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Executives

Blaine Davis - SVP, Corporate Affairs

Dave Holveck - President and CEO

Julie McHugh - COO

Ivan Gergel - EVP, Research & Development and CSO

Alan Levin - EVP and CFO

Analysts

Marc Goodman – UBS

Shibani Malhotra - RBC Capital Markets

Gregg Gilbert - Bank of America Merrill Lynch

David Amsellem - Piper Jaffray

Corey Davis - Jefferies & Company, Inc.

Chris Schott - JP Morgan

Annabel Samimy - Stifel Nicolaus

David Buck - Buckingham Research Group

Michael Faerm - Credit Suisse

Ken Cacciatore - Cowen & Co

Endo Health Solutions Inc. (ENDP) Q3 2012 Earnings Call November 5, 2012 8:30 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Q3 2012 Endo Health Solutions Incorporated Earnings Conference Call. My name is Stephen and I am your event manager. 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 sir.

Blaine Davis

Thanks Steve. Good morning everybody. Appreciate your 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.

Following our prepared remarks, we will open the call to take your questions. I’d like to remind everyone that any forward-looking statements made 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 our 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.

With that, I’d now like to turn the call over to Dave.

Dave Holveck

Thanks Blaine. Let’s start with Endo had a solid third quarter. We reported revenues of $750 million and adjusted earnings of $1.28 per share. These results reflects a number of variables affecting our business including strong growth in our Qualitest segment and the normalization of supply and demand for OPANA ER and Voltaren Gel after the disruptions to the supply of these product earlier this year.

Our financial guidance reflects current thinking in terms of revenue and appropriate expenses. We are now in our previous guidance for adjusted diluted earnings per share and now expect the range of $5.00 to $5.10. Alan will say more about our guidance in a few minutes.

As many of you aware, Endo recently hosted an analyst day for our industrial community. We were pleased to have had the opportunity to share with investors our vision and strategy for Endo to create value for our shareholders. We have diversified our revenue base and have new sources for growth such as sales of Qualitest generic products which increased 12% over last year and at the same time we reported an increase in LIDODERM sales during the quarter.

Our AMS business reported a drop in revenues compared to last year, reflecting a decline in procedures within women’s health. Women’s health has performed well on a year-to-date basis but on a pro forma basis versus 2011 sales have increased by the mid to high single-digit level that we believe represents the growth potential for all of AMS. The long-term prospects for this business are very encouraging. We believe there is strong potential in urology where aged demographics and new minimal invasive medical devices and procedures are revolutionizing economics within the medical practice and increasing patient demand for treatments outside the traditional hospital setting.

Looking ahead, new products, devices and services will be one key to our future success. Today our R&D pipeline is poised to deliver important new products beginning in 2013, including select launches of high-value generics during the next two years. We’re investing in new medical devices and practice management services both on our own and in collaboration with other companies. You should begin to see the fruits of those labors starting in 2013 and 2014.

We have multiple opportunities for significant organic growth within our diversified businesses. And as I stated at last month’s analyst meeting, we expect to enhance our growth by continuing to invest in our current commercial portfolio, delivering an expanded value proposition with new products and services through our pipeline and through business development.

We expect Qualitest to deliver year-over-year double-digit sales growth through 2013. This will be supported by increasing our production capacity by 15% annually over the next year, three years to support its growth. We expect to see a return to double-digit prescription growth in products like Voltaren Gel and the reformulated OPANA ER which will drive growth in our branded pharmaceutical businesses.

We also expect that our penetration into the urology market with AMS and HealthTronics which both really touched greater than 80% of the U.S. urologists in the U.S. will support accelerating mid to high single digit growth in these segments.

In summary, I believe our diversification during the past four years has made Endo a much stronger company today and put it on the right strategic path to meet the needs of tomorrow's healthcare system. Our R&D organization is productive. Our sales organization is more efficient and we have demonstrated our ability to develop new healthcare solutions through EMR, practice management and practice analytics. These are all promising platforms to build on for future revenue and earnings growth.

Across all of our businesses we are focused on delivering a strong finish to 2012 and positioning Endo to succeed in 2013. In branded pharmaceuticals, changing momentum, reformulated OPANA ER and returning it to prescription growth is a top priority. We’re collecting an increasing body of data to support our position that higher hurdles should have to be met before generic versions of OPANA ER are permitted to enter the market. We believe it’s important for clear regulatory and market boundaries to be drawn between the current abuse deterrent formulations of products such as OPANA ER and oxycodone and the generic versions of their discontinued formulations that do not meet the abuse deterrent formulations.

Other priorities include with Qualitest we’re focused on improving operating efficiencies and capitalizing on more of our volume opportunities. Our AMS and HealthTronics business are engaging with physicians and patients to raise the awareness of our products and services in both domestic and international markets. And throughout the organization, we are sizing our infrastructure and prioritizing our investments now in order to deliver the expectations we’ve set.

I would now like to turn the call over to Julie McHugh to review our operations during the quarter. Julie?

Julie McHugh

Thank you, Dave. As Dave mentioned returning OPANA ER to a growth trajectory is a top priority from my branded pharmaceuticals, marketing and sales team. We believe that the prospects for returning OPANA ER to growth remains strong.

In the third quarter, we stabilized demand for OPANA ER and marked the transition of this franchise when we announced in September that more than 90% of prescriptions are being filled with OPANA ER that is designed to be crush resistant. Our commitment shared at our analyst day is to return OPANA ER to double digit growth by the end of 2013. With the supply chain stabilized we believe we are poised to return this product to growth. We believe we can create that growth through application of our successful commercial model that is focused on establishing access and then applying targeted effective demand creation in key physician and patient audiences. I will be happy to discuss the details of our efforts further during Q&A.

Voltaren Gel continued its strong rebound in the third quarter. Net sales of over $35 million for third quarter reflects a strong recovery in prescription trends which returned to growth versus third quarter 2011. Overall we’re pleased by the recovery for Voltaren Gel and we expect to continue to grow prescription volumes in fourth quarter and into 2013.

Net sales of LIDODERM for the treatment of PHN increased 15% compared to third quarter 2011 sales. As discussed previously, the major driver for sales growth is the benefit from the change in royalties payable to third parties on this product. Excluding that effect, LIDODERM continues to produce low single digit growth from a combination of prescription volume growth and modest price increases.

Net sales of generics were up 12% in the third quarter. Strong demand for our established product portfolio and in some areas favouring pricing continued to drive performance for Qualitest. The current pricing environment helped us to produce adjusted gross margins of more than 40% in the generics business for the third quarter consecutive quarter.

Moving on to our AMS segment, sales decreased approximately 14% versus third quarter of 2011. That headline result is well short of our long term expectations for AMS. We won’t be satisfied until we return to mid to high single digit growth in AMS but there are some modest improvements to note.

As we expected, growth rates for women’s health have started to improve on a year over year basis as the changes in procedural volumes experienced in the second half of 2011 have now started to annualize. We also believe that year to date sales for men’s health of 6% on a pro forma basis are better measure of the organic growth for that business. On that basis, men’s health has grown from all major aspects of its business. We had net sales growth from both the male countenance and erectile restoration product line. And men’s health grew in both domestic and global markets.

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

Alan Levin

Thank you, Julie. Endo had a solid quarter and I’ll focus my initial remarks on our results and then comment on our prospects for the fourth quarter and full year of 2012.

For the third quarter, we had total revenue of $750 million, down 1% over the third quarter of 2011. As Dave said earlier, our revenues reflected improved pricing for Qualitest products following a sales shift to higher margin products thereby resulting in an increase of 12% year-over-year in our Qualitest business. On the contribution margin basis, adjusted income for Qualitest was up 70% over the third quarter of 2011.

On an adjusted basis, third quarter gross margin for the company as a whole was 68% of net sales that is in line with our year to date results and full year expectations.

Total operating expenses for the quarter were $313 million. However, on an adjusted basis total operating expenses for the quarter were $242 million. The decrease versus the prior year adjusted total operating expenses of $270 million is driven by the impact of operating efficiencies that we've been focused on delivering since the start of 2012 and we implemented additional changes to our flexible infrastructure at the end of the third quarter that we believe will further improve operating efficiency in the fourth quarter 2012.

On an adjusted basis total operating expenses as a percentage of revenue decreased to 32% as compared to 36% during the third quarter of 2012. In the fourth quarter we expect growth in revenues coupled with continued reduction in expenses to further reduce adjusted operating expenses as a percentage of revenues.

Our adjusted effective tax rate for the third quarter of 2012 was 28%. The adjusted effective tax rate benefited from lower pre-tax income which increases the relative contribution that we enjoy from a fixed amount of net operating losses, as well as the script period benefits from the utilization of tax credit carryforwards and reserve releases.

Our year-to-date adjusted effective tax rate is just under 30% and we continue to expect our full year 2012 adjusted effective tax rate to be in line with our guidance of 30.5% to 31.5%. Adjusted diluted earnings per share increased 2% to $1.28, versus $1.25 in the third quarter of 2011. Our reported or GAAP diluted earnings per share increased $0.45 versus $0.34 in the third quarter of 2011. Those increases were driven in part by the impact of improved operating efficiencies.

Our reported net income for third quarter includes a few items that I would like to note. There is a credit of $46 million to reduce a previous non-cash charge associated with the company’s LIDODERM license and settlement agreement with Watson Labs in accordance with the terms of that agreement. Reported net income also includes the effect of $83 million in charges for the period reflecting settlement of certain legal matters relating to price reporting that we disclosed previously as well as an estimated minimum amounts to resolve the ongoing and previously discussed investigation by the government with respect to LIDODERM promotional practices.

With two months to go before the finish of the year, we are refining our financial guidance for consolidated revenues and adjusted diluted earnings per share. We expect total revenues of approximately $3.05 billion, an increase of 12% versus 2011 consistent with the lower end of our previously communicated revenue range. This guidance further reflects the market potential for the major products in our branded pharmaceuticals portfolio and a continuation of improved pricing in our Qualitest business.

We expect to deliver adjusted diluted earnings per share in the range of $5 to $5.10 for full year 2012, consistent with the lower half of our previously communicated EPS range. As we highlighted in the past, we have a flexible expense structure that permits us to adjust our investment levels to a level that we believe is more appropriate given topline performance. We now expect reported or GAAP diluted earnings per share in the range of $0.84 to $0.94. On an adjusted basis we continue to expect our corporate gross margin to be between 68% and 69% in 2012. With the implementation of our cost-saving 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 to full U.S. tax rate. We will, as we have historically, continue to look for opportunities to improve our adjusted effective tax rate.

We now expect cash flow from operations to be at least $600 million in 2012 reflecting current earnings expectations, the resolution of certain legal liabilities that I previously alluded to as well as an inventory build in key business segments. Our strength in cash flow generation should provide the flexibility to invest in the business to support our growth drivers to continue to execute against our newly authorized share repurchase program and to continue the repayment of our debt.

Repayment of debt remains an important use of our operating cash flow up. Through September 30, we repaid approximately $334 million in term loans this year and that raises our repayment total to approximately $624 million since the acquisition of American Medical Systems. In addition to that, we've been executing against our new $450 million share repurchase authorization. During the third quarter of 2012, the company repurchased approximately $100 million of its common stock and going forward we will continue to be active in this regard.

While somewhat difficult to predict with precision for our full year EPS financial guidance, we believe that diluted weighted average shares outstanding of approximately 120 million shares would be a reasonable share count for 2012. For additional details on our 2012 financial results and guidance please review today's earnings press release.

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

Blaine Davis

Thanks Alan. This concludes the prepared remarks for the call. Steve, if we could go ahead and open the lines to start with the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from the line of Marc Goodman from UBS.

Marc Goodman – UBS

First, if you look at the HealthTronics business if $5 million is coming from this electronics medical record that you acquired, then that means you did like 50 which means that the business is declining in the quarter. I was wondering if you could talk about that, what was going on there? Second, on AMS, it kind of feels like the business is getting worse if not better as far as if you look at the decline in the women’s health and I am talking about just women’s health specifically. So if you could talk about that, we see any stabilization of costs – now that your cost stabilization coming, how you guys are about to go. And then third, the other thing is just on guidance. Here we are revising 2012 guidance like not even that long after we just saw you and I guess how are we supposed to be thinking about guidance going forward? You laid out a whole bunch of guidance for the next couple of years that it’s just very to have numbers changing so quickly right after we just saw you?

Dave Holveck

Let me just take a few of those questions relative to where we are on the urology franchise, specifically with the HealthTronics and the basis there. I think the notable element of HealthTronics is the strong reputation that they have with the practice themselves and when I think you look at the practices, those practices continue to consolidate to become larger. So I think the elements that underpin HealthTronics is that relationship. I think the element that has affected some of the more recent numbers is a by-product of the ruling relative to prostrate and the elements there in terms of testing specifically. And the elements there are really around the cryoablation business as well as in the diagnostic business. As you look at the other element that you mentioned in terms of medical records and the analytics that are being developed I think that is a strong future tenet for what I believe healthcare is going to be more dealing with is a better data and I think we are well-positioned especially in the urology community since 30% of the large practices in urology are under either (indiscernible).

As for AMS, AMS again along with the HealthTronics reputation AMS has a very strong reputation with its physicians. I think a lot of it is sell is based on both its people and the support they give relative to the surgeons in urology community, we’ve had I think yes a downturn in the business in women’s health that is starting to stabilize. The other thing I would mention to you is that those patients are not going away. I think the relationship we have with the leading implant surgeons gives us the opportunity as we are seeing the stabilization and to build on that and to grow forward with it. I think when you take HealthTronics and AMS both in their positions and reputation as I mentioned in my talk with greater than 80% we feel we have a very strong position in that channel.

On that, I will let Alan talk a little bit about the guidance numbers.

Alan Levin

I think with regard to guidance, what we are doing today is really refining our guidance for the full year consistent with the previously communicated ranges. We are at the bottom end of our range on revenue, we are in the lower half of the range on EPS. But I think it's important to note that we remain committed to delivering the revenue performance and the bottom line performance that we articulated today and that we talked about during the analyst day.

I think also there are a number of aspects that we commented on in the third quarter results that are very indicative of how we see future unfolding for us. We’ve talked about double-digit growth in Qualitest business and we’ve certainly seen that yet again year-over-year in the third quarter. We’ve talked about the growth trajectory for the V Gel and OPANA and how we see that moving forward. You clearly see us accelerating the implementation of cost efficiencies within the organization and all of that I think is consistent with the way we've been thinking about our business and the way we’ve been talking about the next several years.

Operator

And the next question is from the line of Shibani Malhotra from RBC Capital.

Shibani Malhotra - RBC Capital Markets

Just a few – so first Endo has publically commented that it has been considering succession planning. And I am just curious if you can comment on when can we get an update on that subject. And then also just how you’re thinking about the strategic alternatives in light of 2011 and 2012 year to date under performance in terms of the stock price? And then I have a separate question on the Qualitest growth. I know I have ask to this before but can you just give us an indication of how much of this was driven by pricing versus script and how much was actually the hydrocodone product?

Dave Holveck

Shibani, I don’t know that first question is editorial question for our succession, I think we are always in the planning phase relative to succession. Personally my commitment is we have to do again – execute against a strategy that I believe is one that sits up against the new changing health environment and I am committed to see that move forward. I think again we are in a position too where strategic elements and the changing healthcare environment continues to be very dynamic and we continue to again monitor where we are in our business. And I think the leadership requirements to navigate in that. So I think all things be it strategy, or dynamic successions, I think in terms of leadership continue to the dynamic. We intend to again position the company for long term growth and strategic value.

Julie McHugh

With respect the Qualitest growth, Shibani, as we have discussed with you prior, it is a combination of both pricing and volume growth. We did benefit from some pricing opportunities on hydrocodone and while that opportunity may not persist going forward, we have a very broad and diverse portfolio. We continue to launch new products and we believe that given the very dynamic nature of the generics business that we will continue to grow volume as we mentioned in our prepared remarks. We’re preparing for expanded volume growth through increases in our manufacturing capacity, and again, we'll continue to be opportunistic with pricing in the marketplace with our very broad commercial portfolio.

Shibani Malhotra - RBC Capital Markets

And can I just have a follow-up for Dave? Dave, I understand what you're saying and we've spoken a lot about your strategy and frankly, we agreed that the approach is the correct one. But if you think about how you expected the Endo business to play out given how you were trying to diversify, are you satisfied with the performance of the company versus your own expectations?

Dave Holveck

Well, again, I don't think anybody who is always satisfied -- I think I'm very satisfied with the diversification again, when we took on the leadership here in '08, we had 70% of the revenues with one product. I think right now again, we're about 28% relative to LIDODERM versus other revenue sources, and I would say that when we looked at the '08 future, we were facing into a possible cliff. And I think we avoided the cliff. Having said that, I think the uncertainties of healthcare continue to be very dynamic. And we're very much I think in the position with the tenets of the strategy in place to be able to react and pivot off of those elements so that we can be, again, a stronger growth trajectory.

So to me, I think we're where we hope to be on diversification. I think on a growth trajectory I think we have the pieces to build on it. Notwithstanding again the dynamics and the driving elements within the healthcare environment.

Operator

Your question is from the line of Gregg Gilbert from Bank of America.

Gregg Gilbert - Bank of America Merrill Lynch

Thanks. I have a few. Let me start off on Dave's last comment. So, Dave, sounds like you and the rest of the board are convinced that the non-pharma businesses that have been acquired are helping to build shareholder value in a tangible way? Is that a fair characterization?

Dave Holveck

I don't know (indiscernible), I think what we're saying is the value proposition today in healthcare going forward is beyond just products. And just beyond the silo thinking of pharma device, biologics, generics, I think the elements are based around the value proposition of best economics or best outcome and the metrics. And so I think what we've been able to do is position ourselves strongly in segments where it's not just the base of products, but where we have a demanding or commanding position with products, but also with the respective physicians. So if you take pain, I think with the elements of generics in pain we have a strong position in the controlled substance area along with the branded and when you take a look at the urology sector as I mentioned with aged demographics and the consolidation of the independent practices, we sit very strongly now with HealthTronics and AMS, along with again, the data segment which very few have really signed up to.

And I think having that insight, being able to have data beyond just having what I consider has been the mainstay for our industry, billing codes, I think now that we do have an understanding of how the patient is actually being treated I think we're in a very strong position. And I think this is an element that will stretch across not just urology but into the pain and other practice elements of our business.

Alan Levin

I think the other piece of that and we tried to showcase this during our analyst day is the growth potential in these other components of our business, whether it's double-digit growth that we see in Qualitest over the 2013 to 2015 period continuing, whether it's the strong organic growth opportunities that we see in the AMS business, which is in part reflected by the men's health performance, whether it's the durable relationships from HealthTronics that help to drive growth in the urology channel. All of that is part of how we think of the business.

Now, obviously it's a fluid environment we're operating in. And we certainly hit some headwinds in the different components of our business in 2012, so as a management team, we continue to evaluate and retool and refine our positioning as we go forward. And as we continue to see the evolution of our strategy, you'll continue to see us refine our thinking as we react to the marketplace and the dynamics that we’re seeing.

Gregg Gilbert - Bank of America Merrill Lynch

A couple of specific ones, Alan. The cash flow target was $700 million to $800 million about a month ago. Can you walk us through what has changed specifically to get to the greater than $600 million today? And then Julie on Qualitest, the guidance implies a huge spike in growth in 4Q versus what we just saw in 3Q. Doesn't look like those launches in the press release would get you there but can you give some more color on your confidence and visibility in that 4Q implied performance?

Alan Levin

So with respect to cash flow from operations, I do believe that the company has strong cash flow generating capacity. We expect to generate over $3 billion of EBITDA over the next three years. As we refine our numbers for the remainder of 2012, you see the revised guidance reflecting our coming out in the lower end of expectations for 2012 full year. You see it reflecting the crystallization of some legal liabilities that I referred to earlier in my prepared remarks.

Cash flow from operations is a GAAP performance measure. And so we need to take into account not only the adjusted operating performance of the company but also these GAAP considerations that crystallized in 3Q. And then finally we continue to invest in inventories in our branded pharma business and our Qualitest business. This is all part of stabilizing the supply availability for OPANA as well as working to ensure that we can meet the volume requirements that we anticipate in the Qualitest business.

Julie McHugh

And to answer your question with regard to our anticipated Qualitest performance, as I mentioned in our comments before, we're on our current run rate to achieve our fourth quarter objectives for the Qualitest business. And those will be achieved largely on the basis of our current commercial portfolio and realizing both volume expansion opportunities, new market opportunities and pricing opportunities. So that is the combination of factors leading up to be confident about the fourth quarter Qualitest expectations.

Operator

Your next question is from the line of David Amsellem from Piper Jaffray.

David Amsellem - Piper Jaffray

Just a couple – just coming back to AMS, this was on the BPH business. Can you give us some more color on why the GreenLight business looks to have come under pressure? This has been a business you've been pretty bullish on. So maybe give us a sense of what's happening there. And secondly on OPANA ER, so sequential sales decline from the second quarter was a lot more than around the 10% to 11% sequential decline in total prescription volumes to talk about AMS, so maybe give us some color. And I may have missed this earlier, on what you're seeing here is it inventory being taken down, or are you running into managed-care headwinds? What exactly is going on quarter-to-quarter?

Dave Holveck

Let me handle the BPH. I think BPH again is a competitive area, but it's also an area that I think affects on a procedure basis, in third quarter and generally procedures tend to be a little lighter. But I do think what we're seeing in BPH with the new MoXy fiber and the elements with our training and the relationships I think that business again has put, I think, a higher degree of metrics on the profitability with the fibers themselves and the new higher energy fibers, which again decrease the time of the procedure and again, I think have better recovery for the patient. I think those elements, along with the adjustments in some of our distribution strategy again show promise in terms of putting that in a higher growth trajectory, and along with the cooperation and relationships that are now being built through the AMS organization.

I think the international is the star really in terms of looking at that franchise growth, better than 42% in the international has grown in the third quarter. While international is a smaller component of AMS, we continue to see that segment of the market really having the greatest growth potential. And I think with the approval of the GreenLight in Japan and I think other elements in the Latin America and the Pacific RIM, I think those are all future upticks relative to that segment per se.

Julie McHugh

With respect to OPANA ER, what we saw in the third quarter is obviously, like I said before we’re excited about the fact we believe we have stabilized demand trends. The decrease in net sales was a function of -- basically a function of the dosage strength mix as well as a slight work-down in inventory levels from the second to the third quarter.

David Amsellem - Piper Jaffray

Okay. If I may sneak in a follow-up on GreenLight. You referenced decreasing share of procedural volumes, so can you just elaborate -- I'm just trying to understand, is there competitive dynamics that are becoming more challenging? Sounds like you're still bullish on it but I'm just trying to understand if there's a competitive challenge that we should be concerned about.

Dave Holveck

I don't know that it's a competitive challenge. I just think third quarter just represents when you talk to the patient how they elect to handle procedures, a lot of times, again, they put them off until the fall. So I think that's what I was referring to there. I think it's a competitive area both on the pharmaceutical and device side. But I do think that what we've instituted in our strategic approach is to be able to have again better and sooner I guess more responsive elements of care with the patient. And I think that aspect of it is a positive tick and then I also think greater leverage with the HealthTronics organization -- some of those elements themselves are through mobilization.

And then the training aspects I think have been improved with some of the simulator training expertise that we are bringing into the market. We piloted in the third quarter and we are starting to see more what I'll call defined training coming up in the fourth quarter.

Alan Levin

And I would add, we remain bullish in terms of the prospects here. It is mostly a soft U.S. story for us. And while we are somewhat disappointed in the execution in the third quarter we’re taking steps to address that. The international side is growing very well in terms of fiber utilization which is the highest margin component as Dave alluded to. We've implemented a new go to market strategy that we'll continue to refine as we move forward. And we're very excited about the Goliath study which should read out in a head-to-head comparison against turf (ph) towards the end of this year, the beginning of next year and that in and of itself should drive some differentiation and growth opportunity.

Operator

Your next question is from the line of Corey Davis from Jefferies.

Corey Davis - Jefferies & Company, Inc.

Thanks. A couple of questions. First, regarding OPANA and generics and as opposed to just playing more of a passive role and waiting for the FDA to act, are there things that you can do to be more aggressive to increase the pressure on the agency to both rule on your NDA discontinuation and issue that guidance that’s supposed to be coming now that we're approaching the end of the year? I'm thinking of filing some sort of lawsuit asking for an injunction against the IMPAX’s ANDA or don't you think that that level of aggression is appropriate at this time?

Dave Holveck

Well again, I don't know -- I'll let Julie take a little bit more of the specifics on what we have done. I think the Citizen position I think is a very active step. I don't think we've been sitting back on that aspect of it. I don't know that the suing or litigation with the FDA is called for at this point. I do think however, that again the society has voted pretty strongly about misuse and abuse. I think the agency has been very clear in terms of their support towards the reformulated and I think the data from -- coming off of that reformulation has been very strong. So I think with the Citizen’s petitions that we filed, again, what Perdue has filed and Covidien has filed, I think we're going to get I think the action desired. And I think the political sensitivities that wrap around it equally I think play in favor. I do not believe they're going to be therapeutic equivalent. So again, that's another dimension of this again, this issue. But I believe we're certainly very active in pursuing that. Julie?

Julie McHugh

Well, I don't really have much to add other than to say we will continue to assess all of our options to protect this franchise. We do believe as Dave stated before that the FDA created a very specific pathway to bring these tamper resistant formulations to market. And we believe that they will issue guidance later this year, early next year to ensure that these formulations continue to benefit from appropriate use in the marketplace.

Alan Levin

And I would just add that this is a very important franchise to us. It's an important growth driver for the company, so you can rest assured that we will leave no stone unturned in order to maximize the value of this franchise for Endo. As Dave said, we do not believe that even if a generic version of the old formulation of OPANA ER is launched in 2013 that it would be therapeutically equivalent to the crush resistant formulation. We do not believe that that would be the case. That is a view shared by other relevant parties as well. And our thinking in that regard has been factored into how we think about the revenue trajectory and the previous guidance we've provided with respect to OPANA ER.

Corey Davis - Jefferies & Company, Inc.

And one question on SG&A, you've done a great job of dropping it sequentially since Q1 and it sounds like there's going to be more to come in Q4. But then going into 2013, is Q4 that right run rate? Or is there still more SG&A decreases that you can make without hurting the promotion of the important products?

Dave Holveck

I think again, it's an issue of how we're synergizing the businesses. And I think again we’re -- it's evolving as we change and add to various leaderships, as we strengthen just because of market drivers and take on those. I think we find other opportunities that we can continue to have on a rolling basis an opportunity to take greater SG&A out of the business and not in any way compromise our abilities to work from the market side. So I think it's an

area that as we've taken these businesses on, and we've again brought leadership in and the expertise around that leadership has given us the

opportunities to see the businesses in the broader enterprise perspective of how we have to deliver that value proposition to the healthcare system.

Alan Levin

And I think that Dave's comments are consistent with what we previously talked about in terms of year over year reductions in operating expenses

as we move forward over the next several years.

Operator

Your next question is from the line of Chris Schott from JP Morgan.

Chris Schott - JP Morgan

Just had two questions around upon OPANA. First, can you elaborate on the efforts you're making to restore growth for OPANA? It does seem like you've stabilized prescriptions here but really haven't seen a return to growth for the franchise. Why haven't we seen a recovery yet, and what makes you so confident you can get this franchise going the right direction? The second question is following up on some of those previous comments. Do those double-digit growth targets for OPANA factor in a non-therapeutically equivalent, non-tamper resistant generic in the market? If it impacts where you get to market with a non-equivalent product, does that change at all your view of your branded OPANA trajectory? Thank you.

Julie McHugh

So let me answer the first part of your question, Chris. Again, we're very encouraged by what we've seen in the most recent script data which shows that we are seeing a stabilization of demand for OPANA ER. As I mentioned in my prepared remarks, you can manage imagine that given the importance of this franchise to Endo that our branded pharmaceuticals team is exquisitely focused on returning the product to growth. We have a variety of different programs focused at the physician, the pharmacist and the patient level. All of which we are confident will return the franchise to growth.

With respect to our guidance, with respect to 2013 and our assumptions underlying that guidance, we've assumed that there will be no therapeutically equivalent A-B rated product in the market to OPANA ER in 2013.

Alan Levin

Having said that, we've also contemplated the possibility that in a non A-B rated generic might come to market. And in that eventuality our guidance anticipates that there would be minimal impact to the franchise. I think you're seeing in the branded pharmaceuticals portfolio, with regard to open OPANA and we're right behind that BEMA Buprenorphine, long-term patent exclusivity on a key growth driver for us. We expect BEMA Buprenorphine to launch in late 2015 at this point. And the commercial model allows us to manage through the loss of exclusivity for LIDODERM and support our competitive position as we move into the medium term.

Operator

Your next question is from the line of Annabel Samimy from Stifel Nicolaus.

Annabel Samimy - Stifel Nicolaus

I just wanted to get a little bit more color on the Qualitest business. It seems like the growth is fluctuating a little bit from earlier this year where it was around 8% up to the higher teens, mid-double digits. Do you have a good sense of your high flying prospect, whether there are more high-margin opportunities or high-volume opportunities? And how can we think about growth in margin going forward given that it's a balance between the two?

Julie McHugh

Well, our growth at Qualitest as I've mentioned is a combination of growth in production capacity and volume output coupled with pricing opportunities. As we've continued to execute against our production strategy at Qualitest, we've been able to accelerate our growth. That coupled with some pricing opportunities in the marketplace, especially around some of our relatively higher margin products, has led to the results that we're reporting and anticipating for the remainder of the year. As we move into 2013 we believe that there will continue to be market opportunities to both capitalize on new business opportunities, as well as continue to optimize our commercial portfolio against our volume to favor those products that are relatively higher margin. So that is inherently how we intend to continue to drive revenue expansion and margin.

Alan Levin

And I would add that while you will see some year-over-year growth differentials from one quarter to the next, Q1 up 8% and Q2 up 20% and Q3 up 12%, we continue to believe that the year-to-date numbers are the best barometer in terms of the sustaining performance of the company. And we're seeing on a year-to-date basis, 13% growth in revenues. What is very exciting and very encouraging also is the margin expansion. Gross margin has expanded on an adjusted basis 850 basis points since last year. And that reflects a lot of the hard work that's gone into portfolio optimization as well as our manufacturing processes. And so whether it is topline growth or bottom line opportunity, we see Qualitest as a very bright spot for us as we move forward.

Annabel Samimy - Stifel Nicolaus

If I could follow-up with one other question regarding the AMS and HealthTronics business. Together, these two businesses seem like they would be very valuable franchise to high-margin business. You've got a good pipeline for product launches next year and you've got a pretty, obviously a top reputation in the street so that would warrant a much higher value than what you're essentially getting for it right now. How long do you give yourself -- how long until you need to make some greater strategic moves to be able to unlock that value?

Dave Holveck

I think the basic tenets of the business you said is there, very strong reputation on both sides and again, that reputation I think can be built out. I do think the elements of HealthTronics, which brings -- and we intend to bring a stronger service content into that business with the data side. And I do think you'll start to see some new elements roll out to complement the base franchise there in terms of data, which again will I think bring even a higher level of recognition with the urology community in a way that not only will the data accept an understanding of the metrics for quality and outcome, but also a big element in the practice today are the ability to organize and build their practices to give a higher value and growth in those products. And I think we have the opportunity to deliver on that.

When you look at the AMS, I think as you know, HealthTronics and AMS I think do complement each other in terms of the devices as well is in the mobilization strategy. And here again I think with the leadership change at AMS, I think those are again elements that will accelerate the growth trajectory. So again, the position we're building off of strong products, strong reputation, I think the data set is sort of the futures. And then I think the leverage with the again, leadership and changes, along with international from an AMS perspective, I think all lead to be nice growth story in 2013.

Alan Levin

And I think the other piece around the AMS business is the ability to unlock the growth potential that we see as well as margin expansion. Clearly in the women's health business, the businesses has been challenged by recent regulatory actions. We believe there's an opportunity to return AMS to its historic operating margins. And we continue to target the high 20% to low 30% range by 2014. You're already beginning to see, as we've alluded to, some procedure stabilization on women's health. You're seeing the year over year on the men's health business, BPH business, we have some more work to do in that regard. So I think there's an execution story to unfold here and you'll continue to see us focused on that. And by working on both top line, bottom line execution, that just enhances the value of those franchises all the more.

Operator

Your next question is from the line of David Buck from Buckingham Research.

David Buck - Buckingham Research Group

A couple of quick ones. First, for Alan, you just referenced the goal of the margin for the AMS business. Can you talk a little bit about any progress that you made in the third quarter sequentially? And then maybe for Julie, can you talk about that $29 million level of sales for women's health in the quarter. Is that indicative of what you think the demand is now, or should we continue to expect some draw down sequentially into the fourth quarter?

And then one more for Dave and following up with some other line of questioning. Is there a goal from the board to have a more explicit tie of management compensation and shareholder price performance, because the comments from others, and we've talked about this previously, are the value of the businesses are not really being reflected by the market. And you've done a good job in terms of diversifying business but again, the market's not realizing that with an Endo multiple, so is there something that the board is thinking of doing to try and help push that along?

Alan Levin

On the margin consideration for AMS, in October, we began to implement some of the restructuring activity and the cost base. Although you wouldn't see it as much reflected in the third quarter results, you should see some sequential improvement in the fourth quarter results that reflects Camille Farhat, our new leader, coming into play in early September doing some quick work in terms of where we might best reposition the business, and beginning in implementation in mid-October timeframe.

Julie McHugh

With respect to the AMS women's health business, we are acutely focused right now on, of course we believe that the market has stabilized in terms of procedures. We're focused on continuing to educate and train physicians and appropriately -- in appropriate surgical techniques as well as arm them with discussion documents to share with their patients on the benefits and the risks of the procedure. And we believe that by continuing to focus on good, solid physician and patient education along with the stabilization of the overall procedural market we can get this franchise back to mid-to high single-digit growth.

Dave Holveck

Now let's talk about again the driving elements for building shareholder value. Obviously elements of the strategy as we talked about, I think we're positioned to do. I think we've had some of the elements in that strategy didn't break entirely relative to some of the Novartis or maybe into the mesh side, but I think the elements were always built around not product but our strategic position for the future of healthcare and we're moving there. Notwithstanding all of that, our board and the management team have always linked again our compensation against the building of shareholder value.

So we do have, in fact, a part of our comp plan at the executive level talking about again, value to the shareholder. I think our comp committee is always active and responsive to the business, its needs and balancing again, what's necessary to build a company sustainable growth in this new environment along with their responsibility to return to the shareholders, a strong growth trajectory. And those discussions are always going to be taking place. And I can tell you that management is very keenly committed to meeting that growth to the shareholder.

Blaine Davis

Thanks, Dave. Just in the spirit of time, I think we can go ahead and take two more questions and then we'll wrap from there. So can we go to the last two questions please?

Operator

Your next question is from the line of Michael Faerm from Credit Suisse.

Michael Faerm - Credit Suisse

Just a couple of quick ones on OPANA and the scenario of generic launches on January 1. First one is, assuming a non A-B rated generic how much volume erosion do you expect anticipate in your 2013 plan? The second question is, if any generic launches, would you anticipate any changes to your sales and marketing spend?

Julie McHugh

So with respect to our current guidance that we've shared with you recently with respect to our expectations for 2013, you can be sure that we have modeled in a couple of scenarios relative to OPANA ER. We do not again believe that there will be a therapeutically equivalent product on the market. And even if we do believe that any product that would be launching into this space has to face into some other hurdles relative to the DEA quota allocation, and all of those factors need to be factored into what impact, if any, a generic product would have on OPANA ER. We also believe strongly in the value proposition of the new formulation designed to be crush resistant. And we believe that we can continue to have high expectations for OPANA ER relative to the current regulatory and legal environment.

Alan Levin

And this is an area where we recognize the value and importance of this franchise for us. So we are very appropriately allocating our sales and marketing spend to support the growth trajectory of this franchise going forward. It is a growth opportunity for us over many, many years given the strength of our intellectual property position that goes out through 2029. Were a generic to come to market, again we believe it would be non-A-B rated as Julie has indicated, and we think that it would not meaningfully impact our revenue trajectory.

Blaine Davis

Can we go to the last question?

Operator

Your last question is from the line of Ken Cacciatore from Cowen & Co.

Ken Cacciatore - Cowen & Co.

Just following up on the OPANA ER and the low probability of a non-A-B rated generic, can you just talk about your new OPANA ER, now that it's been on the market for a while, is there anything different about it? Anything possibly different that would cause patients to like it less to seek out the old formulation, or maybe the clinicians to want to write the old formulations? Is it harder to swallow? Anything about the PK profile that would maybe make clinicians want to write the old OPANA ER, given clearly that there's the less tamper resistant?

Ivan Gergel

Ken, thanks, it's Ivan. It's a good question. And we said this previously though in developing this product we looked at the PK. The PK curves really did sit on top of each other. So that means that the two drugs, the two formulations should perform very, very similar to each other. Essentially they're equivalent as would be necessary. When we first launched it, we monitored carefully the reports coming in to us, but I think at this point we can say that the performance of our new formulation of the tamper resistant is the same from an efficacy standpoint as the old formulation.

But what I would say is the early -- you've heard this before, but the early epidemiological data, very early on at this point, is indicating quite clearly that from an abuse standpoint, we're seeing some data indicating that this drug seems to be doing what it's intended to do. So that's very encouraging.

Julie McHugh

From a market research point of view, we continue to monitor both physician and patient expectations and perceptions of the new product designed to be crush resistant. And we have not uncovered anything that would indicate that both physicians and patients will continue to prescribe this product and benefit from the benefits of the product.

Blaine Davis

Thanks, Ken, and thanks everybody for joining us today. Jonathan Neely and myself will be available this afternoon for additional follow-up questions. Again, thanks very much for joining us on our call today. Take care.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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