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Endo Health Solutions, Inc. (NASDAQ:ENDP)

Q2 2012 Earnings Conference Call

August 07, 2012, 08:30 a.m. ET

Executives

Blaine Davis - SVP, Corporate Affairs

Dave Holveck - President and CEO

Julie McHugh - COO

Ivan Gergel - EVP, Research & Development and Chief Scientific Officer

Alan Levin - EVP and CFO

Analysts

Marc Goodman - UBS

Ken Cacciatore - Cowen and Company

Shibani Malhotra - RBC Capital Markets

Gregg Gilbert - Bank of America/Merrill Lynch

Corey Davis - Jefferies and Company

Annabel Samimy - Stifel Nicolaus

Trevor Davis - Piper Jaffray

Mike Faerm - Credit Suisse

Chris Schott - JP Morgan

Gary Nachman - Susquehanna Financial Group

Greg Waterman - Goldman Sachs

Operator

Good day ladies and gentlemen, and welcome to Q2 2012 Endo Health Solutions Inc. Earnings Conference Call. My name is Sonia and I will be your operator for today. At this point, all participants are in listen-only mode. We will conduct the Q&A session towards the end of this conference call. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I’d like to turn the call over to Blaine Davis, Senior Vice President of Corporate Affairs. Please proceed.

Blaine Davis

Good morning. Thank you for joining us today. With me on this morning’s call are Dave Holveck, President and CEO of Endo; Julie McHugh, Chief Operating Officer; Dr. Ivan Gergel, Chief Scientific Officer; and Alan Levin, Chief Financial Officer.

After our prepared remarks, we will open the call to take 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 change, risks 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 turn the call over to Dave.

Dave Holveck

Thank you, Blaine. Endo had a very solid second quarter with revenues of 785 million and adjusted earnings of $1.27 per share, these results reflect a number of variables affecting our business, including the resolution of previous short-term supply constraints, improved pricing for Qualitest products following a sales shift to higher margin products as well as a lag in prescription and pharmacy restocking for OPANA ER following the first quarter supply interruption. We will make a number of efforts to increase sales of the new formulation of OPANA ER and adjusting our revenue guidance for the year to the range of $3.05 billion to $3.175 billion due to largely reflect the slower recovery effort.

Sales of Voltaren Gel and generics have been very strong and partially offset the OPANA ER disruption. In addition we will focus on further improving our operating efficiency during second half of 2012. And as a result we are maintaining our previous guidance for adjusted diluted earnings per share of $5 to $5.20. Alan will say more about our guidance in a few minutes.

There are several positive developments I’d like to highlight. In May we resolved our litigation with Watson regarding Watson’s generic form of LIDODERM and eliminated a significant uncertainty. The settlement protected our intellectual property interest and avoided further cost litigation and the risk inherent to litigation. Most important the settlement requires Watson to obtain FDA approval of its generic version before it can enter the market.

In addition, the settlement allows us to prepare for the potential launch of the generic lidocaine patch with greater certainty. We manage that event that we expect no sooner than late 2013 if at all.

Last month, we announced the appointment of Camille Farhat as President of American Medical Systems. This was a significant development for our medical device and procedure business. Camille brings a very strong background in pharmaceutical and medical technology including exceptional operating, marketing and leadership skills from his previous work at Baxter, Medtronic and GE Healthcare. He has demonstrated an ability to focus on the needs and concerns of patients and to leave complex and competitive global business and have confident it can apply his expertise effectively at AMS.

The recent rebranding of parent company Endo Pharmaceuticals to Endo Health Solutions is helping our organization focus on therapeutic areas and disease states as pathways not just product opportunities. This rebranding is reflection of a business philosophy that will be the key to our long-term success as we work to expand the value proposition with all of our customers. We built relationships with approximately 70% of the 10,000 U.S. based [urologist]. And that complements our presence in pain or we have relationships with the vast majority of the U.S. based pain specialist that we believe have higher value. We believe that our remaining focus in urology and pain, therapeutic areas that are supported by the ageing demographics, Endo can fill the business with strong prospects for long-term growth.

And finally, I’d like to comment Ivan Gergel’s R&D organization as well as our development partners at BioDelivery Sciences International. Just announced the initiation of the Phase 3 development program for BEMA Buprenorphine in the treatment of moderate to severe chronic pain. And we look forward to providing updates this is potential driver of future growth progresses in its development program.

In summary, we had a good second quarter in which we satisfactorily resolved several key issues, advanced new products, clarified our near-term challenges and continued our pursuit of the right strategies for long-term growth.

Now, I’d like to turn the call over to Julie to describe in more detail our second quarter performance. Julie.

Julie McHugh

Thanks Dave. As Dave mentioned and Alan will detail further, we have adjusted our expectations for OPANA ER sales in 2012, but remain confident in prospects for growth and durability of this key franchise. The transition to the new OPANA ER designed to be crush resistant is essentially complete. Approximately, 90% of the prescription sales during the week ended July 27 were filled with the new formulation.

During second quarter, we identified some key gap affecting patient access to the new formulation that we believe we can close and in doing so reignite the growth engine for OPANA ER. The efforts we initiated are focused on pharmacies, physicians and patients. We believe that the prospects for returning OPANA ER to growth remains strong and we are encouraged that the prescription trends stabilized during July. I’ll be happy to discuss the details of our efforts further during the Q&A.

Voltaren Gel which was also affected by the Novartis facility closure had a very strong rebound in the second quarter and exceeded our expectations. Net sales of nearly $44 million for second quarter reflect a strong recovery in prescription trends as well as the complete rebuild of wholesale and retail inventory levels.

Overall, we are pleased by the recovery for Voltaren Gel and we expect to continue to grow prescription volumes during the second half of 2012. Net sales of LIDODERM, the treatment of PHN increased 15% compared to the second quarter 2011 sales.

As discussed previously the major driver for sales growth this year is the benefit from the change in royalty payable to third parties on this product. Excluding that effect LIDODERM continue to produce low single-digit growth from a combination of prescription volume growth and modest price increases.

Net sales of generic return to strong double-digit growth in the second quarter. Strong demand for our established product portfolio and in some areas favorable pricing combined to produce 20% growth versus the second quarter of 2011. The stable pricing environment helps us produce adjusted growth margins of more than 40% and the generic sector for a second consecutive quarter.

We have also been focused on increasing manufacturing capacity at Qualitest through a combination of process improvement and capital investment. I’m happy to report that in June we had a record month in manufacturing, and produced approximately 1.5 billion dosage form equivalent. For the remainder of 2012, we expect the strong performance to continue at Qualitest and we narrowed our financial guidance for net sales in this segment to 640 million to 670 million for the full-year.

Moving onto our devices segment, sales increased approximately 3% on a pro forma basis versus the second quarter of 2011. Sales for the men’s health business increased 40% versus prior year on a pro forma basis. As a reminder though, AMS temporarily withdrew the AMS 800 artificial urinary sphincter from the market during part of the second quarter of 2011. After the return of that device to market in the third quarter 2011, we recaptured sales from procedures that were delayed. As a result, we expect the full-year 2012 performance for men’s health to normalize towards mid to high single-digit growth.

That concludes my prepared remarks, now I will turn the call over to Alan. Alan.

Alan Levin

Thank you, Julie. Endo had a great second quarter, and I’ll focus my initial remarks on our results and then comment on our prospects for the second half of the year and how those affect our full-year 2012 financial guidance.

For the second quarter, we had total revenue of $785 million up 29% over the second quarter of 2011. As Dave said earlier, our revenues reflect improved pricing for Qualitest products following a sales shift to higher margin products resulting in increase of 20% year-over-year in our Qualitest business. On the contribution margin basis, adjusted income for Qualitest was up 139% over second quarter 2011.

On an adjusted basis, second quarter gross margin for the company as whole was 70% of net sales. This reflects stability and our profitability versus second quarter 2011 the inclusion of AMS and continued strong pricing within our Qualitest business.

Total operating expenses for the quarter were $420 million, however, on an adjusted basis total operating expenses for the quarter were $271 million, this increase versus prior year adjusted total operating expenses of $213 million is driven by the impact of AMS which we acquired in mid June 2011.

On an adjusted basis, total operating expenses as a percentage of revenue decreased to 34% as compared to 35% during the second quarter of 2011. In the second half, we expect growth in revenues coupled with reductions in expenses to continue to reduce adjusted operating expenses as a percentage of revenues.

Our adjusted effective tax rate for the second quarter of 2012 was 31.6%; the effects that the first quarter supply disruption had on measures like the adjusted effective tax rate but now largely normalized and our year-to-date, adjusted effective tax rate of 30.6% is in line with our financial guidance.

Adjusted diluted earnings per share increased 21% to a $1.27 versus a $1.05 in the second quarter of 2011. Our reported or GAAP diluted earnings per share decreased 82% to $0.08 versus $0.44 in the second quarter of last year. The decrease was driven primarily by a non-cash pre-tax charge of $131 million taken this period to reflect the estimated fair value of the [free goods] that we expect to provide to Watson Pharmaceuticals for the terms of our announced settlement and licensed agreement.

Moving on now to our full-year of 2012 financial guidance. We are revising our guidance per revenues and reaffirming our adjusted diluted earnings per share in the range of $5 to $5.20 for full-year of 2012. We now estimate total revenues to be between 3.05 billion to $3.175 billion an increase of 12 to 16% versus 2011.

The revision of our revenue guidance reflects the latest script trends and major products in our branded pharmaceuticals portfolio and the continuation of improved pricing in our Qualitest business.

We expect to deliver adjusted diluted earnings per share in the range of $5 to $5.20 for full-year of 2012. As we have highlight in the past, we have a flexible expense structure that permits us to adjust our investment levels in second half 2012 to a level that we believe is more appropriate given recent top line performance.

We are also focused on realizing additional operating efficiencies in the second half. To do that we will reduce discretionary investments, accelerate synergy capture and delivery improvements in manufacturing efficiency.

We now expect reported or GAAP diluted earnings per share in the range of $1.07 to $1.27. On an adjusted basis, we continue to expect our corporate gross margin to be between 68 and 69% in 2012. With the implementation of cost of savings initiative, we continue to expect SG&A and R&D as a percentage of total revenues to decrease. This is the sixth consecutive year of margin improvement in operating expenses as a percentage of revenues.

We continue to anticipate an adjusted effective tax rate of approximately 30.5% to 31.5% an increase versus 27% in 2011. This increase is driven by the inclusion of a full-year of AMS earnings that are subject a full U.S. tax rate. We will as we have historically continue to look for opportunities to improve our adjusted effective tax rate.

We are modestly adjusting our expected cash flows from operations to be in the range between 700 million and $800 million in 2012. Our strength in cash flow generation should provide the flexibility to invest in the business for sustainable growth to support our newly authorized share repurchase program and to repay debt to achieve our targeted debt-to-EBITDA ratio of 2 to 2.5 times in 2013.

Repayment of debt remains an important use of our strong operating cash flow. However, as announced today, our Board of Directors has authorized a new share repurchase program to repurchase up to $450 million of our common stock through March 2015. This new authorization replaces the $750 million stock repurchase program approved in 2008. As of June 30, there was approximately $175 million remaining under the 2008 authorization. The new authorization will increase our future flexibility that allocate capital for the repurchase of shares and at current prices we expect to be more active in that regard.

While somewhat difficult to predict with precision, where full-year EPS financial guidance , we believe that diluted weighted average shares outstanding of approximately 121 million shares will be a reasonable share count estimate for 2012. For additional details, on our 2012 financial results and guidance, please review today’s earnings press release.

Finally, I’m excited to announce that Endo will be hosting its first Investor Analyst Day. We ask you all to hold October 4th 2012 for a meeting in New York City. Invitations will be provided at a later date. During the Analyst Day we expect to provide 2013 financial guidance and the perspective around longer term financial performance to 2014 and 2015 reflecting the continued evolution of our business. We expect to provide detail regarding our drivers for top line growth and continued efficiency improvements in our expense base.

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

Blaine Davis

Thanks Alan. This conclude all of our prepared remarks, we now like to open the lines to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Marc Goodman [UBS]. Please go ahead, your line is open.

Marc Goodman - UBS

Few things, one on revenues, can you talk about upon your (inaudible) resistant little bit more. How much did, what were revenues as far as that versus the older versions we can get a sense of that. Second, the 20 milligram is what we have been focused on for the past 3, 4, 5 weeks and it doesn’t seem to be moving that much and I thought that was the leading indicator of the business coming back. So, if you can talk about that a little. Second, on SG&A you mentioned accelerating synergies and cutting discretionary spending seems pretty easy, but how do you accelerate the synergies, what are you talking about there. And on gross margin, given the first two quarter, I’d have thought you would be raising the gross margin assumption a little bit. I was curious why not for the second half of the year?

Julie McHugh

Okay, I’ll take the first part of your question Marc. In terms of where we are with OPANA ER, one of the things that we are very excited about is that we have been able to accelerate the conversion of the market to the crush resistant formulation and as I mentioned we have about 90% of prescription volume now being filled with the new crush resistant formulation and the conversion of the market is about 6 months ahead of our original timeline. So, we feel very confident that with this conversion now complete that we can return to franchise to growth.

I think in terms of the looking at the (inaudible) dosage level, it's still a little early to predict how this franchise is going to rebound. We had as you know inventory shortage, outage as a result of the Novartis plant shutdown in the first quarter and despite our best efforts we did in fact have some retail level inventory stock outages in the first quarter which led to some of our patients being switched to new products. With that said, our customers are indicating to us that 93% of those physicians who have previously written OPANA ER intent to come back to the franchise and switch patients back. But in a class where that patient switching dynamic tends to happen on about 90 day cycle I think it's just a little early to see a complete rebound in prescription volume. We do expect by September of this year, we will back to sequential growth and demand.

Alan Levin

With regard to your question on SG&A and synergies, some of that synergy acceleration will come from a reduction in duplicative support services as we continue to integrate AMS into the broader Endo. We are pretty excited about the manufacturing synergies that we are seeing from our Qualitest organization, that’s been a great transaction for us and when we first acquired the company, we talked about $13 million of peak year synergies in 2013. Here we are a year head of that and we are already north of $50 million in synergies from manufacturing efficiencies.

On the gross margin side, I don’t dismiss the possibility of further improvement in gross margin as the year continues to unfold. We expect the continued good performance in our branded pharmaceuticals business; continued strong performance in the generics business and growth in our AMS franchise and all of those would be up driver for gross margin over the remainder of the year.

Operator

The next question comes from the line of Ken Cacciatore, Cowen and Company. Please proceed your line is open.

Ken Cacciatore - Cowen and Company

Alan, I just want to clarify a little bit of your comments on the spending again following up on what market is saying, it seems like really aggressive sequential declines. Can you just get a little bit more specific on where that’s coming from. And then on LIDODERM, we see there were two other filings in the quarter, can you just discuss the interaction continue as you try to work with them about establishing what you believe are the proper guidelines and then I have a follow-up after that thanks.

Alan Levin

So, on the spending side, Endo has a robust history of managing its expenses to invest in accordance with its top line priorities. And so, what are you really seeing here on the SG&A side is a pull back in some discretionary investments. Having said that, we are really allocating against some of our biggest growth opportunities like OPANA ER where we see that coming.

Dave Holveck

I’d also add to it that, if you look quarter-over-quarter first quarter and second quarter we have taken 12 million out, I’d also add that with the acquisitions we have made over the last three years, we have in the planning for the acquisition have understood where I think those synergies are. So, I don’t know that we are seeing anything a typical other than the game plan of going through the integration; and again looking at the strategy which is as I’ve said focused in the pain and urology sector. So, I think when you are focused like that, I think you can’t get the synergies as Alan talked about.

Alan Levin

And with regard to LIDODERM, I guess I want to say upfront that while we are not while we do believe that there are high hurdles to a generic coming to market for LIDODERM, in the event we do see it generic, we are ready. And we can dive down on our expense base accordingly we remain very confident that the regulatory hurdles are very significant for Watson or others to come to market. And just the fact that we have seen 34 months since Watson has filed and the FDA has not ruled tells us that they are taking our citizens petitions very seriously.

Ken Cacciatore - Cowen and Company

And Julie, just following up on your comments about stocking, can you just give us a sense, are we all done here in terms of the pharmacies that we are having issues stocking the new products maybe the success of your new pharmacy rest, just a little bit more specific. Thanks.

Julie McHugh

So, we have basically in terms of all of the pharmacies that purchased OPANA ER in 2011, we have successfully restocked 80% of those pharmacies, but in addition to that we have added 4700 new pharmacies that never stock the product before which more than compensate to the 20% who are not current, who haven’t yet stocked new formulation. Now we are not satisfied with that, we are reaching out to each and every one of those pharmacies that haven’t yet reordered with the intention of getting them to restock the product, but right now stocking is not an issue with respect to OPANA ER and we are really focused now on demand generation activities.

Alan Levin

And just to come back to LIDODERM for a moment. I really do think that the market under-appreciates the extent to which we would retain franchise economics in the event of a loss of exclusivity on LIDODERM. We believe that we could retain at least 50% of the volume on that sale or we would earn a 25% growth in Watson sales. And I think that, that is meaningfully undervalued in current views of the company.

Operator

The next question comes from the line of Shibani Malhotra, RBC Capital Markets. Please proceed, your line is open.

Shibani Malhotra - RBC Capital Markets

Just a couple of questions, first on OPANA, Julie you said you expect the share or the performance to start improving in September, but can you just comment on basis for that, specifically I guess we are asking how much of the negative prescription trend is based on things that can be managed in turnaround versus of [users] potentials moving to other products. And then secondly, and this is I guess a question for everyone, on your strategic options in the company as a whole, clearly the shares haven’t or stock hasn’t been reflecting the value of Endo at least as we see it, but just wanted to get a better understanding of how management sees the options available should the shares continue not to reflect the true value of Endo going forward.

Dave Holveck

This is Dave Holveck, and let me Shibani talk first about maybe the overriding message is, one, we have I think done extraordinary job relative to industry standards in terms of the conversion and the fact that we doing for most of [full stock] to a convert which is now completed and is certainly is truly indicative the changeover having the stocking, the additional elements in the trade now either on board or new that are come on board. And I think the other element is the elements relative to the environment where I think the use misuse (inaudible) if you would of opioids is in the forefront and I do think that’s another positive trend. We are standing again some of the elements that have to be put into place just to move forward on the patient level; again we have the sales team and the elements of promotion in a very good spot. So, the supplies were there, I think the environment is very receptive and at the same point I think we have the sales team and clinical support that can move this forward. Let Julie take a little bit more of the [granular cost], but when you look at overall elements of where this business is and where it's compound in the last 8 weeks, I think we are ahead of the industry standards.

Julie McHugh

I’d agree with that Dave, this is in an essence a product launch, we came off of a supply disruption event that has backed a little bit but again having converted the market now almost entirely within record time, we feel very confident about the long-term prospects of the franchise and just the reason I’m convinced that we will be backed sequential growth in the late third quarter early fourth quarter, is that we got our sales force fully trained and armed with promotional messages that have been approved by the FDA, with respect to the new formulation and the fact that it's been designed to be crush resistant that is a set of key messages that we were not able to provide initially until we got the FDA clearance of our promotional material. So, the reps are now armed, they are trained, they are out there, communicating and creating demand. We have also introduced a new co-pay program, that we believe is a best-in-class co-pay program and essentially reduces patient out of pocket cost to about $15 per prescription, that is basically what they would pay for a generic in this category. So, we feel that to the extent that there is any economic barrier to reigniting demand. We have addressed those.

The other thing I’d say in terms of, you asked the question around the trends with respect to what we can control and what we can’t control. Clearly, to the extent that there were people using OPANA ER in properly, we are happy to see them move our franchise and (inaudible) stronger over the long-term, better for growth. And I just point to the fact that when we did see patients switch off OPANA on a temporary basis, we saw them switch pretty equally to morphine sulfate extended release and oxycodone, which as you know is only available in a tamper resistant formulation. When you look at that combined with the fact we now have new writers and new pharmacies stocking this product, it tells me that there is tremendous market demand for tamper resistant long acting opioid. So, I’m confident we will be able to get franchise back to sequential growth.

Shibani Malhotra - RBC Capital Markets

Can I just a clarification and then if you guys can deal with my other question, but just two things, one, are you expecting a further decline before we see growth; and then two, are you able to estimate what proportion of the franchise will [abuse] us.

Julie McHugh

What I can tell you is that what we have seen over the past four weeks in prescription, data is what I believe to be a flattening out of the downward trend. So, we are optimistic that we will be back to sequential growth shortly. I can’t estimate to what degree there were misuses or abusers in the franchise, but as I’ve said before, to the extent that we had done in our franchise we are happy that they are no longer part of the core base business. We think that we are positioned toward for long-term growth, now that we got this new crush resistant formulation on the market.

Dave Holveck

And from the standpoint of strategic options, I think that Endo’s current stock price really undervalues the growth opportunities that we see in the company and that’s a function of how we continue to execute on the company that we put together. I think second quarter 2012 is very strong in that regard, you are seeing good strong V-Gel sales and revenues were bounding to pre-disruption levels, very strong contribution from the generics business, maintenance of bottom line, financial guidance which has attended to it very strong cash flow generation. The implementation of a share repurchase program to support our stock. So, all of this tells me that in my view is very indicative of the management team that is focused on executing on the business that we build and creating more value.

Operator

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

Gregg Gilbert - Bank of America/Merrill Lynch

I have few, first for Alan, can you detail what’s behind the change in cash flow guidance for the year. And can you give us any help on potential legal exposure on the mesh related issues, some other companies have disclosed number of law suits and I think there have been some verdicts etcetera, can you help us (inaudible) that issue for Endo?

Alan Levin

So, I think with respect to the cash flow guidance, I’d remind you that cash flow from operations is a GAAP measure and so that’s affected by some incremental restructuring charges that we now expect in the second half of the year. It is also affected by the timing of some payments to payers on rebates that have been recently adjusted. We are seeing very strong cash flow from operations about $200 million in this quarter alone.

On the mesh side I think it's early days for all of the mesh related litigation most f our cases were consolidated into an MDL in West Virginia, they are in front of the same judge that saw both the J&J as well as the hard cases and we really expect that any really trial activity around that is 2013 and beyond. So, it's really to speculate on that.

Gregg Gilbert - Bank of America/Merrill Lynch

Have you settled any cases?

Alan Levin

We have settled a couple of cases for deminimus amounts.

Gregg Gilbert - Bank of America/Merrill Lynch

Julie, on Qualitest, is this quarters level of sales and gross margin a good level to use for a quarter that excludes major launches or there other things that benefited that or detracted it this quarter?

Julie McHugh

I think what we are looking at is a more sustained performance level in the second quarter. We spend a lot of our time in the first quarter optimizing our capacity to support sales of our highest gross margin products. We continue to have a lot of pricing flexibility with our current portfolio, as you know e have got a very diverse portfolio with over 170 product families and 600 SKUs. We have also been successful in getting approval of some of our ANDAs and getting those product very quickly into the market. So, it's a combination of factors, but I will tell you I think that health of that business is just inherently our ability to continue to meet market demand with production capacity that’s been optimized.

Alan Levin

And I think it's sustainable over the medium term, we are seeing our growth coming from in line product performance, we are being more judicious in the SKUs that we are selling into the marketplace, we are seeing market dynamics that allow us to take price increases. Those were parts of the things we saw as attractive in the Qualitest acquisition when we first brought it into the full. And I think that business is performing better than we ever anticipated.

Gregg Gilbert - Bank of America/Merrill Lynch

And lastly if I could direct this to Dave, it's not apparent to us that services and devices are helping Endo from a sales or stock price standpoint. It's good to see management and the company put money where the mouth are in terms of repurchase of stock, but just wanted to get your latest thinking on your confidence that services and devices are good legs of the stool to have as you look out over the next couple of years.

Dave Holveck

I appreciate the question, because I do think it gets undervalue as one looks into the future and Gregg you know from the early days of coming on board with Endo, I really believe that we were tooling the company in order to compete against the we saw as the changes in health both in not only the standing from the insurance basis but how it was delivered. I think what we have right now is a very strong franchise I mentioned with urologist. I think the service business where we have the HealthTronics namely we positioned more in the centric from data and I think data is going to be either the currency or the future, if we are going to be talking about how to grow this, are used, the devices are used or importantly outcomes are obtained. I think our position of what we have through the acquisitions give us a greater than 30% and almost out of the million patient records which gives us a lot of strong data to give us guidance, both for the practitioner as well as for us as planners for the future.

When you take about AMS, I mean the considerable aspect that AMS bring us legitimacy in urology and again we have a very strong reputation and as a company that as we bring into the enterprise, I think both of the HealthTronics and AMS now with a new leadership of AMS working with HealthTronics, I think we have a tandem of opportunities that we are going to further direct our growth as well as I think put us in the forefront of transforming the company that’s got to be competitive in the new world.

Julie McHugh

And I think I might add that, I think when you think about the AMS business then clearly there have been some headwinds with respect to procedural growth in the U.S. in particular and that’s a broader sector dynamic. We believe that if you look at the dynamics of the underlying demographics of the patients that we treat, the ageing patient population that the demand for these procedures will get back to growth. And in the mid-term we got a number of exiting things that we were looking forward to including a number of international launches this year and I will just remind you that unlike a lot of other segments of the healthcare industry, devices tend to be very stable in terms of the cash flow not subject to things like patent clips, solid margins over 80%. So, again we believe that with Camille coming on board and really getting back to reigniting growth on the top line and optimizing the cost base, but this is going to be a key contributor for us going forward.

Operator

The next question comes from the line of Corey Davis, Jefferies. Please proceed.

Corey Davis - Jefferies and Company

First, just to be clear in talking about your expectations for sequential OPANA growth. I think you were referring mostly to volume, but with respect to revenue the question is how much in this quarter was stocking and would you expect the revenue to be higher than the 93 million this quarter in Q3 and Q4.

Julie McHugh

So, I think what you are seeing in the second quarter with OPANA is a lot of inventory restocking, I expect that going forward now that we have stabilized inventory trends, that what you are going to see is the sequential growth will be driven by demand TRF growth. And I think we got about $76 million that we are anticipating attributable to demand generation and roughly 18 million in stockings.

Alan Levin

And I think the other thing that I’d add is what we saw in previous years in OPANA ER is migration of dosage strengths and as patients are restarted on OPANA ER you typically start at the lower 20 milligram strength migrate up to the 30 and 40, that’s a greater value prescript for us and should be enough driver in our revenues as well.

Dave Holveck

And I guess (inaudible) not to take just a short-term view, the long-term view is what excites me about the OPANA, is we put a patent state against, so it text out to 2029 and to me I think to Julie’s comments relative to our product launch. I think we have a stronger asset than we ever had, and I think we are in a marketplace buttressed with the pain franchise and the generics, I think puts us in a very strong long play position. So, short-term again work, yes, long-term I think the markets there and our position on the patent state gives us legitimacy as long-term standing player.

Corey Davis - Jefferies and Company

My next question which is, I assume that you had a chance to take a look at the recent Purdue Citizen's Petition filing with respect to what it takes, what they think it takes to get a generic approved and showing tamper equivalence. So, one, do you agree with the basic principles there; and two, are you going to the active on that front; and three, do you expect to see FDA guidance on that by the end of this year as was required in the PDUFA filed legislation I believe.

Dave Holveck

Again I’ll reinforce my last comment, is that we are in here to play for the long-term, so yes to your question, we do have and we will continue to bolster again the elements that support that. And I think again, the positions that we have taken both as a company and within the industry and again within the guidelines that I think society wants us to play in. We are in a leadership position on all aspects. Alan.

Alan Levin

Yes, Corey, it's a great question. Look clearly, the TRF, bio equivalence to TRF raises some particularly taxing complex scientific questions as it requires very careful consideration by FDA. We believe in using the CP process, when we have a strong scientific and regulatory argument to make, and to be clear indicative of OPANA we believe that we have a strong scientific and regulatory argument to make.

Julie McHugh

And I’d just say, we have looked at the Purdue Citizen's Petition and we are in strong agreement with the concept that they raised in that petition. In today’s point you can be assured that we are committed to appropriate responsible use of opioid and we continue to be active in Washington to try to be part of that solution. So, you can expect those efforts will continue.

Operator

The next question comes from the line of Annabel Samimy, Stifel Nicolaus. Please proceed.

Annabel Samimy - Stifel Nicolaus

Just going back to the inventory stocking, can you give us a sense of how much of the Voltaren Gel demand versus the stocking? And then separately on guidance, you mentioned that you brought down guidance from OPANA, but we did see some tweaking down of the AMS business and the services business, if you can give a little bit of color there, what’s going on with women’s health is that stabilizing or is it going to continue to climb. And then finally, we obviously saw the share buyback, can you just to us a little bit about business development going forward and where you think you might be looking to invest?

Alan Levin

Well, with regard to V-Gel I think the really important message for this quarter is the pace of the snapback in V-Gel sales. We are at 95% of pre-disruption levels in terms of the sales trajectory. We are seeing very strong sequential growth in script trends, it's a product that has typically performed well. So, irrespective of how much is script growth and how much is stocking at the end of the day. We have got a very vibrant franchise that’s backed to a robust growth trajectory.

With regard to the AMS business, we do see that providing at the top line or more modest contribution this year, but I think that we are very focused on opportunities to regenerate demand in our women’s health and our men’s health segments. We have completed a transition in the BPH business that should generate fiber optic in the U.S. and it was not often seen in the AMS statistic is the vibrancy of the international operations. The European operations were up 37% year-over-year in the second quarter, Asia-Pacific was up 18% year-over-year in the second quarter. And that international performance is a testament to the diversified model that we believe strongly and even within AMS itself. I look forward to working with Camille as we look to reignite growth in the franchise.

With regard to share repurchase and business development, again this is a company that will generate in 700 and $800 million of free cash flow. I don’t see any reason why we can’t take some of that cash flow to continue to pay down debt and meet our debt-to-EBITDA targets to take some of that cash flow and purchase stocking. I still have the opportunity to pursue external growth opportunities. I think those growth opportunities will be more modest relative to what we have seen in the past. We are very focused on extracting the value from the opportunities we have already put in.

Operator

The next question comes from the line of David Ansellem, Piper Jaffray. Please proceed.

Trevor Davis - Piper Jaffray

This is Trevor Davis on for David. Just a couple. On the generics business, can you give us an idea of how many product approvals you are looking at over the next 6 to 12 months or if you can put it in other way. How many of the ANDA filings pending at the FDA are maturing, or I guess said in other way, at least two years from a filing date. And also what affect on margins for the generics business for the new products bring over the next 6 to 12 months. Thanks.

Julie McHugh

We are it's hard to predict with any kind of precision how many ANDAs you can pull through the FDA in any given year, but our expectations are it will be somewhere between 7 to 9 approvals this year. We got about half of those in the bag at this point. And we are working on a number of future filing, but really our focus right now is trying to pull through those 50 ANDAs that are currently on the backlog at FDA. So, we have been really focused on optimizing the velocity of throughput there.

With respect to the margins of the new product, the way we as you know in the generics business every single market segment is very dynamic and as we get an approval it's not a [bolt on] conclusion that we will launch that product. We may wait for market conditions that are optimal such that we can optimize our overall contribution margin of that business. So, we are constantly looking for the ability to optimize our production capacity against our highest margin products and as new products get approved they go into the mix for consideration of sale based on those goals.

Dave Holveck

I guess I’d add the bigger picture on the generics business is really the strong contribution from in line products. It's really the in line product growth that is generating 20% quarter-over-quarter revenue growth for us is in line product that are behind the 139% increase in profitability year-over-year for U.S. The pipeline opportunities for us are icing on the cake on that. We have a very vibrant growing in line portfolio and we expect that to be the trend going forward.

Operator

The next question comes from the line of Mike Faerm, Credit Suisse. Please proceed.

Mike Faerm - Credit Suisse

A couple on AMS, on the women’s health business, can you just elaborate a little bit on what your expectations are for mesh procedures. You said in the past that you thought first quarter you were seeing the bottom, do you think it was there yet and how do you think that unfolds for the second half of the year.

Dave Holveck

Ts hard to predict again, what I tell you is that, I do think we are adjusting and we are seeing to the point of stabilization. I do think that in the field it is recognized that when you get into a prolapsed, you do have a couple of options certainly just pure surgical or the addition of the mesh. I do think again we are finding that the durability continues to be seeing from medical practice that it's best. I think the issue really is that the patients have to be elected appropriately and I do think again the skill sets to apply the mesh are critical element. All of that I think is a big part of what we think going forward with the AMS reputation with the relationship and the skills that we add to the physician along with the education. We think we are in a strong position to see that business be a contributor going forward. We also have and I think this is another area that more to come. Our pipeline that looks beyond just mesh relative to how we look at AMS in general and also relative to the women’s health. And again I think there is a point of as we look going forward into overall growth for the service and device business, I think we have again a greater synergies as of yet to be realized between AMS and HealthTronics more to come as we see and show you there; with the diagnostics with the mobile service providing aspects of it as well as with the (inaudible). So, net of it all I think we are just starting now to bring that business to the next level.

Mike Faerm - Credit Suisse

And my second question was on the BPH business, it's down about 4% year-over-year and about flat sequentially. Can you give us some color on what’s holding that back and how you expect growth to progress or not progress over the remainder of the year?

Dave Holveck

I think again you are hitting on a couple of areas, one on the upside, over the international is really a big contributor to the near-term growth. I think the longer term aspects go into a couple of areas, one is the access to the market where I do think we have gone through, AMS has gone through couple iterations of strategy there, but I do think what we now have at our hands is the synergies that I talked between HealthTronics as well as the AMS group. Remember HealthTronics is 30% of relationships with independent practices. They have a mobile service I think we haven’t brought to bear some of the training elements, that element can contribute to BPH. I also think that again it's a matter of training, we will be introducing some augments to facilitate training and again more of that will be shown in the third and fourth quarter. So, again we are in the point of new management and the adjustments that I think come with the critical mass that the enterprise can put up against this issue.

Alan Levin

I think the quarterly revenues and that piece of that franchise (inaudible) very exciting trends in terms of what we are seeing on fiber utilization and fiber sales. That’s the highest margin component on the business, the international market we are seeing well north of 20% growth in the fibers across the board in our direct markets. In the U.S. we are seeing double-digits growth among the direct accounts that AMS has and we are in the process of completing now a retooling on or go-to-market strategy in the U.S., which should setup the remainder of the U.S. market for good fiber growth as the strategy continues to unfold. So, we are really quite encouraged by it.

Operator

The next question comes from the line of Chris Schott, JP Morgan. Please proceed.

Chris Schott - JP Morgan

First question was just coming to back to OPANA, how broad of use you are expecting for the co-pay program and what impact should we think about that on ASPs of the product. Second on OPANA, if you can just update us on your latest positioning of that product relative to oxycodone? And then finally just coming on the repo and your stock price. I mean you have got fairly attractive debt levels or rates, you got now one more clarity on LIDODERM cash flows. I guess my question was with this repo announced why not allocate most of your cash flow to repo at these levels given that seems your stocks are at a pretty attractive levels.

Julie McHugh

So, with respect to OPANA in terms of the co-pay program, basically this is a program that is targeted to commercially covered patients and essentially reduces their out of pocket, we have exposure. We fully factored in the impact of what we think this co-pay program will mean in terms of sales and that’s inherent in the guidance that we are issuing. With respect to our positioning versus oxycodone, what we really focus on in terms of positioning OPANA ER in the marketplace is the inherent advantages of the compound itself. It's a compound that given its PK profile lends itself to true twice daily dosing whereas with a lot of other product including oxycodone doses tend to get migrated to 3 sometimes even greater frequency of dosages per day. We also focused on the fact that Oxymorphone is not metabolized by the cytochrome P450 system, unlike other opioids, which can lead to drug interactions. So, we are really focused now on selling the clinical features and benefits of OPANA ER, now that’s been fully converted to the new crush resistant formulation, we feel even stronger about positioning OPANA ER as optimal choice for patients who need long acting control of their moderate to severe pain.

Alan Levin

And with regard to share repurchase, I don’t really think that pay down versus share purchases in either or scenario, we have got 7 to $800 million of cash flow from operations. We do believe that at our current stock price the market under values the growth opportunities that are implicit in Endo, and our board would not be taking the action to put $450 million of capacity at our disposal. If it didn’t believe that it was inappropriate investment of our cash.

Operator

The next question comes from the line of Gary Nachman, Susquehanna Financial Group. Please proceed.

Gary Nachman - Susquehanna Financial Group

First clarification on OPANA TRF, Julie what are these gaps in access that you were talking about was it just pharmacies or something else? And then in Qualitest how much of an improvement have you seen in pricing. If you could quantify that. And expand on what are you doing to enhance manufacturing capacity?

Julie McHugh

With respect to TRF and I forget what the question was sorry about that.

Gary Nachman - Susquehanna Financial Group

When you talked about the gaps in access, I’m just curious if that was just at the pharmacy level or if there was something else that could have contributed to that.

Julie McHugh

I was really just referring to the pharmacy stocking and again I think we are in a really good position now, we actually have more pharmacy stocking OPANA ER in the new crush resistant formulation today than we did a year ago. And so I don’t believe that stocking is a barrier to patient access any longer. So, again as I mentioned earlier, we are highly focused on demand generation activities at this point.

Gary Nachman - Susquehanna Financial Group

And changes in terms of the sales force promotion behind that product given that you have seen a little bit of change in demand from what you were expecting?

Julie McHugh

OPANA ER continues to be the most important product and our portfolio relative to our sales force compensation. It's the first position detailed for us and we are highly focused on returning the product to sequential growth. And in terms of our messaging, we really haven’t changed our inherent messaging in terms of the value of the compound itself, what we are focusing on though is making sure that physicians are aware that it's now available in a new formulation that’s designed to be crush resistant. So, that’s the only shift in our promotional messaging at this point. And again I’m very delighted with the physician reaction we have got very favorable initial physician reaction to this new product and a very strong intense prescribe. So, I’m very encouraged by that.

Dave Holveck

On the Qualitest just to point relative to the expand of manufacturing, we think again the critical aspects there are further elements in the automation. I think better processing I think our automation with interior works relative to process and training are really being the biggest assets. I think we also can see, some of the elements in terms of our growth built around meeting greater flexibility providing different ways in which we both practice, package as well as deliver. So, elements of our manufacturing I think relative to the footprint of the factory but also the workings are probably where we get the biggest near-term scale. Beyond that I think we look at other alternatives.

Alan Levin

And I think we are actually quite excited to be making some of these investments in manufacturing space in Qualitest with 20% plus year-over-year growth last year at 13 to 18% growth that we were guiding for this year. We need more capacity, so that we can continue on our revenue trajectory and those are the kind of investments that make an awful lot of sense for us.

Gary Nachman - Susquehanna Financial Group

Just order of magnitude just to help us how much of an improvement you have been able to get generally speaking.

Alan Levin

I think the gross margin improvement which is a 12 percentage point improvement year-over-year is very indicative of the kind of benefits that we are able to get on the pricing side. It falls right to the bottom-line for us.

Operator

The final question comes from the line of Greg Waterman, Goldman Sachs. Please proceed.

Greg Waterman - Goldman Sachs

First the clarification, are there any (inaudible).

Alan Levin

Yes, first with regard to the share purchase assumptions, there are no share purchase assumptions built into our guidance, we expect to meet our guidance on purely operational trends and considerations. Blaine will give you better sense offline on the U.S. versus ex-U.S. split. I don’t have that handy at the moment, but what I can tell you is that the international side of our business is typically about 30% of our overall revenues and FX had no appreciable impact on the top line.

Blaine Davis

With that I’d just like to close the call thanks everyone for joining us today. Jonathan Neely and myself will be available this afternoon for any follow-up question you have. Thanks for joining us today, we appreciate it.

Operator

Thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect. Good day.

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