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Executives

Blaine Davis - VP of IR and Corporate Communications

David P. Holveck - President, CEO, Director

Nancy J. Wysenski - COO

Ivan Gergel M.D - EVP - Research & Development

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

Analysts

Gregg Gilbert - Merrill Lynch

Gary Nachman - Leerink Swann & Company

Ken Trbovich - RBC Capital Markets

Richard Silver - Lehman brothers

James Kelly - Goldman Sachs

David G. Buck - Buckingham Research Group

Scott Henry - Roth Capital Partners

Ian Sanderson - Cowen & Co., LLC

Annabel Samimy - UBS

Michael Tong - Wachovia Securities

David Windley - Jefferies & Company

Timothy Chiang - FTN Midwest Securities

Lei Huang - Summer Street Research Partners

Endo Pharmaceuticals (ENDP) Q2 FY08 Earnings Call July 31, 2008 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 Endo Pharmaceuticals Earnings Conference Call. My name is Lauren and I'll be your operator for today. At this time, all participants are in listen-only mode. [Operators Instructions]. As a reminder, this conference call is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Mr. Blaine Davis, Vice President of Investor Relations and Communications.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks Lauren and good morning everyone. Thanks for joining us to discuss Endo's second quarter 2008 financial performance. Here with me this morning to discuss our results are Dave Holveck, our President and CEO, Nancy Wysenski, our Chief Operating Officer, Ivan Gergel, Head of R&D, and Charlie Rowland, our CFO. We will begin the call with some prepared remarks from each of the executives who have joined me this morning followed by a Q&A session.

Any of their forward-looking statements may involve risks and uncertainties that may cause the company's actual results to be materially different from future results expressed or implied by these forward-looking statements. Listeners should not rely on any forward-looking statements 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 S.E.C. filings under the heading 'Risk Factors' in Endo's 2007 Annual Report on Form 10-K filed with the SEC on February 26, 2008. We encourage you to review this factors.

In addition, during 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 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 earlier today 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 Holveck, our President and CEO. Dave?

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

Thanks Blaine. I would like to begin with some brief remarks about my first few months here at Endo and our recent reviews of the company's business operations and R&D programs, then I will have Nancy, Ivan and Charlie report on more details on our commercial outlook, R&D plans and financial results. One of my top priorities when I joined Endo in April was to evaluate the company's competitive strengths, human resources, R&D focus and financial position to see how we could make the business more successful. Specifically we looked at what we could do quickly to accelerate product development, increase product sales and improve operating efficiency. With the help of my colleagues and the new head of R&D, Dr. Ivan Gergel, we've now completed that review and made some important decisions.

First, we decided to discontinue Endo's participation in the development of Rapinyl for breakthrough cancer pain and the Topical Ketoprofen Patch for tooth pain. We are in the process of transitioning these activities back to our partners, so we can focus on other compounds in our pipeline and free up resources for other development activities. I think this is a prudent decision, which will allow us to focus on other development projects as well to increase our focus on searching for new drugs to in-license and to partner for development and commercial sale. Ivan will say more about this in our R&D commentary in a few minutes.

Second, we've cut overhead by eliminating some physicians and reducing our utilization of outside consultants. As a result, we took severance charges of $6.4 million in the second quarter to cover these reductions, which we do not reflect... which do not affect our field sales force. Third, we are recognizing certain functions to make Endo more responsive to the dynamic market being more competitive and more profitable. For example, we are building and enhancing some key capabilities within the R&D function while within the broader organization we have eliminated certain redundancies, increased span of control and focused on maximizing the return of our sales force efforts. Nancy will say more about this in a moment.

Fourth, we are expanding our business development activities to encompass a broader range of potential product acquisitions, equity investments, strategic alliances and promotional opportunities. Endo remains a leader and a player in pain management, but we must begin to look beyond this category and look at other indications and other opportunities, which are associated with pain where we have expertise and where we can be competitive. We see promising opportunities in areas such as CNS and Oncology. In addition, we are currently exploring various platforms such as large and small molecule and devices that we believe have the potential to generate multiple growth opportunities for Endo. We will provide you with additional updates as we progress through the year, but I wanted to give you a sense of how we are thinking about this area from a high level perspective. As a final point, while we take seriously the importance of meeting or beating our financial guidance, to do this, I believe we need to be transparent yet conservative when projecting revenues and expenses. Since we are not changing our guidance for the balance of 2008 even though we've got certain personal and program expenses you can assume that we are now taking a more conservative posture towards revenue guidance. With our business review completed and key decisions implemented, our operating priorities going forward are to increase sales of branded products, pursue new business opportunities, support the development of our most promising growth candidates and support our generics business.

My charge to the team is to work harder, more efficiently and opportunistically to grow our business. We will continue to build on our core competencies and add talent where we need it. Yes, I think we are off to a strong start. As you'll hear from Nancy and Charlie in a moment, we had a strong second quarter driven by healthy increases in sales of our branded products. This growth and our strong cash position gives us the flexibility to invest in new products, new partnerships, new opportunities to make Endo a much stronger company. I look forward to giving you an update on our progress later this year and we will now turn the call over to Nancy to discuss our commercial business. Nancy?

Nancy J. Wysenski - Chief Operating Officer

Thanks Dave and good morning everyone. I would like to take the next few minutes to provide you with an update on our commercial business. As Dave stated, we had strong second quarter performance from our inline brands. Net sales for the second quarter 2008 were $306 million versus $257 million in the same period in 2007. This represents 19% growth year-over-year. LIDODERM continued its strong growth recording net sales of $185 million for the second quarter 2008. This represents 10% growth over the prior year. During the quarter, the total Rxs increased approximately 7% according to [inaudible] data versus the prior year. The difference between prescription demand and net sales is primarily attributed to the positive impact of price increases taken both in July of 2007 and April of this year offset by the negative impact from increases in managed care rebase as well as a slight inventory workdown. We recognized that the growth of this product is beginning to slow, as it has begun to mature and competition in the pain market has also begun to increase.

LIDODERM remains an important product for our business and we have initiated activities that we hope can sustain its growth during the second half of the year and into 2009. Some of these activities include a renewed and targeted focus on the high prescribing physicians who treat patients with PHN, the continued education of primary care physicians on the benefits of LIDODERM usage in PHN as well as the exploration of certain appropriate non-personal selling techniques that we believe may bolster growth. I'd now like to take just a minute to address the question that arose on our first quarter call that at the time we were unable to answer. The question concerned the gap between our reported net sales for LIDODERM during the first quarter versus what we reported as our first quarter demand sales.

Beginning in the latter part of 2007, we began to analyze the various data inputs that went into our calculation of demand sales. Following our first quarter earnings announcement, this activity was expanded and we began working closely with external data providers including [inaudible] and IMS to better understand the sampling and projection methodologies utilized by these providers to collect data on our marketed products specifically LIDODERM and to some extent Opana. We have completed our analysis and have concluded that the methodology utilized by the data providers to capture total prescription results in an overstatement of the total prescriptions for LIDODERM and an understatement in total prescriptions for Opana. While this obviously does not affect the growth rate year-over-year or quarter-over-quarter, it does affect our ability to accurately calculate demand sales.

As a result Endo will no longer calculate demand sales as a metric to measure the performance of our business, we will instead focus on net sales growth as compared to total prescription growth over prior periods to provide you with more clarity and transparency on how we measure our business performance. Let me take just another moment and address the specific questions that arose on our first quarter call around LIDODERM utilizing the total prescription data versus our reported net sales. During the first quarter, our net sales for LIDODERM grew approximately 17% over the prior year versus total or excess growing at 11%. The majority of this delta was the result of the price increase taken in July of 2007 on LIDODERM , which you may recall was 5%. We did not have any major changes in inventory levels in the first quarter of '08 versus the prior year and did not see significant changes in rebating during the quarter.

Now let's go back to the second quarter results. Our other products performed very well during the second quarter with Opana growing 86% reporting net sales for the second quarter of 2008 at $46 million. The total Rxs for the quarter increased 97%. The difference between prescription demand and net sales can be attributed primarily to the impact of managed care rebate on net sales for the second quarter of '08 resulting from increased contracting with managed care organizations offset by the price increase. We continued to invest in Opana and believe that the future growth of this product will be more heavily influenced by pain specialists.

We are currently in the process of modifying our physician targeting. The focus on the specialist and particular primary care practitioners who treat patients with long-acting opioids and can identify the most appropriate patients for treatment with OPANA. We are also encouraged by the results of our recent launch of VOLTAREN GEL. We have seen very positive trends thus far and prescriptions are currently tracking ahead of our internal forecast. The business is currently being generated from both primary care physicians as well as specialists.

During the second quarter, we brought on additional sales representatives from our contract sales organizations and have seen a positive impact from the addition of these resources. As the launch has progressed however, our initial assumption that each prescription would eventually result in the sale of 5 tubes has not yet been met. Each prescription is currently closer to 2 tubes per prescription. We will continue to execute against our launch plan that has led to the prescription growth exhibited by the product thus far and focused on increasing the number of tubes per prescription through the education of both the physicians who are prescribing and the pharmacists dispensing the product.

One final comment about the recent changes to our organization, as Dave mentioned, we completed the review of our business and we made some strategic decisions to strengthen our commercial organization. We have eliminated certain redundancies, increased spans of control, and we are focused on maximizing the return of our sales force effort. Specifically within our commercial organization, I have enhanced our business analytics function and reorganized the brand marketing teams. The field sales force has not been affected by the organizational changes. I believe these are the right moves to strengthen our commercial business and that we have the right strategies to support revenue growth.

Now I'd like to turn the call over to Ivan to provide you with a few comments on R&D. Ivan?

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

Thanks, Nancy and good morning everyone. I'd like to take a moment to take you through the results from our recent R&D reviews as well as provide you with some commentary around our R&D focus, priorities, and future. Over the past few months, we have gone through an extensive review of our R&D organization. The review encompassed a thorough analysis of our current R&D pipeline, including a rigorous analysis of each product's commercial potential, development timelines, and the investment required to bring them to market.

As a result of this review, we have decided to discontinue development of Rapinyl, the sublingual fast-dissolving tablet of Fentanyl being studied for the treatment of breakthrough cancer pain and the Topical Ketoprofen Patch, which was being studied for the treatment of acute pain associated with soft tissue injuries. And they will of course work closely with our development partners to ensure smooth transition of work as we transfer these activities back to our partners.

We currently intend to continue the development of the Oral Rinse for the prevention or delay of severe Oral Mucositis. As has been previously disclosed, this program has been placed on clinical hold by FDA. We are currently conducting pre-clinical studies as we attempt to better characterize and provide clarity around the questions that led to the clinical hold and we expect to complete this work at some point later this year and will provide with you an update when we have additional information.

We are also continuing the development of the Transdermal Sufentanil Patch for the release of moderate-to-severe chronic pain. This program is currently in Phase II and we expect to have data by the end of 2008, which will help determine the path forward for the program and depending on the results of the Phase II program we hope to hold an end of Phase II meeting with the FDA either in late 2008 or early 2009. We are also going to continue the development of Staccato fentanyl that uses Alexza's proprietary Staccato system inhalation technology to deliver fentanyl for the treatment of breakthrough pain. This program remains of course at an early stage and we'll update you when appropriate. There of course can be no assurance that any of the aforementioned development projects will progress and if they do that they will be successful. I also want to take a moment to make some comments around our R&D priorities and focus for the future. As a result of the discontinuation of the program that I have just discussed we are currently refocusing the R&D organization on our remaining development assets and partnering with our business development colleagues to provide the scientific evaluation of new business opportunities.

Our priorities are to expand and grow our pipeline to include both near and long-term assets that can contribute to the future growth of Endo. In order to do this, we must begin to enhance our R&D capabilities and over the next few months I intend to expand our R&D competencies including the addition of key positions in the discovery area in pharmaceutical development and in clinical development. We believe that this expansion will allow us to further improve our competencies in early and later stages of development. It will enhance our ability to invest in semi-virtual homes and research and development. And it will expand our expertise in evaluating business development opportunities and platforms that will contribute to Endo's future growth. What I would like to do now is to turn the call over to Charlie for a summary of our financial performance.

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

Thanks Ivan. I am pleased to announce another quarter of strong financial performance for Endo. For the three months ended June 30, 2008, net income was $59 million or $0.48 per diluted share or net sales of $306.2 million. This compares with net income of $60.5 million or $0.45 per diluted share, our net sales of $257.1 million in the second quarter of 2007. On an adjusted basis, as detail in the supplemental financial information in today's press release, net income was $70 million in the second quarter of 2008 versus $64.3 million in the second quarter of 2007. Adjusted diluted earnings per share were $0.57 for the second quarter of 2008, compared with $0.48 in the second quarter of 2007, a 19% increase. Nancy provided you with a summary of our product performance, so I will summarize our expenses for the quarter. Gross profit margins for the three months ended June 30, 2008 were 79.4% versus 78.7% in the second quarter of 2007. We expect our gross margins to decline over the balance of 2008, as we anticipate paying royalties on the net sales of our OPANA ER.

Selling, General and Administrative expenses for the second quarter of 2008 were $127 million versus $88 million for the same period in 2007. The year-over-year comparisons reflect the launch of VOLTAREN GEL, 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 certain separation benefits. Research and development expenses for the second quarter of 2008 were $27 million compared with $28 million for the same period in 2007. The reduction in expense for the second quarter when compared to the prior year is driven by the decision to discontinue the development of Rapinyl, which resulted in the reversal of an approval for a milestone payment of approximately $4.5 million that had been recorded during the first quarter of 2008 partially offset by a $3 million impairment charge taken on property, plant and equipments.

During the quarter we also wrote down the remaining balance of our Rapinyl intangible assets of $8.1 million making the total impairment charge due to the decision to discontinue the development of Rapinyl $11.2 million. We also recorded a $6.4 million charge related to staff reductions. As a result of the business and R&D review that took place during the second quarter and the activities we've undertaken following the completion of these events, let me try and provide you with some comments on how we view our expenses for the remainder of 2008.

On the SG&A line, the second quarter included incremental launch costs, both advertising and promotion and for the contract field organization for VOLTAREN GEL. This is in line with what we discussed on our first quarter call. Moreover, as a result of completing this business review, we are in the process of changing our business structure to reduce our utilization of outside consultants and create a more efficient operating model. We expect this will slightly offset some of the growth in SG&A seen in the second quarter in the upcoming third and fourth quarters of 2008. As is stated in the press release and earlier by Ivan, we've discontinued the development of two assets in the R&D pipeline. While we expect some benefit to the R&D line over the long term, as a result of these decisions keep in mind that we have contractual and other obligations to ensure a smooth transition in unwinding of these programs. Also as Ivan mentioned earlier, we are expanding or we are in the process of expanding on and building some core competencies in this area and this will affect our R&D expense as we go forward.

The tax rate for the second quarter of 2008 was 32%, down from 37% in the first quarter. The second quarter tax rate was lower as a result of resolution of certain issues that we were effectively settled with taxing authorities for various tax years after 2002. We expect the full-year tax rate to be slightly higher than the full-year 2007 effective tax rate. We reiterate our guidance for total 2008 net sales to be between $1,245 million and a $1,280 million and adjusted EPS to be between $2.15 and $2.19. Our financial 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.

Now as you know in early April the Endo Board of Directors approved the repurchase of up to $750 million of stock over the next two years... over two years. As we stated on our previous quarterly call, as part of the accelerated share repurchase program initiated in April 2008, we repurchased 11.9 million shares. We expect approximately an additional 1.3 million shares to be delivered under this program during the third quarter of 2008. Also during the second quarter, we repurchased on the open market an additional 2 million shares. These changes have been factored into our EPS guidance.

In closing, we are pleased that Endo had another quarter of strong performance. We are focused on executing against our strategic plans to grow the business, while managing our expenses.

Now let me turn the call back over to Blaine to begin the Q&A session. Blaine?

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks, Charlie. Lauren, I think we're ready to go to the Q&A session.

Question and Answer

Operator

Thank you. [Operator Instruction] And your first question comes from the line of Gregory Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks, good morning. I have a few and then I'll get back in line. First for Dave, can you provide some more color on the level of cost savings that you're targeting and perhaps the timing of those?

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

I think the level cost savings basically have come out and was mentioned in the call, relative to one reductions in some of the R&D programs and then obviously the... the personnel reductions and I think... from the standpoint of those two, the other probably third notable one was the consultants, there was a fair number of consultants that were being filed into the IT area and again maybe the overstated umbrella from all of the direction I had given in this area is, the complexity of the business was reduced and I think what we've today going forward is an opportunity to create a more dynamic organization and I think we're in a position to be more flexible and can produce some higher level of return.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Do you have the next question, Lauren?

Operator

Your next question comes from the line of Gary Nachman with Leerink Swann.

Gary Nachman - Leerink Swann & Company

Hi, good morning. For Ivan, can you talk about the decisions to divest Rapinyl, It seems that you guys had an accelerated pass to the product, so is it more the market dynamics that have changed your breakthrough pain, just go through the rationale there?

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

Yeah. As I said a bit earlier, we did a very extensive review. We looked at the whole pipeline and that included a very rigorous analysis of each product's commercial potential, the development timelines, and the investment required to bring each of them to market and when we put that all in and we thought about it and we discussed it, our decision was rapid, we should discontinue development around the that number.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Got the next question, Lauren?

Operator

Your next question comes from the line of Ken Trbovich with RBC Capital.

Ken Trbovich - RBC Capital Markets

Thanks for taking the question. I appreciate the clarification you provided with regard to the outlook on some of these products. I'm just trying to understand, how we should been thinking about discounts and especially as it relates to our own models, these deficiencies in the data sources, how should we adjust for that, should we just compensate through higher price per Rx, on OPANA going forward, what are your recommendations on that, can you tell us?

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

I guess, the way I would start doing anything is taking through the historical numbers and applying the growth factors, that's probably going to be the best way to go, because the adjustments factor would vary month-to-month, quarter-to-quarter, and the prominence of data providers actually is a history and so I can't give you a adjusted factor by X and you will be at the right amounts. So, I would look at it more from the standpoint of what's our historical sales that are reported and then what are your projected growth rates?

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Do you have the next question, Lauren?

Operator

Your next question comes from the line of Rich Silver with Lehman Brothers.

Richard Silver - Lehman brothers

Can you just perhaps elaborate again on the R&D? It sounds like a... it may be a bit of a wash in terms of the projection for this year versus your previous expectation... given that you will be dropping two programs but also expanding at the same time, so is that the message that really shouldn't be looking for much change versus previous expectations in total spending on R&D.?

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

I would… this is Charlie, I would expect that you are not going to see a drastic reduction in the R&D spend, because as we mentioned on the call we have contractual obligations on wind and transfer or transition some of these either to a new partner or back to the old partner, but as the result of some of the operational efficiencies and things that both Dave and I have been talked about, you will see a slight decrease from where we were in the second quarter.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Can we have the next question?

Operator

Your next question comes from the line of James Kelly with Goldman Sachs.

James Kelly - Goldman Sachs

Great. Thank you. On the…on the Oral Rinse product…I am just interested is the pre-clinical exploration more focused on the active ingredient or the projectile's [ph] metrics just in the active ingredient, I believe it has been around for a while and I am just interested in what the FDA is interested in there? Thank you.

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

Well. I think as we said previously there is some… an issue came up in a pre-clinical study that may ask us to put it on hold, we are currently taking studies, hope to provide data back to the NDA as the latter part of this year to address their issues. Thanks Jim.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Can we go to the next question?

Operator

Your next question comes from the line of David Buck with Buckingham Research Group.

David G. Buck - Buckingham Research Group

Yes. Thanks. Two quick questions. First for Charlie, can you give us your sense of what an appropriate price might be now for VOLTAREN GEL that we should be using in modeling and for Dave, in your R&D sort of strategy and comments, it seems like you are looking in a lot further a field than obviously just pain. Can you talk about in your evaluation along with Ivan, how you came with the conclusion that say oncology might be a targeted area for and given in CNS, given I guess a higher risk profile potentially then you core pay management area? Thanks.

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

Yeah. I think that the…again I want to be able to put a little bit of context around the comments I made and certainly the question, but I am not going to go very…very far because I have obviously more detail that I still want to work through. I think what we have seen is that number one, the pain area certainly extends into that so, maybe a better way to say is how we look at oncology is maybe through the eyes of how it relates to our pain experience in the contacts in that way. I think from the standpoint of the technology platforms, which I had mentioned I think as you said looking the field small molecule, large molecule related device and again those areas that are associated with both how on the therapies can be formulated as well as how they can be delivered. I think again you have a broader field for us to work in. Now that the challenge I think in just staying in the pain area per se, is as again obviously very hardly regulated and I also say that the mechanism and actions are still in the future and we want to look at that growth more in the near term with continued investment for long-term in the pain. So I guess that sort of the framing that I would like to put around those comments more to come between now and in certainly our next call, but at this point that sets our thinking.

Nancy J. Wysenski - Chief Operating Officer

David, this is Nancy if I could maybe pick up the call on the pricing for VOLTAREN GEL you know a rocket we have disclosed earlier as 2210, and as you might imagine since this product has only been marketed for a little more than one quarter, it's not been added to a great deal of formula.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

We will go to the next question.

Operator

Your next question comes from the line of Scott Henry with Roth Capital.

Scott Henry - Roth Capital Partners

Thank you. First, are there any updates with regards to the OPANA life cycle management targets as well as a potential for a European partner. And second, along the intellectual property front, are there any changes to the requirement for LIDODERM generic or are you getting any feedback since the last call with regards to that. And along that line given your as new management given your review of the assets under management, do you have any thoughts on the confidence level for extending to intellectual property for OPANA, the prior management had a fear to express confidence in that, I just wanted see if that feeling was felt by yourself as well?

Nancy J. Wysenski - Chief Operating Officer

Sure. As you might imagine, we continued to evaluate life cycle management opportunities for OPANA as well as geographical expansion and Europe is certainly one of the markets that we look at and continue to look at. Moving along I believe we are very confident in the skill sets that are here and the capabilities to support both the further development efforts of this drug as well as our abilities to continue to prosecute any challenges that may arise related to OPANA. And the topic of LIDODERM generics, we are not aware of any change in that situation. There have been no paragraphs for notices brought to our attention and we continue to feel quite confident that the five patterns we hold will continue to support the product through 2015.

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

Even if I could add in terms of the IP behind OPANA, we continue to vigorously prosecute patents with the PTO when we confidence as that we never some of more IP. We'll go to the next question.

Operator

Your next question comes from the line of Ian Sanderson with Cowen.

Ian Sanderson - Cowen & Co., LLC

Good morning and thanks for taking the question, sorry for the background noise here. Just a follow-up on the prosecution of the patterns with PTI-01 on OPANA, can you give us a kind of an update on where they I believe it's the 192 patterns stands when you expect the next feedback from the FDA and then secondly on the pipeline, do you still consider yourself to have rights on the lighter TSMC congress at efficates [ph] if there is any update there?

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

I'll cover the first question on OPANA, we don't comment on individual patent applications that we're in the middle of prosecuting. So we are going to leave it at that.

Nancy J. Wysenski - Chief Operating Officer

And I'm sorry. Could you please repeat the second question?

Blaine Davis - Vice President of Investor Relations and Corporate Communications

We’ll actually just go to the next question.

Operator

Your next question comes from the line of Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi, thanks for the clarification on the LIDODERM and OPANA, do you think you can give us quantify the variability or the overstatement and understatement on each of those products on average you've seen and also on LIDODERM you have some $10 million drawdown last quarter and a little bit more drawdown this quarter. Can you quantify of the drawdown in this quarter and is there any more... is there any further more particular amount?

Nancy J. Wysenski - Chief Operating Officer

Annabel, as you might imagine the changes in the projection methodology and where those fall out vary from quarter-to-quarter, it's extremely complex when you look at all the variables and that's exactly why we've decided to step up away from that and just really stick to sharing net sales and relating that to our TRX rate. On LIDODERM for this quarter, I believe you're asking about, we have had a slight inventory workdown, but I think the differences that you see between the 10% increase in net sales and the 7% increase in total prescriptions are primarily created by balancing that slight inventory workdown against the price increase in April and then some further contracting pricing reductions that are coming through in part B.

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

Annabel, in the first quarter call we did talk about the inventory pattern that we expect to see consistently year-from-year now and the second quarter and third quarter we will have slight workdowns first and fourth quarters we will have inventory builds but year-to-year we should not have fluctuations that are significant in inventory. This one I think that tends to go back to Ian's second question, Charlie does have actually a response to that.

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

So, Ian, your question about the patent rights or the IP rights to [inaudible] LIDODERM and so forth, yes we do have all that still.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks Lauren. Can we go to the next question?

Operator

Your next question comes from the line of Michael Tong with Wachovia Capital Market.

Michael Tong - Wachovia Securities

Hi, good morning, just a quick question for Charlie, I just wanted to see if you can clarify as you given us some additional clarity on the R&D against SG&A trend going forward for the second half of '08. Are those numbers off of the Q2 GAAP number or an adjusted number, should I look at R&D in Q2 to be closer to 31 million rather than 26 and SG&A as something lower than 126 to begin with?

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

They're off of the GAAP numbers that are there, but I think to be fair on the R&D number, it would be the lower number the 26 that we ran that off of.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

We'll go to the next question?

Operator

Your next question comes from the line of David Windley with Jefferies & Company.

David Windley - Jefferies & Company

Hi, broader overall question here two parts, the first is you mentioned your review of core ,competencies I was hoping that if you could get into a little bit more granular detail about what you concluded from that review in core... as to which are the core competencies? And secondly, in R&D where you talk about adding competencies in discovery and some other areas. Is that... should interrupt that as your intend to complete or pursue that those elements of R&D in house or bringing competencies in house to oversee outside vendors doing that work?

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

Let me they've hold back here, let me again go back to the comment that we want to work again a broader than just the pain areas. So from the standpoint of competencies as we look forward and again look forward in a growth plan in the strategic direction it's obvious that some of the elements that we want to pursue we think have growth did not exist. I think from that standpoint we want to fill those physicians. I think from the physician of where Ivan was coming from and again it falls in the same line. We're again looking at specific areas where we have been our growth and beyond just what our normal I guess business mode was more of the 505(b)(2)perspective and again where we see a higher growth and higher value more sustainable will require a greater control over more of the early development and again early are. Ivan, any comments you want to make on it?

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

Yes, and so we are certainly looking at our current R&D organization, we have looked a lot of competencies, we are going to be refining that and that will certainly including building out some more core capabilities and function it allows to execute a more virtual form of research at earlier stages of development but without having to built significant infrastructure and hopefully this new R&D model will allow us to invest against targets at earliest stage of development that we hope can increase the sustainability of our business over the longer-term.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks, can we go to the next question please?

Operator

Your next question comes from the line of Tim Chaing with FTN Midwest Securities.

Timothy Chiang - FTN Midwest Securities

Hi, thanks. A question for Ivan. Have you guys evaluated the pipeline, Rapinyl, and the Topical Ketoprofen Patch, was it the lack of efficacy or was it the lack of IP that sort of led you to discontinue these two late stage programs or was it just both, I mean, I just want to get your thoughts on how you sort of got to the conclusion of getting rid of these two?

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

As I said earlier it was a very... we did a very extensive review internally. We did a very thorough analysis of number of factors including sort of looking at the overall pipeline, each product's commercial potential the development timelines and also the investment that will be required to put into them to bring them to market.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks. Can we go to the next question please?

Operator

Your next question comes from the line of Lei Huang, with Summer Street.

Lei Huang - Summer Street Research Partners

Hi, thanks I've got two questions. First, can you just clarify in terms of some of the charges that you break out in your press release and to separate milestones clarify exactly where those fall in the P&L whether it's COGS, SG&A, or R&D and number two you talked about a revised operating model and new operating priorities, increasing brand sales, new business opportunities, supporting R&D programs etcetera they don't sound very different from things that you were focusing on prior to this corporate review that you have done so I just want to understand what changed who have been tweaked as a result of this review that you've done. Thanks

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

Well, let me take the first or the last question or the last part of your question and Charlie can take more of the first part and [inaudible] by the way, I'd agree with you... the words themselves probably don't sound any different not only from the last call, I mean another calls that people will have. I think we haven't provided you with enough of the context of what is behind those words. I think you should take some hard and maybe some of the words surrounded by the reductions that we have made relative to both the pipeline allowing again for increased elements in our core competencies to go after our other things. I think the opportunities of allowing ourselves less complexity again to enable us to move in a little bit more aggressive fashion to pursue new opportunities but until we come forth with more of the details which will be forthcoming and some of the actions that we will be taking again those words are probably no different and we'll probably have a hollow ring, but I assure you that the last four months of what we have been through was done on the direction to make sure this business was on a sound footing going forward and we will step of in that platform in the future calls.

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

And Lee, to answer your first question. The milestones... the [inaudible] milestones they all fall into the R&D line, but the IP charge that we took actually has its own line, the 8.1 million. It was another 3.1 million it was related to writing off some property plant equipment that was in the R&D line and then the severance charge is actually split between the two.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks. Can we go to the next question please?

Operator

Your next question is the follow up from the line of Gregory Gilbert with Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Thanks, a couple of model questions for Nancy and Charlie. So if we assume we will not see significant inventory fluctuations year versus…in the quarters versus prior year's quarters, how should we think about what portion of future price increases will actually stick in light of your contracting efforts, are you still expecting 20 million to 30 million for VOLTAREN GEL and if not would offset that to keep the guidance the same on the top line? And lastly for Dave, what is your strategy in generics going forward, is there any activity there now, any filings etcetera? Thanks.

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

I will start off on your first question on inventory and then start it over to Nancy. The way I would look at inventories is, this is the first and fourth quarters our inventory is going to be at the highest levels, second and third quarters at the lowest levels, year-to-year though at the end of year, you are not going to see any change. Next year would be the year that you probably won't see fluctuations from quarter-to-quarter, but last year was not 100% down at the lower levels of inventory.

Nancy J. Wysenski - Chief Operating Officer

I will take the question on VOLTAREN GEL as I said earlier in the call we are quite pleased with the response from the marketplace and I don't think we have changed our views on how that product will perform this year.

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

Relative to the generic side, we think it's a strategic element within our business going forward. I believe that the generics business as a business itself begins to gain certainly more importance in our healthcare delivery system. I think it's becoming more stratified in the sense that there is the very low hanging fruit and with a little more complex formulations. So going forward we really want to direct ourselves into a little bit more of the complex higher value, but we think it's going to be a contributor in the near-term.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks. Lauren, I think we have time for about two more questions.

Operator

Your next question is a follow up from the line of James Kelley with Goldman Sachs.

James Kelly - Goldman Sachs

Great, thank you. I want to just revisit the decisions on Rapinyl and Ketoprofen Patch on one particular line. It really has to do with whether or not it was the market opportunity that was an important driver and I want to ask that one again principally I am interested in whether or not revisiting products in these portions of the…in these sub categories inside pain is something that the company will continue to do going forward? Thank you.

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

Let me step a little bit into this, again a lot of what I saw the potential of the company and its ability to move forward in this changing environment within the healthcare is again to broaden its position in the marketplace and again I would say the overriding element was to me the timing and the business return on the investment relative to what I think other opportunities that we can pursue and it was also in alignment with how we are going to be able see us grow from the core competency area and move beyond just again the 505 (b) (2) strategy. So, I would say it was heavily driven more from the business perspective and sustainable but long-term growth. There was a second part of the question. I missed something. Maybe that was the overriding element of it. But that's such that, that was what I would portray as the underopinion of the decision there.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

Thanks. I think we have time for one more question.

Operator

Your last question is a follow-up from the line of Rich Silver with Lehman brothers.

Richard Silver - Lehman brothers

Can you just review the status of the products that are slated for continued development, where exactly they are and what we can expect in terms of timetable and milestones to mark them to market?

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

Well, I will give you some update on the products that continue and the -- on the development. We intend to continue development of the Oral Rinse, which is being studied with the prevention or delay of severe oral mucositis, the Sufentanil Patch, which is being studied for the relief of moderate-to-severe chronic pain and the Staccato Fentanyl product which is more specifics, we're currently working to understand the issues related to the clinical hold that has been placed on the oral mucositis product and we have additional information later this year, which will allow us to determine the Passport for this development program. Regarding Sufentanil Patch we would hope to meet with the FDA for an interface two either at the end of this year of beginning of the next year to discuss the results of our Phase II and discuss our plans for Phase III. Once again that will allow us to better characterize the Passport for that program and of course we will continue to work with our partner Alexza regarding the Staccato Fentanyl but of course this one's at a very early stage in Phase I.

Blaine Davis - Vice President of Investor Relations and Corporate Communications

So, with that it's the completion of our Q&A session. I want to thank everybody again for joining us to discuss the second quarter 2008 financial performance. If anyone has any follow-up questions or when the completion of the call you can contact me directly in my office. Thanks again for joining us.

Operator

Thank you, for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.

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Source: Endo Pharmaceuticals Holdings, Inc. Q2 2008 Earnings Call
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