Endo International PLC (ENDP) 2003 Q3 法說會逐字稿

Good morning and welcome to Endo Pharmaceuticals third quarter 2003 teleconference. This call is being recorded. Before we begin today, I would like to remind you that during the course of this call, Carol, Jeff or David may make forward-looking statements concerning such topic 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 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.

[Inaudible] should not rely on any forward-looking statement. 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 and under this statement risk factors and Endo's registration statement on Form S-3, filed with the SEC on July 1, 2003. We urge you to review these factors.

In addition, during the course of this call, Carol or Jeff may refer to non-GAAP financial measures such as consolidated EBITDA, adjusted net income and adjusted diluted earnings per share. These non-GAAP financial measures are not prepared in accordance with generally accepted account principles in the United States and may be different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Endo's earnings press release issued this morning, Endo's reasons for including these non-GAAP financial measures and their earnings announcement to receive (ph) the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

I'd now like to turn the call over to Carol Ammon. Please go ahead, ma'am.

Thank you. Good morning. Earlier today we reported our financial results for the 2003 third quarter and year to date. We're pleased and excited to have this opportunity to discuss those results with you as well as other recent developments. Jeff Black, our Chief Financial Officer, is joining me on the call this morning as is Dr. David Lee, our Executive Vice President of R&D and Regulatory Affairs.

First, I'd like to briefly summarize our financial results. We had another outstanding quarter. Net sales, led by the continuing success of Percocet and Lidoderm on the branded side and by our morphine sulfate extended release and Endocet generics totaled $149.4 million. This represents a 35% increase from the year-ago third quarter. Gross profit was 122.3 million and this was up 42% from the year-ago third quarter. Earnings per diluted share for the third quarter of 2003 were 30 cents compared with a net loss of 18 cents per diluted share in the comparable 2002 period.

Adjusted earnings per share for the third quarter of 2003 increased to 33 cents per diluted share compared with 26 cents in the comparable 2002 period. Consolidated EBITDA increased to $72.9 million and this is a 48% increase from a year-ago quarter. It's worth noting that we achieved this growth against the backdrop of an increase in R&D investment and SG&A. We remain committed to building long-term value by reinvesting in these critical areas of our business in support of our continued growth.

I'm also pleased to report a strong year-to-date performance as well. For the nine months ended September 30, 2003, net sales grew 59% to $453.7 million. Earnings per diluted share for the nine months ending September 30, 2003 were 77 cents compared with nine cents in the comparable 2002 period. Adjusted earnings per share for the nine months rose to $1.04 per diluted share in 2003 compared with 53 cents in 2002. For the first nine months of 2003, consolidated EBITDA was $228.9 million. This is up 108% from 2002.

Though the arrival of generic competition to Percocet and our extended-release morphine sulfate generic product will have a significant impact on the net sales of these two products in the fourth quarter, we are revising upward our total net sales guidance for 2003 based on our year-to-date performance and expectations for the fourth quarter. We believe we are currently well positioned to achieve 2003 net sales of approximately $570 million versus our previous guidance of 535 million. We anticipate GAAP earnings per share for the year ended December 31, '03 to be approximately 35 cents per share.

Now, as discussed in the press release, during the fourth quarter of 2003, we estimate recording a charge of approximately $25 million to reserve the inventory of our generic Oxycodone Extended Release tablets that we will have manufactured during the fourth quarter. In addition, in October 2003, we recorded a non-cash compensation charge of $96 million relating to the vesting of our Class C4 Endo Pharma LLC stock options.

As a reminder, no additional shares of company stock will be issued, however, because these stock options are only exercisable into shares of company common stock that are held by Endo Pharma LLC. Accordingly, these stock options will not dilute the ownership of our other public stockholders. Despite the estimated $25 million Extended Release Oxycodone inventory charge, we are not changing our full-year estimates for consolidated EBITDA of approximately $238 million and adjusted earnings per share of approximately $1.08. I would like to remind everyone that there can be no assurance of the company achieving these results.

Now in addition to our outstanding financial performance, I'd like to mention some other recent notable developments. On September 15, we announced that we had exercised our option to convert our community-based contract sales force to full-time Endo employees from the contract employees provided by Ventured Health U.S. Sales, Inc. (ph) . This conversion will be effective on December 15, '03 and this will bring Endo's internal sales force to a total of 231 sales reps. This conversion reflects not only the commercial success we've enjoyed to date, but also our prospects for continued growth, particularly with Lidoderm.

On September 18, our development partner, SkyePharma, announced that the FDA had accepted for substantive review its NDA for DepoMorphine, a novel epidural analgesic intended for the management of moderate to severe post-operative pain. The NDA acceptance triggered a $5 million milestone payment to SkyePharma as part of the original development and commercialization agreement between the two companies, which was reached in December, '02. On October 20, we announced that we had received approvable letters from the FDA with respect to our Oxymorphone Immediate Release and Extended Release NDAs, which we had submitted to the agency in December, '02. I will discuss these further in a moment.

Now, Jeff will review, in greater detail, our third quarter and nine month results.

Thanks, Carol. As Carol mentioned, Endo's net sales for the third quarter of 2003 grew 35% to 149.4 million. For the nine months, net sales rose 59% to 453.7 million. Net sales of Percocet grew 61% to 59 million for the quarter and were up 66% to 166.9 million year to date. This growth reflects a strong market acceptance of the Percocet 7.5/325 and Percocet 10/325 that we launched in the fourth quarter of 2001.

These dosage strength forms allow physicians the flexibility of increasing the dose of narcotic with a reduced level of acetaminophen. Prescription growth for Percocet was up 20% and dispensed unit growth was up 32% in the third quarter of 2003 compared with the comparable 2002 period. Prescription growth for Percocet was up 25% and dispensed unit growth was up 39% for the first nine months of 2003 compared with the comparable 2002 period.

As Carol noted, we expect to add generic competition to Percocet 7.5/325 and 10/325 dosages as early as this week. As a result, we expect this to have a negative impact on sales of Percocet in the fourth quarter. We are commercially ready and expect to launch our own generic version of these strengths as early as this week.

Net sales of Lidoderm grew 51% to 37.5 million for the quarter and were up 116% to 129.6 million year to date in 2003. Lidoderm, a patent protected analgesic patch that has Orpan (ph) status through March 2006 and patent protection beyond that has been gaining strong market awareness and acceptance as more physicians and patients recognize its benefits.

As we discussed last quarter, at the end of the second quarter, due to the speculative buying by our customers based on their anticipation of a price increase, customer inventory levels grew to a couple weeks more than normal. In July 2003, we did take a price increase on Lidoderm. During the third quarter, our customers' inventories returned to their normal levels.

Prescription growth for Lidoderm was up 91% and dispense unit growth was up 101% in the third quarter of 2003 versus the comparable 2002 period. Prescription growth for Lidoderm was up 93% and dispense unit growth was up 104% for the first nine months of 2003 versus the comparable 2002 period. Based on IMS data, the run rate on Lidoderm is now approximately 200 million. We believe Lidoderm will achieve net sales of $175-180 million in 2003.

Our generic products achieved net sales growth of 12% for the third quarter, rising to 49.2 million, primarily due to our extended release morphine sulfate product and our generic Endocet. For the nine months, generic sales were up 138 million in 2003, up 26% from the same period of 2002. As Carol noted, we expect generic competition to have a negative impact on sales of our morphine sulfate product in the fourth quarter.

Gross profit for the third quarter 2002 increased 42% to 122.3 million and grew to 372.8 million for the year to date, up 74% from the first nine months of 2002. Gross profit margins increased to 82% for the quarter and nine months in 2003 versus 78% and 75% in the same period for 2002. Selling, general and administrative expenses for the third quarter 2003 increased 24% to 35.8 million. This increase reflects the promotional efforts and support provided to Lidoderm and Percocet as well as to our new product pipeline. For the nine months, SG&A expenses were 113.7 million in 2003, up 42% from the same period of 2002.

Research and development expenses for the quarter were up 35% to 20.7 million as a result of our continuing investment in new product development. Included in the third quarter 2003 R&D amount is the $5 million milestone due to SkyePharma for the acceptance of the DepoMorphine NDA by the FDA. For the year to date, R&D expenses were 42.2 million in 2003, down slightly from 43.9 million in 2002.

Net income for the third quarter 2003 increased to 39.9 million from a net loss of 18.3 million in the comparable 2002 period. Diluted earnings per share for the third quarter of 2003 were 30 cents per share compared with a net loss per share of 18 cents in the comparable 2002 period. Adjusted earnings per share for the third quarter of 2003 increased 27% to 33 cents per diluted share compared with 26 cents per diluted share in the comparable 2002 period.

Consolidated EBITDA for the 2003 third quarter was 72.9 million, up 48% from the year-ago third quarter. In October 2003, the company made the decision to manufacture additional launch quantities of its extended release Oxycodone tablets to provide the company the opportunity to launch its generic product should it win its litigation with Purdue Frederick and make the decision - the determination to launch.

Due to the uncertainties surrounding the ultimate timing of the product's final approval and launch, however, the company will fully reserve for this inventory and accordingly estimates recording a charge of approximately 25 million or 12 cents per share net of tax during the fourth quarter of 2003. In addition, the company recorded a non-cash compensation charge of 96 million or 45 cents per share net of tax in October 2003 as a result of divesting of the 4.8 million outstanding Class C4 stock options.

No additional shares of company common stock will be issued, however, because these stock options are exercisable only into shares of company common stock that are held by Endo Pharma LLC, an affiliate of Kelso & Company, in which certain members of management have an interest. Accordingly, the exercise of these stock options will not dilute the ownership of Endo's other public stockholders.

We anticipate GAAP earnings per share for the year ended December 31, 2003 to be approximately 35 cents per share. Despite the estimated $25 million of Extended Release Oxycodone inventory charge, we are not changing our full-year estimates for consolidated EBITDA of approximately 238 million and adjusted earnings per share of approximately $1.08 per share. Adjusted earnings per share for fiscal 2003 exclude non-cash compensation charges net of tax of approximately 67 cents per share, manufacturing transfer costs net of tax of two cents per share and estimated payments to partners for successful achievement of regulatory milestones, net of tax, of four cents per share.

Consolidated EBITDA and deducted (ph) earnings per share do include the charge of 25 million or 12 cents per share, net of tax, to fully reserve for the Extended Release Oxycodone inventory being manufactured in the fourth quarter of 2003. Excluding the $25 million inventory charge, our full-year estimate of consolidated EBITDA would have been 263 million and our full-year estimate of adjusted earnings per share would have been $1.20 per share. Of course, there can be no assurance of Endo achieving these numbers.

We generated cash flow from operating activities of 168 million for the nine months in 2003 and our cash and cash equivalents totaled 195.4 million at September 30, 2003. In addition, we currently have an unused revolver of $75 million. 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 in pain management as well as other complementary areas. I would now like to turn the call back over to Carol for some closing comments.

Thanks, Jeff. Before we take your questions, I'd like to just take a few moments and discuss the status of Oxymorphone. We were pleased to announce on Monday that Endo has received approvable letters from both the extended release and the immediate release versions of Oxymorphone. We are also pleased that the FDA was able to issue these action letters within a 10-month timeframe. In the approvable letters, the FDA has requested that Endo address certain questions, provide addition clarification and information and conduct some form of additional clinical trials to further confirm the safety and efficacy of the products.

During the 10-month period leading up to the action letters, we were in communications with the FDA. During this time, the agency only asked questions for clarification on the NDAs. They asked a few interpretive questions - they asked few interpretive questions relative to the data. The company is confident that these products are safe and efficacious and now looks forward to having regular dialogue with the agency to better understand their remaining concerns, to resolve any questions and issues that they may have and to further clarify what is needed for final approval of these products.

As you all know, this is an ongoing process and the issuance of these letters represent one more step on the path to approval for marketing. As a reminder, joining us today is Dr. David Lee, our Executive Vice President of R&D and Regulatory Affairs. I am once again proud to report a strong financial quarter and would like to thank the entire organization for their continuing contributions to our success. And now, let me open up the call for any questions that you may have.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Angela Larson of Smith Barney.

Good morning and congratulations on a good quarter. I want to ask a couple kind of modeling questions. First, on the R&D, you did mention that you have that $5 million payment in there. But if you exclude that, you're still looking at about a $15 million run rate. This is higher than your historical norms. Do you anticipate that going forward?

We haven't provided, obviously, any further clarification on 2004. We have provided, obviously, sales and earnings and EBITDA guidance for 2003. We had a lot of activity, obviously, in the third quarter of this year related to the work we were doing on the oral rinse for oral mucositis product and the Lidoderm Phase 2 back pain studies. Both of those studies were substantially complete and we're currently in process of compiling the data on those two studies. So I can't say whether that's going to be the ongoing run rate of the R&D spend, but it was a fairly active quarter for us.

No, that's great, Jeff. When looking at fourth quarter, you have mentioned that you're bringing in the sales force from Ventiv. There's a one-time charge associated with that?

Yes. There is a one-time charge associated with that of about three-quarters of a million dollars - less than three-quarters of a million dollars that we did take in the third quarter, based on our announcement.

And you do not believe that the ongoing operations of having the sales force in-house versus out of house is an operational cost change?

No, from a cost perspective and we had the same experience with the 70 specialty reps that we brought internally, although there is some infrastructure cost that does need to be billed to support the additional sales reps, we no longer have to pay overhead or profit to Ventiv for that. So from a cost standpoint, it's effectively neutral to internalize the sales force. As we may have talked about in the future, though, it's generally accepted that it's a more productive sales force once they are internal, due to increased ownership feeling of the products as well as less turnover from the products.

Great. And then, just last on the oral mucosis rinse. Since the studies have completed, when will we be seeing that data?

We're not sure of the answer. We're currently in process of gathering that data and scrubbing the data. There are some conferences coming up in January - Ash and ASCO (ph) - that we may be presenting that data at. If there is a material development, however, in the - in those studies or once we do know the results of that data, both the top-line and the more detailed data, we may do a public announcement prior to that.

So if I read you correctly, there's no guarantees you'll do a top-line announcement, but at the latest, maybe we'll hear something by Ash or ASCO (ph) .

That's correct.

OK. Great. Thank you very much.

Your next question comes from Dave Gwenly (ph) of Jeffries and Company.

Hi. Good morning. Congrats on the quarter. First question regarding morphine sulfate ER. Could you, clearly, you're saying in guidance that you expect that generic to come. Are you - are you applying that expectation at the beginning of the fourth quarter or kind of as of today - first part. And second part, can you talk a little bit about what you're sensing from the channel as to timing? Thanks.

Sure. I guess I'll answer the second one first. As far as the channel, we are aware that Melancroft (ph) is out there contacting customers. We've been in dialogue with customers ourselves. What we've been able to gather from the IMS weekly data is that Melancroft (ph) is sort of out there. Last weekly data we saw, they had just short of 4% of the scrips compared to north of 80% for us. So they're not out there in a big way as of today's - sitting here today with the weekly data. We do know they are actively discussing with customers and that hasn't all been determined yet.

OK. And then, in your guidance, the timing of the assumption?

Yes. We're assuming they're coming now.

Now. OK. And, Jeff, you had said, in the past, on the Ventiv decision and Angela has basically asked this question, but the Ventiv decision - you looked at it close (ph) with an Oxymorphone launch and without and thought that it pretty much made sense either way. And I suppose that's still the management's feeling on that situation. No intent to, given the news, delay that into 2004, for example.

Absolutely not. The decision was made earlier this year to internalize, solely to support Lidoderm. Of course, we did look at it with other potential products and the sizing and configuration of the force with potential other products in the pipeline, including Oxymorphone, DepoMorphine, and the Oral Rinse product, but this decision was made solely to support Lidoderm that we would want and need 230 sales reps to promote that product alone. If we do end up introducing other new products in 2004, there could be an increase needed in the size of the sales force beyond the 230 sales reps that will support Lidoderm and Percocet here in the near term.

Right. And your intention there would be to pretty much do that in house, or could that be done in a multi-pronged fashion, as well?

It's possible that it could be done in a multi-pronged fashion. The contract sales organization model has worked well for us in the past, but we also may just do that straight internal recruiting to increase the size of the sales force.

OK. And then one last question possibly for Dr. Lee - the - in terms of any communication that you have been able to have with the FDA subsequent to the letter announcement on Monday, can you provide any color as to discussions that you've had? What, you know, timeframes, what expectations you now understand - anything along those lines and whether or not ongoing trials might satisfy their requests, or are we going to have to design something new and start from scratch on the - not really from scratch, but start at the beginning of a new trial to satisfy this data request of theirs?

We - obviously when we received the letters, we did what is standard practice and we contacted the FDA and requested the opportunity to interact with them further to get clarification. And those discussions are just ongoing at the present time, and there's really nothing further that I can say. We're still seeking clarification of some of the points that were raised.

Similarly on whether we will be able to satisfy them with existing information or new information will have to be generated is just not something that I can respond to at the moment because we're ourselves at this stage not clear exactly what it is the FDA's concerns are and we have to clarify that before I would be in a position to give a clearer answer.

OK, thank you.

Your next question comes from Michael Tong of Wachovia.

Hi. Good morning. Couple of quick questions - number one, just a follow-up on the Oxymorphone situation - you mentioned additional studies for safety and efficacy. As far as safety is concerned, is the FDA concerned more about the product safety or how it might be used in the marketplace given the attention given to Oxycontin?

And speaking of Oxycontin, what's your interaction with FDA with respect to final approval of the ANDAs that you're - that you should be eligible to receive final approval for?

With respect to the first question on Oxymorphone safety, again, it's difficult for me to answer your question until we get further clarification from the agency on exactly what their concerns and issues are. Of course, we have been working with the agency through the review period on a risk management plan and I'm sure as part of that of the final approval there will be further discussions around the risk management plan.

With respect to the final approval of our Oxycontin generic, we will follow the pathway that is appropriate once we get a final decision from the judge. There is a process that is then followed to obtain final approval or change the tentative approval that we now have to final approval, and we'll just follow that pathway.

Your next question comes from Ian Sanderson of SG Cowen.

Good afternoon and thanks for - or, good morning and thanks for taking the call. On the generic Oxycontin, what is the dating on that inventory that you're building? In other words, what is the latest that you could start shipping that inventory and still have it be marketable?

Sure. The dating on new products is typically two years dating from when it's manufactured. The latest by which it's available to be shipped is somewhat contingent on what competition may be in the marketplace.

If we're exclusive in the marketplace and the choice of the customer is between the brand product and the generic product where they can make more money, they're typically going to take a product with shorter dating than they might otherwise take, maybe even as low as six months dating remaining.

Typically, however, if there is other generic competition out there, all things being equal, the date you can usually ship when there's about a year left of dating on the product.

OK, and can you just update us on the litigation timeline when the last hearing was and when we might expect a judge's ruling although I realize that latter question's impossible to answer.

Sure, let me take that one. Just essentially, as you may recall, we had a hearing trial with the judge that took place in June of this year. We submitted our post-trial briefs, and essentially we're in a position where we're waiting for the judge then to render his opinion. And we essentially don't have knowledge of timing; we just really have to wait for that to be rendered. So, that's it.

And do you - when might you hear from the FDA regarding exclusivity?

The exclusivity is something that we only hear about at the time that we get final approval.

All right. Thank you very much.

Sure.

Your next question comes from Deb Knobelman of J.P. Morgan.

Hi, guys. Most of my questions have been answered, but I just had two little follow-ups. One, David, you had said that you are waiting to meet with the FDA to get a better idea for Oxymorphone - exactly the concerns and the issues. I was wondering if know when that meeting date is so we can get a better idea of when we'll know - you know, get some more clarity.

And then my second question was around Percocet line extensions. I know in the past, you know, we had talked about getting some additional line extensions to Percocet and I was wondering if that's still under consideration or development.

Why don't I take the Percocet question first and then turn the other question over to David?

But as we have done in the past, we have - Percocet's been an important brand for us, and we had the opportunity to improve this product and issue a number of line extensions over the past five years, and we will continue to manage the life cycle of Percocet. But because of the competitive nature of the product as well, it really hasn't been our practice to discuss what we might be working on relative to it other than to say that it's an important product and we will continue to manage the life cycle of this product.

And with respect to timelines of our interactions with the FDA, again there's not really a whole lot I can say about that because this is a continuing dialog. This is something that we're doing on an ongoing basis. And I think the only thing that I can say is that as soon as we have any clarity on anything that may result in a material change to date or timelines, then of course we will inform you.

OK, so if you do have to do additional trials, you'll let us know when you're aware of that?

If we are in a situation that we have to do additional trials that would be a condition of approval and therefore had a material impact on timelines, we would let you know.

OK, great. Thanks, guys.

Thank you.

Your next question comes from Gabe Hoffman (ph) of Ocipiter Capital Management (ph) .

Hi. Thank you very much for taking the question.

In the approvable letter that was issued by FDA, did they specifically request new trials?

In the letter, they did certainly indicate that new trials may be needed, but I would then immediately like to add that, again, we - the basis for their concerns were not made clear in the letter, and therefore exactly what the nature of those trials, if any, might be or the timing of those trials, if any, might be is very difficult to speculate on at the moment. Clearly, we have to understand what the FDA's concerns are.

And I would also like to point out - just come back to something that Carol said earlier on that during the PDUFA review period - the ten-month review period that the FDA met, the questions that we received from them on our NDAs were questions for clarification. We had few, if any, questions on interpretation of the data. And so that is the period that we're going through now.

We're clearly going to be interacting with the FDA on the understanding and interpretation of the data, and we'll see where that - what that results in and whether we can satisfy them with data that we have or whether additional information will have to be generated and if so what would be the exact timing of that additional information. So, again, at the moment, that's all speculation, and we'll know more in the coming weeks.

Oh, OK, so if I understand it correctly, the FDA indicated that additional trials might be needed, but it's not clear exactly the cause. Just as a follow-up, was - are any of the questions related to the change in requirements for a, you know, long-acting opioid that occurred, you know, during the development process of the product in terms of the, you know - the period of use in (ph) human testing and the - you know, the animal tox data?

Right. Again, you know, I think it would be, you know, speculation to [Inaudible] respond to that at the moment. Again, until we speak to them, we can't really give you a firm answer.

I would just stress again that we interacted with the FDA on an ongoing basis during the development program. We met with them at a regular - on a regular basis, so we had agreements with the program that we were doing. But, of course, circumstances can change and the FDA has, you know, liberty to do what they like if they think that there is public health interest at stake or whatever. But, again, we need to better understand what it is they're looking for before we are in a position to know if anything needs to - further needs to be done.

Great. Well, thank you very much.

Your next question comes from Scott Kim (ph) of C.I.S. (ph) .

Yes, hi, guys. Congratulations on the third quarter.

Thanks.

Just had a quick question - can you give us a slight update on the FEMA bid and any potential impact from any of the larger guys getting interested?

Yes, I would just say, you know, we saw the articles in the paper and we don't comment on market rumors or speculation.

Right.

So, we couldn't make a comment.

OK.

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'll pause for just a moment to compile the Q&A roster.

Your first question comes from Angela Larson of Smith Barney.

Hey, there, and thanks for taking the follow-up - one - question for David and one for Carol.

David, in your response to the Oxymorphone discussion, you said material impact on timelines, what timelines are you assuming that the investment community is using for the launch of this product?

Well, I think that we have indicated that we were hoping to launch in the first quarter of '04.

OK, so your press release on Monday indicated that it wasn't approvable and there is the possibility of studies. Many analysts took that to, you know - to be conservative and go ahead and move back the launch by a year. Would you view that as a very conservative approach at this point?

You know, Angela, I can't really sort of speculate on that. Again, we really do need to see what it is the agency is looking for and agree with them what, if anything, further needs to be done.

OK. So once you really feel like first quarter is out of the question, you'll issue additional guidance?

Yes, I think when we get information that - again, that leads us to believe that we have a material change in that timeline, then obviously we'll let you know straight away.

OK, fantastic. And Carol?

Yes?

I'm not going to let you off the hook on that question. I'll just ask it a different way, which is when you look at the strategic activities that you've done in recent months, they've been more of a collaborative stance doing joint development and joint marketing. Has your taste and your appetite changed? Are you interested in acquiring companies and products? Or do you find that the market is more available of co-promotions and co-developments?

You know, I guess I'd suggest that, you know, it's been our practice all along from the beginning of the company to look at a very wide variety of be it products - be it companies that really would have a fit with our strategic direction, you know, such as the acquisition of BML (ph) as a company and then looking at the acquisition of Lidoderm and such. So we continue to look at a wide variety of products and companies that are in our complimentary areas, so --

And in addition to that, what's your appetite for dilution? Some of these other acquisitions you've done brought products that were immediately accretive or opportunities very near term. Are you willing to take some dilution in the near term for technologies or development products?

If you don't mind, Angela, I'll take that question.

We are willing to do dilutive deals. What our - what we're trying to do is create value. And sometimes then, you know, as everybody knows, pharmaceutical companies are valued based on their pipeline. If you do acquisitions or licenses of pipeline products, those end up being dilutive type deals, however, add to what we believe is creating a higher valuation for the company and longer-term growth prospects for the company. So our goals are to create significant value for the company, and that could be by doing dilutive deals which could include pipeline licenses and/or pipeline companies.

Great. Thank you very much.

Thanks.

Your next question comes from Michael Tong of Wachovia.

Hi. Thanks for taking a follow-up. Just two brief ones. Number one, as far as the SG&A expense line is concerned, there was a sequential decline from Q2 to Q3. I was wondering if you could be more specific about what drove the decline and where we should be thinking about going forward as a normalized run rate.

And the second question, again, going back to generic Oxycontin, is there any statutory limitations that's keeping you from getting final approval at this point?

You know, let me just ask (ph) on the Oxycontin basically that the process [Inaudible] is we're filing the ANDA applications; they are reviewed; the agency renders its opinion. They did render the opinion that these are approvable or tentatively approved - let me put it that way. And then essentially it's really when litigation is resolved, then that then is the process by which those would be turned (ph) to approved.

So unless I'm misunderstanding the question, that basically is the process.

But I've also seen cases where final approval's been given without any resolution of litigation as long as the 30-month clock is up.

It's not our understanding --

It's our understanding that we're not going to get final approval from the FDA until litigation has been resolved.

OK. And on the SG&A run rate?

Sure. Again, we haven't given guidance into '04 and have given just top line and EBITDA and earnings guidance in '03. I'm not sure, Michael, if there's anything I could specifically point to sequentially between the second and third quarter in the SG&A line that was either an unusual item in the second or third quarter itself.

Yes, and Michael, just to add back to the question that you asked before, you know, we don't intend to seek final approval before the court decision has decision has been rendered.

OK, thank you.

Sure.

Your next question comes from Jerry Trefel (ph) of Wheaton (ph) .

Hello.

Hi.

Does - is Mallinckrodt your API supplier on morphine sulfate?

Yes, they are.

And they're competing with you on the finished product at this point?

Yes, but they are also our raw materials supplier on oxycodone and compete with us on our generic Endocet.

OK, so they're [Inaudible] ...

Yes, they seem to act as two different entities. The API supply - the API suppliers are either Noramco or Mallinckrodt in this business. Noramco is a subsidiary of J&J, which is obviously also a competitor, and Mallinckrodt. So, but they do seem to keep sort of Chinese walls available and separate. We have a long-term contract with Mallinckrodt regarding our pricing on raw materials which they can't change just because they're competitors, if that's your concern.

You know, Wall Street had Chinese walls, too [Inaudible] just for your information. [Inaudible]

They've been a very good supplier.

One other - you know, as I listen to how you describe your letter from the FDA on the [Inaudible] , doesn't it strike you that this [Inaudible] to be a wee bit odd? I mean you discussed with them, they never really mentioned their concerns, they send you a letter - "We think you might have to do some clinicals, but we're really not going to tell you what we're really concerned about."

Yes, you know, I can't obviously comment on what goes on in the FDA. I think we've followed all the processes and procedures. We obviously ourselves found it a little bit odd that we had not received more clarification, and, you know, obviously we were somewhat puzzled by that. But I think, you know, we have [Inaudible] the FDA I'm sure will be happy to continue dialoguing with us to help clarify the situation. I see no reason why they would want to do anything other than follow the rules and regulations that govern them to ensure that a safe and effective product is brought onto the market.

I understand that, but they're also supposed to be helping companies [Inaudible] --

I --

-- [Inaudible] clarifying things - not confusing things.

Yes, Jerry, you know, I - the only thing I would say there is that, you know, if you look back - if you look on the pharma - the Pharmaceutical Research Manufacturers Association I think has expressed some concerns that the PDUFA period has been used increasingly recently to complete an initial review and then the questions of interpretation come subsequently. And so I think that the experience that we have found here is probably very much in line with that that many other companies, if not most other companies, are having at the present time. But we'll have our dialog with the FDA and we'll reach [Inaudible] solution.

OK, thank you.

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

Hi, Jeff (ph) . Wanted to ask you a quick question on gross margin. Clearly a number of things that could impact - the first thing I'm interested in is your transfer of manufacturing was fully complete in this quarter - true? And remind me - was this the first quarter or has that been in place for longer than that and would there be any further positive impact to gross margin as a result of that.

The manufacturing contract with BMS as it related to the extension of our five-year agreement ended in August of this year - August 2003. The transfer is substantially complete to Novartis. There is however inventory that was built at BMS that is going to continue to go through our income statement for some period of time until, you know, the stuff that was built at BMS is exhausted and it's fully over to Novartis.

So, I'm not - a lot of the products, such as Percocet, Endocet, had been transferred already to Novartis earlier in the year, so we're seeing some of the benefits of that already. I'm not sure there's a lot more available there.

OK, and inventory that remains at BMS is fairly insignificant at this point or applies to other products?

It doesn't - the inventory is transferred to us, but it was manufactured under the old BMS contract.

Right.

It's a bunch of sort of the other brands and other generic products in our income statement [Inaudible] ten or fifteen different products.

Right, and small revenue dollar representation?

Relative to the Lidoderm, Percocet, and morphine? Sure.

Right, and then as the generics come on Percocet and you launch new Endocet strengths, there should clearly be some shift in mix between revenue in branded and revenue in generic that could cause some gross margin movements. Are there other reasons beyond that that would - that one should also anticipate gross margin downward movement?

Well, competition with our Morphine Sulfate generic - the competition will be on price, so that will also, as one of our big three products, will impact us into the future, as well.

OK, thank you very much.

Sure.

Your next question comes from Robert Ule (ph) of Wells Fargo.

Thank you. Can you just tell me how much inventory you currently have on hand of Oxymorphone IR and ER and what type of production orders you have placed for manufacturing those two products over the next three months or so and have your orders changed during the past week?

We haven't changed our orders in the past week. The product - as of September, we didn't have any in inventory. We are building and - we are building with the commercial expectation of launching in the first quarter. [Inaudible] so ...

OK, thank you.

At this time, there are no further questions. Ms. Ammon, are there any closing remarks?

Yes, I'd just like to say thank you to everybody for joining us on this call today. We were, you know, again just pleased to announce our results, and we thank you very much.

Thank you. This concludes today's Endo Pharmaceuticals Third Quarter 2003 Teleconference. You may now disconnect.