Endo International PLC (ENDP) 2004 Q4 法說會逐字稿

Good morning. My name is Beth and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Endo Pharmaceuticals Holdings' earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) At this time, I will turn the call over to Mr. Newbould, Vice President, Corporate Communications. Sir, you may begin.

Good morning. This call is being recorded. With us on the call this morning are Carol Ammon, Chairman and Chief Executive Officer; David Lee, Chief Scientific Officer; and Jeff Black, Chief Financial Officer.

Before we begin, I would like to remind you that during the course of this call, Carol, David, or Jeff may make forward-looking statements concerning such topics as future results, product performance, anticipated timing of FDA approval of certain of the Company's drugs, and possible timing of the commercial launch of certain of the Company's products, as well as other nonhistorical 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.

Listeners 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 the heading Risk Factors in Endo's registration statement on Form S-3, filed with the SEC on April 30, 2004, as amended. We urge you to review these factors.

In addition, during the course of this call, Carol, David, or Jeff may refer to non-GAAP financial measures, such as consolidated EBITDA, adjusted net income, adjusted diluted earnings per share, or similar terms. These non-GAAP financial measures are not prepared in accordance with accounting principles generally accepted in the United States and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's earnings press release issued earlier today for Endo's reasons for including these non-GAAP financial measures in its earnings announcements and to see the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Now I would like to turn the call over to Endo's Chairman and Chief Executive Officer, Carol Ammon.

Thanks, Bill. Good morning. Earlier today, we reported our financial results for the 2004 fourth quarter and full year. We welcome this opportunity to discuss those results with you, as well as other recent developments. With me on the call this morning is Jeff Black and David Lee. Now I would like to take a few moments to summarize our financial results.

Led by another strong quarter for Lidoderm, net sales were 157.3 million, compared with 142 million in the fourth quarter of 2003, a 10.8 percent increase. Net sales of Lidoderm were up 109 percent to 101.9 million for the 2004 fourth quarter versus 48.7 million in the 2003 fourth quarter. Net sales of Frova, our new migraine drug that we began detailing in September of 2004, were 6.4 million in the fourth quarter.

Diluted earnings per share for the three months ended December 31, 2004, were 22 cents versus a diluted net loss per share of 24 cents in the comparable 2003 period. On an adjusted basis, diluted earnings per share for fourth quarter of 2004 were 23 cents compared with 28 cents in the year-ago fourth quarter. Net sales for the full year were 615.1 million in 2004, compared with 595.6 million for 2003.

Net sales of Lidoderm were 309.2 compared with 178.3 million in 2003, a 73.4 percent increase. Diluted earnings per share for the year ended December 31, 2004 were $1.08 compared with 53 cents in the comparable 2003 period. Adjusted diluted earnings per share for 2004 were $1.16 compared with $1.31 in 2003.

We look forward to the continuing growth of Lidoderm and the contribution from our newest products, Frova and DepoDur. In addition, we hope to be in a position to launch two additional products in 2005, generic Duragesic and generic OxyContin.

To reiterate our current guidance, we expect net sales in 2005 to be approximately 650 to 660 million, which includes Lidoderm net sales of approximately 390 to 400 million. Net sales of Frova in 2005 are estimated to be approximately 45 to $50 million. (Technical difficulty) Net sales of DepoDur in 2005 are estimated to be approximately 12 to $15 million.

We estimate GAAP earnings per share for 2005 to be approximately $1.18 to $1.20 per share, and adjusted earnings per share to be approximately $1.19 to $1.21, which excludes estimated payments to partners for successful achievement of regulatory milestones, net of tax, of 1 cent per share. This guidance does not reflect the impact of stock compensation charges. Please note that our guidance also does not reflect the launch of our generic Duragesic and generic OxyContin.

I would also like to briefly recap some noteworthy developments that occurred during the fourth quarter as follows. On November 3, we presented our oral arguments before a three-judge panel in the U.S. Court of Appeals for the federal circuit in Washington D.C. relating to the appeal of Endo's patent litigation with the Purdue Frederick Company regarding our AB-rated bioequivalent version of Purdue's OxyContin. We anticipate a decision will be issued in this case sometime in the first half of 2005.

In late November, the FDA granted final approval of the protocol relating to oxymorphone extended release under the FDA special protocol assessment process. Under the terms of the SPA, Endo is connecting a 12-week multicenter, double-blinded, placebo-controlled Phase III trial of oxymorphone extended release in patients who have had no prior or recent treatment with opioid analgesics. Enrollment in this trial, as well as an additional trial in opioid experienced patients, is well underway, as is enrollment in a short-term repeat field study for oxymorphone immediate release. We believe we will be in a position to file our complete response to the FDA's approvable letters for oxymorphone extended release and immediate release in early 2006.

DepoDur, our newest product, became commercially available when we began shipping product in December of 2004. DepoDur is FDA approved for the treatment of pain following major surgery. Anecdotal evidence supports our belief that DepoDur has been well-received thus far and that anesthesiologists have expressed a good deal of enthusiasm for the product.

We continue the previously announced expansion of our sales force in January. We added approximately 70 reps to our specialty and primary-care sales forces. We now have about 300 salespeople in total to support the ongoing launch of Frova and the continuing growth of Lidoderm. In addition, we reconfigured these sales forces to target high potential prescribers of both products.

For our hospital sales force, which is promoting DepoDur, we brought on 45 reps in January, after the product had become commercially available, to augment the initial 25 we had hired last summer subsequent to FDA approval of DepoDur. These 70 reps are targeting approximately 1000 hospitals where a significant number of major surgeries are performed. In total, among all three of our sales forces, we now have approximately 370 salespeople.

As you know, the FDA recently dismissed the citizens' petitions that had been filed to launch block the launch of generic equivalents to Duragesic. We are of course encouraged by this development and look forward to a final decision from the FDA on Noven's ANDA for our generic sentinel patch, which is currently under review.

Now before we take your questions, Jeff will review in greater detail our fourth-quarter and twelve-month results.

Thanks, Carol. As mentioned, Endo's net sales for the fourth quarter of 2004 were 157.3 million, compared with 142 million in the fourth quarter of 2003. For the 12 months, net sales totaled $615.1 million in 2004 versus $595.6 million in 2003. Net sales of Lidoderm rose 109 percent to 101.9 million for the 2004 fourth quarter and were up 73 percent to 309.2 million for the full year in 2004. Prescription growth for Lidoderm was up 49 percent and dispensed unit growth increased 53 percent in the fourth quarter of 2004 versus the comparable 2003 period.

Prescription growth for Lidoderm was up 57 percent and dispensed unit growth rose 63 percent for the 12 months in 2004 versus the same period of 2003. Based on the IMS data, we estimate that prescription demand for Lidoderm in the fourth quarter of 2004 was approximately $90 million. Lidoderm inventory at our customers has now returned to levels that are closer to historical norms. Based on IMS data, the run rate on Lidoderm in December 2004 was approximately $375 million.

Net sales of Percocet were $16.1 million for the three months ended December 31, 2004 versus $47.3 million in the same period in 2003. For the full year in 2004, net sales of Percocet were $86.5 million, compared to $214.2 million in 2003. Net sales of Percocet have been adversely affected during 2004 by the introduction of generic versions of Percocet 7.5 325 and 10 325 in the fourth quarter of 2003.

In addition, due to the generic erosion of Percocet, inventory at our customers increased above normal levels during the second and third quarters of 2004. As we expected, we were able to bring inventory levels of Percocet at our customers back to normal by the end of 2004. Based on the IMS data, we estimate that prescription demand of Percocet in the fourth quarter of 2004 was approximately $27 million. In addition, based on the IMS data, the current run rate on Percocet sales is approximately $100 million.

Net sales of Frova were $6.4 million for the fourth quarter of 2004 and totaled $11.4 million for the year. We began shipping Frova upon closing of the license agreement with Vernalis in mid-August 2004 and initiated our promotional efforts in September. We believe that Frova has differentiating features from other migraine products, including the longest half-life in the triptan class and a very low reported recurrence rate in its clinical program.

We believe these distinct characteristics have yet to be fully exploited in the North American market and that we will be able to capitalize on Frova's clinical benefits and commercial potential by targeting the specialty physician audience and effectively leveraging the relationships and reputation that Endo has built with the neurology and pain specialist community over the years. We believe we can create an advocacy base among thought leaders who treat patients with the most intractable migraine. Further, Frova's potential future application for the prevention of menstrually-related migraine makes it one of the Company's most promising products.

Net sales from Endo's generic products were 27.7 million for the three months ended December 31, 2004, compared with 43.2 million in the same period in 2003. Net sales from our generic products were 192.4 million for the 12 months in 2004, compared with 181.3 million in the same period of 2003. During 2004, Endo experienced a decrease in net sales of its morphine sulfate extended release tablets due to the generic competition introduced in the fourth quarter of 2003. For the full year 2004, this has been offset by our launch in the fourth quarter of 2003 of two new strengths of Endocet.

The pricing pressure and market share erosion that began to affect both Endocet and our morphine sulfate extended release tablets in the third quarter of 2004 continued during the fourth quarter of 2004. Going forward we expect that competitors will continue to have an impact on our marketshare and price of both of these generic products, which will adversely affect the net sales and profitability of our generic products.

Gross profit for the fourth quarter of 2004 was $116.3 million, up 33 percent from $87.2 million in the same period a year ago. For the 12 months in 2004, gross profit was $474.1 million versus $459.9 million in the comparable period of 2003. Gross profit margins were 74 percent and 77 percent for the quarter and 12 months respectively in 2004 versus 61 percent and 77 percent in both of the same periods of 2003. These gross profit margins in 2003 reflect the impact of the $24.6 million charge to cost of sales in connection with our decision prior to the District Court decision in our favor to fully reserve the inventory we had built for our generic OxyContin. Excluding these charges, gross profit margins were 79 percent and 81 percent for the fourth quarter and year respectively in 2003.

Pricing pressures on our generic products, combined with the introduction in April, 2004 of more costly single-pouch, child-resistant packaging for Lidoderm were the primary factors affecting the gross margins for the fourth quarter and year-to-date in 2004.

Selling, general, and administrative expenses for the fourth quarter of 2004 were $54.9 million versus $42.1 million in the same period of 2003, a 30 percent increase. For the 12 months, SG&A expenses were $180.2 million in 2004, up 16 percent from the same period in 2003. This increase is due to our continued investment in our commercial business and promotional marketing and educational activities to support our products, Lidoderm, Frova, and DepoDur.

During 2005, we anticipate increasing our investment in educational and promotional efforts over 2004 levels. This increase is primarily attributable to the hiring in January 2005 of approximately 70 sales reps to bring the total number of sales reps supporting both Lidoderm and Frova to about 300, and the additional hiring of approximately 45 sales reps in early 2005 to bring the total number of hospital reps to support the launch of DepoDur to approximately 70.

Research and development expenses for the quarter were $12 million versus $8.9 million in the year-ago quarter. This increase is primarily related to a $3 million milestone payment on one of our early stage development programs. For the year, R&D expenses were essentially unchanged year-over-year at 50.5 million in 2004 and 51 million in 2003. Excluding milestone payments to partners, we anticipate increasing our research and development spending in 2005 over 2004. During 2005, Endo will direct its development efforts on various projects focused mainly in pain management, including completing the studies for oxymorphone extended release tablets and immediate release tablets and the initiation of the Phase III clinical studies of Rapinyl.

Net income for the fourth quarter of 2004 was $29.2 million, compared with a net loss of $31.7 million in the same period in 2003. Diluted earnings per share for the fourth quarter of 2004 were 22 cents, compared with the net loss per share 24 cents in the fourth quarter of 2003. Adjusted diluted earnings per share for the fourth quarter of 2004 were 23 cents versus 28 cents in the comparable 2003 period.

Diluted earnings per share for the year ended December 31, 2004 were $1.08 compared with 53 cents in the comparable 2003 period. Adjusted diluted earnings per share for the year ended December 31, 2004 were $1.16 compared with $1.31 in the same period in 2003. Adjusted diluted earnings per share for the full year 2004 exclude payments to partners for successful achievement of regulatory milestones, net of tax, of 6 cents per share and exclude the cost associated with the termination of Endo's development agreement with Labopharm Laboratories, net of tax, of 2 cents per share.

We generated cash flow from operating activities of $172.1 million for the 12 months in 2004 versus $218.3 million in the same period of 2003. This decrease primarily reflects an increase in accounts receivable and an increase in our inventory levels in 2004. The increase in accounts receivable was substantially attributable to the timing of purchases by our customers during fourth quarter 2004 versus the fourth quarter 2003. Our sales are reported net of deductions for items such as charge-offs and rebates. Our accounts receivable are reported on a gross basis prior to the sales deductions, with a corresponding liability on the balance sheet for these deductions.

On a comparative basis, either gross-to-gross or net-to-net, our Days Sales Outstanding or DSO were approximately 47 days as of December 31, 2004, down from our DSO of approximately 53 days as of December 31, 2003.

The increase in our inventory levels is due primarily to an increase in our Lidoderm inventory. Historically, we have carried low inventory levels of Lidoderm due to our manufacturing not being able to keep up with a product demand. In 2004, we added more capacity and our manufacturing of Lidoderm has not only been able to keep up with demand, but we have able to build a safety stock of Lidoderm inventory.

That said, we are at this time, however, carrying more Lidoderm inventory than we would prefer. Although there is not a risk of obsolescence with this inventory, as there is sufficient product demand and sufficient expiration dating, it is more inventory than we want to be carrying. We have been able during the course of 2004 to bring the Lidoderm inventory levels to more appropriate levels, and during first half of 2005, should have Lidoderm inventory at the appropriate level.

During 2004, our net cash used in investing activities includes the $30 million license fee paid to Vernalis for the marketing rights to Frova; $50 million for the loan made to Vernalis, and $10 million to Orexo for the rights to market and develop Rapinyl.

During the 12 months ended December 31, 2004, net cash used in financing activities includes the $13.5 million paid to Endo Pharma, LLC, a limited liability company that currently holds a significant portion of Endo common stock, in which affiliates of Kelso & Company and certain members of management have an interest. This payment was made pursuant to the tax sharing agreement between the Company and Endo Pharma LLC, which requires the Company under certain circumstances to pay Endo Pharma LLC the amount of tax benefits that are usable by the Company as a result of the exercise of stock options granted pursuant to the Endo Pharma LLC stock option plans. These stock options are exercisable only into shares of Endo common stock held by Endo Pharma LLC, and accordingly, do not dilute the ownership of the Company's public stockholders.

Due to the sale of the shares of Endo common stock by Endo Pharma LLC and others during 2004, a liquidity event occurred as defined in the tax sharing agreement, triggering the Company's obligation to pay Endo Pharma LLC the tax benefit attributable to 2001, 2002, and 2003. Assuming the Company will be able to use compensation charges resulting from the Endo Pharma LLC stock option plans to reduce its taxes in 2004, the Company will be obligated to pay to Endo Pharma LLC a tax benefit amount of approximately $43 million.

Our cash and cash equivalents totaled $278 million at December 31, 2004 and we have no debt. We feel our strong financial position provides us the opportunity to use our cash and cash flow from operations to continue to pursue acquisitions, licenses, and other strategic alliances within the therapeutic areas of pain management, neurology, perioperative care, and supportive care oncology. We believe investments of this nature provide us the opportunity to accelerate our growth as a premier specialty pharmaceutical company.

I would now like to turn the call back to Carol for some additional comments.

Thanks, And, Jeff. And before we open it up for questions, I'm just going to take a moment and review with you some of our upcoming milestones.

Now that the citizens' petitions have been dismissed, we do look forward to a decision by the FDA on Noven ANDA for the generic transdermal sentinel patch. Noven has manufactured sufficient quantities of inventory for us to launch this generic version of Duragesic immediately upon approval. We expect that a decision will be forthcoming in the first half of 2005 regarding the appeal heard on November 3, 2004 of the lower court decision that invalidated Purdue Frederick's patents covering generic OxyContin.

We're excited about the prospects in 2005, which we believe will be a year of opportunity, achievement, and growth. We will be actively promoting Lidoderm, Frova, and DepoDur with an expanded sales force and we could potentially be on the market with generic versions of Duragesic and OxyContin, the two largest selling strong opioid analgesics on the market today.

With regard to our development pipeline, we look forward to continuing to advance the clinical development of our late-stage products, including oxymorphone extended release and immediate release, Frova for the menstrually-related migrant indication, Propofol IDD-D, and Rapinyl. And finally, we will continue our efforts to leverage our substantial cash position to pursue strategic value-driven acquisitions of products, companies, or technologies that can provide a source of future growth.

Now my colleagues and I would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) David Buck with Buckingham Research.

Just a couple of quick ones. First on generic Duragesic, what is your understanding of the remaining deficiencies that Noven's might have had? And are you still in any back and forth with the agency or is it more now just waiting for a decision? That's the first one.

I think it is that we're waiting for a decision. The Office of Generic Drugs is not very transparent when it comes to where a particular filing is in review. We have had questions -- or Noven has had questions over the past few months, which we have addressed, and we do anticipate that we are now coming into the final stages of the review process.

And can you comment on that market? It has been characterized as being a very aggressive pricing environment there. Can you give us some sense of what you feel about that pricing environment when the approval comes?

Sure, I think the pricing environment probably reflects the fact that not only are there two competitors out there currently, but there are several others that are waiting in the wings, and have been out there actively trying to potentially get business, of course assuming ANDA approval. I think maybe the pricing that some expected in the marketplace, that may reflect only two players being out there, is probably more reflective of there being multiple competitors out there because there are several people who believe they are close to getting final approval.

Okay. And on a different tack, where does Endo stand in terms of any distribution services agreements or inventory management agreements with the top three wholesalers and what impact on gross margin?

We have entered into one distribution services agreement with one customer, anticipate that in the future, we will be entering into others as well. Certainly there is a discount off of sales that is necessary in these types of arrangements. On the flip side, there is less speculative buying that is anticipated as a result of entering into these agreements. So I think we will wait to see how it plays out over time. Our expectation, however, is that it will not have significant impact on margins in the future.

Okay. And just to review, the margin expectation on the gross line without OxyContin and Duragesic is what? What's the best estimate for '05?

We're still estimating that there should be a slight decrease from the full year 2004 gross margins.

Okay, thanks.

Robert Uhl with Friedman, Billings.

Good morning and thank you. Could you just update us on where you are with the additional -- I believe it is chronic back pain studies with Lidoderm and when might there be an FDA decision there -- I'm sorry, submission.

Right, yes. This is a Phase II program that is ongoing and will be running for much of 2005. And in this program, we were really trying to evaluate which was the most appropriate parameters to be studying in an eventual Phase III program, what is the right definition of the patient population, and how do we maximize our chances of demonstrating an effect of Lidoderm in an indication where we know that there is going to be a large placebo response? So we really do need to see the results of the studies that we have underway, and at that point, we will decide whether we need to do further exploratory studies or that we feel confident enough to go into a Phase III program and look forward to then to an eventual regulatory submission.

All right, thank you.

David Windley with Jefferies & Company.

Thanks for taking my questions (technical difficulty). I think the difference between dispensed unit growth on Lidoderm and Rx growth has been converging through time. I suspect that is expected to continue. Is that a true? And secondly, is that basically because you are lapping the prior rapid uptick of growth in number of units per Rx?

Yes, I think over time there has been a -- certainly the number of patches per prescription has grown this year versus last year. I am not sure if we expect that to continue in the future or not. I think part of that is dependent on the types of uses that the product is seeing. Obviously for larger areas, you're going to get more patches per prescription, etc., so I think some of that is probably going to be based on if we are able to successfully develop new indications for the product as well.

And switching gears to David Buck's question, could you take your response on fentanyl patch market pricing environment a step further and comment on how what you are seeing compares to your expectations as presented in your guidance earlier?

Sure. We had expected in our guidance that there were multiple competitors including ourselves and not just a two-player market, so in terms of the pricing that is occurring in the marketplace, it is not tremendously different than what our expectations were.

Okay. On DepoDur, I know the numbers are relatively small, but now that we are some 40 or so days into the next quarter, what is your sense of pull-through on DepoDur as it relates to your deferred revenue and, obviously, continued growth and launch of that product?

Sure, as far as recording the deferred revenue as actual revenue, I think we are evaluating that and trying to determine when the appropriate time to recognize that revenue is. As was mentioned anecdotally, we're hearing very positive feedback from the surgeon community, the anesthesiologists. There has been a lot of excitement and enthusiasm about the product. We are detailing hospitals pretty aggressively, including the formulary area. We have been accepted on several formularies and plan to be reviewed under several other ones during the coming months. So so far things look good in terms of that launch, but probably too early to be able to predict or give any more guidance versus what we have done.

As a twist on that, are you shipping additional product in the first quarter?

I can't really comment on the first quarter.

Last question. Frova inventories, it sounds like you are close but maybe not all the way there in getting channel inventories to a level that you would like them to be. Is that accurate? I'm just thinking about are you expecting in the first quarter to be able to recognize revenue that is closer -- much, much closer prescription demand then has been the case over the last couple of quarters?

That is our expectation going forward. We were able to bring the Frova inventory levels at our customers to about 1.5 months in the channel, which is -- again, we don't have history with this product so we're not sure necessarily what normal is, but that kind of level, 1 month, 1.5 months is fairly consistent product that we have out there when they are in normal inventory levels. So given that, we would expect our sales and prescription demand to more closely mirror each other in the future.

Okay, great. Thank you.

Scott Henry with Oppenheimer.

Thank you. Just a couple questions. First, on the SG&A line, I know there are a lot of moving parts. And I guess my question is how should we think of the 55 million rate in Q4? You're obviously adding some more reps in Q1, but I imagine there is some seasonality to SG&A, and there are probably some pre-costs. So I guess first just what your take would be on the Q4 run rate going forward.

Sure. Other than the guidance that we do expect to spend more in 2005 versus 2004 in this SG&A area, I'm not sure how much more clarity, but you are correct. We did in fact spend a lot of money, both in pain initiatives through our clinical development and education group, as well as quite a bit on meetings, conferences, sample aids, things of that nature, in preparation of what we are terming the relaunch of Frova, as well as starting the year strong with Lidoderm. So a lot of spending anticipated in advance of the hiring of the reps in January occurred during the fourth quarter of this year -- some of the agency work, etc., development of campaigns and all that kind of stuff.

Frova, when we acquired the product, we did not really do a whole lot other than put it into our sales reps bags and have them detail to the doctors they were currently calling on. Didn't do a lot with the marketing of the product or changing anything as it relates to the messaging that was going on in advance of (indiscernible) it. So during the fourth quarter, we had worked pretty hard on trying to develop the message that we wanted to put into the reps' bags going into '05 and a lot of that spending occurred in the fourth quarter.

Just a follow-up question, not related to SG&A -- more to the generics business. We are looking at the script trends. They paint a pretty clear picture, but is there also some seasonality to that line? I guess what I'm wondering is, is there anything that can make that 27, 28 million line go up on a sequential basis or should we really be thinking of that as kind of a flat to down franchise?

There is nothing in the true sense of seasonality in terms of maybe what a cough/cold product or other types of products like that. There's no seasonality necessarily. But some of the dynamics in the fourth quarter -- the sales that we had in the generic business in the fourth quarter were probably not necessarily representative of the demand. The demand was probably higher than what the generic business demonstrated in the fourth quarter. A lot of that is due to the pressures and the share erosion that occurred during the fourth quarter.

If you remember, we had been competing with just one competitor for most of the duration on the Endocet product, most of the duration of 2004. But in the third quarter of 2004, another competitor came and we did feel the price impact, but not necessarily the share impact, from that competitor. And in the fourth quarter, that competitor was obviously able to get a very substantial amount of the share of the product of Endocet, and had caused customers leaving us, going to them, which probably created some less shipping on our side than demand probably dictated by a little bit.

Thank you.

Ian Sanderson with SG Cowen.

Thanks for taking the question. First on Frova, could you update us on where the development program for the MAM indication stands and what might be rough timing of an SNDA filing there? And in terms of marketing, are you actively marketing the single study in MAM or are you holding off on that? And maybe if you could just touch on other Frova development programs that are going on.

Secondly, now you have behind DepoDur a significant hospital-based salesforce. Can you comment on any plans to expand your product offerings through this salesforce beyond DepoDur?

Let me take that question first. We are very active on the acquisition front, continuing to look for new opportunities, not only in pain management, but certainly some of these complementary therapeutic areas. And now that we do have the hospital force up and running, the long-term intention certainly is to be able to add Propofol IDD to that bag. But in the ensuing time, we are very active in looking to see what other types of products in that hospital environment that we could add. And the types of sales representative we did add to the hospital force are very experienced hospital sales reps, so I think it put us in a good position to be able to look at a number of opportunities out there. So clearly the intent is to add another product there.

From a Frova perspective, I will ask David to update you on where we are with the studies, but we are currently detailing or working with a physician audience, particularly in neurology and pain management, looking to really work on that product for the more refractory patient, looking at it for acute treatment of migraine. To the extent that we do have one successful study completed on the MAM indication, we will utilize that data within the meeting type environment, like American Pain Society meeting or any of the other big meetings, where it would be appropriate to talk about that. But certainly not within the field organization at this point in time. But we certainly do actively await the completion of that study. And David, maybe you would like to update Ian where we are with that.

The menstrually-related migraine study that is being run by our partner, Vernalis, who is currently enrolling patients. And we are still anticipating being able to file a supplemental NDA during the first half of 2006.

We do not have any other active development programs going on at the moment and as Carol has indicated, we are focusing on our promotional efforts on this product and on the approved indication, which is for the acute treatment of migraine, and of course, very much taking advantage of the fact that we believe that the data demonstrate that there is a lower headache recurrence rate in patients who are treated with Frova as compared to the recurrence rates reported for other triptan therapies.

And if I could just follow up on -- I was under the impression that there was one completed MAM study of Frova that was done prior to your acquisition of the drug. Is that incorrect?

That is correct. That study was completed and was actually published in the Journal of Neurology in July of last year, and has been accepted by the FDA as a pivotal study showing the prophylactic benefit of Frova in the treatment of menstrually-associated migraine.

But it is not something that you are actively handing out to clinicians?

We can't use that for promotional purposes, but certainly if any specialist in the treatment of migraine and certainly in the treatment of migraine in women asks about this, then we, in accordance with the appropriate procedures, can, through our medical department, send reprints of the article and potentially even discuss that with the appropriate people. But again, not through our salesforce.

Okay. And then finally, should be looking for any data from these oxymorphone studies late this year?

We, as Carol has indicated, are on track still to file the response to the NDA deficiencies in the first part of 2006 -- about a year from now, slightly less. However, if the results of certainly the extended release trials may well be material information, then obviously as soon as we are in possession of that material information, we will make that known.

Thank you.

Michael Tong with Wachovia Securities.

This is actually Sam Martin (ph) sitting in for Michael. On your gross margin trend, can you give us any indication of how that looks in Q1? And then the second question is, is there any update on the Percocet pediatric indication as far as where we stand or when that might be completed?

As far as the margin trend, again, we are not in the practice of giving quarterly guidance. But for the full year 2005, we expect a slight decrease from where we are for a full year of 2004 of 77 percent, so a slight decrease from there. Certainly we have felt a lot of the margin contraction on the generic side of the business during the course of 2004. Hopefully, a majority of that -- and there may be slight decreases in the future there, either if more competitors come in or if pricing becomes more aggressive.

On the branded side of the business, with the growth from that side of the business expected in 2005, we would expect some improvement in those margins.

As far as Percocet is concerned, we do continue to explore ways of developing this franchise and, obviously, looking at potentially new indications or new formulations. But as we have always said, this is a highly competitive environment and we prefer not to talk to much about what our plans are in that area.

Okay, thank you.

Andrew Forman with Advest.

The question is more strategic in nature and on the pipeline. First, could you comment on the status of Chronogesic as it stands with your partner Durect? Is that being fully funded this year, any time estimates, if you could provide that? And while on Durect, are you taking a look at some other products? I understand there is a seven-day -- like a fentanyl patch next generation using a soufentanyl that could be a big improvement for Duragesic. Have you done any market research on that opportunity? Is that something could be potential -- (indiscernible) deal with Shirer (ph). Some thinking, if you can't be specific, is it more likely that you'll do a deal this year or in 2006? Give us some comfort on growth beyond '06. Thanks.

I'll ask David at the end to just comment on the current status of Chronogesic. But from an acquisition perspective, if you look back over the past couple of years, we have been very acquisitive. We are not a discovery based organization, which certainly is purposeful. We continue to feed our pipeline both with late stage and somewhat earlier stage compounds. We did four acquisitions in 2004, which we were quite pleased about, so we added significantly to the pipeline. Also in 2004, then launched DepoDur, which was an outgrowth of a 2003 relationship with Skye Pharma that was formed.

So being that we are debt free and that we're in a strong cash position and that we have been established (indiscernible) as a leader in pain management, and now are starting to really migrate into some of these complementary therapeutic areas, I think it is safe to say we are well poised to be able to continue on that acquisition front.

So it is not our policy to really discuss in any kind of detail deals before they have been ready to be talked about, so to speak, so I can't really comment on any specific questions that you raised. Although suffice it to say that we clearly are aware of everything that exists in the pain space that is publicly available to know about and we stay on top of all of that so that we can make certain that we're at the forefront for those deals that we choose to be at the forefront for. So with that, let me just ask David to comment on the current status of the Chronogesic project which Durect.

Durect is continuing to work on further modifications to the design of the titanium implant (indiscernible) formulation of soufentanyl that is going in that to try to get around some of the problems that have been seen earlier, a premature shutdown in a few animal studies. Under the terms of our agreement, Durect has primary responsibility for that part of the development program. Our responsibility is more in the direction of the clinical program. So as far as any further details on Durect's progress there, I think it would be more appropriate for you to talk with them.

Okay, thank you.

Andrew Swanson with Citigroup.

Thanks very much. I know this has been gone over in some detail, but I just want to take a slightly different tack on the Lidoderm inventories. Specifically, the wholesaler stocking, I should say. I think in the past, you have spoken about sort of an end of wholesaler buying and maybe sort of a new norm of two weeks, and now we're thinking about maybe a return to historical levels. Am I wrong in thinking about it in that regard or has something changed since this was last discussed? Thanks very much.

I think what we said is that we didn't know what the new norm would be. We did get down to about a two-week level at the end of the second quarter and had speculated potentially that that would be the new norm for wholesalers under their fee-for-service type relationship. Having said that, we also, I believe, talked about that there is going to be a temptation to continue the speculative buying patterns that had made them money in the past and we were sort of going to wait to see whether that would continue in the future.

There was what seemed to be speculative ordering of product during the fourth quarter of this year. We did raise prices effective January 1 of 2005 and controlled how much we shipped out the door and how much could be ordered at the old price, permitting wholesalers and customers to buy an additional two weeks of products over what they normally need or require, and then we decided whether we wanted to ship that during 2004 '05, depending on the underlying demand of the product and how much inventory they had on hand, because we didn't want to have too much out there.

So we did -- we do foresee potentially under inventory management agreements, if that is the way everyone goes, is that there probably will be less fluctuations and a limitation on how much inventory they will carry. We're sort of still in the wait-and-see mode, however, and entering into our first one in the fourth quarter, probably a couple more coming this year. We don't know.

Great. Thanks for clarifying.

A follow-up from David Windley with Jefferies & Company.

Thanks for taking the additional questions. A couple of clarifications. I want to make sure I understood, Carol, that you described a total of 115 sales rep hires in January of '05. Is that right? Did I hear that right?

Yes.

And that was 70 in your field force and 45 in the hospital?

That is correct.

Separate topic, getting back to Frova and the triptan class, it looks like the last couple of quarters the growth rate for the class overall has picked up a little bit, and Frova has not participated in that uptick. I wondered if you would attribute that to the transition and your needing time to get ramped up with all the materials and salesforce training and all that kind of thing or if there was another reason.

I think you are right. We, again, put Frova into the reps' bags and the reps continued substantially the same call plan that they had before, which was potential writers of Lidoderm for post-herpetic neuralgia. So we did begin detailing the product in September, but not really with a focused effort on potential migraine sufferers. The reconfiguration and upsizing of the salesforce in early 2005 is expected to then increase the prescription growth rate of Frova for the course of 2005.

Certainly, Frova is a very small piece of the overall triptan market, so I don't know whether we would necessarily participate with that growth or decline or flatness. We expect growth, obviously in 2005, from a script standpoint, but really not until in the coming weeks and months as we see the concentrated effort on the migraine patients being put together by the reps that we launched in the first quarter.

Jeff, I think I know what the answer is going to be before I ask it, but I'll ask anyway. On Frova, do you have specific share or script growth and/or timing targets that you would be willing to share with us?

Outside of the fact that our guidance is 45 to $50 million, up from a run rate of about $40 million at year end, I can't really share that number.

That's what I thought. Thank you very much.

A follow-up from David Buck, Buckingham Research.

For either David or Carol, can you just give us a sense of timing of Rapinyl Phase IIIs? And no pun intended, but how rapidly you expect those to lead towards a file. And also Propofol IDD, just an update there.

Yes. On Rapinyl, we are in the process of transferring the manufacturing activities from Sweden to the U.S., which is obviously an activity that takes some time. And then we will be filing an IND and meeting with the FDA so that we can use the development program that has already been initiated in Europe as a springboard to go into Phase III. And we still anticipate being in Phase III later on this year.\

Propofol, in the second half of last year our partner, Skye Pharma, had an end of Phase II conference with the FDA, and subsequent to that, there was some further retractions with the FDA which I think clarified but also made a little bit more onerous the requirements that the agency would be applying to any new formulations of Propofol based upon publications that had come out from Europe, where there are multiple Propofol formulations, which suggests that because a Propofol reactive ingredient is so poorly soluble, any change in the formulation potentially has a more substantial impact on the way in which the product performs than had initially been anticipated. And so the FDA, we believe, reacting to this has really, we think, ramped up the requirements for the completion of a program and the submission of an NDA. So that is not just for our product. That is any new formulation of Propofol.

So Skye, with support from ourselves, are in the process now of embarking on that program. But until we, I think, have a clearer picture of enrollment rates, particularly in some of the more challenging uses of Propofol, particularly the long-term use in the intensive care unit, I think it is a bit premature to put out any forecasts on NDA filings (ph).

Okay. Just to follow up on the Propofol comment, and for Carol, does the potential pushback in Propofol filing then make it more urgent that you acquire in the hospital space? And from a capital market standpoint, any insight into the plans of Endo Pharma LLP in the remaining 11 million shares under the shelf?

Sure. As far as getting the hospital product, clearly we would like to leverage that salesforce and to do that as soon as we can. We had anticipated a gap, so our plan always was to go out and look for another product in that sector, and we are actively doing that now.

As fare as the remaining 11 million shares on the shelf, there is no timeline for pulling that down and I think that we just will need to wait and see determination of value in stock price. But there is no timeline on that; so there is no update that we could give you at this point.

Okay, thanks.

At this time, there are no further questions. Do you have any closing remarks?

Just that I'd like to say thanks to everybody for being on the call. We certainly appreciate your ongoing interest in Endo and we look forward during the course of 2005 to keeping you apprised of the many activities we have underway. So thank you very much.

Thank you for participating in today's conference call. You may now disconnect.