Endo International PLC (ENDP) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Endo Pharmaceutical's teleconference to discuss 2002 fourth quarter and full year financial results. This call is being recorded.

Before we begin today, I would like to remind you that during the course of this call Carol or Jeff may make forward-looking statements concerning such topics as future results, product performance, and anticipated timing of FDA approval of certain of the company’s 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 as such as, we believe, expect, plan, anticipate, predict or similar expressions. By their nature, these forward-looking statements involve known and unknown risks and uncertainties that may cause the company's actual results to be materially different from any future results 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 SEC filings. We urge you to review these factors. Ms. Ammon, you may begin your conference.

Thank you and good morning. Earlier today, we reported our financial results for the 2002 fourth quarter and full year. We thank you for dialing in and giving us the opportunity to discuss these results with you as well as other developments. Joining me on the call this morning is Jeff Black, our Chief Financial Officer. Now, I would like to take a few moments to briefly summarize our financial results.

Net sales for the quarter totaled a $113.5m, a 45% increase from the year ago fourth quarter. The major factors driving this growth are strong performances once again from our leading branded products Percocet and Lidoderm and from Morphine Sulfate extended release and Endocet on the generic side. Gross profit increased to $85.7m, a 48% increase from the year ago fourth quarter. Consolidated EBIDTA at $47.9m was more than double the year-ago quarter. Net income for the 2002 fourth quarter excluding certain charges was $30.1m or $0.29 per diluted share versus $10.5m or $0.11 per diluted share in 2001.

Turning now to our performance for the full year in 2002, net sales totaled $399m, a 58% increase from 2001. Consolidated EBIDTA rose 99% to $158.1m. Excluding the impact of certain charges each year, net income grew to $82m or $0.80 per diluted share in 2002 from $27.6m or $0.30 per diluted share in 2001. We reiterate our previously disclosed guidance for 2003 of approximately $440m in net sales and approximately $160m in consolidated EBITDA which assumes generic competition on our extended-release Morphine Sulfate in January 2003 and assumes generic competition around mid year for our 7.5/325 and 10/325 strengths of Percocet. In addition to these outstanding financial results, we were active during the quarter and the year in taking the kind of steps that will form the foundation for sustaining our growth in the future and I will come back to a few of those points later in the call. Before I do, however, Jeff will review in greater detail our fourth quarter and full year results. Jeff.

Thanks Carol. As Carol mentioned Endo's net sales for the fourth quarter of 2002 were up 45% to a $113.5m. For the full year, net sales grew 58% to $399m. Net sales of Percocet, our largest selling product, grew 57% to $44m for the quarter and were up 43% to a $144.6m for the year. In April 2001, generics drug Percocet 7.5/500 and Percocet 10/650 were launched which adversely impacted net sales in 2001. The growth in 2002 reflects the continued market acceptance of the Percocet 7.5/325 and Percocet 10/325 that we launched in the fourth quarter of 2001. These dosage forms allow physicians the flexibility of increasing the dose of narcotic for effective pain management with a lower level of acetaminophen. We are pleased that the early acceptance of these new formulations by physicians and pharmacists that we observed in the first nine months of the year has carried over to the fourth quarter. According to IMS data, these new dosages now represent approximately 65% of all Percocet prescriptions dispensed. Percocet as a family, according to IMS data, now represents approximately 15% of the oxycodone/acetaminophen prescription market compared to approximately 10% of that market at the time of the launch of these new strengths.

Net sales of Lidoderm grew 68% to $23.3m for the quarter and were up a 103% to $83.2m year-to-date in 2002. Lidoderm, a patch approved for post herpetic neuralgia, has [inaudible] drug status until 2006 and patent protection beyond that. Market awareness and acceptance for the product continues to grow as more physicians and patients recognize its benefits. Lidoderm prescriptions, according to IMS data, were up a 104% for the fourth quarter and a 107% for the full year 2002 versus the same period to 2001. Based on IMS data, the run rate on Lidoderm is now approximately $116m.

Net sales of Endo's generic products also showed strong growth increasing 47% to $39.9m for the quarter and 77% to $149.1m for the year. This is due mainly to the strong sales of our extended-release morphine sulphate product in our generic Endocet. For the year in 2002, generic sales represented approximately 37% of Endo's total net sales. It should be noted that generic competition with our products may have a material impact on our results of operations and cash flows in the future.

Gross profit for the fourth quarter 2002 increased 48% to $85.7 million and rose to $300.1 million for the year, up 69% from 2001. Gross profit margins increased 76% and 75% for the quarter and year respectively in 2002 versus 74% and 70% in the same periods of 2001. During the fourth quarter of 2002, we substantially completed the manufacture of the estimated launch quantities of our extended release oxycodone tablets. Due to the uncertainties surrounding the ultimate timing of the product's final approval and launch, we recorded an $8 million charge during the fourth quarter to fully reserve for this inventory. Excluding this charge, which is included in cost of goods sold, gross profit for the fourth quarter would have been 83% versus 74% in the same period of 2001.

The 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 product mix and the existing fixed cost nature of certain of our manufacturing relationships. Selling, general and administrative expenses for the fourth quarter of 2002 were up 26% to $31 million from the year ago fourth quarter. This increase reflects the promotional efforts and support providing to Lidoderm and the new strength of Percocet as well as support provided to our new product pipeline. For the year, SG&A expenses totaled to $110.9 million in 2002 up 39% from 2001. Research and development expenses of $12.9 million for the 2002 fourth quarter were down slightly from the same period a year ago.

For the year, our investment in R&D grew to $56.8 million, a 46% increase from 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 oxymorphone. As previously disclosed, MorphiDex will not be approved prior to March 31st 2003.

As a result, three events will occur. One, the warrants held by Endo Pharma LLC, an affiliate of Kelso & Company (ph) in which certain members of management have an interest and others became exercisable into $29.7 million shares of company common stock, thereby increasing Endo Pharma LLC's ownership of the company to approximately 75% from approximately 68%. Endo Pharma LLC has advised the company that it has exercised this warrant thus increasing the total current shares outstanding to approximately $131.7 million from a $102.1 million.

Second the Endo Pharma LLC 2000 supplemental stock option plans became effective on January 1st 2003 resulting in the issuance of approximately $10.7 million stock options to certain employees and members of management. Because approximately $9.2 million of these options were vested upon their issuance and they will take a non-cash compensation charge of approximately $48.5m in the first quarter of 2003. However, no additional shares of Endo common stock will be issued because these stock options are exercisable only into shares of company common stock that are held by Endo Pharma LLC. Accordingly these stock options do not dilute the public shareholders. The weighted average exercise price of these options was $2.42 per share.

Finally, if the publicly traded class A transferable warrants, traded on NASDAQ under the symbol ENDPW and class B nontransferable warrants will expire on March 31, 2003 and have no economic value. Accordingly the company intends to de-list these warrants upon their expiration.

During the fourth quarter of 2002, we have certain charges that I would like to review with you before I turn the call back over to Carol and we take your questions. These items included the following. As I mentioned during the fourth quarter of 2002, we substantially completed the manufacture of the estimated launch qualities of our extended-release oxycodone tablets. However, due to the uncertainty surrounding the [inaudible] timing of the product's final approval and launch, we took an $8m charge in the 2002 fourth quarter to fully reserve for this inventory. During the year ended December 31, 2002 we reported $34.7m for non-cash compensation charges related to the vesting of non-dilutive Class C 3 stock options. During the third quarter of 2002, we recorded an estimate based on the probable vesting of these options in the amount of $40.4m. We adjusted this amount in the fourth quarter based on the actual vesting occurring on December 31, 2002. The adjustment of $5.7m was recorded as income in the fourth quarter reflecting the difference in the market price of the company's common stock at the end of the fourth quarter of 2002 compared with the third quarter of 2002. During the year ended December 31, 2002 Endo also recorded $20.3m for purchased in-process research and development charges related to the previously announced acquisition of BML Pharmaceuticals.

During the third quarter of 2002, the company recorded $13.3m based on preliminary estimates. Based on the final appraisal, it was determined that the fair value of the purchased in-process research and development was approximately $20.3m. Accordingly, during the fourth quarter of 2002, we recorded an additional non-cash charge of $7.0m and a corresponding liability to reflect an additional element of cost of the acquired entity related to the contingent consideration that would be paid to the former owners of BML Pharmaceuticals if the oral mucusitis product is approved by the FDA. Upon FDA approval of this product, the former owners of BML Pharmaceuticals will receive a $32m payment in addition to an earn-out based on a percentage of net sales of the product. The former owners of BML Pharmaceuticals also are entitled to receive an earn-out based on a percentage of net sales of certain of the other products in the BML pipeline.

If any of this contingent consideration is paid, additional purchase price may be recorded.

Excluding these charges, net income was $30.1m or $0.29 per diluted share for the three months ended December 31, 2002 compared with $10.5m or $0.11 per diluted share in the same period of 2001. Further, excluding these charges net income was $82m or $0.80 per diluted share for the year ended December 31, 2002 compared to $27.6m or $0.30 per diluted share in the same period of 2001. We generated cash flow from operating activities of $109.6m for the full year of 2002. We had cash and cash equivalence of $56.9m as of December 31, 2002. During the first quarter of 2003, we paid the SkyPharma (ph) the $25m upfront payment related to the license of marketing rights to Depomorphine and Propofol IDD-D. We feel our solid financial position provides us an opportunity to pursue acquisitions and other strategic alliances, which would, we believe, accelerate our growth as a premier specialty pharmaceutical company. I would now like to turn the call back to Carol for some additional comments about the fourth quarter performance.

Thanks Jeff. I think as of you have all just heard 2002 was really an excellent year for Endo from many different perspectives, financial growth as well as really positing our company for the future. So, what I would like to do before we open this up for Q&A is just really reiterate some of the highlights of 2002 for you.

Our financial results where outstanding, which allowed us to invest further in our sales and marketing infrastructure and in R&D, creating long-term value. We had sales of $399m, compared with $252m in 2001, that was a growth rate of 58%. Even with significant investment in the business, we grew EBIDTA to a $158.1m compared to $79.5m in 2001, almost a 100% increase. Net income excluding the impact of certain charges was $82m or $0.80 per diluted share versus $27.6m or $0.30 per diluted share in 2001.

Lidoderm rose 103% to $83.2m for the year and currently has a run rate of $116m. We expect continued significant growth from this patent protected product. Net sales of Percocet were $144.6m in 2002 versus $101m in 2001, a 43% increase. During the year the company also repaid its promissory notes to Bristol-Myers Squibb and we became debt free. We positioned ourselves extremely well from a manufacturing perspective by continuing the transfer of the majority of our products to Novartis Consumer Health, Inc. Although we were disappointed about our clinical trial results on MorphiDex, we never intended it to be the only product in our pipeline. We successfully completed the clinical trials on both the oxymorphone extended-release and immediate-release products and we filed two NDAs with the Food and Drug administration in December. These important products will compete in the $3b strong opiate market.

Annual sales volume in this market has more than doubled since 1999. To further enhance our long-term value, we made significant strides in the development of our pipe line. Consistent with our vision to become a premier specialty pharmaceutical company anchored in pain management with a balanced focus in complementary therapeutic areas. Specifically, in July we acquired BML Pharmaceuticals and among others, their lead products [inaudible] EN3247, an oral rinse for the prevention of oral mucusitis. This product now in Phase III is anticipated to be filed in late '03, early '04, and will receive fast track review at the Food and Drug Administration. This product enables us to move into the palliative care side of Oncology. In November, we announced a collaboration with DURECT (ph) Corporation where Endo will market their Chrongesic, a patent protected implantable pump containing sufentanil intended to deliver a 3-month dose of pain medication. This drug will compete in a strong opiate market and has in our belief the potential to change the way in which chronic pain is treated. On December 31, we concluded a transaction with SkyPharma where Endo will market both Depomorpine and Propofol.

Depomorphine, in phase III and anticipated to be filed in the middle of this year, it is a sustained-release injectable formulation of morphine sulfate administered epidurally and it is intended for the management of post-operative pain. Propofol IDD-D is an IV formulation of propofol intended for the maintenance of anesthesia in adults during surgery and for sedation of adults hospitalized in an intensive care setting. Propofol IDD-D is currently being studied in Phase II. We believe that both of these products were important pipeline additions to Endo and allow us to move into the critical care side of pain management. As you can see, Endo has positioned itself extremely well for long-term value creation. With two NDA filings in 2002 plus the addition of two Phase III and two earlier stage products, Endo could potentially be in a position to launch four new products in 2004 should they all stay on schedule and be approved by the Food and Drug Administration. On behalf of all the Endo employees we are extremely pleased to have presented these results to you. And now Jeff and I would be happy to take your questions.

At this time, I would like to remind everyone in order to ask a question please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Corey Davis from JP Morgan.

Hi guys. It is actually Deb Nobleman (ph). Congratulations, great quarter.

Thanks.

I just had a question on Lidoderm. I noticed that the sequential prescriptions were up about 21%, but that the revenue growth was sequentially down again. Do you guys have a good feel for a wholesaler pattern or if there is any de-stocking that has been going on?

We have, I guess, a very good feel of what is in the pipeline with our wholesale customers and the retail chain customers as well. We would have to characterize the inventory levels that are there, at the end of the fourth quarter as relatively low versus prior quarters and even at an absolute level.

So, you don't expect to -- you think the sequentially down revenue was probably some de-stocking but that is over now?

I don't know that this is going to be the level that we are going to maintain it at, but it is a relatively low level of -- versus historical as well as versus -- on an absolute basis.

Okay, great. Thanks a lot, guys.

Thank you.

Your next question comes from Michael Tong (ph) of Wachovia Securities.

Hi. Good morning. Congratulations on the quarter.

Thank you.

Couple of quick questions. One, the gross margin continues to improve and I was wondering -- you know, absent generic competition to the new strengths of Percocet and additional competition in MSER. Is that a level that is sustainable? And two, I was curious about the decision to begin the manufacturing of generic OxyContin and then write off the inventory. Is there some legal development that we need to be aware of on that front? Thanks.

Sure. I will take the margin question first. We did have a favorable mix of margins during the fourth quarter absent the reserve we took for the OxyContin inventory. We have said in the past that we do expect our inventory level or the gross profit margins to continue to increase. Some of that is again due to the fact that some of our relationships are of a fixed nature and that any time sales are increasing that's going to increase the gross profit margin as well. Also, the mix of products as the brands and the hard to do generics that [inaudible] margins increase, obviously margins will continue to increase. So, I think that type of level that we experienced in the fourth quarter absent the charge is potentially sustainable in future, but may be at the high end of what is sustainable.

Related to your second question, there are no regulatory developments necessarily that prompted our wanting to take that charge. We had planned for some time to be commercially ready to be able to launch the product in the early part of 2003. The manufacturing plan was set into place to accomplish that. We were able to accomplish that and become commercially ready to launch. However, we don't have a trial date as of today. We don't know what the potential timing of a trial date could be or obviously the outcome of that trial. So, I couldn't pin down and say there was one event that characterized during the quarter that said, lets reserve this inventory because of our uncertainty but, as you are all well aware, there is a dating on all inventory reproduced and if we are not certain that we're going to sell the product, or there is some uncertainty as to whether we sell the product, we conservatively decided to take a reserve for that.

Great. If I can just sneak a follow up in when is the expiration dating and two, have you filed your motions for summary judgment in that case?

As far as the dating, the dating is two years for any inventory until you are able to demonstrate that you can extend the dating beyond that obviously for new products you get two years dating therefore and as far as summary judgment, I'm not sure we're able to discuss strategy there to the extent its public record due to courts. I can encourage you to go look at that but otherwise we are not able to discuss the strategy at this point.

Okay, thank you.

Thanks Mike.

Your next question comes from John Curran (ph) from Abicus Capital (ph).

On the generic OxyContin, when are you supposed to get a trial or are you supposed to hear about what your trial date would be?

As far as the trial date, it really is up to the court to determine when that date is and we do not know. We are anticipating that it'll probably be later in this year but again we don't have a date as yet.

So you don't have any idea even as to when you are going to get a date? Not that you know when the date is, but you don't even know when you are going to get a date?

There is nothing in the procedure that would say you have to established a schedule date by a certain date. We know the end of the 30-month clock, the first 30-month clock is the end of March 2003.

So is it reasonable to expect that you'll hear what your trial date is within a couple of months of that?

We hope to but it's not within our control to do it, it is up to the courts.

Okay. I missed the first part of the call and so I don't know if you went over this, if you did just tell me. What's the status on the generic competition on the morphine sulfate?

As of right now, there is nobody that has been approved for generic morphine extended release. However we did, in our guidance for 2003, predict that we would have competition as of January 2003, but as of today there are no approvals out there. Other than that, as we had disclosed, I guess, in 2001, Watson (ph) did receive approval of the morphine sulfate extended release 100 mg, but to date have not launched that single strength.

Okay and what's the schedule for, when you guy's are going to present the oxymorphone data?

We will be presenting some data at the upcoming American Pain Society Meeting, which I believe is around the 20th of March.

There is five abstracts that have been accepted for presentation at that meeting in March.

Thank you.

Thank you.

Your next question comes from Dave Winley (ph) from Jefferies & Company.

Hi. Good morning.

Hi.

I wanted to ask a question about the focus of your development efforts talked about, you mentioned in your prepared remarks the cash that is available to you to look at additional layers of growth. Are you looking beyond the timing of the depomorphine and other products that you brought into the pipeline or possibly earlier than that to bridge a gap between your expected generic Percocet and when those products could be launched?

Sure. Let me just give an overview of what our philosophy is relative to the pipeline. This year was very important to us, because we were able to add some products that are in Phase III and are relatively near-term products, assuming that the schedules stay on track and the agency approves them. But we also did put some earlier stage Phase II products in the pipeline. We also have not disclosed everything that is in our pipeline and our philosophy is to continue with the track record we have had from a business development perspective with balancing the portfolio from a risk, reward basis and from a timing perspective, so that we can continue to bring over time important new products to the pay markets and the complementary markets. So the fact that we became debt free this year and the fact that our financials are as strong as they have been and also I think from the perspective that we built some excellent credibility as a partner, if you look at the Lidoderm performance. So that we are able to really go out now and I think be able to talk to a lot of different folks about opportunities for filling the pipeline. We also look at opportunities from a commercial perspective as well. So the idea with the pipeline to answer your question really is going to continue to balance that from an early stage to a late stage perspective so that we can continue to bring out new products year-after-year.

Okay, great. If I can, I will just drill into that one time and answer it if you can. Can you say yes or no, are you looking at products that could generate revenue for Endo in 2003?

Yeah.

Okay. Bye.

Your next question comes from Andy Schopick (ph) of Nutmeg Securities.

Carol, first I would just like to ask you if there are any seasonality related matters here that you can comment on in terms of the business looking out over the next calendar year?

This is Jeff, Let me answer that. Although we do have some cough, cold and flu products in the product line, that’s a relatively small percentage of our overall sales. So there's not really any seasonality necessarily in our net sales, our GAAP sales. What typically happens is the wholesaler buying patterns is what its fairly either inconsistent and/or unpredictable and quarter by quarter may change. We watch both the prescription trends and the pipeline that is pipeline reports that are generated to make sure that we can follow what the wholesaler's have on hand versus what we are shipping out the door. So there, I guess there is no seasonality in the business so to speak but there are buying patterns that are sometimes inconsistent amongst the wholesalers and there is a significant concentration of customers in our business because, substantially because of the narcotic nature of a lot of our products, as well as just the concentration in industry amongst the big retail chains and the wholesale, wholesalers themselves.

Do you have 10% customers per se that you can disclose?

We have historically had at least 4, sometimes 5 depending on the industry consolidation. The obvious story the wholesalers are all greater than 10% as well as one pharmacy chain has been 10% for quite a while.

Okay, Jeff on the balance sheet. I do have a couple of questions for you.

Sure.

Other intangibles net of $36.7 million up from the $12.5m. Now what would the other finite [inaudible] intangibles, I guess, that were added to the balance sheet. What do they arise from?

It's entirely arising from the SkyPharma license for the marketing rights to Depomorphine and Propofol IDD-D.

Okay, and can you, you do have a line item to depreciation and amortization on the P&L. What was the amortization associated with just the intangibles in the fourth quarter, and can you give us some guidance on what the amortization of these intangibles will be in the current year?

Intangible amortization historically has been about $750,000 a year.

It will be higher though this year, won’t it?

It will be higher this year, the $25 million that we paid for the rights to Depomorphine and Propofol were still, I guess in process. It's a 2003 item that was affective December 31st. We'll start amortizing that first quarter this year. It's going to be an asset somewhere in the range of 15 to 17 years that we would amortize that $25 million over.

The $25 million over 15 to 17 years?

Yeah, that's our estimate as of this second.

Okay. And also, with respect to cash flows based on the guidance you have given us for revenue and EBITDA in 2003. What would you anticipate cash flow from operations would look like in 2003? Can you comment any further about what you might expect to use for investing and financing activities this year?

Sure. As far as financing activities, there are no planned financing activities offerings, or there is no debt to be repaid or anything like that. Obviously, there can be some small financing activities based on options, exercises, etc. So, there is nothing planned about financing activity. In the investing activity, we have historically had capital expenditures, mostly computers and lab equipment and things of that nature. During 2003, we are building a new R&D facility, and it is an existing facility and we are renovating it for our group that is in Long Island and that is expected to be several million dollars of capital expenditures this year to renovate that into a lab facility that is of very high quality. So, I think this year capital expenditures will be higher than historically that they have and then, obviously in investing activities we would include any other acquisitions which we certainly are trying and hoping to make during 2003. As far as cash flow from operating activities, this year we had EBITDA for the year about a $158m, generated cash flow from operations about a $109m. Our guidance is a $160m in EBITDA for 2003. Working capital obviously is a thing that can swing that one way or the other. There will be, if things go well in terms of potential product launches or maybe some buildup of inventory towards the end of the year in order to support some of the launches that we expect in 2004. Receivable - it should be nothing really unusual that could occur there, provided sales are relatively constant with where they are this year.

Okay. Thank you.

Thank you.

At this time again, I would like to remind everyone, in order to ask a question please press star then the number one on your telephone keypad. There are no further questions. Ms. Ammon, are there any closing remarks?

Yeah. I just want to say thank you to everyone for being on the call today and we look forward to keeping you apprised of our progress as the year progresses. So, thank you and goodbye.

This concludes today's conference call. You may now all disconnect.