Endo International PLC (ENDP) 2005 Q4 法說會逐字稿

Good morning. My name is Toni, and I will be your conference operator today. At this time, I would like to welcome everyone to the Endo Pharmaceuticals fourth-quarter and full-year 2005 financial results conference call. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Bill Newbould, Vice President of Corporate Communications. Thank you. You may begin your conference.

Thank you. Good morning and welcome to the Endo Pharmaceuticals fourth-quarter 2005 earnings conference call. This call is being recorded.

With us are Peter Lankau, our President and Chief Executive Officer; David Lee, our Chief Scientific Officer; and Jeff Black, our 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 on certain of the Company's drugs and possible timing of the commercial launch of certain of the Company's products as well as other non-historical facts that reflect Endo's current perspective on existing trends and information.

As you would expect, these statements will be made with appropriate qualifying language, such as we believe, expect, plan, anticipate, predict or similar expressions. By their nature, these forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results to be materially different from any future results expressed or implied by these forward-looking statements. Listeners should not rely on any forward-looking statement. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that may affect Endo's future results include but are not limited to those factors discussed under the heading "Forward-Looking Statements" in Endo's SEC filings and under the heading "Risk Factors" in Endo's registration statement on Form S-3, filed with the SEC on January 19, 2006 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 financial measures to their most directly comparable GAAP financial measures.

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

Thank you, Bill, and good morning, everyone. Thanks for joining us this morning. First, I will summarize our financial performance for 2005 and discuss several of our recent developments. I will then ask Jeff to provide a more detailed review of our operating results. Then, we would certainly welcome your questions.

So, to begin, net sales in the fourth quarter of 2005 were up 53% to $240.8 million compared to $157.3 million in the fourth quarter of 2004. This strong top-line growth was driven once again by net sales of Lidoderm, our topical local analgesic patch indicated for the treatment of pain associated with post-herpetic neuralgia. Sales of which rose 28% in the quarter to $130.5 million from $101.9 million in the same period in 2004 as well as sales that have been generated by our OxyContin generic. We continue to be encouraged by Lidoderm's strong performance, which we believe reflects an ever-increasing awareness and acceptance of this product in the marketplace.

Net income for the 3 months ended December 31, 2005 was $72.9 million compared to $29.2 million in the comparable 2004 period. On an adjusted basis, net income for the 3 months ended December 31, 2005 was $77.8 million compared with $31.5 million in the same period in 2004.

Diluted earnings per share for the 3 months ended December 31, 2005 were $0.54 compared with $0.22 in the comparable 2004 period. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for the 3 months ended December 31, 2005 were $0.58 per share compared with $0.24 in the same period in 2004.

Overall, 2005 was a strong year for Endo from a financial, operational and strategic standpoint. We continued to expand our development and on-market product portfolio, solidified our R&D and commercial infrastructure. And we have taken several other measures that we believe will help sustain our growth.

To highlight a few of these items -- on December 22nd, we filed our responses to the FDA's approvable letters on our oxycodone -- excuse me on our oxymorphone extended and immediate-release tablets. In addition, on January 20, 2006, the FDA accepted these responses as complete and confirmed our 6-month PDUFA date as June 22, 2006.

We continue to make significant progress with several of our key late-stage develop products. Among these is Frova, which is being studied for a potential new indication, the prevention of menstrually-related migraine headaches, and for which the second pivotal Phase III trial has now completed enrollment. We also advanced Rapinyl, our sublingual, fast-dissolving fentanyl tablet for breakthrough cancer pain into Phase III clinical trials.

We licensed in new innovative patent-protected product opportunities, including Synera, an FDA-approved local topical anesthetic patch for which we acquired the exclusive U.S. marketing rights in January. Additionally, in 2005, we licensed both a topical ketoprofen patch for soft tissue injuries and a 7-day transdermal sufentanil patch for moderate-to-severe chronic pain.

Finally, we strengthened our commercial infrastructure to accommodate new product opportunities by adding approximately 115 sales representatives to our selling effort in 2005. We currently expect to add more in 2006 to support the oxymorphone launch.

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

Thanks, Peter. As mentioned, Endo's net sales for the fourth quarter of 2005 were 240.8 million compared with 157.3 million in the fourth quarter of 2004, an increase of 53%. For the full year, net sales were 820.2 million in 2005 compared with 615.1 million in 2004, an increase of 33%.

Net income was 202.3 million for the full year 2005 versus 143.3 million in the prior year. As detailed in the supplemental financial information in today's press release, adjusted net income for 2005 was 230.2 million compared with 154.8 million in 2004.

Diluted earnings per share for the year ended December 31, 2005 were $1.52 compared with $1.08 in the comparable 2004 period. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for 2005 were $1.73 compared with $1.17 in 2004.

For the 3 months ended December 31, 2005, net sales of Lidoderm were 130.5 million compared with 101.9 million in the same period in 2004. For the 12 months of 2005, net sales of Lidoderm were 419.4 million, up 36% from the same period a year ago. Prescription growth for Lidoderm was up 29%, and dispensed unit growth was up 32% in the fourth quarter 2005 over the comparable 2004 period. Prescription growth for Lidoderm was up 36%, and dispensed unit growth was up 38% for the 12 months in 2005 versus the comparable 2004 period.

We estimate that prescription demand for Lidoderm was approximately 125 million in the fourth quarter and $438 million in the full year of 2005. We estimate that the annual run rate on Lidoderm in December 2005 was approximately $525 million.

Net sales of Percocet were 29.7 million for the fourth quarter 2005 compared with 16.1 million in the same period of 2004. Net sales of Percocet were 110.7 million for the 12 months ended December 31, 2005 compared with 86.5 million in the same period of 2004. We estimate that prescription demand for Percocet was approximately $31 million and 109 million in the fourth quarter and full year 2005 respectively.

Net sales of Percocet have been adversely affected during 2004 due to the introduction of generic versions of Percocet 7.5/325 and 10/325 during the fourth quarter of 2003. Our customers were reducing their inventory levels of Percocet during most of 2004. We estimated that our customers' inventory levels returned back to normal by the end of 2004 and remained at these levels at the end of 2005.

Net sales of Frova were $13 million for the 3 months ended December 31, 2005 compared with 6.4 million in the same period of 2004. Net sales of Frova were $38.1 million for the 12 months ended December 31, 2005 compared with 11.4 million for the period in 2004, following Endo's commercial launch of the product in August of 2004. We estimate that prescription demand for Frova was approximately $11 million and $40 million in the fourth quarter and full year in 2005 respectively.

With respect to Frova, we are encouraged by the progress we have seen over the last several months in gaining traction among our primary audience, high-prescribing neurologists who see the most difficult to treat migraine patients. We also look forward to completion of the Frova Phase III clinical development program in the prevention of menstrually-related migraine and a supplemental NDA filing in the first half of 2006.

Net sales of our extended release oxycodone tablets were $35.5 million for the 3 months and 114 million for the full year ended December 31, 2005. These net sales reflect the impact of a more difficult-than-expected pricing environment on this product.

For the fourth quarter, combined sales of Endo's other generic products were 28.1 million compared with 27.7 million in 2004. Due to increased generic competition with both Endocet and our morphine sulfate extended-release tablets, net sales from our other generic products were 123 million for the full year ended December 31, 2005 compared with $192.4 million in the same period in 2004. We expect this additional competition to continue to adversely affect our market share and the price of both Endocet and our morphine sulfate extended-release tablets.

Our gross profit for the fourth quarter of 2005 was 187.7 million, up 61% from 116.3 million in the same period a year ago. For the 12 months in 2005, gross profit was 633.8 million versus 474.1 million in the comparable period of 2004, an increase of 34%. Gross profit margins were 78% and 77% for the fourth quarter and full year respectively in 2005 versus 74% and 77% in both of the same periods of 2004.

Selling, general and administrative expenses for the fourth quarter of 2005 were 54.3 million versus 54.7 million in the same period of 2004. For the 12 months, SG&A expense were 211.2 million in 2005, up 18% from 179.3 million in the same period in 2004. The year-over-year increase is due to our continued investment in our commercial business and our infrastructure to support our products and pipeline, including the addition of approximately 115 sales representatives in early 2005 to promote our product -- Lidoderm, Frova, and DepoDur.

During 2006, we anticipate our SG&A expenses will be higher than in 2005 as we increase our level of investment in educational and promotional activities as well as overall support of our business, including supporting the pre-launch activities for oxymorphone ER and IR.

Research and development expenses for the fourth quarter of 2005 were 18.2 million versus 12.3 million in the year-ago fourth quarter. For the year, R&D expenses were 88.3 million in 2005 compared with 51.5 million in 2004. This increase is primarily related to our increased development efforts with respect to oxymorphone ER and IR and the advancement of other recently-acquired pipeline products. Excluding milestone payments to partners, we anticipate increasing our research and development spending in 2006 over 2005, primarily for continuing clinical development of Rapinyl, our topical ketoprofen patch, and our transdermal sufentanil patch.

Net income for the fourth quarter of 2005 was 72.9 million compared with 29.2 million in the fourth quarter of 2004. Diluted earnings per share for the fourth quarter of 2005 were $0.54 compared with $0.22 in the fourth quarter of 2004. Adjusted diluted earnings per share for the fourth quarter of 2005 were $0.58 versus $0.24 in the comparable 2004 period. Diluted earnings per share for the year ended December 31, 2005 were $1.52 compared with $1.08 in the comparable 2004 period.

Adjusted diluted earnings per share for the year ended December 31, 2005 were $1.73 compared with $1.17 in the same period in 2004. Adjusted diluted earnings per share for the full year 2005 exclude upfront and milestone payments to partners net of tax of $0.13 per share and exclude the write-off of transdermal fentanyl patch inventory and the unamortized portion of the license fee to our partner, Noven Pharmaceuticals, net of tax of $0.04 per share and $0.04 per share net of tax for employer payroll taxes payable to us by Endo Pharma LLC.

To reiterate our guidance for 2006, we expect net sales in 2006 to be approximately 860 to $880 million and adjusted earnings for the year ended December 31, 2006 to be approximately $1.75 to $1.80 per diluted share, Which excludes any stock compensation charges and estimated payments to partners for successful achievement of regulatory and other milestones.

Our 2006 guidance includes estimated net sales of Lidoderm of 530 to 540 million; estimated net sales of our Company's oxycodone extended-release tablets, a bioequivalent version of OxyContin, of approximately 50 to $60 million; and estimated net earnings attributable to net sales of our bioequivalent OxyContin of approximately $0.20 to $0.24 per diluted share. Please note that our guidance does not reflect the impact of net sales from the anticipated launch in the second half of 2006 of our oxymorphone extended and immediate-release tablets.

As announced on February 1, 2006, the Federal Circuit Court of Appeals has vacated its unanimous June 7, 2005 affirmance of the opinion and order issued in Endo's favor by the U.S. District Court for the Southern District of New York, which found Purdue had committed an equitable conduct in the U.S. Patent and Trademark Office. The Federal Circuit also affirmed the District Court's finding that if Purdue's patents are enforceable, Endo's oxycodone extended-release tablets infringe these patents.

Further, the Federal Circuit issued a new opinion on February 1, 2006, remanding the case to the same District Court for its further consideration as to whether the Purdue patents are enforceable.

As we announced last week, we intend to continue marketing our generic oxycodone extended-release tablets. In the event there is a final, non-appealable judgment that Purdue's patents are valid and enforceable, we could face substantial liability for patent infringement and be obligated to pay Purdue damages in an amount to be determined by the District Court. Although there can be no assurance, we believe that we would be able to fund the payment of these damages without materially adversely affecting our business operations, including our acquisitions and licensing strategy.

Accounts receivable at December 31, 2005 rose to 290.8 million versus 139 million at December 31, 2004. As a reminder, our sales are reported net of deductions for items, such as charge-backs and rebates. Our accounts receivable are reported on a gross basis prior to these sales deductions with a corresponding liability on the balance sheet for these deductions.

On a comparative basis, either gross to gross or net to net, our day sales outstanding -- or DSO -- were approximately 51 days as of December 31, 2005 compared with a DSO of 47 days at December 31, 2004. This increase reflects a higher proportion of generic sales at the end of 2005, which carry payment terms of net 60 days versus net 30 days for branded product sales.

During the 12 months ended December 31, 2005, net cash used in financing activities included the $42.8 million paid to Endo Pharma LLC, a limited liability company that currently holds a significant portion of Endo common stock, in which affiliates of Kelso & Company and certain members of management have an interest. This payment was made pursuant to the tax-sharing agreement between the Company and Endo Pharma LLC, which requires the Company under certain circumstances to pay Endo Pharma LLC the amount of the tax benefits that are usable by the Company as a result of the exercise of stock options granted pursuant to the Endo Pharma LLC stock option plans. These stock options are exercisable only into shares of Endo common stock held by Endo Pharma LLC and accordingly do not dilute the ownership of the Company's public stockholders.

The Company will be able to use the compensation deductions resulting from the exercise of Endo Pharma LLC stock options during 2005 to reduce its taxes in 2005 and accordingly has recorded a tax benefit obligation due to Endo Pharma LLC of approximately 195 million as of December 31, 2005, which is net of the employer taxes paid by the Company that would be reimbursed by Endo Pharma LLC.

Our cash and cash equivalents totaled approximately 501 million at December 31, 2005, and we have no debt. We think our strong position provides us the opportunity to use our cash and cash flow from operations to continue to pursue acquisitions, licenses and other strategic alliances within pain management in closely allied 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. 2006 is shaping up to be a very important year for Endo, with a number of significant events that we believe will continue to drive our growth and create a sustainable business over the coming years. So, before I open up the call to your questions, I would like to briefly summarize these events as follows.

First, completing the confirmatory Phase III trial on Frova in prevention of menstrually-related migraine and filing the supplemental NDA in the first half of this year. This prevention indication would, we believe, be a first and only amongst the triptans.

Next, following an Endo Phase II meeting with the FDA for our topical ketoprofen patch, we will be initiating the Phase III program in the first half of 2006 for the treatment of soft tissue injuries. We expect to receive action letters from the FDA by June 22nd on oxymorphone ER and IR and if approved launching these products soon thereafter.

Also, launching Synera, our FDA-approved topical local anesthetic patch for pretreatment prior to venous-access procedures, such as IV infusions, blood draws, and superficial dermatological procedures in the second half of 2006.

Continuing to advance the clinical development of our late-stage product Rapinyl, now in Phase III trials, for the treatment of breakthrough cancer pain and continuing the development of the transdermal sufentanil patch for the treatment of moderate-to-severe chronic pain.

Finally, we will continue our strategy of pursuing licensing and acquisitions of products, companies or technologies that can provide sources of future growth and sustainable revenues and earnings.

So, now, Jeff, David, and I would be happy to answer any questions that you may have.

(Operator Instructions). Dave Windley, Jefferies & Company.

Thanks for taking the questions -- Jeff, a few on the numbers. You gave demand sales for a number of the products, not oxycodone ER. Is it possible to get a demand sales estimate on that one?

We didn't obviously do that. We are I guess not prepared at this time to disclose that number. The underlying demand obviously in the fourth quarter is not necessarily reflective of where 2006 is going to go since we were -- we had exclusivity on three of the strengths for a large part of the fourth quarter. We from an inventory standpoint -- if that's where the question is going -- certainly, we have probably a higher than what normal level of inventory would be for oxycodone ER at the end of the year, relative to where we would think normal would be. Normal within the opiate sector seems to be sort of in the 4 to 6-week timetable in terms of how much is out there. We are a little bit higher than that obviously since exclusivity expired in the market is sort of shaking out for the course of 2006.

Okay, so there just seemed to be a fairly wide gap between your reported sales and what IMS attributes to you. I wondered how much of that was inventory channel destocking and how much of that was rebating back to your customers.

Certainly, the pricing environment was worse than what we expected during the fourth quarter and even during the exclusivity period. So, obviously a lot of that to the extent the customers stayed with us, we did adjust and give what's called a shelf-stock adjustment for customers that stayed with us to get them down to the new price for any inventory they had on-hand that they would have bought at a holder price. So it's obviously a combination of those factors, but pricing was certainly not as good as we had expected.

I would just add that IMS sales for generic products will rarely if ever match the factory sales of the Company based on rebates and other considerations. So that's usually not a very good indicator.

What may be a related question over on the balance sheet -- the AR growth is outpacing your revenue growth. And I think you described some differences between gross and net in a prior conference call. Could you walk through that and help me to reconcile that a little bit?

Sure. We did touch on that in prior conference calls and had on this one as well. Our receivables are recorded on a gross basis with a corresponding liability in the current liability section. Our sales are recorded on a net basis, net of sales deductions, such as charge-backs and rebates, etc. So, there's not a great corresponding apples-to-apples comparison from the balance sheet to the income statement on that. We tried to give you some flavor for it by providing on an apples-to-apples basis either gross to gross or net to net that our day sales outstanding at the end of the year was about 51 days. Our branded terms are about 30 days. Our generic terms are about 60 days. We typically don't get paid on time but generally get paid.

So the timing is always a little bit slower than what the terms would indicate. But it was 51 days DSO at the end of this year versus about 47 at the end of 2004.

Sorry, I should've been more specific. So is it possible to quantify the current liabilities account number? It looks like it's lumped in, in the press release.

Related to sales deductions?

Right.

Not at this time. I believe that will be disclosed though in our 10-K.

Okay, last question and I will jump out is -- with the price deductions in OxyContin and with the strength in Lidoderm, which has historically correlated with an actual reduction in your gross margin, I would have thought that gross margins would have declined a little bit in the fourth quarter. Any further color maybe there on what contributed to the sequential improvement in gross margin?

It's a product mix as we've talked about in the past. Some of our generic products have brand-like margins. Some of our brand products probably don't have margins that you might expect with a brand because there is license royalty fees, etc., on some of those. So it's product mix related -- is why I guess there was a sequential growth in gross margin.

[Jeff Goder], SG Cowen.

Just a few here. Could you provide us an update on the clinical development status of LidoPAIN and also the back pain program for Lidoderm? And then along the lines of Lidoderm, what did Lidoderm trade inventory levels look like around the end of the year? Were there any price increases during the quarter?

I'll take I guess -- no, there were no price increases in the quarter. The last price increase on Lidoderm occurred in early August of last year. So, we didn't take a price increase.

As far as trade inventories, they remained at what we considered to be what kind of the new standard, a few weeks outstanding. We provided obviously our GAAP sales as well as what we think the underlying demand sales were for both the quarter and the full year. The full year IMS demand we estimate to be about 438 million, and about $130 million is what we ship in the fourth quarter versus the 125 million of underlying demand. But it's you know a day or so of extra sales that may be out there. So they are at a relatively normal level, and I will let David speak to the clinical development.

LidoPAIN BP, the development of that product is the responsibility under our agreement of EpiCept. So I think you would have to check with them for more specific details. But I believe they have publicly disclosed that they hope to be meeting with the FDA in the first half of 2006 and initiating a Phase IIb study in acute low back pain of course during the course of 2006.

Now with respect to the back pain study with Lidoderm, we have been conducting a placebo-controlled exploratory efficacy study. This is not a Phase III study; this is a Phase II exploratory study. And we have always said that the outcome of that study may result in us proceeding to a full Phase III program and trying to get an additional indication in the label, or conceivably the results may lead us to doing additional pilot studies or possibly we may decide that the results don't warrant any further exploration of that particular indication.

I don't think we are anticipating making a major announcement about the results of that. Obviously, we may be presenting results at a clinical meeting at some time in the future. And we will have to see how that all plays out.

Just a couple of other questions for Jeff. Jeff, can you just give us an update on the total shareholdings for both Endo Pharma LLC and also Kelso & Company? And then also, can you explain a little bit the employer payroll taxes payable by Endo Pharma LLC that showed up?

Sure. The ownership by Endo Pharma LLC is about 10.6 million shares, which is about 8% of the outstanding shares. If you kind of cut through that, there's about 3.6 million of that 10.6 million that is attributable to options to management and employees of the Company (technical difficulty) 3.6 of the 10.6. The remaining 7 million is shares owned by unit holders of Endo Pharma LLC. Kelso's ownership of that is about 6 million of the 7 million shares.

As far as the employer payroll tax, the tax-sharing agreement with Endo Pharma LLC as we talked about provides that any tax benefits that are attributable to the deductions that are taken as a result of Endo Pharma LLC options being exercised since those options only dilute Endo Pharma LLC and not the other public stockholders that any tax benefits that the Company would get are essentially dividended out after those deductions are taken and used to reduce the Company's taxes, so essentially a wash for the Company as if the options didn't exist.

Because of the significant exercise of options that occurred in the past year prior to their expiration on January 1, 2006, there was a significant tax deduction taken. But in addition to that since it's compensation to the employees, there's also an employer portion of both Medicaid and FICA to the extent applicable that needs to be paid to the government. That amount will be reimbursed or essentially withheld from the payment otherwise made to Endo Pharma LLC in 2006 related to the 2005 tax-sharing agreement. So that has to be reflected as an expense on the Company's books. However, we'll be essentially reimbursed by Endo Pharma LLC as what will show up as an increase in equity.

David Buck, Buckingham Research Group Inc.

Andrew Swanson, Citigroup.

As the pricing environment for generic OxyContin worsens that's supposed to become even more different -- even more important rather to differentiate oxymorphone. I was just wondering if you can remind us how you are going to position that product. And then also internally, is it your expectation that we will see filers for generic Lidoderm in March?

Sure, Andrew. With regards to the positioning for oxymorphone, it is certainly a multifaceted positioning in that the clinical program has been conducted for oxymorphone is probably one of the broadest and deepest ever -- with studies being conducted in low back pain, osteoarthritis, cancer pain, postoperative pain all showing very positive outcomes either on all primary or secondary parameters. This will be positioned as a very highly tolerable opioid analgesic to the extent that we've been able to demonstrate in at least the last several studies a very good tolerability and titration of the product to efficacy levels that are acceptable by the patient. It will have a true twice-daily dosing schedule, which we believe will be an exception in the marketplace, since many of the other opioids do often have to be dosed more frequently than their label dose.

Oxymorphone as a molecule actually has a longer half-life, and its formulation allows for what we believe to be a true twice-daily dosing. We also believe that the opportunity for physicians to have a new molecule in the marketplace, what we kind of termed the first new opioid in decades in an oral formulation, allows physicians to optimize the level of efficacy versus side effects in order to ensure a continuity of care. And as a new treatment option, under the concept of opioid rotation, it will certainly enable the physicians to have a new treatment option to find that right mix of efficacy and side effects.

Then lastly, we will have a number of different formulations in addition to the two orals. We will also have an IV formulation, which we currently have approved by the FDA. We haven't been promoting it recently. But, that will be relaunched along with the ER and the IR. We have a suppository formulation that potentially could be utilized in terminal care patients.

So we've got a number of different characteristics that we believe will justify its utility in the market. We also, by the way, will have a very high share of voice once we do launch. As you know, both the Johnson & Johnson and Purdue have withdrawn the significant if not the total amount of their promotion from Duragesic and OxyContin. And the only products left in the market currently that have physicians' share of voice is Kadian and Avinza.

When we launch with oxymorphone, as I mentioned earlier, we do expect to add significantly to our sales force to ensure that we have an optimal level of share of voice in the market. Clearly, that will enable physicians to gain a high level of awareness and potentially turn that, based on its clinical profile, into utility.

So I think the market will be very receptive to oxymorphone. It is clear that we also are entering a market, where the pricing pressures on managed care and Medicare as well as other payers will be a factor. We will be analyzing that quite robustly during the springtime as we conduct our pricing research to determine what the optimal level of pricing will be in those markets to ensure that the price volume mix is optimal. But we do believe that oxymorphone will have a very strong position in the market.

With respect to Lidoderm and potential generics in March, in March of this year -- I think it's March 6 -- we lose our orphan exclusivity -- sorry, March 19, I think slightly later in March -- or around that time, we lose our orphan exclusivity on the product.

What that means is that the FDA on that date could approve another lidocaine containing patch for the treatment of post-herpetic neuralgia, assuming that one had been approved and that it didn't otherwise infringe the patent estate that we have. If anybody had wished to file a generic, they could have done so already. The expiration of the orphan drug date doesn't actually impact that. Of course, in order for anybody to file a generic, that would have to be a Paragraph IV filing with the appropriate notifications because the Orange Book listed patents that we have around this product. So far, that has not happened. We're not aware of anybody proceeding in that direction at this time.

We should also be aware that because the FDA has not defined any guidance for industry on what constitutes equivalence for a topical product like this, there is no clear pathway for a generic company to develop a generic and go after the product in this way. Anyway, they would be able to do it if they wanted to follow the generic route -- would then be to come up with their own definition of what constituted equivalence, file a citizen's petition arguing with the FDA that that did indeed constitute a demonstration of equivalence and then show that their product met that. We're not aware that that's happened either.

Of course, the product is very large now. We would certainly anticipate that generic companies would be trying to produce a generic. But for the reasons that I've described, we don't see one on the near-term horizon.

If I could just follow up on oxymorphone briefly, surely you've looked at its interactions with alcohol at this point and if you could just comment on whether you've seen any Palladone-type effects.

Yes, no, we have not seen any Palladone-like effects. We have conducted in vitro studies in which we have put oxymorphone extended-release in varying concentrations of alcohol, which appear to be those concentrations of alcohol that the FDA is looking for. And again, they've provided no clear guidance here. We are only imputing this from what is in the public domain around Palladone.

But in those in vitro studies, we see no evidence at all that the formulation is impacted. There is no acceleration of release of the products and no evidence of dose dumping.

We have conducted an in vivo study. Again, the FDA hasn't given any indication that they require such a study. But we just felt that was the most prudent thing to do as we are preparing for the launch of the product. In that study again, we saw no evidence of dose dumping or any interference with the formulation. We did see the highest concentration of alcohol tested, 40% alcohol equivalent to 240 milliliters of neat vodka that we get a transient increase of blood levels of oxymorphone. But, this is the same pattern that we have seen in studies conducted comparing Fed and fasting blood levels of oxymorphone. It's independent of the formulation. We see it with a solution, the immediate release and the extended release. And this seems to be exactly the same phenomenon. We attribute this to a transient increase in absorption of oxymorphone released in the formulation and no impact at all on the formulation itself.

Just finally in terms of the FDA interaction going forward, if they wanted to see that data, would you anticipate that as an interim step in your communications with them between now and June? Or would you expect them to ask for that data in the form of some sort of an approvable letter at the end of June?

No. We're obviously -- we don't want that to happen. We've actually agreed with the FDA that we can submit any data that we have generated on alcohol interaction within 3 months of filing a complete response. And we will certainly do that.

David Buck, Buckingham Research Group Inc.

It's Jim Dawson for David Buck. Can you talk about the phasing of enrollment for both Rapinyl and the ketoprofen patch in Phase III and a potential target filing date?

Yes. The Rapinyl program, we have two Phase III studies that are now enrolling patients. One is in fact pivotal efficacy study of placebo-controlled study. The other is an open-label, longer administration safety study, which the FDA also requires. We have not yet provided any guidance on a filing date of the NDA. But, I anticipate that we will do so sometime in the first quarter of this year.

With respect to the ketoprofen patch, again we will put out some more definitive guidance once we have finally agreed with the FDA on the Phase III program. Remember, we already have two placebo-controlled trials of this product that we acquired when we licensed the product. The two trails were done in Europe in soft tissue injury, joint sprains and strains. And we will seek the final decision of the FDA on and how far they will accept those studies as pivotal studies or supportive studies and what additional studies they will require to be done. We do anticipate an additional study at least, but maybe additional studies will be required. But again, once we have definitive information or feedback from the FDA on that, we will put out further guidance.

Just on DepoDur, as it continues to disappoint, is there any focus on reducing expenses for this product?

We have continued to believe that DepoDur does have a place in the postoperative analgesia market that has yet to be fully optimized. Clearly, the reports that we've reported thus far in 2005 are not where we fully expect this product to have capability of achieving. We do know that where there are obstacles to the product being used, it is not the result of a formulary decision. In fact, the formulary decision approvals have been extremely high. The late rate limiting factor has been actually getting on the formulary committee agendas for a review. And so, that we always anticipated as being a rather long-term process. We expect that that process will continue throughout 2006 as formulary committees get through the various items that they are looking to attend to.

Our thrust will clearly be focused on how we can increase the penetration rate within the hospitals for which we've already gotten approval. And there, we are beginning to see much more utility of the drug. We're also going to be publishing several studies coming up in the springtime and thereafter on effective utilization of the DepoDur in patients -- safety studies as well as administration studies that will help physicians more clearly identify the patients types, the interactions with other drug agents that are being used and how they can assure that there is in fact a clear path forward on the patient having that full 48-hour pain control.

So we do think that DepoDur is not yet where we expect the potential for the drug to be. And we will continue to monitor that very closely during the course of 2006.

Having said that, with regards to the expense items, obviously we are going to -- plan to launch Synera with the hospital sales team. That will be a hospital-focused product at least in the short-term. And so that product will look to be launched sometime in the second half of 2006. And we're also going to be expecting to launch oxymorphone with the hospital sales team as well both for the IV formulation as I mentioned earlier as well as for both the ER and the IR formulations to initiate what will become somewhat chronic therapy for patients exiting the hospital to initiate that therapy while they are in the hospital. So, the utilization of our hospital sales team will continue to be optimized in addition to DepoDur, the Synera and oxymorphone in the short-term. Clearly, our product acquisition and licensing strategy will also be focused on acquiring additional products for the perioperative space as we go down the line.

Just a follow-up on that, so you're keeping the same hospital sales force impact until oxymorphone ER is approved?

Yes, that is correct.

Lastly, have you had any settlement talks with Purdue on generic OxyContin? Thanks.

Probably a question we've had fairly frequently over the last several weeks. Clearly, we are pursuing the full judicial process. So with the remand back to the District Court in New York under Judge Stein, we would never certainly discount any potential opportunities for a change in that direction. But, clearly, that's not our focus. We are in fact very much looking forward to the opportunity for this decision to be affirmed once again in the District Court.

Angela Larson, CE Unterberg Towbin.

Looking at the SG&A line, I was wondering if you could give us an update on when was the last time you had a cohort of reps that came into the line and when would you next need to increase your sales force?

Sure. As far as the timing in early 2005, we hired the net additional 115 reps and additional 45 hospital sales reps and an additional 70 reps to promote Lidoderm and Frova. So that was sort of early first-quarter 2005 timetable.

As far as future plans, although we will be -- we will have our existing sales forces of 370 total reps fully trained to launch oxymorphone later this year. It's not very likely we'll hire in advance the additional reps, which although we haven't finalized any sort of numbers, we are sort of expecting somewhere in the 150 to 200 additional rep range that we would hire for launching oxymorphone. But we probably won't do that until such time we have an approval.

Then I was frankly caught a little bit surprised on your Rapinyl comment that you plan to give an update on your status and timing in guidance in the first quarter of '06. That really means you plan on giving guidance within the next 6 weeks. What is the event leading to being able to give guidance?

I think we are just in process of finalizing that timetable. Certainly, we began the Phase III development in late 2005. We've got a bunch of internal timetables that we're still sorting our way through to try to provide some reasonable guidance to people. I think over the next few weeks, we will have finalized that and be able to provide that sort of guidance.

Will the guidance just be for Rapinyl, or will it be more inclusive of some other development activities you have?

I think historically, we've tried to just do it for things that are in Phase III and talk about major milestones, such as the filing of a NDA for example. So I think once other products enter into Phase III and we're comfortable with the timetables that we have internally for products, such as ketoprofen which we expect to enter Phase III this year, will also provide timetables around the NDA filing for that.

Scott Henry, Oppenheimer.

If I could just start with Lidoderm, with regards to your 2006 guidance of 530 to 540 million, are you expecting any impact from stocking, whether it be positive, negative or neutral? And additionally, on Lidoderm, are you noticing any material impact from the Medicare drug benefit?

I will let Peter speak to Medicare if he'd like. As far as the stocking issues, as you may or may not know, we do have one inventory management agreement with one of the big three wholesalers. We also have another one with the more mid-sized customer. We do not however have inventory management agreements with the other two wholesale customers -- large wholesale customers. We do expect over the coming weeks, months, whatever that may be for us to potentially enter into those types of arrangements. If that occurs, there is obviously the potential because of at least the way the existing one works the customer is not incentivized to buy in advance the price increases sort of stacked by as they have historically because they don't get credit for what they have in inventory when we raise price. So at least the existing one we have does carry a lower level of inventory than they had historically under this new fee-for-service type model. We expect to potentially enter into those again next year. So, inventory levels could come down if they decide that the levels they carry now are not warranted under the new arrangement.

As it relates to the Medicare Part D, we have done a fairly extensive analysis of the potential for Part D in 2006. We do have contracts that we have put in place, where we are reimbursable on either a second tier or a third tier, in one or two cases a prior authorization. However, the number of patients who actually according to physician surveys that are on Lidoderm that are 65 and older is actually a relatively small proportion of its total use. And of those patients, there are even fewer numbers who do not have prior third-party co-pay-type reimbursements.

So, for 2006, we have made a very diligent effort to be available where we needed to gain access for Medicare patients and Medicaid patients for whom we would not otherwise be able to provide that access. But clearly, as the year goes on and as the enrollment numbers start to come in, we will reassess where we want to go for the balance of the year and into 2007 at that time.

If I could ask just a couple follow-ups on the OxyContin generic, could you give any color into how pricing is within the generic market? When we look at your guidance, it somewhat implies 70 to even 75% discounting. I am wondering, is that a reasonable assumption?

Secondly, since the recent court decision, are you noticing any change in the competitive landscape? Are any of the competitors doing anything noticeably different?

As it relates to the pricing, obviously we haven't provided any color around where our pricing is for obvious competitive reasons. What we did indicate in our guidance call in January was that the pricing pressures that existed in December when the other players came into the market certainly exceeded our expectations with regards to a three or four-player market acting more like an eight-player market. So, clearly, you can see how the net impact of that pricing change has been reflected in our fourth-quarter numbers and certainly in our 2006 guidance.

As it relates to the court decision and our internal decision to continue to market the product, we have not seen any movement whatsoever from customers with regards to our product, nor frankly any of the other products in the marketplace. It has been quite business as usual. And, we would not expect that this decision would have any impact on customers purchasing generic products, particularly those for whom we have continued to maintain relationships with, nor for the other competitors in the market for which they have garnered a certain amount of share.

If I can just ask one final question for Jeff, as it relates to the 7.7 million for the payroll taxes -- if I wanted to strip that out as the model in terms of SG&A and R&D, can you give any guidance as to the allocation of that sum?

I can't. No, I'm sorry. I don't have that information in front of me.

Michael Tong, Wachovia Securities.

Most of my questions have been answered. But I've got one question; it has to do with Synera. I'm wondering if you can give us a frame of reference as to what the intended market size for the product is. And secondly, what have you learned from the DepoDur experience that you can apply to Synera and make it a better launch?

Sure. I think that the Synera situation is one that is very different than what we faced in DepoDur. Let me give you some color as to why. First of all, this is not really going to make a major change in the way in which patients that are treated in the hospital for blood draws, for IV infusions or for the superficial dermatological procedures, the way in which the protocols are going to be changed or not changed. In fact, this is basically taking existing medications that are somewhat more time-consuming and frankly more messy -- ointments and creams and the like -- and replacing it with a very simple Band-Aid-like patch that within 20 minutes or so provides very good local analgesic to the skin such that the patient can be virtually pain-free upon needle insertion.

That is a very different mechanism than DepoDur, where we basically had to change an entire paradigm around how postoperative pain was going to be controlled, including monitoring procedures and pre and postoperative preparations.

There's also the fact that Synera is a lidocaine and tetracaine-containing topical patch -- in all likelihood will not involve a lot of time and attention from the physician but rather more time and attention from the nursing staff and other healthcare providers in the hospital, who are really doing the preparation work on patients prior to these venous-access procedures.

So we think that the learnings from DepoDur are in fact not very applicable to most of what we will look to do with Synera. However, there is a synergy that will exist in terms of really securing our relationship and our ability to interact with the nursing staff in each of these hospitals. The benefit being that we will have fairly ready market opportunity in the nursing environment for Synera, whereby we have to really use that relationship to generate enthusiasm and continued dedication to DepoDur usage in postoperative pain patients.

There are about 5.5 million children a year -- actually the 11.5 million -- the patient days per year, whereby children primarily under the age of 15 are hospitalized and for whom they undergo at least one daily venous-access procedure -- again an IV start, a blood draw, or other procedures. So 11.5 million patient days a year for just the children under 15. There are also -- this is also applicable to elderly patients for whom they had very difficult to access to the veins. Tetracaine actually is a very good vasal dilator and enables a little bit easier access to veins upon these access procedures.

Gary Nachman, Leerink Swann.

A few questions. First, on Frova, we're starting to see a little bit of a pickup in prescriptions. It was actually sequentially up in the quarter. Are you guys starting to get more traction with the PCs or maybe with some OB/GYNs if you are targeting that group? And then, could you talk about what your plans would be for promoting the product if you end up getting some positive MRN data if that would change your strategy at all at least in the near-term?

I think the main thrust of what we're seeing now is a very strong uptick in neurologists prescribing Frova for these more difficult to treat patients, primarily menstrually-related migraine patients who typically have either high levels of recurrence during a 3, 4, 5-day period per month or who have their migraines last in long durations, anywhere from 12 to 24 hours at a time.

As you may recall, Frova has a very long half-life, a 26-hour half-life, which means that it remains in the body for an extended period of time vis-à-vis other triptans and allows these more difficult patients to be treated on an acute basis with Frova and have a better degree of success, fewer tablets a day, and fewer breakthrough episodes required for incremental medication.

As it relates to the PCPs and the OB/GYNs, we're seeing increases in the PCP market, less so than we are in neurology. We are just now experimenting in OB/GYN. We did in fact commence a co-promotion with our partner, Vernalis, in January. They are going to be responsible for both double coverage of certain high-value neurologists as well as OB/GYNs and will assess the uptake of Frova in the OB/GYN market during this coming year to determine whether or not our strategy for a prevention claim would suggest a bigger impact in OB/GYNs with that prevention claim under belt.

Currently, OB/Gs do not prescribe a large volume of triptans. They prefer instead to use other medications to treat these migraines. And so, we are really assessing the value of that in real-life fashion now and will continue to evaluate it on a market research basis going forward.

If you want to have a bigger impact in the OB/GYNs, do you think ultimately you would use a CSO or a partner with someone that has a women's health sales force or build it yourself?

It's probable that we would certainly evaluate the best opportunity if that was to be the direction we would go in. So, all of the above is probably feasible. Although, I would suggest that our own sales force for OB/GYN is probably the least likely, given the fact that we would really want to leverage that sales force in that specialty. So, a CSO or a co-promotion option would probably be the preferable route. But, yet, we are many months away from having to make that determination. But it is very much in our consciousness around how we will in fact go to launch the supplemental indication, should it be approved.

Then on Endocet and morphine sulfate, those prescriptions are actually pretty strong in the fourth quarter for both products. Is there anything unusual that would be causing that? And then, Percocet is now at $120 million run rate. It was last quarter I think at $100 million run rate. Do you think it could hold up at that level?

There's nothing really in the marketplace on Endocet and MS ER on a prescription basis that has shifted. Clearly, as time goes on, we do see continuing use of these entities in the market with certainly some modest growth across all products, brands, and generics. Any change in prescriptions would only come about frankly as a result of share shifts, and we haven't seen a significant amount of that. So it may just be an artifact from this particular quarter.

On Percocet, we have seen what we believe to be the bottoming of the erosion rates for some of the strengths, and others will probably still continue to see modest declines over the balance of this year. The 5 milligram as an example is about a 2% share that remains. But, those patients are extremely loyal and continue to ask for the brand. So we do think that that simply indicates that the size of the oxycodone/acetaminophen market, the Percocet market brand and generic, continues to be a very important part of pain management.

If you were to brand dollarize all of those prescriptions, we would be talking over a $3 billion market. So, clearly, physicians are continuing to use this kind of medication in the various strengths that are available. We certainly see that the brand Percocet however will continue to modestly decline as time goes on. It's just a natural history to have these products ultimately you know play out their lifecycle.

I will just add to that that in our 2006 guidance, we do estimate that we are gunning for both MS ER and Endocet. Both price and share decline will occur as they typically do within the industry. There's always -- on occasion, there are supply issues that have occurred historically and may occur in the future in terms of supplying product to customers, where we may pick up share as a result of that temporary situation. But, on a go-forward basis, we do expect additional competition to increase and hurt both our share and our price for 2006 guidance that we provided.

Last question on oxymorphone. What are the chances that you get an advisory panel for this product, given how cautious the FDA has been in general? When would we find that out if they decide to do that?

Well, officially, we would find it out just a handful of weeks; I think it's like 6 weeks before the actual date of such a meeting. And it's published in the Federal Register. If the Agency or the division did want to call or refer us to an advisory committee, we hope we would get some informal indication before that. But, there's no certainty of that.

Under the regulations, the FDA is supposed to get the opinion of an advisory committee prior to the PDUFA date, but that doesn't always happen. Although again in principle, they are supposed to do that. So, if it is going to happen, it should happen before our June 22nd PDUFA date.

This particular division doesn't have a track record of referring products to -- or product decisions to an advisory committee if you go back through their recent history. Clearly, it is a possibility. This is a historically contentious area. And you know, potentially the division could be looking for some political cover to put it in, in those terms. However, one has to sort of speculate on what questions may -- the individual may want to ask of an advisory committee. We believe the efficacy data that we've submitted are pretty clear, and that there's more a loss of area of question from an advisory committee there.

Safety risk management programs are obviously always a possibility. But this division has sought the advice of an advisory committee a couple times in the last 2 or 3 years on risk management programs for extended-release opioids and really not a whole lot has changed, if anything, in that period time for them to go back and ask for a revised opinion from an advisory committee.

So, that's sort of the thinking process that we're going through. Clearly, it would be remiss of us if we didn't anticipate that this might happen and prepare accordingly and as far as we can prior to knowing that a committee would be called and what questions they would be asking. But, at the present time, we are not rating the likelihood of that as being very high.

Corey Davis, JPMorgan.

It's actually David Shaw. Thanks for taking the questions; I just have a couple. Would you be able to comment on how much FAS 123R would impact the adjusted EPS guidance you offered? And then on the OxyContin litigation, a few like -- what are the timelines for the case? Will each side be allowed to brief those issues? And is intent to deceive the primary issue that needs to be resolved?

As far as the EPS, we will provide that with our first-quarter earnings and what we expect full year to be. We are in process of implementing the new stock compensation rules as we sit here today. So, we will try to provide something with our first-quarter 2006 earnings call.

On the OxyContin litigation front, there really is no timeline that is before us as to what we could reasonably expect. We are certainly at the behest of the courts. We know that the remand has taken place, that the lower court is basically waiting for that formal mandate to come down. We have asked for a briefing meeting with the judge in order for us to understand from a procedural basis how he expects this to play out. We haven't been granted that meeting as of yet.

But, beyond that, we are probably not going to have any formal arguments or perhaps not even briefings. But, the judge has to determine that. He may simply take the evidence that was presented at the original trial and reframe his opinion based on the evidence at that trial. But, there's no way for us to either know that in advance, nor to impact that.

Just a quick follow-up, would you agree with the theory that if you lose, you could be held responsible for damages out to 2013 when patents expire?

There are a number of theories -- economic theories that we have looked at to try to get our handles on what potential damages might or might not look like. Frankly, there is no formula here. It is up to the discretion of the judge. This would in all likelihood in that particular case be handled by Judge Stein in the Southern District of New York.

We've made the determination based on our own assessment of the economic theories that have been presented to us and our assessment around the likelihood and have made the determination to continue to market this drug. And, knowing that if in fact damages would be assessed that they would not materially impact our ability to continue to conduct business operations, including our licensing and acquisition strategy.

We do think that the likelihood of trouble damages is very remote, given the fact that we did in fact only launch at the conclusion of the Appeals Court Decision -- a unanimous decision I might add -- which would in fact and did in fact start the clock on the Waxman-Hatch exclusivity period. And so I think that reasonableness would suggest that that would be a highly unlikely scenario. So we don't think that the trouble situation would in fact apply here. But, with regards to the time and duration of any other damages that might be awarded, we have no way of knowing that.

Then finally, if I may, on the pricing on the product (technical difficulty)?

We indicated earlier that we have not provided any details on pricing -- won't provide details on pricing because of the competitive nature of the market.

Jon Stephenson, Summer Street Research.

Most of my questions have been answered, just a couple of quick ones. First, I was wondering if you could give us a timeline in terms of when we might hear on any progress on sufentanil patch and when that might move into Phase III, and I have some follow-ups as well.

This product is still in early development. And you know, it is our policy not to go into too much detail on products in early development. As Jeff indicated earlier, our preference is to give more detailed guidance once the product is clearly in Phase III. Through the course of this year, we will be manufacturing clinical supplies and proceeding to do the standard Phase I studies and eventually into early Phase II.

Then in terms of the tax rate, what should we be assuming going forward? It came in a little bit lower than 38% guidance.

It did come in a little bit lower than that. On a go-forward basis, we've historically sort of been in the call it 37.5 to 38%. We didn't provide any specific tax rate guidance in our 2006 release. Not sure it will materially vary from that sort of 37.5 to 38% rate that we have historically experienced however.

Just lastly following up on the question earlier pertaining to Rapinyl. Is the release of the timeline for Rapinyl going to be occurring at the same time as some clinical data release or is it totally independent?

It's independent of any clinical data release.

There are no further questions at this time.

Well, terrific. I'd certainly like to thank everyone for joining us on the call today. We appreciate the opportunity to update all of you on our earnings for 2005, and we certainly can look forward to your continued interest and support of Endo. Thank you, everybody.

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