Endo International PLC (ENDP) 2005 Q3 法說會逐字稿

Good morning. My name is Deborah and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Endo Pharmaceuticals third quarter 2005 earnings 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). I would now like to turn the call over to Bill Newbould, Vice President for Corporate Communications. Thank you. Mr. Newbould, you may begin your conference.

Good morning and welcome to the Endo Pharmaceuticals 2005 third quarter teleconference. This call is being recorded. With us on the call this morning are Peter Lankau, President 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, Peter, 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 that 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 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 and in Endo's registration statement on Form S3 filed with the SEC on September 2, 2005, as amended. We urge you to review these factors.

In addition, during the course of this call Peter, 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 measures to their most directly comparable GAAP financial measures.

Now I would like to turn the call over to Endo's President and Chief Executive Officer, Peter Lankau.

Thank you, Bill, and good morning everyone and thank you for joining us on our call today. Early this morning, we reported our financial results for the 2005 third-quarter and year-to-date periods. We are pleased to have this opportunity to discuss those results with you as well as some other recent developments.

First, I would like to briefly summarize our financial performance. Net sales for the third quarter of 2005 were $245.2 million, up 53% from $160.3 million in the third quarter of a year ago. Diluted earnings-per-share for the three months ended September 30, 2005 were $0.50 per share compared with $0.31 per share in the same period of 2004.

Adjusted diluted earnings per share for the third quarter of 2005 were $0.58 compared with $0.31 in the same period of 2004. The driving factors behind this strong quarterly performance were primarily the continued strong growth of Lidoderm and the launch of our generic extended release oxycodone tablets. Net sales of Lidoderm were $124.3 million for the 2005 third quarter versus $83.8 million in the 2004 third quarter, an increase of 48%.

Market demand remains strong for Lidoderm, our topical analgesic patch indicated for the treatment of pain associated with postherpetic neuralgia and we believe we are on track to achieve our previously stated guidance of 390 to $400 million in net sales of this product for the full year 2005.

Generic extend-release oxycodone tablets, our generic version of Perdue's OxyContin, contributed $49.3 million in net sales for the three months ended September 30, 2005. Following the favorable appellate court decision announced on June 7, Endo launched all four strengths of this product and will share generic marketing exclusivity on the 10, 20 and 40 mg strengths with the authorized generic until December 2005. Based on IMS data, the generic share of the market was approximately 68% at the end of the third quarter. At September 30, we estimate Endo's market share of the generics to be approximately 55% for the 10, 20 and 40 mg strengths and approximately 50% of the generic OxyContin market overall.

I am pleased to report on our excellent financial performance on a year-to-date basis as well. For the nine months ended September 30, 2005, net sales were $579.4 million compared with $457.8 million in the comparable 2004 period. Diluted earnings-per-share were $0.97 for the first nine months in 2005 compared with $0.86 in the same period a year ago. Adjusted diluted earnings-per-share for the 2005 nine months were $1.14 per share versus $0.92 per share in 2004.

As noted in our press release, we are reaffirming our guidance for 2005 of 800 to $825 million in total net sales, 390 to $400 million dollars in net sales of Lidoderm and $1.68 to $1.73 in adjusted diluted earnings per share. I would like to remind everyone of course that there can be no assurance of the Company achieving these results. We believe the continued growth of Lidoderm, combined with the ongoing development of our pipeline, including oxymorphone ER and IR, leave us well positioned for future growth.

Now I would buy to briefly recap some noteworthy developments that occurred during the third quarter. As previously announced, we were notified by our partner, Noven Pharmaceuticals that the FDA had informed them that they would not approve Noven's currently pending abbreviated new drug application for its developmental transdermal Sentinel patch. We believe the FDA's position is based on the FDA's assessment of potential safety concerns related to the higher drug content in the Noven product versus the branded product, Duragesic.

In August, our partner, Vernalis, announced completion of patient enrollment for the confirmatory Phase III advocacy study of Frova for the prevention of menstrually-related migraine, MRM. We believe topline data from this trial and the filing of a supplemental new drug application to include data from the Phase III trials undertaken by Vernalis are on schedule for the first half of 2006.

Finally, we announced positive results for the Phase III clinical trials that we conducted in response to the FDA's request for additional information for both our oxymorphone extended-release and oxymorphone immediate-release tablets. For both of the two oxymorphone ER trials, one of which was conducted under the FDA's special protocol assessment process, we showed statistically and clinically significant outcomes in two distinct patient populations -- opioid naive and opioid experienced in chronic low back pain. For oxymorphone IR, we showed statistically and clinically significant outcomes in a repeat dose clinical trial conducted under an SBA in postsurgical patients.

Finally we believe we are on track to file the complete response to the FDA's approvable letters by early 2006 and we look forward to action letters from the agency for both NDAs six months from the filing date.

Now before we take your questions, I would like to turn the call over to Jeff Black for a more detailed look at our third-quarter and nine-month results. Jeff?

Thanks, Peter. As Peter mentioned, Endo's net sales for the third quarter of 2005 were to $245.2 million compared with $160.3 million in the third quarter 2004. For the nine months, net sales totaled $579.4 million in 2005 versus $457.8 million in 2004. Net sales of Lidoderm, our topical analgesic patch, rose 48% to 124.3 million for the 2005 third quarter and were up 39% to $288.9 million year-to-date in 2004. Prescription growth for Lidoderm increased 35% and dispensed unit growth was up 37% in the third quarter 2005 versus the comparable 2004 period. Prescription growth for Lidoderm was up 39% and dispensing unit growth was up 41% for the first nine months of 2005 versus the same period of 2004. Based on the IMS data, we estimate that prescription demand for Lidoderm in the third quarter of 2005 was approximately $115 million.

Although for the quarter Lidoderm net sales exceeded our estimate of prescription demand, inventory at our customers remained at relatively low levels compared with historical levels. We expect our customers' inventory of Lidoderm to remain at relatively low levels compared to historical levels for the remainder of the year. Based on IMS data, the run rate on Lidoderm is now approximately $470 million.

Net sales for Percocet were $28.8 million for the three months ended September 30, 2005 versus $26 million in the same period in 2004. For the first nine months of 2005, net sales of Percocet were $81 million compared with $70.4 million in the year-ago nine months. Based on the IMS data, we estimate that prescription demand of Percocet in the third quarter 2005 was approximately $27 million. In addition, based on the IMS data the run rate on Percocet net sales remains in excess of $100 million.

Net sales of Frova were $10.3 million for the three months ended September 30, 2005 and 25.1 million for the year-to-date period. As previously announced during the first quarter of 2005, we increased the size of our sales forces and realigned our sales representatives and their management to capitalize on the product opportunities for both Lidoderm and Frova. Based on IMS data, prescription demand of Frova is estimated to have been approximately $10 million in the third quarter of 2005. Frova's potential future indication for the prevention of menstrually-related migraines make it we believe one of the Company's most promising products.

Net sales of DepoDur was $740,000 for the three months and $3 million for the nine months ended September 30, 2005. Endo began shipping DepoDur in September of 2004 and began the full commercial launch with its 70 representative hospital sales force earlier this year. DepoDur is intended to provide consistent pain management for up to 48 hours after major surgery. We believe that this product is still in its launch phase.

On June 7, 2005, we began commercial sale of all four strengths of our extended-release oxycodone, the generic equivalent of OxyContin. Net sales of our extended release oxycodone were $49.3 million for the third quarter of 2005 and $78.5 million year-to-date. The net sales during the second quarter of 2005 reflected typical launch quantity purchases and by September 30, customer inventories were at expected operating levels. Due primarily to increased generic competition with Endocet and our morphine sulfate extended-release tablets, net sales from and Endo's other generic products were $29.2 million in the third quarter and $94.8 million for the nine months in 2005 versus $42.7 million and $164.7 million in the respective periods of 2004.

Our gross profit for the third quarter of 2005 was $183.8 million versus $122.1 million in the same period a year ago. For the nine months, gross profit was $446.1 million in 2005 versus $357.8 million in 2004. Gross profit margins declined to 75% and 77% for the quarter and nine months, respectively, in 2005 versus 76% in the year-ago third quarter and 78% for the nine months ended September 30, 2004. Excluding the write-off of the generic transdermal Sentinel patch that we previously announced, gross profit margins were approximately 77% and 78% for the quarter and nine months, respectively, in 2005.

Selling, general and administrative expenses for the third quarter of 2005 were $47.3 million, up 9% from $43.5 million in the year-ago third quarter. For the nine months, SG&A expenses were $157 million in 2005, a 25% increase from 2004. The quarter and year-to-date increases in 2005 are due primarily to the expansion of our salesforce earlier this year along with additional investment in promotional, educational and other activities to support our new product launches.

Research and development expenses for the quarter, including $6.5 million in milestone payments to partners, were $22.1 million versus $9.5 million dollars in the year-ago quarter. For the year-to-date, R&D expenses were $70.1 million in 2005 versus $38.5 million in 2004. The year-to-date increase in R&D spending is attributed in part to up-front and milestone payments to partners of $26.5 million, including the up-front fee of $10 million we paid for the exclusive license to develop and commercialize the Sentinel transdermal patch and the $10 million up-front payment we made to develop and commercialize the once-daily Ketoprofen topical patch. We expect to continue to make substantial investments and R&D to support the advancement of our product pipelines, an integral component of our growth strategy.

As a result of the FDA's decision on the generic transdermal Sentinel patch and in addition to the $5 million write-off of our inventory costs of the patch included in cost of sales, we also wrote off $5.5 million dollars representing the unamortized portion of the license fee we paid to Noven. I would like to point out that our prior guidance for the year ending December 31, 2005 did not include any sales or earnings from this product.

Net income for the third quarter of 2005 was $66.6 million, up from $41.4 million in the comparable 2004 period. Diluted earnings plus share for the third quarter of 2005 were $0.50 compared to $0.31 in the third quarter of 2004. As detailed in the supplemental financial information contained in today's press release, adjusted diluted earnings per share for the third quarter of 2005 were $0.58 versus $0.31 in the comparable 2004 period. Year-to-date, our 2005 net income was $129.4 million versus $114.1 million in 2004.

Diluted earnings per share for the nine months ended December 30, 2005 were $0.97 compared with $0.86 in the same period of 2004. As detailed in the supplemental financial information contained in today's press release, adjusted EPS for the nine months was $1.14 per diluted share in 2005 compared with $0.92 per diluted share in 2004. During the nine months ended September 30, 2005, net cash used in financing activities included the $21.4 million payment to Endo Pharma LLC, a limited liability company that currently holds a significant portion of Endo common stock in which affiliates of Kelso and Company and certain other 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 the tax benefits that are usable by the Company as a result of the exercise of stock options granted pursuant to the Endo Pharma LLS stock option (indiscernible) which 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. Additionally during the fourth quarter of 2005, the Company will make a payment of approximately $21 million to Endo Pharma LLC for the remaining 50% of the 2004 tax benefit.

On October 12, 2005 as part of the sale of 33.4 million shares of our common stock, approximately 19.5 million shares underlying stock options granted under the Endo Pharma LLC stock option plans were exercised at a market price of $26.04 with a weighted average exercise price of $2.72 and assumed tax rate of 38.4%. Assuming the attributable composition charge deductions are usable to reduce our taxes in 2005 which will permit us to apply for a refund previously paid taxes, we are obligated under our amended tax sharing agreement to pay the Endo Pharma LLC an additional tax benefit amount of approximately $175 million. 50% of the estimated tax benefit amount attributable to the October 12, 2005 offering and any additional tax benefits attributable to the exercise of stock options granted under the Endo Pharma LLC stock option plans detailed in 2005 will be due within 15 business days of the date we receive an opinion on our final audited 2005 financial statements from our independent registered public accounting firm which we estimate will occur within 60 days of our fiscal year end of December 31, 2005. And the remaining tax benefit amount attributable to 2005 is due within 30 business days of the data on which we file or 2005 tax return with the Internal Revenue Service.

Additionally, we anticipate that up to 2.3 million additional stock options granted under the Endo Pharma LLC stock option plans will be exercised prior to January 1, 2006, and therefore, assuming exercise at a market price of $26.04 with a weighted average exercise price of $2.72, an assumed tax rate of 38.4% and assuming the attributable compensation charge deductions are usable to reduce our taxes in 2005, we will be obligated under our admitted tax sharing agreement to pay to Endo Pharma LLC an additional tax benefit amount of approximately $21 million in 2006. All pavements that have been or will be made or accrued pursuant to the tax sharing agreement have been or will be reflected as a reduction of stockholders equity in our consolidated financial statements. The exercise of stock options under the Endo Pharma LLC stock option plans do not result in the issuance of additional shares in the Company and will not dilute the ownership of our public stockholders. The estimated tax benefit of amount payable to Endo Pharma LLC attributable to Endo Pharma LLC stock options exercised may increase as certain holders of Endo Pharma LLC stock options exercise stock options in addition to those noted the bowel.

We generated cash flow from operating activities of $171.7 million in the nine months ended September 30, 2005 versus $70.6 million in the same period of 2004. In addition, our cash and cash equivalents totaled $410.5 million at September 30, 2005. We feel our strong financial position provides us the opportunity to utilize our cash and cash flow from operations to continue to pursue acquisitions, licenses and other strategic alliances within pain management and complementary therapeutic areas, such as neurology, perioperative care and supportive care oncology. I would now like to turn the call back to Peter for some additional comments.

Thanks, Jeff. Before we take your questions, I would like to take a few moments to review with you some of our coming milestones and significant events.

First, we look forward to initiating the Phase III trials for Rapinyl, our sublingual Sentinel tablet being studied for brachial (ph) pain by the end of this year. We feel that Rapinyl's distinctive benefits -- fast responsive action, enhanced absorption characteristics and added convenience -- provide us with a great opportunity to compete in this growing market.

We believe we're also on schedule to file a complete response by early 2006 to the FDA's approvable letters for oxymorphone ER and IR. We anticipate filing a supplemental NDA in the first half of 2006 for Frova as a preventative treatment for menstrually-related migraine. And finally, we look forward to continuing to make progress in advancing our development pipeline and to use our substantial cash position to take advantage of strategic expansion opportunities in pain and complementary therapies. Now, Jeff, David and myself would like to take your questions.

(Operator Instructions) Scott Henry, Oppenheimer.

Thank you. I just had two questions on the quarter, the first being SG&A it looked a little bit lower than I would expect it. I'm just curious what the trends are there and why that is playing out. The other one with regards to OxyContin generics, I'm just curious your take on some of the IMS data because the number looked a little than I would have expected as a lot of the scrip data we're looking at would imply 49 million was almost done by the end of August. So I'm just curious your take on why we would get that separation.

I'll answer the SG&A question and let Peter answer the OxyContin question. SG&A trends, the only guidance we provided for 2005 is that we expect it to be up versus 2004. Certainly with the early in the year launch of DepoDur and Frova as well as additional promotional educational things going on with Lidoderm as well as the launch of the generic of OxyContin with some risk management initiatives that we incurred in the first and second quarter were higher than what we experienced in the third quarter, whereas we're now sort of running full (indiscernible). So the trend I guess early in the year was really surrounding the launch of these new products and the various materials that are required there and training required there and educational things as well as risk management. And so we posted a slightly declined number in the third quarter.

Scott, relative to the OxyContin generic, as you recall in the second quarter, we recorded sales of about $29 million net with demand that was substantially lower than that, and that was due to filling the distribution pipeline with many of the wholesaler and chain customers. Over the course of the third quarter, much of that load if you will was worked down to the point where we believe we are currently at normal operating levels of inventory, which as you know for generics, are typically higher than they are for branded products. The wholesalers like to generally keep more inventory there because a lost sale of course can't be substituted for with another generic because they typically only carry one for their source program.

One other dynamic that is occurring in the market which is probably not evident from the general IMS data that most of the analysts receive is a mix of a number of factors. One is what the generic erosion rate is, and it is different by strength; obviously what the share is, and everybody has been monitoring that. And a last dynamic that is somewhat different here is the mix of erosion rates by strength by distribution channel. And what we're finding here is some anomalies that typically don't exist in the market. The 40 and 80 mg strengths as an example of oxycontin generics are not being substituted as rapidly as the lower strengths. And of course, the lower strengths are the less-expensive strengths.

What is also evident is that the chain stores are substituting at a much higher rate than are the independents or the food stores, and that of course means that on a mixed basis, what we're seeing in the market is not necessarily even between chain substitution and share versus independent store substitution and share. And therefore, because of the fact that the strengths that are being substituted more frequently are the lower strengths which are less expensive, that probably has led to what perhaps your observation is of lower than expected sales volume. But in our estimation, it is certainly what we had expected in the context of the mix of different distribution channels as well as within the share gain that we have established.

One of the anomalies here as I mentioned, however, is that the lower strengths are substituting much faster than the higher strengths. And that dynamic we would expect to continue throughout the rest of this year until such a time as we see the market settle out with the change in exclusivity come December and January and how that market will shake out should give us a better feel for how the different strengths will start to even out across all of the channels.

Thank you. And if I could just follow up. So in summary, is the 49 million number in the quarter, is that reflective of demand, or do you think it's higher or lower. And just as a follow-up on the same topic, do you think the recent switch in authorized generics plays into this market in any way? And thank you for taking all of the questions.

I think that the demand in the quarter is now pretty much starting to reflect that dynamic in the market as I mentioned earlier of higher than brand inventory levels. We certainly had to burn down a good portion of the excess inventory that was shifted in June. I think from this point out, that demand in factory sales will start to track much more consistently. While we haven't indicated what our demand sales are in the quarter, we certainly have expected that for the balance of this year that those inventory levels will maintain at current operating levels.

The dynamic shift with regards to change in authorized generic, frankly we don't see much change in the market. Much of the wholesaler anticipation for the loss of exclusivity on the lower strengths that's expected to occur in early December I think is keeping everyone as a status quo for the time being. We don't know exactly when Watson will be able to shift into a replacement mode for the IVAX product. We do know that Watson, of course we compete with them with other products in their line. We have been a very productive and responsible generic competitor from the pricing. And from a customer relationships perspective, we don't expect to see any substantive shift. And I think once the exclusivity period expires as we had certainly projected, we expect four players to be in the market and that to be the market dynamic for the foreseeable future.

Andrew Swanson, Citigroup.

Can we circle back and talk about the SG&A little bit more? I know you talked about some additional costs that were in the first half and we won't have those going forward. Does that make $47 million the new run rate until we move into oxymorphone launch mode in the second half of 2006?

We certainly won't might have the significant launch costs. We are certainly continuing to promote Lidoderm, Frova and DepoDur not only with our sales forces, but with the other educational and promotional activities during the course of the remainder of the year. However, the significant portion of those costs are typically included in the initial launch of those products and annually we just sort of update and refreshed your plan for even existing products. So I would expect those significant costs that may have a occurred in the first part of the year to maybe not continue for the remainder of the year.

And on DepoDur, can we just talk a little bit about, and I know you haven't provided product-specific guidance, but how a $740,000 number compares to plan?

We certainly are still very much in the launch mode for this product and we do believe that given the dynamic of this product in the hospital market with the need to change a lot of standards of care, that this will continue to be a launch phase product for probably the first 18 to 24 months of its lifecycle. Certainly during the summer months as you're probably well aware, formulary committees typically take the summers off, so we didn't get a lot of incremental formulary edge during the summer. We are expecting those to come back here full swing in the fall season. We have had very good feedback from those formulary committees that have actually put it on the calendar for review. High level of acceptance. We certainly believe that. However, once the product is some formulary, it does take time for education to take place amongst not only the litany of anesthesiologists and surgeons who are going to be involved with the use of this product, but also the nursing staffs as well as all of the other ancillary personnel in the hospital environment.

Products of this ilk typically will take an extended period of time to really get their foothold here. We certainly are expecting that this product will continue to be an important change in the way postoperative pain is managed. We have a full intent to continue to drive formulary acceptance with our hospital sales team and we expect that, again, over the first 18 to 24 months, we will be able to see what we expect as the long-term success of this product.

And then finally just briefly, if we could circle back onto the transition of the authorized generic. Will Watson have some form of preferred position with Ivax's customers going forward, or will they have -- I know you mentioned they have historically been a responsible competitor in the marketplace, but will they have to play price to hold onto that business, and will you be playing price to aggressively try and grab some of that business?

I think what is probably predicted here is that where Ivax currently is, they will remain with whatever inventory levels they have in the marketplace. If customers start to dwindle down inventory, it's probably likely that Watson will simply step into that position. Although we do believe that where the real change in the marketplace is going to occur is going to be in December. As I mentioned earlier, there is a fairly high level of inventory in the market for generics versus brands. So many customers may actually have enough inventory to take them to December. It's only six weeks from now. So I think that there very much will be no substantive change in the market with Watson in playing over that next six weeks, but I do expect that in December it will start to be a somewhat more competitive market. But as we have indicated earlier, because there have been long-lasting relationships with many of these customers by Endo as well as there have been relationships with the other players, Teva and Watson for sure. And certainly with the impacts coming in play, we expect that whenever that market settles out, it will be a reasonable decline in share and pricing because it will be somewhat stable from that point there going forward, from that point on. So we don't see any significant shift in price at this stage and we certainly will expect to see the dynamic shaking out at the end of the year.

Angela Larson, Unterberg.

Good morning and thanks for taking the question. I wanted to stay on the OxyContin as the patent exclusivity or the marketing exclusivity kind of changes there and the additional competition coming in. Could you give as a little bit of color about how you handle the reserves and the potential to putbacks on price that could occur as additional competition comes into the market?

Sure. We would look at, which is typical in the industry, to have potentially some sort of shelf stock adjustment for those customers that stay with us, so we would reserve it at that time when we have that sort of knowledge. Typically, what we've seen in these marketplace is that customers will sell out what they have remaining of year inventory if they are in fact switching and then put the new vendor in place once they have worked that through or maybe at the same time as they are working that through. We do not have a significant amount of inventory out there, so we wouldn't expect that to take a long time to the extent that someone switches from us, which we obviously certainly expect. But for those customers that stay with us as is typical in the industry, when pricing changes on the generic, we make the customer whole (ph) on that price change when the price change occurs and reserve it at that time.

So the reserve could affect fourth quarter?

It could affect the fourth quarter, certainly, and we anticipated that in providing guidance for the full year.

And in previous guidance, you had mentioned on DepoDur that it could be 12 to 15 million for the full year. What's your comfort level with that?

We had provided guidance for both Frova and DepoDur earlier in the year with essentially the launch of both of those products. That was our guidance at the time and as is our normal practice, we provide overall revenue and earnings guidance. We provide Lidoderm as a product specific but try not to get into product by product type guidance. Certainly with having the recorded sales of about $3 million for the first nine months of the year, achieving $12 to $15 million obviously seems like quite a stretch relative to where the demand is at this point. We still are very committed to this product over the long-term. We think we can build a significant presence in the hospital area with this product as well as potentially other products that we can add to the bag. But we are going to try not to provide product by product guidance except as it relates to Lidoderm as we go on in the future.

That's great. Last question on DepoDur. The earlier conversation you had mentioned that hospital formularies don't meet (ph) during the summer and things of that nature. Has the formulary acceptance been less than what you originally anticipated?

No, Angela. Actually, the hospital formula acceptance has been quite right on where we expected. It has been very strong actually. As I mentioned, the timeframe for hospital formularies to actually put new products on their agendas often takes as much as six to nine months. And as we saw in the beginning of the year, it was in fact a process of launching in late December, getting the salesforce in play in the January/February timeframe. At that point, many hospitals didn't have opened slots until September. So not all obviously, but many do. So we are still very much in the midst of getting on the agendas for the first time. But where we have been on the agenda and we have had a thorough review, we have had excellent acceptance and approval of the drug on formulary. So we've actually been quite happy with the acceptance of the product. Obviously, the timing of getting that process in play and then getting educational and the (indiscernible) efforts has been less than what we had hoped for.

David Buck, Buckingham Research.

Thank you for taking the question. A couple of questions. First I guess one on follow-up on DepoDur. If you look at the run rate for this year and extrapolate I guess some growth into next year, it looks like 2006, perhaps 2007 will be another year of lawsuits for this drug. I guess first, do you expect that to be the case and what type of losses are you prepared to bear for this product without leveraging the salesforce of 70 reps with some type of acquisition?

Certainly, the guidance for '06 has not been established yet for DepoDur, so we haven't given any indication as to where we expect the "breakeven" to take place. But I do think that as I have indicated earlier in the year, this kind of a product does need a dedicated sales force to really launch it effectively. It needs to have the time and attention to devoted to it without a whole lot of distraction. That is in fact occurring and as I indicated before where we are getting on the agendas for formulary committees, we are getting very good acceptance.

Having said that, we clearly are going to want to leverage the sales force as time goes on. And as part of our business development activities, we are continuing to look at opportunities for acquiring products that could be either on market already or short-term to market. That obviously becomes a very important point for us.

Having said that, as you probably are well aware with our oxymorphone program, given where it is, we expect that in the second half of 2006 if we're granted FDA approval that this hospital sales team will clearly be involved in the launch of oxymorphone not just for the extended release and the immediate release tablets, but also we have it in a currently marketed injectable form which we'll be rebranding to conform with the ER and IR and that hospital sales team will also be involved in the launch of oxymorphone based on the ability to get it on formulary, get patients on the product when they're in the hospital and carry them out to the community once they have been discharged. So we've certainly seen that that's a leverage point for us as well.

But clearly, as you indicated we are going to continue to look for opportunities to build a presence in the institutional environment, whether it be in the pure pain area or whether it be in those complementary areas that I referred to earlier.

Just a follow-up on sales force and SG&A. Peter, what do you think you need in terms of overall sales force to launch?

We have not done a complete analysis at this stage, David. As you know, the dynamics in the market have shifted quite a bit over the last year. We do believe that oxymorphone could potentially be either one of three players with share of voice in the market, or it could potentially be more than a fair share of that three-player market, depending upon what happens with some of the other brands. With that having been said, we estimate at this stage without having done the full analysis that we're probably looking at somewhere upwards of 150 to 200 incremental sales reps to launch the product. That would include both specialty focus representatives as well as primary care-based representatives. We don't currently cover all geography in the U.S., so certainly expanding our reach would be part of that analysis, deepening our penetration into the high prescribers of the strong opioid market will be part of that analysis. And obviously what we believe to be the long-term potential drug given what the FDA will provide us in terms of a label, that will help to determine the size and scope of this sales force effort. But that's sort of our rough estimate at this time.

Robert Uhl, Friedman Billings Ramsey.

Thank you. Could you just comment on the generic OxyContin price in the quarter? Did it remain stable throughout or maybe erode a little bit or just what was going on there?

(technical difficulty) of OxyContin generic, at least as far as Endo is concerned, has stayed stable almost from the very first day we launched. We've had our number of customers that we locked up with the Endo product within the first 18 to 36 hours of launch and the pricing really hasn't changed since then. So it has been fairly steady.

And the Lidoderm sales that were a little above demand, is that at all related to the August price hike or just why do you think that occurred?

As we had previously stated, we expected after the first quarter or at the end of the first quarter this year when there was a significant difference between supply and demand of the product that we expected through the last three quarters of 2005 for supply and demand to be approximately equal for the duration of the year. In the second quarter of 2005, we shift about $100 million in product whereas IMS demand would have told us 105 million was the right number. So we were short, so to speak, by $5 million.

In this quarter, we estimate IMS demand at about 115 versus what we shipped to 124, so about a $9 million -- making up part of the I guess the 5, plus $4 million additional, that probably equates to about two to three days of inventory at the $470 million run rate level. So it's tracking. Unfortunately it's not going to marry itself perfectly. We have to sort of estimate prior to the end of the quarter where we think the quarter will end up from an IMS demand standpoint, so we're trying to shift essentially approximately to demand, give or take. So I don't think it really has to do with the price increase that we took in early August. Most of that should have worked its way through during the course of the quarter. It's just a normal differential that's going to occur when a middleman or two or three are involved in between us ultimately and the patient.

So if anyone thought there might have been channel staffing, that's probably an erroneous conclusion?

That is an erroneous conclusion.

Yes, that certainly is. This is within the normal variance that occurs between factory and demand sales and not concern to us at all.

Thank you.

Gary Nachman, Leerink Swann.

Just a follow-up on Lidoderm. I guess given the quarter's performance and your guidance for the (indiscernible) year, it seems that you're expecting sales to be down in the fourth quarter. So I just wanted to know if there's some seasonality to the product that would cause that or are you guys are just being conservative with your guidance? Because you said I think in your prepared comments that you expect the inventory levels to stay roughly the same?

Yes, a similar answer I guess to the previous one in that there's going to be typical on a quarter-to-quarter basis differences between supply and demand. Second quarter, we shipped less than demand; this quarter, we shipped a little bit more than demand. Next quarter, we assume that we're going to ship less than demand. Certainly with IMS demand at 115 for the third quarter with the product continuing to grow in the high 30% percentile range, we expect the fourth quarter IMF demand to be higher than the 115 it is today. Our guidance for the year at 390 to 400, which is consistent with where we have been now for awhile, would indicate that wholesalers and their customers are going to order less than what the IMF demand says and get down to a little bit lower than where they are today, but sort of all within a range of what you would expect on a quarter-to-quarter basis.

Thanks. And on gross margin, they seems to be coming in a little bit better than I guess the expectations that you set out when you gave guidance at the end of last year. So any updates to your guidance of being down overall year-over-year from the prior year?

Sure. Our expectation is for the full year for gross margins to be slightly down from where it is in 2004; that hasn't changed. Certainly on the generic side, we will experience margin pressure when exclusivity on OxyContin expires in early December. Nothing on the brand side, but on the generic side, there's always additional slight decreases and with OxyContin having additional competition, we would expect to see some impact from that. So our guidance remains the same, that we expect a slight decrease in gross margins in '05 versus '04.

And finally just on oxymorphone, is there any other safety work that is ongoing that you're waiting to complete before resubmitting, or are you just currently compiling all of the Phase III data that just finished up recently?

We're currently compiling the Phase III data that we've reported in this quarter. It's not just a question of completing the report for those studies, which obviously has to be done, but the data has to be integrated into the integrated summaries that were in the original NDA filing, so we've pot all the data together. But we're not waiting for any additional information and we're still on track to file our complete response in early '06.

Richard Watson, William Blair & Co.

Good morning. I just had a question about your other generic business, and maybe you could give us a little more color, specifically where you're seeing the most pressure there, and is it marketshare pricing or how that's playing out. And then my other question was, given that you have an injectable oxymorphone product, has that allowed you to kind of go out and feel out this market in terms of the tablet and how that's going to fit? And just basically can you frame for us what expectations are reasonable for how that market -- or for how that product could penetrate the market? Thanks.

On the other generics outside of OxyContin, we had experienced for the course of 2004 additional pressure on that more RMS contin (ph) generic, which we were essentially by ourselves for about five years we did get competition from (indiscernible) on that in late '03 and during the course of '04. That seems to have settled out substantially where it's ballpark 50/50 share of the generic. We had heard an announcement that Ivax was reauthorized generic recently from Purdue Frederick, so there could be additional competition in the future there.

On our Endocet, which is the bulk of the remainder of the other generics, similar -- somewhat similar phenomena. Watson and us were exclusive. Once Percocet became generic, Watson obviously launched the generic Percocet, we launched our generic Endocet. The two of us were the entire generic market for a period of time and then, again, late in '03, Mallencrot (ph) came into the scene and, again, the share in pricing there over the course of '04 and maybe into early '05 was still somewhat shaking out. But during the second and third quarters of this year, it's essentially fairly stable, both price and share.

In regards to the injectable oxymorphone, at this time we actually have the two formulations of oxymorphone that have been marketed -- the IV as well as a suppository. And our plan all along was to use the fact that we would have four dosage strengths of oxymorphone as a competitive advantage in the marketplace. The injectable form will primarily be used in the hospital arena where currently either injectable morphine, or fentanil, or sufentanil are used. We don't expect that that will be a large marketplace because obviously, it's mostly genericized at this point. What we do expect, however, is that for physicians who expect patients to be on an opioid, a strong opioid for an extended period of time, and that want to discharge them on oxymorphone, that they could initiate that patient on the injectable while they're in the hospital and carry through on the same conversion ratio from injectable to either IR or to ER to maintain them on a steady state of opioid.

So today, we don't foresee an awful lot of penetration into the market, even though it has -- it is approved. One, we're going re-brand it, and that necessitates conversations with the FDA. That process is ongoing and clearly, we're going to need to do a fair amount of subsequent market research, primarily in the spring. Once we are able to get out our data on these final three studies, we expect to publish that at medical congresses in the springtime and to fully articulate its benefits as well as the results of these studies in anticipation of launch. And in combination with the other forms, we'd expect to conduct additional research around that to identify what our best strategies will be for executing hospital to community-based to hospice as sort of the continuum of care that oxymorphone will be able to handle for most patients.

So that's sort of our strategy at this stage and obviously the first real step in that is to follow the complete response, and that's where we're headed.

Corey Davis, J.P. Morgan.

I know I've asked you this before, but have you guys yet figured out the accounting for oxymorphone? And when it's running at an operating loss presumably during the launch phase, will you be able to extract payments from Penn West?

We haven't finalized what the accounting will be for that yet. We will over the course of the first part of 2006 do that. Obviously, there's different ways to account for it, including putting the profit split in various geographical areas within the income statement or maybe breaking out the profit split as a separate line item component. So we'll try to finalize that and obviously will finalize that part of launching the product.

As far as Penn West commitment and extracting, I don't know. They obviously elected a couple of years ago to cease the funding as they were allowed to do as part of the agreement. So for the last couple of years, we have funded not only the development work as well as premarketing work relative to that product. They have at their option the ability to opt back into it, make us a payment and begin the profit split, or we can reduce the -- not from dollar one, but sort of on a pro rata basis, reduce the profit split that they get over a certain period of time until that money is recouped, including any losses I guess that would occur as a result of this. So short answer, it's not really in our control as to whether we will be able to recoup money. It within their control, but obviously, we are excited about launching this product and we're willing to continue to fund that if we need to.

When do you make the decision to hire they additional reps? Would you do it before you had the final approval in hand, or would you just want to wait until you have that guarantee in the middle of the year? I'm just trying to figure out when to start building in the expense my model?

That's great question, Corey, and clearly, we haven't made that decision as of this point. I think a couple of factors are in play here, one of which of course is, if there are any tea leaves to read from the FDA during the final review process, that would certainly give us some idea as to whether or not hiring representatives in advance of an approval would be prudent. We don't know whether or not there will the any tea leaves to read, but certainly that's one of the factors that we have considered. Secondly, however, is we will in fact use our entire 370 representative sales force as we have them today to launch the product anticipated in the second half of '06. And if we had to hire these additional representatives during the course of the second half of '06 after the approval letter was in hand, that certainly would be the safer assumption, particularly if in fact we aren't able to get any insights around what the label will be during that review process. So I think as we sit here right now, our worst-case scenario is to launch with the 370. And if we are able to make a better determination in advance of an anticipated action letter from the agency, we might be in a different position to hire some or all of those additional feds in advance. But right now, that has not been determined.

I would just like to add, it has been our experience that in these types of reviews that we do not expect to actually get any tea leaves from this. So our experience has been, we will hear at the time when it's appropriate for the complete response to occur and probably it would be shopping if we heard prior.

Michael Tong, Wachovia Securities.

Thanks for taking the question. Actually a quick follow-up for you, Jeff, on that. If it is as your expectation that you don't read any tea leaves from the FDA, what is your base case assumption? Are you going to wait for the action letter before you start to ramp up the salesforce? Second question is, I noticed that current liabilities went over about 100 million sequentially. Is there any specific line item that you can draw our attention to that contributed to that increase?

I guess I'll defer on the oxymorphone sales force launch to Peter, but as far as current liabilities, as you know I think, within our accounts receivable, we reflect them gross, meaning that we do not reduce those for charge-backs, rebates, including Medicaid, and things of that nature. We reflect those as part of current liability. So with the launch of additional generic and -- the additional generic OxyContin, which obviously has rebates, charge-backs, et cetera, associated with it, that would create an increase in that area. Just like receivables go up, the current liabilities also sort of go up because of the nature of how we report those things. Our sales of course are recorded net of those things, but our receivables as well as car liabilities are gross with charge-backs and the like not reducing those numbers.

Again just on the sales force configuration, I think as I mentioned earlier, the worst case scenario is for us to hire -- once we have received the approval letter, that would be basically taking us to full-sized sales forces probably by the fourth quarter of '06, assuming we had a third-quarter action letter of course. And at this stage, as Jeff indicated, it's probably unlikely that we'll get a whole lot to read. We'll take a look at what we believe to be their conference level internally, consult with our FDA and medical advisors and clearly make that determination based on the information that we have at the time.

David Buck, Buckingham Research.

Yes, just one quick one. Historically, you have given guidance for the upcoming fiscal year in late December or sometime in December. Do you still plan to do that this year, and what would be the assumption that you would be making for oxymorphone in that guidance? Thanks.

It's likely we would not include oxymorphone sales and launch costs in that guidance. Certainly, there will be activities in advance of it regarding sales force positioning and sizing like we're doing today and marketing message and market research and the like, which is occurring today. And we would expect that to occur during 2006 and be included in our guidance, but any sales on actual launch costs, we would likely not include in our guidance.

As far as the timing of our guidance, we have historically done it in sort of the mid-December time period. However, due to the loss of exclusivity in early December with the generic oxycodone extended-release, it's likely we will wait until that market settles out before we provide any guidance. Although we are comfortable that this is going to be a reasonably limited number of competitors in the marketplace with four players that have been previously mentioned, all of those companies are profit motivated and we believe that pricing will stay very strong. We would like to see with a little more clarity where that all shakes out and what our relative share and price are prior to providing that guidance. So as with most companies who provide it after their fiscal year end along with the annual earnings announcement, I don't know whether we would provide it as late as that, but at the minimum we would provide it at that point if not earlier once we believe the dust has settled with the generic OxyContin.

So it's being pushed out then because of that issue?

Correct.

Jeff (indiscernible), SG Cowen.

It's Ian Sanderson, and thanks for taking the question. Could you, number one, give us an update on where you stand on inventory management agreements with your wholesalers? Second, any update on the clinical development program for propyfol? And third, any news from the FDA on the Ketoprofen (ph) patch, specifically whether the European pivotal trials can be used in the U.S.?

As far as inventory management agreements, we still have just the one inventory management agreement with one of the big three wholesale distributors. We have not entered into any others, although our expectation is with the shift of the wholesale model to this fee for service type relationship, that at some point in the future, we will be entering into additional ones.

As far as the Propyfol program is concerned, our partner SkyePharma is responsible for the development program there and they are continuing to complete what studies are needed to allow them to initiate the Phase III program given the tightened requirements that the FDA has around development programs for all new formulations of propyfol, not just the Skye product. So really I cannot give you any further update on that. The Ketoprofen patch, we'll have an end of Phase II meeting with the FDA sometime in the coming months and we do anticipate being in Phase III in the first half of 2006.

Now as we've said previously, we still don't know yet whether the FDA will accept the two European placebo-controlled studies that were positive as pivotal studies for the U.S., whether they'll accept either of them or one or both of them potentially neither of them. We are continuing to plan as if we bore out to do at least an additional Phase III study, but as soon as we have completed our discussions with the FDA and we are currently there, we will put out some additional guidance.

Thank you. And just a follow-up if I may on the Sufentanil patch. The FDA has started to crack down on the fentanil patches. Have you changed your development program there at all?

We don't believe that the decision that the FDA has made on Noven's generic Sentinel patch really has any impact or the sufentanil patch development. The decision made by the FDA on the Noven patch we believe was related to their essentially theoretical concern that because the Noven patch head more Sentinel in it, there could potentially be a safety issue. (indiscernible) this was a generic product, they were not prepared or they felt that they were not able to under the regulations accept any additional data or arguments from Noven on the potential safety of their patch because the assumption with the generics that the safety and efficacy are identical to the originator.

Completely different with an NDA patch such as our sufentanil patch because there, we will be providing thousands of patients worth of safety and efficacy data so that we will be able to address any concerns that the agency may have or issues the agency may have and be able to provide an appropriate benefit risk analysis, and that of course was not possible with a generic.

Alan Sebulsky, Apothecary Capital.

Yes, Jeff, I wanted to loop back on the tax payments to Endo LLC. I noticed in looking in the '04 cash-flow statement, you ended up with a positive item for tax benefits for options, only a part of which was paid out to Endo LLC. Can you just clarify -- I assume that you will be booking in positive tax benefits that are positive to cash flow and then paying either some or all of those out. Is it a net wash, are there timing differences, or is there a net cash flow impact over the defined period?

Over time, is a net wash. There are time differences which are favorable to the Company and at a disadvantage to Endo Pharma LLC. We take tax deductions over the course of the year as we make our estimated quarterly payments for any of the stock compensation deductions that arise as a result of the exercise for these Endo Pharma LLC options. So during the course of 2004, we were taking tax deductions with the estimate that we would be taking deductions and therefore owe less tax to the government by the end of '04. So therefore, we got to reduce our tax things to the government. Those tax benefits that we actually used during 2004, the payments for those don't occur until the subsequent year. So in March of 2005 and then October this month 2005, we will make the payments related to the benefits we received in 2004. So from a timing perspective, it's favorable for the Company and we get to sit on the cash for a while until we pay Endo Pharma LLC. But sort of over the long-term, it washes out and that will work similarly in 2005 with the significant tax deduction that we'll get as a result to the exercise of the options associated with the secondary as well as other option exercises in 2005. We will apply in early '06 actually for a refund because the magnitude of the stock compensation deductions, although it doesn't impact the income, the GAAP earnings does reduce and actually put us into a tax loss for 2005. As a result of that, since we were a taxpayer in 2003 and 2004 and even 2005 to date, we will actually be able to apply for a refund in early 2006 for those payments previously made, those tax benefit payments to Endo Pharma LLC again to the extent usable will be paid to Endo Pharma LLC 50% in March of '06 and 50% in October of '06. So over the long-term, it's a wash but the company gets the benefit of sitting on the cash until it actually (indiscernible) it out to Endo Pharma LLC.

Thank you.

Corey Davis, J.P. Morgan.

When you do give your '06 guidance for the first time, how are you going to approach FAS 123, and how should we think about that historical amount of dilution with what could end up being there in '06?

We disclosed that amount that has occurred. The substantial portion of the options related to Endo Pharma LLC were actually performance-based options and we actually recorded compensation charges for those as they vested. The more traditional 2000 and 2004 stock incentive plans we chose the disclosure only, as most companies did, version of that. So we've historically disclosed the $0.02 to $0.03 to $0.04 dilution that occurred over an annual period as a result of that. Haven't completely yet, but my assumption is we will sort of break that component out and let people decide as to whether they will include that in there thinking or not. Obviously beginning January 1, 2006, that becomes GAAP, but we will probably break that out in our earnings guidance for the course of year so people can decide whether to include or exclude that in their own estimates.

But as you say historically, it was only between $0.02 and $0.04 per year?

Yes. Outside of the Endo Pharma LLC options, which we did record those as compensation expense as the options vest.

Thanks.

Steve Zaliquat (ph), Argus Partners.

Thanks. I'm not sure you covered this yet, but on Lidoderm, you said in at the beginning of the call that the inventory levels are still low in the channel relative to history. Can you just try to quantify some of that in terms of where it was historically and maybe what it is right now?

Sure. Historically Lidoderm -- it varies obviously from quarter to quarter, but if you had to pick what a norm was, it was sort of in the six to seven weeks time period in what was carried historically. What we have indicated earlier this year in our expectation on a go-forward basis is that it will remain in sort of a few weeks inventory out there in the wholesalers. So that is down from where it has been, but that's the new model for the distribution channels.

Real quick on that, if I'm doing my math correctly, I'm getting about 9 million in sales for each week of inventory. So if the 4Q sales might be down 20 million from 3Q and you are saying levels are at two weeks, you would be going to essentially zero weeks of inventory.

We said a few weeks, which can be two, three, maybe more than that, weeks.

Scott Kay, Partner Fund Management.

Thanks for taking the call. I just wanted to fall back a little bit on the payments. Let's assume oxymorphone gets an approval in '06. Can you give us an idea, Jeff, of what costs you guys have kind of incurred, an idea in round figures for the development of oxymorphone? And then obviously it came out of the P&L and in '05 in an earlier year. So does that go back into the P&L in '06, either in a onetime payment, but it sounds like it's more of an income statement issue because it has hurt you on the back end?

We've funded this for the last couple of years. I can't remember exactly when we started funding it, so we have expensed 100% of those costs for the last couple few years. It somewhat depends on what Penn West chose us to do. We would -- if they pay us back in one shot, certainly there could be income recognition there. If they decide not to and we just reduce the royalty payment, then obviously that will come out over time. We have not really looked specifically as to what the accounting will be for that because we don't really know what (indiscernible) ultimately will decide to do.

Obviously they're very committed to this product, as are we. We are happy doing the funding for now. We think it's going to be a very significant product for both of us. They have been a great partner to date and we are happy to do this if this makes sense. How they choose to pay us back and when they choose to pay us back is at their election. And I guess when they determine that, then we can try to determine the impact on the income statement. To the extent we do recognize this big sort of onetime income item and it is recorded as income as a -- because it's this, we will break it out separately and let you know that it's onetime income generating item, if that's the accounting.

Gentlemen, are there any closing remarks?

No they're aren't any closing remarks, other than to say thank you very much everyone for participating on today's call. We certainly appreciate your continued interest and support of Endo and we hope you have a great day. Thank you very much.

This includes today's Endo Pharmaceuticals conference call. You may now disconnect.