Endo International PLC (ENDP) 2005 Q1 法說會逐字稿

Good morning, my name is Brandy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Endo reports quarter one, 2005 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) Mr. Newbould, you may begin your conference.

Good morning. This is Bill Newbould, Vice President Corporate Communications. With us on the call this morning are Carol Ammon, Chairman and Chief Executive Officer; Peter Lankau, President and Chief Operating Officer; and Jeff Black, Chief Financial Officer. This call is being recorded.

Before we begin I would like to remind you that during the course of this call Carol, Peter 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 transient 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 being 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 S3 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, Peter 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 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, and good morning to all. Earlier today we reported our financial results for the first quarter of 2005. Net sales of 137.8 million in the first quarter of 2005 were down from 153.5 million in the first quarter of 2004. Net income for the three months ended March 31, 2005 was 13.8 million compared with 41.2 million in the comparable 2004 period. Adjusted net income for the three months ended March 31, 2005 was 26.3 million versus 43.5 million in 2004.

Diluted earnings per share for the three months ended March 31, 2005 was $0.10 compared with $0.31 in 2004. Adjusted diluted earnings per share for the first quarter of 2005 were $0.20 compared with $0.33 in the same period of 2004. Our performance in the first quarter was adversely affected by wholesale of destocking of Lidoderm, our largest selling product. As you will hear shortly, the underlying prescription demand for Lidoderm is strong and continues to grow as expected. We are reaffirming our previously announced guidance for 2005. We expect net sales in 2005 to be approximately $650 to $660 million.

For the full year 2005 we maintain our previously announced net sales guidance for Lidoderm to be approximately 390 to 400 million. Net sales of Frova are estimated to be approximately 45 to 50 million and net sales of DepoDur are estimated to be approximately 12 to 15 million in 2005. We continue to estimate adjusted earnings per share for 2005 to be approximately $1.13 to $1.15, which excludes estimated upfront and milestone payments to partners. Of course there can be no assurance of Endo achieving these results.

I would like to point out that our guidance does not reflect the impact of stock compensation charges, the impending launch of our generic transdermal sufentanil patch or our extended or our generic extended release oxycodone tablets. Now I would like to turn the call over to Jeff who will discuss 2005 first-quarter financial results in detail.

Thanks, Carol. As previously noted, net sales were $137.8 million in the first quarter of 2005 compared with $153.5 million in the first quarter of 2004. Net income for the three months ended March 31, 2005 was $13.8 million compared to 41.2 million in the comparable 2004 period. Adjusted net income for the three months ended March 31, 2005 was 26.3 million versus 43.5 million in 2004. The license agreement for the rights to develop and commercialize the topical ketoprofen patch and the transdermal sufentanil patch each required an upfront payment of $10 million for a total of $20 million, which was expensed as research and development in the first quarter of 2005.

Due to wholesalers' destocking during the first quarter 2005, net sales of Lidoderm were relatively flat as compared to the prior year period with $64.1 million in the first quarter 2005 compared with 65.4 million in the same period a year ago. Similar to the phenomenon we experienced in the second quarter 2004 inventory levels at our customers are at historically low levels. We estimate that prescription demand for Lidoderm in the first quarter 2005 was approximately $93 million. Prescription growth for Lidoderm was up 41%, and dispensed unit growth was up 45% in the first quarter of 2005 versus the comparable 2004 period. Based on IMS data the run rate on Lidoderm is now approximately $399 million. Based on this underlying demand, we remain confident that net sales of Lidoderm for 2005 will be between 390 million and $400 million.

Net sales of Percocet were $27.4 million for the three months ended March 31, 2005 versus 30.7 million in the same period in 2004 as expected generic erosion continues to adversely affect net sales of this product. We estimate that prescription demand for Percocet was $26 million in the 2005 first-quarter. Based on IMS data the run rate on Percocet is now approximately $100 million.

Net sales of Frova were 6.1 million for the three months ended March 31, 2005. We estimate that prescription demand for Frova in the 2005 first quarter was approximately $9 million. As previously noted, inventory levels of Frova at our customers were unusually high when we began to sell this product in August, 2004 due to the buy in of certain customers prior to our closing of the transaction with Vernalis. We believe that by the end of the first quarter 2005 Frova inventory levels were at expected normal levels. We began shipping Frova upon the closing of the license agreement in mid-August 2004 and began promotional efforts in September 2004.

During the first quarter 2005 the Company increased the size of its sales forces and realigned its sales representatives and their management to maximize the product opportunities for both Lidoderm and Frova. Although Endo began the commercial shipments of DepoDur to its customers during the fourth quarter of 2004, we have determined that it is not appropriate to recognize net sales for any shipments of this product at this time under accounting principles generally accepted in the United States.

Depending on the end-user demand of DepoDur going forward, these shipments which are recorded as deferred revenue of approximately $1.9 million may be recorded as net sales in future periods. For the first quarter of 2005 due to increased generic competition with both Endocet and the Company's morphine sulfate extended release tablets net sales from our generic product decreased to 37.3 million in 2005 from $53 million in 2004. Gross profit for the first quarter 2005 declined to 108.2 million from 120.6 million in the same period of 2004. The gross profit margin of 79% was essentially unchanged from the year ago first quarter.

Selling, general and administrative expenses of 53.6 million were up 38% from the year ago first quarter. The increase in SG&A is due primarily to the addition of 115 new sales reps in the first quarter 2005 combined with the costs associated with our promotional efforts and support for our new product launches. Excluding $20 million for upfront payments for the two development products licensed in the first quarter 2005 research and development expenses were $10.7 million compared with 9.8 million for the 2004 first quarter.

Diluted earnings per share for the first quarter 2005 were $0.10 versus $0.31 in the comparable 2004 period. As detailed in the supplemental financial information in today's press release adjusted diluted earnings per share for the first quarter 2005 adjusted to exclude the $20 million expensed for upfront payments were $.020 compared with $0.33 per share for the first quarter 2004. We generated cash flow from operating activities of $39.6 million for the 2005 first quarter. Our cash and cash equivalents were 304.7 million as of March 31, 2005.

We feel our solid financial position with good cash flow and no debt provides us an opportunity to pursue acquisitions, licenses and other strategic alliances which we believe will accelerate our growth as a premier specialty pharmaceutical company. Now I will turn the call over to Peter Lankau who will provide additional commentary on our first-quarter results.

Thanks, Jeff. As has been mentioned in the first quarter this year we experienced a reduction in inventory levels of Lidoderm by certain of our customers that was somewhat similar to what happened in the second quarter of 2004. I am pleased to note, however, that the underlying prescription demand for Lidoderm remains strong. We continue to be enthusiastic about the short-term and long-term growth prospects for Lidoderm.

At the recent American Pain Society Meeting in Boston we presented the results of an open label Phase IV study in osteoarthritis patients that was the first to compare Lidoderm head-to-head with a Cox-2 inhibitor. In this case, Celebrex. Though the trial was voluntarily halted prior to reaching the original enrollment target, due to the safety concerns around the Cix-2 class, the results suggest that Lidoderm can alleviate the pain associated with osteoarthritis of the knee. And as we are currently engaged in a Phase II program for Lidoderm in chronic low back pain, we continue to evaluate additional indications for Lidoderm.

Now with regards to Frova, we are pleased with the progress we have made so far. Specifically, the approximately 70 new salespeople we hired in the first quarter have completed their training and have now been in the field in full force since about March first, when they joined the existing 230 representatives in selling both Frova and Lidoderm. Supporting their efforts is a new marketing and promotional campaign that stresses Frova's clinical benefits including its long half-life and low recurrence rate, especially among difficult to treat patients.

Just last week, for example, we announced an educational partnership with tennis great Serena Williams, a menstrual migraine sufferer who began using Frova when other treatments proved ineffective. We are also encouraged by how the launch of DepoDur is progressing. We added 45 representatives in January to bring our total hospital sales force to 70. And they are making good progress in targeting the 1000 largest surgical hospitals in the United States.

Though accounting rules preclude us from recognizing revenue at this time, field intelligence suggests that the product is being well received and is progressing as expected. Now as many of you know, however, hospital selling is a methodical, brick by brick effort requiring formulary review, acceptance, and a change in protocols for the way post-operative pain is treated at each individual institution. We continue to be excited about the growth prospects for each of these products as 2005 unfolds.

Additionally, on March 14th we announced that we had reached two separate licensing agreements for two products using patch technology. The first is an agreement with ProEthic Pharmaceuticals for the U.S. and Canadian rights to develop and commercialize a once-daily ketoprofen containing topical patch. Currently in Phase II clinical trials in the United States this ketoprofen patch is being developed for the localized treatment of acute pain associated with soft tissue injuries such as tendonitis or joint sprains and strains.

The second agreement is with DURECT Corporation for the exclusive license to develop and commercialize DURECT's sufentanil containing transdermal patch. Here again in both the United States and Canada. This sufentanil patch which is in early stage clinical development is intended to provide relief of moderate to severe chronic pain for up to seven days duration.

We remain excited about these pipeline prospects as well as the overall strength of our development pipeline. We currently have 11 mid to late stage products in our R&D pipeline, each representing potentially significant growth opportunities. We will continue to license and acquire additional products, companies and technologies in the future in both pain management as well as complementary areas, such as neurology, perioperative care and supportive care oncology. I would now like to turn the call back to Carol for some additional comments.

Thanks, Peter. Now before we take your questions I would like to just take a moment and review some of the upcoming key milestones and significant events at Endo. We look forward to a decision by the FDA on Novens ANDA for the generic transdermal sentinel patch. Novens has manufactured sufficient quantities of inventory for us to launch this generic version of Duragesic immediately upon approval. We expect the decision will be forthcoming regarding the appeal heard on November 3, 2004 of the lower court decision that invalidated Purdue Frederick's patents covering generic Oxycontin. And we continue to be excited about our prospects in 2005 for a number of reasons including our expanded sales force which will be actively promoting Lidoderm, Frova and DepoDur. And the potential launch pending the generic versions of both Duragesic and Oxycontin which are currently the two largest selling branded strong opioid analgesics.

The advancement of our development pipeline, including our late stage products Oxymorphone for extended release and immediate release, as well as Frova for an indication for the prevention of menstrually related migraine. And our substantial cash position which affords us the opportunity to pursue strategic value driven acquisition of products, companies or technologies with the potential for growth.

Finally, on March 9 we announced that as part of a management succession plan I would be rehiring as Chief Executive Officer and that Peter Lankau had been appointed by Endo's Board of Directors to succeed me in that role effective May 20, 2005. I am confident that Peter has the ability, experience and expertise to bring Endo into the next phase of its growth. While I look forward to enjoying my retirement, I am also excited to remain involved with Endo as its Chairman of the Board. Now my colleagues and I would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Dave Windley with Jefferies & Co.

I wanted to ask a few questions around inventory to start. The Lidoderm channel inventory, I know it is a fairly narrow list of customers, but is this an across the board reduction, or is this kind of one culprit that is more volatile? And in your guidance for Lidoderm for the balance of the year, is your assumption that inventories will now stay at this lower-level, particularly since your run rate, your sales run rate is pretty close to the high-end of the range, your guidance range for this year today? Thanks.

Sure, David. Our expectation is that on a go forward basis that inventory levels will stay at this lower-level that we have experienced by the end of the first quarter. So we don't expect inventory levels to move up any material amount. And part of that I think is driven to your first question. We had announced that we have in fact signed one agreement with a customer for inventory management, and we did not, have not yet signed them for others. Our expectation, however, is that is a model that the substantially the wholesale customers are moving towards. The one customer who we do have an inventory management agreement with their inventory stayed relatively constant from fourth quarter last year till first quarter this year. But the remainder of the business is not under any sort of inventory management agreement. So their inventories can still be relatively volatile.

Okay, and you indicate that you think that is the way the business is going. Should we expect you to be signing more management agreements, and would those put pressure on channel inventory levels?

Our expectation is over the course of the coming year or years we will be signing more of these agreements. It could potentially put some additional pressure, although inventory levels again are pretty low by operating standards. So we expect inventory levels to stay at this level for the course of the year, and will see how the year plays out.

Moving on, your Lidoderm on your balance sheet 0has been something that you have been working down over the last couple of quarters. Where does that stand?

It's actually as of the end of the first quarter in pretty good shape within probably the range of what we want to hold on hand since we are not a manufacturer? We tend to probably hold more inventory than companies that are manufacturers; it's somewhat of an insurance policy or backup plan. Lidoderm as you know is single sourced from Japan. So we want to hold more of that product than might otherwise make sense from a carrying cost perspective. But Lidoderm is in pretty good shape as of now.

And the last question, I think that prepared last inventory question prepared remarks comments that Frova inventory in the channel is now down to a normal level. Is that normal similar to Lidoderm or normal similar to historical levels?

It is normal relative to our expectation for the future of what type of inventory will be held of Frova.

And so that would imply that you would expect that sales for Frova in the second quarter would reflect script demand.

That is for the course of the year that is our expectation.

Okay. Peter, I was hoping while we're on Frova could you talk a little bit about what you are seeing in the more detailed script report returns on Frova? At ATS I talked to a few people that expressed some enthusiasm about the reception for Frova in the specialist community. But the aggregate script returns that we get to see don't seem to reflect a pickup yet. What would you attribute that to?

Sure, Dave. First of all, I think that the clear advantages that we see with Frova are very well suited towards type of patients that the neurologist particularly are seeing. And we are seeing the neurologists begin to pick this product as a very clear choice for long duration migraines particularly. And those have a tendency of being both for menstruation as well as those that are not associated with menstruation. We are just now beginning to employ the sales force in a very targeted fashion to identify and to now begin calling on a great deal of the neurologists that were not called on in previous quarters because of the reorganization, and the realignment. So I think that the script trends that we've seen to date through the month of March are just now beginning to see a pickup in where we would expect Frova to go over the course of the balance of this year. And so I think subsequent quarters will give us a better indication as to how well the opportunity for this market segment is being appreciated by the neurology segment. Primary care is pretty much doing as we had expected.

And one last question -- and I will jump out -- prepared remarks commented that you now have 11 products in the pipeline. Could you summarize which one of those, if it's less than the 11, you have control over and 11 strikes me as quite a few. How are you deploying resources to ensure that those 11 products are all getting the necessary attention to move them rapidly through development? And thank you for your answer.

Let me try to take a crack at that. Clearly our number one priority right now is the oxymorphone program. We do have total control over that program and have been executing the remaining Phase III trials as we speak. And that is in fact our number one priority. We are also involved and engaged in the development of many of the projects that are in our pipeline, whether it be with a partner or solely under Endo's auspices. Rapinel (ph) is a product that we are that we could be developing clearly on our own. Ketoprofen patch will be one that would be on our own. Yet we will continue to be in discussions with our partners over the course of all of these programs because clearly our ability to maximize the opportunity goes not just to our own clinical expertise but also the development expertise that came from our partner. We have, in fact, begun to segment our R&D resources to better be apportioned to these projects as we see the priorities, and we will certainly ensure that during the course of 2005 that those priorities are met.

Thank you.

Ian Sanderson with SG Cowen.

Good morning, and thanks for taking the question. First on the SG&A spending in the quarter, is that a representative baseline number we should use for the quarters looking forward, or were private (ph) sales force adds really not hitting in that quarter in Q1? And secondly, on the sales force buildup on the hospital side, you've got 70 reps. DepoDur didn't seem to be really justifying a full 70 reps. Should we be looking in the near-term for some additions to that hospital product sales line in terms of product addition?

And then just a housekeeping question, were there any price changes in Q1 that could have exacerbated some of the inventory buildup on Lidoderm? And then finally, Lidoderm use in osteoarthritis patients, have you started to see (technical difficulty) reaction to that trial versus Celebrex?

(technical difficulty) I'll take a couple of these. The SG&A for the quarter, although doesn't necessarily reflect the full payroll cost, so to speak, of the reps for the entire quarter, there are significant launch costs and other costs as it relates to recruiting, etc., that are being recognized in the first quarter. So we don't provide quarterly guidance. Our full-year guidance as to SG&A is that we expect it to increase from where it was in 2004.

So I can't really comment as to whether it is representative for the quarters other than give you some flavor for what is in there; a lot of launch costs in the first-quarter and some amounted to payroll and other recruiting costs as it relates to the ramps. As far as price increases, we took two price increases -- or price increases effective January 1st for Lidoderm and Frova. And we did not take any price increases on those products in the first quarter.

I'm sorry, were there price increases on January 1st for those two?

Yes, they were effective January 1st for those two. We announced those, actually, in December to our customers. So we knew that it would be effective -- what that would be. We permitted, as we have historically done, permitted our customers to buy an additional two weeks at the old price above their normal December demand, and then we controlled when we shipped that product as to whether it was a fourth-quarter shipment or first-quarter shipment based on what we perceived to be the underlying demand.

Okay, and can you give us the amount of those price increases?

Sure. We took a 7.5% increase on Lidoderm and an 8% price increase on Frova.

And I will just touch on the other questions that you had there, Ian. On the hospital sales force we are clearly in the future looking at the opportunity to leverage the sales force across a multitude of products. However, we are very comfortable currently in allowing this sales force to really engage with the launch of DepoDur. This product, remember, just started commercial shipments in December. We believe that, as I mentioned in my prepared comments that this will be a methodical process and it will take us some time and effort to change the protocols within many of these institutions. And so the concentration on DepoDur at least for the short term is something that is very desirable.

With regards to Lidoderm's use in OA, clearly there is a number of off label uses for Lidoderm that exists in the market. We have indicated in the past that we believe that that is somewhat more than half of the uses. We aren't able to indicate to us whether or not there are increases or not in usage of those off label indicators. We simply see what total script trends look like, and clearly those continue to be strong and will probably get the more anecdotal feedback over the course of the next several quarters on whether the data that has been available for us to publish in OA results in further usage in that indication.

Thank you very much.

Scott Henry with Oppenheimer.

Just a couple questions. First on the generic business, how should we think about that sequentially? And if you look at the script trends and I see a roughly 30% year-over-year, does that base out? And then the second question on Lidoderm. Just trying to get an idea of what percent, if you know of scripts are in managed care versus Medicaid and kind of along that line of the 7.5% price increase, what amount sticks after rebates and what not.

As far as the generic business goes, the two main drivers of that is our Endocet product and morphine sulfate extended release. And those products both received competition in late '03 and during the course of 2004. The market has somewhat stabilized as it relates to those products. There is ourselves and two competitors on Endocet and two of us in morphine sulfate. The shares seem to have somewhat stabilized and pricing seems to have somewhat stabilized. But of course that can always change if another competitor comes in or another competitor becomes more aggressive. So our expectation for the year we have not disclosed but the dynamics of these now seem to be relatively stable. But that can always change pretty quickly.

Relative to Lidoderm, Scott, the majority of prescriptions that are reimbursed for Lidoderm are clearly third party pay, both managed care as well as Medicaid. There is a substantial amount of Lidoderm business that is in the Medicaid market as is the case with many pain medications. We haven't discussed or disclosed what percentage those are, but I can tell you that clearly the price increases that we've taken are not wholly reflected in our net sales as a portion of those exceeding CTI by regulation are not given to the full benefit of the product. So we think, and here again we haven't broken that down at all, but I can tell you that there is an amount that does not reflect in the net sales of Lidoderm.

We have said in the past that our Medicaid usage is about one-third of Lidoderm. So that does take significantly from any potential price increase, and as we mentioned earlier as well the inventory management agreements tend to dampen price increases, as well.

Thank you for taking the questions.

Jim Dawson with Buckingham Research.

Just a couple of things. I don't know if you mentioned this earlier, but what is the current level of inventory for Frova and Lidoderm right now? Also why was there such a sharp inventory destocking of Lidoderm if it is a growing product? And then just finally, what was the rationale for not preannouncing for the quarter when there was such a large miss versus consensus? Thanks.

We only give annual guidance so we did not provide quarterly guidance. So we are sticking to that policy to announce only on an annual basis what we expect for the full year with sort of a longer-term view of the potential growth of our business. As far as the current levels of Frova and Lidoderm, I am presuming you mean within the wholesale trade area. I guess I will comment on why there's such a significant destocking, I think relates again to the fact that a lot of our customers, the wholesale customers in particular are moving to a fee-for-service type of relationship with their manufacturing partners. Whereas historically they had relied on purchasing product from manufactures in advance of price increases and then be able to pass the increase along to their customers stack buying as its termed. That is a relatively choppy model, and for reasons that are really not known to us they have decided to move a model away from that to carry lower levels of inventory and start charging essentially fees for the service of distributing the product for the manufacturing partners. All of the large wholesalers seem to be moving in that direction at different speeds, and so that is why we expect that there was such a destocking in the quarter.

Andrea Larson with CEO Unterberg.

I want to continue on the Lidoderm thought process here. I understand why you didn't want to preannounce the quarter because you only give quarterly guidance, but I think when you see that a product is reporting revenues at a 30% disconnect to what the prescription trends are, even though you haven't given guidance that is a significant difference. Why is that not worthy of preannouncing? Because you said prescription trends look like 93 million in revenue yet you are reporting 64.

I will just comment again we don't give quarterly guidance. We try to think about our business more in a longer-term basis for annual periods and longer than that. We don't preannounce when earnings are good, and we don't preannounce when earnings are bad. And that's relative to other people's expectations. So I'm not sure how else to comment.

Again we reaffirmed our guidance for the year, we reaffirmed our guidance on Lidoderm of between 390 and 400 based upon a strong demand that the product is showing. So we are comfortable with our guidance for the year.

I think if our full year guidance was in jeopardy we would certainly announce that.

So when we look at a 90 plus million run rate and you said that in fourth quarter there was approximately $10 million due to stocking, we have 20 million that has disappeared due to inventory, and then previously you just said that you did not expect inventory to increase. So was the destocking a penalty because you haven't signed agreements with these wholesalers?

We don't believe it is a penalty for not signing agreements. It could be in anticipation of signing agreements. In many of these scenarios the wholesale customers are limited to the amount that they can hold our products by themselves and by us. And rather than have some sort of work down post signing the agreement, potentially we don't know this but potentially there could be a work down now in advance of potentially signing these agreements.

So if you're maintaining your annual guidance and you are currently at a $93 million quarterly run rate you are anticipating continued acceleration of the product throughout the year.

We expect prescription growth to continue over the course of the year certainly. It grew from a patch standpoint 45% from on demand year-over-year. Obviously it has declined from when it was in triple digits historically as the product gets bigger and bigger, but we still expect prescription growth to grow the remainder of the year.

Do you feel like the wholesale or inventory levels with these agreements is a solid run rate that will protect you in case of snowstorms or things like that than can interrupt supplies or do you feel like they are taking inventories to a level of concern? Because 20 million differential seems huge on a product that is running 90 million a quarter.

It certainly was big. I don't know what exactly is in their mind. There is going to be the range by which the agreement, we believe will state of how much they can hold of certain of our products. Within that range they are permitted to go up or down depending on either their needs or whatever the case may be the way these agreements are being drafted. We believe however there is not going to be a significant incentive for them to do step buying or move inventory up and down. I think the model they want for the future is to carry less inventory so they have less carrying costs and they will run that at a lower level than they ever have in the past and probably just try to maintain that level in future. But again, I'm not sure what completely their thought process is.

Okay, and then on the Percocet run rate would you be willing to give us some color as to what percent of sales is old Percocet versus what percent is the more recent formulations with the lower acetaminophen that has faced the new competition?

We haven't broken that out by strength historically. I guess I would say there is still some expectation that there is continued erosion going to occur with the newer strengths. The newer strengths are substantially generisized, but there is still some room to go for those as it relates to the older strengths, which are more generisized. So our expectation is there will be a decline year-over-year and from this existing run rate as a result of continued erosion they haven't bottomed out but they are pretty close to the bottom in terms of erosion.

Okay, and last question, in your conversations with Noven do you believe they are in an active dialogue with the FDA?

Yes, they certainly are in active dialogue. I think that as we have discussed previously in the O.J.D. division does not typically provide any particular updates on where and how and when you will have a final decision. But in terms of answering questions or any other dialogue to help them complete their review process Noven has been very actively engaged with the agency.

Great. Thank you.

Ken Trbovich with RBC Capital Market.

Thanks for taking my question; I guess I would like to start with Frova, if we could. Given that you've had the product now for six months I was curious if you're disappointed at the inability to move the Rx line and how long you think it might be before we should expect to see some movement on that level.

We're not disappointed at all. In fact we believe that we are tracking as we had expected. We knew that as we acquired the product in the latter part of 2004 that our sales force was at that time aligned around optimizing Lidoderm and Frova was added to the detail (technical difficulty). And clearly was not the sales force was not optimized around the highest prescribing migraine physicians. That has occurred here in the first quarter, and as we indicated by hiring the additional 115 representatives in total, 70 of which are selling Frova now, that hasn't been there before, we believe that we have re-optimized our sales force to maximize both Frova targets as well as Lidoderm targets. And we are expecting that as the year progresses that increased penetration within those specialty physician audiences particularly will start to occur.

Okay, and could you give us an update on where Vernalis is with regard to the man (ph) indication in their efforts in those studies?

The prevention study that is ongoing as we've indicated earlier was initiated in the latter part of 2004. That study is progressing. It is enrolling patients as we speak. And we are expecting that an opportunity for us to potentially file a supplemental NDA will occur sometime in the first half of 2006.

Obviously you folks take pride in looking at the business over the long-term. Could you discuss any brand management strategies for Percocet that might help to recover the brand to former levels?

As you know Percocet is a long-standing brand for Endo. It has tremendous brand equity. We've always said that our intention is to manage the life cycle of Percocet. We are clearly not in a position to divulge what our intentions are there specifically since we do not have any exclusivity or patent protection around Percocet. In fact our last two versions of Percocet were launched without having indicated previously what those formulations would look like. But suffice it to say that our intention is to continue to manage the life cycle of the Percocet franchise.

And one final follow-up, have you completed the pediatric studies on the existing version?

We haven't commented at all on any of the progress that we are doing with regards to that life cycle program. So I couldn't give you any commentary on that.

Okay. Thank you.

Robert Uhl with Friedman, Billings, Ramsey.

Just on DepoDur, I wonder if you could tell us how many of those thousand hospitals you're targeting now have it on the formulary or how many of them have it stocked in the pharmacy. Just some idea about the penetration there. And then what would trigger your recognition of the sales of that product? And is 37.5% your tax rate for the year?

I'll address the first question, Robert. We have not discussed and disclosed the details around the progress of DepoDur by hospital. But we will certainly indicate that as each individual institution has to take its due course to review and approve the product as we had expected during the course of 2005 that is progressing on schedule. We do see this as being obviously a time-consuming exercise, and we are on target to where we expect it to be.

As it relates to recognizing revenues on DepoDur, GAAP requires you to, in order to book revenue you have to be able to reasonably estimate returns for the product. You take into account all kinds of factors, including how novel the product is, if it is a new area for you, etc. which has led us to not recognize revenues since the hospital area from a promotional standpoint at least is new to us. So we are going to wait until further in the year hopefully where we can look at the data that will be generated, reorders by customers, the (technical difficulty) data and things like that that will give us some comfort that in fact the product, certain amount of the product is not going to be returned and will be able to book our revenue in that case in the future. So it is somewhat of a gut feel, but you have to be able to estimate what your returns are and until we get further into the course of the year, we didn't think we could recognize revenue at this point.

But the guidance number is what you're going to recognize?

That is our expectation. As far as the tax rate goes, a 37.5% that is somewhat our expectation for the course of this year. The rate has come down versus where it has been historically. In part due to the cash on hand being invested in tax-free municipal funds and the cash balance growing. As well as interest rates rising so that has impacted our tax rate favorably, as well as the Jobs Creation Act did create a manufacturing credit that we have been able to take advantage of and lower our effective tax rate.

Thanks.

Michael Tong with Wachovia Securities.

Thanks for taking the question. I hate to come back to Lidoderm inventory again, but can you remind us what you saw was the historical level of trade inventory and where it is now? Secondly, in your generic segment there was a pretty good bump sequentially from Q4 to Q1, and yet the gross margin for the entire Company also went up close to 5 percentage points. Can you talk about the reason for the sequential ramp in generic revenue and what is the moving part with respect to the gross margin for the company that actually got it back up to 78%? And then finally, can you give us an update on to be oxymorphone trial in terms of patient enrollment?

I'll take the first few and let Peter comment on the trial enrollment. As far as Lidoderm historical levels, depending again on purchasing patterns when we take price increases, etc., we had liked to see a month and a half or so of product out there historically or that I guess is what we have witnessed historically with our wholesale customers. Now its a few weeks out there, which obviously caused the drop-off. So we historically have experienced something like a month and a half, and now we are in sort of a few weeks camp similar to where we were in the second quarter of 2004. As far as the sequential growth in the generic business, I think that is substantially due to some of the competition we are experiencing during the course of 2004 with both morphine sulfate and Endocet that took a while probably to shakeout which customers were going with which manufacturer and customers that we potentially lost had to work down their inventories etc. So I think once everything sort of settled out towards the end of 2004 that is why there was some growth because it was then based more on demand from ultimately who ended up with who in the business.

As far as the margin, a comment although our expectation is for there to be a slight decline in our margin full year 2005 versus 2004, product mix obviously has a lot to do with what that is. We don't manufacture our own product, so we don't get the benefit necessarily of variances in manufacturing. It is more ala carte pricing for us. So the product mix, whether its composition of brands or generics or even specific products can impact that, and we were favorably impacted in the first quarter based on the products that we sold.

And can you be more specific about which ones were the ones that drove the margin expansion?

We really don't comment on individual product margins. So I can't really comment much further.

With regards to the oxymorphone trial, as you recall we have two trials for the ER that are currently underway. Both of those trials are enrolling as we expected, and we are expecting to file the complete response in the early part of 2006, as predicted.

James Mulloy with Oppenheimer.

Thanks for taking my call. Just a few quick questions. First on the Lidoderm, when was the price increase in '04 put into effect? And when you gave guidance for the full year '05 did you factor in the first quarter destocking or is that a surprise and you're now ahead of expectations? And then I guess the last question would be on the fourth quarter you also had guided to about $0.10 expectations assuming an end of first quarter start of second-quarter approval on the generic Duragesic. At what point does that start becoming an issue?

As far as the $0.10 Duragesic guidance that was our expectation assuming an early 2005 launch of the product. Obviously we are beyond early 2005. As it relates to that we once we have clarity as to more specifically what the timing of our approval would be or if we know when an approval would be as well as potentially who else may be in the marketplace we will update that guidance as appropriate. As far as the price increase, it was effective January first of this year 2005 for both Lidoderm and Frova. We did permit customers to order an additional two weeks of product at the old price in addition to what a normal December would look like. And then again decided to ship in '04 or '05 depending on what we thought the needs were for those customers, as well as what they thought their needs were.

As far as the destocking in the first quarter, we did expect and have expected that the customers wholesale customers moving to this fee for service type model, as well as their publicly stated desire to carry less inventory would impact what our expectations would be for four Lidoderm. So I guess we do factor in inventory all the time when we do our forecast for the year, and that was one of the factors we considered.

Thank you very much.

Andrew Swanson with Citigroup.

All of my questions have been answered. Thanks.

Rich Watson with William Blair & Company.

Thanks for taking the call. Just had a quick question on kind of the overall opioid market with your Percocet franchise and the morphine sulfate facing incremental competition and scripts reflecting that. It is kind of hard to tell whether there is anything unfavorable in terms of trends in the overall market and prescribing of opioids. Have you seen any negative impact from kind of some of the broader issues that have been ongoing? Is that reflected at all in the script trends as we are seeing them today?

Sure, Rich. Actually the opioid market is continuing to be quite robust. The compound annual growth rate of the strong opioid segment now at about $4.2 billion has been better than 20% over the last four years. While clearly in the Percocet segment and the MSAR segment those actually as they almost wholly generisized at this point are still growing quite nicely. So we haven't seen any negative impact on the overall opioid market as a whole, which clearly we see as boding well for the potential launch of oxymorphone in mid to latter part of 2006 assuming approval. We expected that will continue to be a strong market on a going forward basis.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Are there any closing remarks?

I would like to thank everybody for being on the call today, and on a more personal note as the next conference call I will have already retired as Chief Executive Officer, I wanted to just close by letting you all know how much I've enjoyed working with you and I have really appreciated your support over the time. And I do look forward to seeing you in the future; I will be attending some conferences albeit not as many as I did in the past. But again we thank you and we look forward to keeping you apprised of our progress.

This concludes today's teleconference. You may now disconnect.