be a data issue, but it does not impact our overall revenue forecast at this point in time.

Unidentified Analyst

Okay, thanks.

Operator

I would now like to turn the presentation back over to Nancy Wysenski for closing remarks.

Nancy J. Wysenski - Chief Operating Officer

So, before we close out the conference call, I'd just like to say thanks to all of you for your active participation, the great questions and for spending the time with us today. We appreciate your interest and your continuing support. Thank you.

Operator

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

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Source: Endo Pharmaceuticals Holdings, Inc. Q1 2008 Earnings Call Transcript
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