Endo International PLC (ENDP) 2002 Q1 法說會逐字稿

Good morning, everyone, and welcome to Endo Pharmaceutical's first quarter 2002 teleconference. Today's conference is being recorded. Before we begin today, I would like to remind you that, during the course of this conference, management may make forward-looking statements concerning such things as future results, product performance and anticipated timing of FDA approval of certain drugs, as well as other non-historical facts that reflect Endo's current perspective on existing trends and information.

As you would expect, these statements will be made with appropriate qualifying language like Endo believes, expects, plans, anticipates, predicts or similar expressions. By their nature, these forward-looking statements involve known and unknown risks and uncertainties that may cause Endo's actual results to be materially different from any future results expressed or implied by these forward-looking statements. Listeners should not rely on any forward-looking statements. 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 Form F-3 and Endo's other SEC filings. Endo urges you to review these factors.

I would now like to turn the conference over to Ms. Carol Ammon, Chairman and CEO of Endo Pharmaceuticals. Please go ahead, ma'am.

Thank you. Good morning. We are holding this conference call with the investment community, following the release this morning of our first quarter 2002 results. We are pleased to have this opportunity to share our results with you. We are extremely pleased with our strong fiscal performance during the first quarter. We experienced strength across our product line and are particularly happy with the favorable market acceptance of our new strength of Percocet and the continued growth of Lidoderm.

For the first quarter of 2002, Endo's net sales grew 70 percent to 67 million, from 39.4 million for the same period in 2001. Percoset net sales grew 16 percent to 23.5 million, from 20.2 million in 2001. Lidoderm achieved net sales growth of 178 percent to 10 million from 3.6 million in 2001. Our generic products achieved net sales growth of 166 percent to 28.2 million from 10.6 million in 2001.

Consolidated EBITDA increased by 246 percent to 15.9 million from 4.6 million over the comparable 2001 period. We achieved this growth despite a 46 percent increase in R&D spending and a 48 percent increase in SG&A. We are committed to building a long-term value through our investment in research and development and sales and marketing, as well as the infrastructure to support our continued growth.

Due to this strong performance and our anticipated performance for the remainder of 2002, we are revising out previously provided guidance for 2002 upward. Before I get to our revised guidance and an update on our R&D pipeline, I would like to ask Jeff Black, our Chief Financial Officer, to review some of the details of our first quarter financial performance. I will then discuss our enhanced outlook for the year and why we remain excited about our growth potential. Jeff?

Thank you, Carol. As Carol mentioned, net sales for the first quarter of 2002 increased by 70 percent to 67 million from 39.4 million. During the fourth quarter of 2001, we launched to new strengths of Percocet - a seven-and-a-half milligram with 325 milligrams of acetaminophin and a 10 milligram with 325 of acetaminophin. These two dosage forms allow physicians the flexibility of increasing the dose of narcotic while still maintaining a low level of acetaminophin. We are pleased to see solid, early acceptance of these new dosage forms by physicians and pharmacists during the early part of 2002.

According to IMS data, these new doses now represent approximately 45 percent of all Percocet prescriptions dispensed. Percocet, as a family, according to IMS data, now represents approximately 14 percent of the Oxymorphone and acetaminophin market, compared to approximately 10 percent of the market at the time of the launch of these new strengths.

Net sales on Lidoderm, the first FDA approved product for the treatment of the pain of post-herpetic neuralgia increased to 10 million for the first quarter of 2002, from 3.6 in 2001. Lidoderm, which has orphan status through March 2006 and is also patent protected, continues to make great strides in terms of recognition in the pain community and to demonstrate favorable prescription trends. Lidoderm prescriptions, according to IMS data, are up 104 percent for the first quarter of 2002 versus the first quarter of 2001. Based on IMS data, the run rate on Lidoderm now is approximately $64 million.

Additionally, net sales of our generic products during the first quarter of 2002 increased to 28.2 million, from 10.6 million in 2001, primarily due to our extended release morphine sulfate product and our generic Endocet. In the future, generic competition to our products may have a material impact on our results of operations and cash flows.

Gross profits for the first quarter of 2002 increased 80 percent to 48.1 million from 26.7 million in 2001. Gross profit margins increased to 72 percent from 68 percent in 2001. This increase in gross profit margin is due to our continued focus on brand products and difficult to develop generic products that have the ability to generate brand-like margins. In addition, the increase in gross profit margins was also due to the existing fixed cost nature of certain of our manufacturing relationships. Although, from time to time, there maybe fluctuations in gross margins, due to product mix, expect gross profits and gross profit margins to continue to increase in the foreseeable future.

General and administrative expenses for 2002 increased 46 percent to million from 15.9 million in 2001, as a result of promotional efforts and support provided to our new products, including Lidoderm and the new strengths of Percocet. Research and development expenses increased 46 percent to 13.4 million from 9.2 million in 2001, as a result of our investment in new product development, including the development of MorphiDex and our extended release and immediate release versions of oximorphone.

Net income increased to 5.4 million or five cents per diluted share from a new loss of 14.2 million or a loss of 16 cents per diluted share in the comparable 2001 period. Effective January 1, 2002, we adopted the new goodwill accounting standards and will no longer amortize goodwill and work force in place. Excluding the amortization of goodwill and work force in place, net income increased to 5.4 million or five cents per diluted share from a net loss of 1.6 million or a loss of two cents per diluted share for the comparable 2001 period.

We generated cash flow from operating activities of 29.1 million in the first quarter of 2002 and our cash and cash equivalents totaled 117.7 million at March 31, 2002. During the first quarter of 2002, we utilized 6.7 million of our cash to repurchase 8.6 million of our Class A transferable warrants and warrants. We may used a portion of our remaining cash and cash equivalents to repay all or a portion of the notes that we have issued to the Bristol-Myers Squibb pharma company, formerly DuPont Pharmaceuticals or for possible acquisitions. We believe we are well positioned to pursue acquisitions and other strategic alliances which would, we believe, accelerate our specialty pharmaceutical company.

I would now like to turn the call back to Carol for a summary of our first quarter performance and our expectations for the remainder of the year. Carol?

Thanks, Jeff. I would like to summarize what the first quarter 2002 results means and indicate. It was an excellent quarter with net sales growth of 70 percent, gross profit growth of 80 percent and consolidated EBITDA growth of 246 percent. This growth underscores Endo's ability to consistently bring new pain products to market. We had previously indicated that we expect net sales for 2002 to be approximately 280 million and consolidated EBITDA for 2002 to be approximately $90 million.

Due to our strong first quarter performance and our anticipated continued strength of our product line, we are revising our guidance upward for 2002. We believe that we are well positioned to achieve net sales of approximately $300 million, an increase of 19 percent over our 2001 net sales and consolidated EBITDA of $100 million, an increase of 26 percent over our 2001 consolidated EBITDA.

The pain market continues to be a significant market, characterized by compounded annual growth rates of approximately 28 percent over the last several years. This, coupled with a rapidly changing environment that is focused on more aggressive treatment of pain will, we believe, enable Endo to continue to see strong growth in the future.

In addition, we are progressing toward our goal of filing three NDA products in 2002. We believe these three products - MophiDex, Oxymorphone oral extended release and oximorphone immediate release - will enable us to achieve our vision of providing new ways to treat pain. We continue to invest in research and development as we complete Phase III clinical studies and prepare for these NDA filings.

We are committed to ongoing investment in research and development as we begin to advance our earlier stage pipeline. We anticipate releasing data from the first of three studies late in the second quarter of 2002. In addition, we are coming close to completion of enrollment in both of the two remaining MorphiDex clinical studies. Although there can be no assurances, we continue to expect to resubmit an amendment to the existing MorphiDex NDA with the FDA in the late third quarter or during the fourth quarter of 2002.

In addition, we are nearing completion of our Phase III clinical trials on our immediate release oral version and extended release oral version of Oxymorphone. We believe we will be in a position to file both of these Oxymorphone NDAs in the second half of 2002. Finally, we anticipate being able to present data on MorphiDex and our extended release oximorphone product at the World Pain Congress in San Diego in August.

On behalf our entire organization, we are very pleased to have shared our first quarter 2002 results with you and would now like to open up the call for any questions that you may have.

Today's question-and-answer session will be conducted electronically. At this time, if you would like to ask a question, please press the star key, followed by the digit one, on your touch-tone telephone. Once again, if you would like to ask a question, press star, one. We'll pause for just a moment to give everyone a chance to signal.

We'll take our first question from with Salomon Smith Barney.

Good morning. Congratulations on just a great quarter here.

Thanks, .

Yeah. A couple of quick questions on Percocet and the environment out there. I mean, you've launched these new formulations. They have been very well accepted. Could you remind us if there's any price differentials between the new formulations and the existing formulations, if there's been any price increases in the quarter and inventories levels are out there.

Yes. On there Percocet, there is no price differentials with the new Percocet . Other Percocets, we have not had any price increases in the first quarter, and relative to the , the typical levels of inventory that the wholesalers maintained.

Yeah. Typically, they hold about one month of Percocet, except for times when we do raise price and permit a wholesaler buy in. But none of that has occurred. We're still at about one month.

Very good. Thank you. And then, just one quick question on the generic side of the business. Sometimes, in the past, you've given us a little greater on the difference between morphine sulfate and Endocet as far as sales growth have gone.

I'm sorry. As far as sales?

Yeah.

I would just indicate that we've had a strong performance across our generic line and part of that is due to strength in the extended release morphine sulfate and also our Endocet.

Yeah. As far as IMS data, we are now - we have about 69 percent of the entire MS Contin market in terms of units on prescriptions. We, in terms of Endocet, we currently have about 60 percent of that generic market - the generic market of Endocet is about 80 percent of the old Percocet higher strength products.

And, within the Percocet market, the Endocet market, pricing has been pretty stable or continued pressure.

Yeah. In terms of the generic market, morphine ...

Yeah.

... market stayed the same. Endocet has also stayed about the same.

Excellent. Thank you, very much.

Thank you.

We'll take our next question from with JP Morgan.

Thanks. Just help me understand the MorphiDex timelines a little bit better. If you're going to show the first data late in Q2 and you can still file in Q3 and Q4, does that mean the other two trials that are still ongoing are going to be part of that submission or would you go ahead and submit just with the results from the first trial?

Yeah. Let me try to give you a sense for the timing, but I'll go back to what was previously said, relative to the studies. We can't predict, at this point, how many studies we will file. What we need to do is see the results from each of these studies and determine, based upon the results of the study, whether we file with one or whether we file with all of them. So, it's going to be kind of a look-see as we go along.

And, as we indicated, we have completed enrollment and the first patients are finishing their three-month treatment period. So, we anticipate being able to get a look at that in - late in the second quarter and we'll analyze the results from those studies naturally and it's just tough to take a strategic look as to what we'll do, relative to the filing. Relative to the other two studies, we are pleased with the enrollment in those studies. We anticipate that we're nearing completion on these as far as the enrollment goes and then the patients will complete their three-month treatment period. And we believe that we'll still be in a position then to be able to file late third quarter or fourth quarter.

So, if the first trial comes back just overwhelmingly positive, there is some chance that you'll go ahead and file just with that data.

You know, again, , until we look, we have primary endpoints, we have secondary endpoints in those studies. Plus, we have all of the data that's been put together on the NDAs before. What is most important to us is that we believe that when we file this NDA, it's going to be an NDA that is approvable and one that we believe we have the best chance for commercial success. So, we really are not in a position to answer question as to whether it's one, two or three studies. It's the point we want a package that's going to be approved and commercially successful.

OK. The of sales reps that are doing all the selling on the new Percocet line extensions, is there any advantage to you bringing them in house sooner than expected? And, if so, what would be the effect on the P&L? How much more expensive would it be to have your own sales reps versus a CSO?

Yeah. It's an interesting question because we ask ourselves this every day. We analyze it as to when it makes most sense to do some type of conversion with the upcoming NDAs that we're filing. Also, the excellent prescription growth that we're seeing in Lidoderm and what we're seeing relative to Percocet. And we will, at some point in time, make a decision as to when that makes sense to do.

From a P&L perspective, we believe it's fairly neutral, in terms of no impact or little impact on the P&L. We do have an up-front charge that we would need to pay to convert this sales force to an internal force. It's a relatively small charge from the standpoint that, on a go-forward basis, we would incur additional charges internally. However, the flip side of that is we would not be paying profit to vendors. So, from a P&L perspective, it's fairly neutral. So, we'll continue to analyze this decision, really, based upon our new product launches, our existing products and when that's going to make the most sense to continue to get the type of value creation we're looking for.

Is it still around 200 reps?

Two hundred and thirty reps. We have 70 sales reps in the specialty force. And we have 160 reps in the community-based force.

And the last question is the - of the total Percocet number that you gave in the quarter - 28-and-a-half million - can we assume that the distribution between the new and the old versions is roughly what we see in the prescription data or are there some fluctuations in what wholesalers are buying from you?

That's roughly about right.

OK. Great. Thanks, guys.

We'll take our next question from with SG Cowan.

Hi. You've increased your sales guidance or guidance for total sales. I'm wondering if you've changed your guidance for any of the key products, specifically on Percocet or Lidoderm. And I have a follow-up on MophiDex.

OK. We haven't, in the past, given specific guidance on any of the products. Really, looking at the first quarter performance that we've had, the strength of the various products, such as Percocet and Lidoderm was what really enabled us to have the confidence in increasing that guidance to 300. But, specifically, , we have not given guidance as to individual products.

Yeah. And, really, the strength has been driven by the entire product line, not just Percocet and Lidoderm, but also ...

Right.

... on some of the generic products, pricing has stabilized or if not really dropped, and competition has not come as quick as might have otherwise expected. So, strength - the increase, really, is sort across the product line, not product specific.

OK. Thanks. And then, on MorphiDex, you've mentioned that we'll see data in August, at the pain meeting and I'm wondering if - which studies we should expect to see data from. Should we expect data from each MorphiDex study that's ongoing? And just - the data from the first study that's being presented in Q2 - is there a medical meeting we should be aware of or to look for that data to be presented at - or should we expect a press release?

Yeah. From the perspective of the World Pain meeting, we have submitted a number of abstracts and, of course, we have to wait back as to exactly which ones are going to be approved for communication at the Congress. We are, as we indicated, preparing to be able to announce results on the first of the three studies sometime during late second quarter. We have not set dates yet as to when we expect to be able to release data on the second and third study. So, that would be really unknown at this point in time.

Thanks.

Sure.

We'll take our next question from with Wachovia Securities.

Hi. Good morning. With respect to MorphiDex, just a follow-up. Carol, you said you're nearing completion of patient enrollment. Can you give us any color as to the size of those two studies?

Yeah, the - you know, each of these studies, we had moved forward with three studies. They're all in the 200 to 300 patient range. So, well, that's it - about 200, 300 patients per study.

And just ...

... study that we expect to be able to release data on in late second quarter is a little bit north of 200 patients. One of the other studies is around 200 patients. And the third one is about 300 patients.

OK. Great. And just a follow-up on your generic product line. You've got 28 million or so in this current quarter. Is that a good base number to go forward with? Because, in the past, you've indicated that you may be discontinuing some older products. Are you done with that so that we can build a base - based on the 28 million number?

If you could promise us exclusivity in generics, then you could probably build that as a base. We have weeded out a number of products from what we purchased from DuPont. Those aren't completely gone yet. My - our concern in terms of how we forecast for the future is we always anticipate competition. We have been effectively exclusive on morphine sulfate since we introduced the generic in November of 1998.

We are aware that Watson has launched on the 100 milligram only. They have not - they had received approval on just that 100 milligram. Had not launched it until just recently. So, we're not alone on the 100 milligram. We are still by ourself on the generic side, on the other four strengths of the MS Contin generic. We don't know what impact that may have by them launching one strength to either the number of units and/or the pricing.

On our - so, we're still the dominant player there. But time will tell whether pricing or number of units will erode in the future. Again, we always anticipate that we will have competition on these products and that pricing will erode, in fact, when we do our own forecasting. On the Endocet product, it's just us and Watson. We're about 60 percent of that market, in - on terms of the generic. Because of the success of our seven-and-a-half, 325 and 10325, that market is, in fact, going away, to a certain extent because we're eroding that market pretty quickly.

On the generic side, it's about 80 percent, generically eroded, which means the brand retains 20 percent. We have about 60 percent of that generic piece and pricing has stabilized today. But if there's new entrance into that market and/or somebody wants more share, pricing could erode. So, it's tough to predict that's a reasonable go-forward number. We would never do that, internally.

Great. Thank you.

Next, we'll take a follow-up question from with JP Morgan.

Just a quick one. If there's any progress on the litigation with Purdue over the OxyContin generic ANDA or what's the next step in court?

Yeah. We're still in the discovery phase of litigation. We're - we do not have a date for trial yet. We're anticipating that to be towards the end of the year or the beginning of next year. And our 30-month clock on that ends March '03. Meanwhile, our application is down at the agency and we are awaiting the status of that to be an approvable, of course - because since it cannot be approved until the litigation is complete or the 30-month clock. We currently are in the deposition phase of the litigation work. So, we're progressing, basically, is about where we are.

Have you thought about what you'd do in the event that the 30-month clock expires and the litigation's not resolved and the FDA goes ahead and approve it - approves it. Would you go ahead and launch?

Yeah.

We've thought about it a lot, but haven't made any decisions.

Yeah. I'd say, you know, I think we really have to wait and see what the climate is and we couldn't be in a position to really answer that question today.

OK. Thanks.

Sure.

We'll take our next question from with Investments.

Thank you, very much. If you can clarify a little bit what the status of the second and third trials for MorphiDex is, in terms of how many more patients you need for enrollment and when enrollment's expected to be completed.

Sure. Let me - let me just indicate that we, in the past, have not really given out numbers as to how many patients are in, how many more patients need to go, because we really don't find those numbers to be meaningful. It's really a question of determining how many valuable patients we have to be able to make a determination as to when enrollment is complete on that.

I think I can suffice it to say that the other two studies, as I indicated, I'm pleased with where enrollment is going and that we believe we are nearing completion of the enrollment phase. And then, those last patients, then will complete their three-month treatment phase. And in such a manner that we still believe we're in a position for filing in late third quarter or fourth quarter of this year.

And how long once the patient enrollment is completed and then they've gone through their trials - how long after that would the results be ready on these two trials?

Well, once the patients - the last patients are in, as I said, they have to go through a three-month treatment phase and then it's a question of the databases getting locked and all of the data being evaluated and the results being tabulated. And then, getting the answers to that. So, it takes a period of time after enrollment is complete.

Do you know approximately how long that would take - whether it's a, you know, a one month or two ...

It's a minimum of one month for us to understand the top-line results. To delve deeper into the data, it's a couple months after that.

And how long after that could an FDA filing be made?

Shortly thereafter. Because the filing is on, you know, the accumulation of the data is ongoing as you'd analyze the data. So, shortly thereafter.

Yeah. Because, you know, we don't wait until - we're not going to wait until everything is completed. There's a lot of sections and a lot of work on the NDA that can be done as we go along. And, I'd just clarify, too, that this is an amendment to an NDA that's already on file. So, this is a six-month review under .

Great. Thank you, very much. I ...

Sure. Thank you.

We'll take our next question from David Einhorn with Greenlight Capital. Mr. Einhorn, your line is open. Please go ahead, sir.

OK. Thank you, very much. My question's been answered.

We'll go next to with .

Good morning. Thanks for taking my question. I was wondering if - you mentioned that there'll be some data on Oxymorphone ER at the World Pain Congress. Are you planning on any other public forums to disclose data over the course of this year for that product?

Yeah. At this point in time, we have looked at some of the meetings that are coming up and we are submitting abstracts, depending upon the type of meeting. So, I would really consider the forum to be the scientific type meetings. We will look at publications as well, but that schedule has not yet been completed. But, certainly, we are nearly completion of these Phase III trials and look forward to anticipation of filing these NDAs in the second half of the year.

Great. Thanks. And just a quick follow-up. From a - from a sales force perspective, you're obviously adding some more drugs and you're filing a few this year. Those will come on, you know, hopefully 12 months hence. What are your plans to grow the sales force, if any?

Sure. We're looking at that now. As we finish up these studies and as we get the results from all the studies and then look at the benefits and the positioning of these products in the marketplace, we will look at what the appropriate size of the sales force needs to be. And then, we will build accordingly to make certain that it is the right size to be able to maximize the commercial value of all of these products. But that is going to take time until we really have all of the final results in and can really look at the clinical positioning of these products.

Yeah. I mean, just briefly, our sales force, for the size for the existing product line we have today, we are waiting for clinical results and what the benefits and the potential for the products are and we'll right size it accordingly. Our feeling today is there will be some growth in the overall sales force, but exactly how much and in which of the special forces versus the sort of general force, it's unclear today.

Great. Thanks, very much.

Sure.

Next, we'll take a follow-up question from with Salomon Smith Barney.

Just a quick question on some of the other platform products. Where are they - what's their status and development as you continue to move forward with MorphiDex?

Sure. We currently have three other products that are in Phase II. That's a combination of oxycodone and dextromethorphan. The combination of hydrocodone, acetaminophin and dextromethorphan, and then the combination of oxycodone, acetaminophin and dextromethorphan or Percocet , if you will. Those all are currently in the stage of Phase II and we're progressing those as we go forward.

We are investing in those products this year. We are starting and continuing to progress within the Phase II as you can appreciate and find the three NDAs on the Phase III products is the number one priority for the year. But those are getting quite a bit of attention as well.

Absolutely. The idea really has been to make certain that we're able to leverage the technology - the NDA technology and those would be the next three products in the hopper to go forward. And already in Phase II.

And approximately how big are Phase II studies as far as number of patients involved?

It's probably going to be a little bit different for each one and it's going to grow as we go along. I don't think I could give you any definitive numbers at the moment, .

OK. That's fine. Thank you.

Next, we'll take a follow-up question from with Wachovia Securities.

Hi. Just a quick follow-up on the oxycodone paragraph four filing. Is there any chance that your court case might get consolidated with the other pending cases that are also in New York?

Right. We would really have no way of knowing that. I guess, anything is possible but, at this point in time, we don't know.

But there hasn't been any petition as far as you are aware of to consolidate.

We're not aware of that. There may have been. It may be a strategy utilized by the others.

OK. Great.

Sure.

We'll go next to , private investor.

Congratulations on a great quarter.

Thank you.

Quick question on the balance sheet for a moment, specifically liabilities and stockholders equity. What is the status of the company's long-term debt?

I'll turn this over to Jeff in a moment, but we had a follow-on offering at the end of last year and we paid down the debt from the initial management buyout back in 1997. There is still some debt on the balance sheet as a result of notes that we have from a manufacturing agreement. And, Jeff, you might want to elaborate on that.

Yeah. We did pay down all of our senior debt. We do have a $75 million revolver, which we have not utilized, as well as $25 million delayed draw loan, which we have not utilized. We have, on the balance sheet, about $92 million of debt. We - that debt matures on August 26 of 2002 so, therefore, it's classified as current portion. We do have cash on hand of $117.7 million.

So we have cash on hand in excess of the debt balance. We have the ability to extend those notes for another two-and-a-half years through February 2005 at a fairly expensive interest rate. So, we would either utilize our cash on hand to repay those notes, if we haven't otherwise utilized that cash for acquisitions and/or refinance that debt at that time. So, other than that, we have no other debt.

That's great. Thank you.

And I just wanted to follow up on question. I've been told that Teva has moved to consolidate with our case in the southern district of New York on the oxycodone product. But the status of that, we don't know, other than it moved for that.

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Ms. Ammon for any additional or closing comments.

Oh, I'd just like to take a moment and thank everyone for participating in the conference call. We certainly appreciate the opportunity to share our results with you. So, thank you.

That concludes today's conference call. We thank you for your participation. You may now disconnect.