Endo International PLC (ENDP) 2006 Q1 法說會逐字稿

Good morning. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Endo Pharmaceuticals first-quarter 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 session. (OPERATOR INSTRUCTIONS).

Mr. Newbould, you may begin your conference.

Good morning and welcome to the Endo Pharmaceuticals first-quarter 2006 teleconference. This call is being recorded. This is Bill Newbould, Vice President, Corporate Communications. With us on the call are Peter Lankau, President and Chief Executive Officer; Jeff Black, Chief Financial Officer; and David Lee, Chief Scientific officer.

Before we begin, I would like to remind you that during the course of this call, Peter, Jeff or David 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 non-historical facts that reflect Endo's current perspective on existing trends and information. 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 futures 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 2005 Annual Report on Form 10-K and Endo's registration statement on Form S-3, filed with the SEC on March 21, 2006. We urge you to review these factors.

In addition, during the course of this call, Peter, Jeff or David may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that 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 Peter Lankau.

Thank you, Bill, and good morning, everyone. Thank you for joining us on our call this morning. Earlier today, we reported our financial results for the first quarter of 2006. But before we begin to discuss this quarter in detail, I'd like to take a few moments to review some recent developments.

This morning, we announced that we and our partner, SkyePharma, have decided to discontinue development of their anesthetic agent, propofol IDD-D, as recent data have indicated that the product has a low likelihood of being able to achieve our agreed-upon target product profile.

During the quarter, Endo's ownership structure changed after two stock offerings, totaling 25.5 million shares. As a result, Kelso & Company, the private equity firm that provided funding for the management buyout from DuPont Merck in 1997, liquidated its position. Reflecting this situation, the composition of our Board has also changed. We have added two new independent, outside directors to replace five outgoing directors, including certain Kelso partners. The new directors are John Delucca, a retired financial executive, who was appointed to the Endo Board in early January, and Michel de Rosen, the Chairman and CEO of ViroPharma, who was appointed yesterday. Both of these gentlemen have a broad base of experience as senior corporate executives, and we look forward to benefiting from their expertise and counsel as Endo embarks on a new phase in its growth.

Of course as you probably know, yesterday evening, we announced that Jeff has decided to retire. We will begin a new search for a new CEO -- CFO to succeed him, both internally and externally. But in the interim, he has agreed to stay on until August to ensure a smooth transition to his successor. I would like to say that I cannot overstate the contribution that Jeff has made to Endo's success since he joined the Company at its inception in September 1997. Since that time, we have grown from a company, which we acquired with $110 million of equity and $167 million of debt, to one that has a market capitalization of more than $4 billion, $584 million in cash, and no debt. Our workforce has grown from 25 to more than 700 dedicated individuals, and we've built one of the broadest pipelines in pain management.

Jeff has been here through this entire period of tremendous growth and accomplishment. His greatest legacy, however, may very well be the outstanding financial team he has built over the years that are the arms and legs behind the scenes. A first-class group of seasoned professionals, we are and will remain strong financially because of this team. So as he leaves, Endo is in good financial shape, and we're confident that his contributions will be felt for years to come.

While we are sad to see him go, we are grateful for all that he has done. I know that all of us who have worked with Jeff have valued his expertise and above all his high sense of integrity. I'm sure you will agree with me in wishing him nothing but the best as he transitions to a well-deserved retirement.

So with that, I'd like to turn the call over to Jeff.

Thank you, Peter, for the kind words. I am proud to have played a part in Endo's development as a premier pain management company, and I'm confident that it will continue to enjoy success under such a highly competent management team. I'm retiring so that I can spend more time with my family. From now until August, however, I will remain committed to working closely with Endo's senior leadership team as we search for my successor.

Now, I'd like to summarize Endo's quarterly financial results. For the first quarter of 2006, we earned $20.5 million or $0.15 per diluted share on net sales of 205 million. This compares with net income of 13.8 million or $0.10 per diluted share on net sales of 137.8 million in the first quarter of 2005.

On an adjusted basis, as detailed in the supplemental financial information in today's press release, net income was 55.2 million year to date in 2006 versus 26.3 million in the same period of 2005. Adjusted diluted earnings per share were $0.41 for the first quarter 2006 compared with $0.20 in the first quarter 2005.

Our financial results for the quarter continue to be driven by net sales of our topical analgesic patch, Lidoderm, which totaled 125.1 million for the quarter. This compares with net sales of 64.1 million for this product in the first quarter 2005, when net sales of Lidoderm were adversely affected by wholesaler destocking. We are pleased by the continuing strong performance by Lidoderm, which we believe reflect the product's growing acceptance and awareness in the medical community. Prescription growth for Lidoderm was up 25%, and dispensed unit growth was up 28% in the first quarter 2006 versus the comparable 2005 period. The Company estimates that prescription demand for Lidoderm in the first quarter 2006 was approximately $133 million.

Net sales of Percocet were 27.5 million for the 3 months ended March 31, 2006 versus 27.4 million in the same period in 2005. We estimate that prescription demand for Percocet in the first quarter 2006 was approximately $25 million.

Net sales of Frova were 7 million for the 3 months ended March 31, 2006 compared with 6.1 million in the same period a year ago. We estimate that prescription demand for Frova in the 2006 first quarter was approximately $10 million, reflecting a reduction in trade inventory during the quarter.

Net sales of DepoDur were 0.9 million for the 3 months ended March 31, 2006. Endo began promoting DepoDur in early 2005 with a 70-representative hospital sales force. The launch phase of this product is expected to continue throughout 2006.

In June 2005, we began commercial sale of all four strengths of our extended relief oxycodone tablets, the generic equivalent of OxyContin. Net sales of extended-release oxycodone tablets were 9 million for the first 3 months of 2006. Net sales from our other generic products decreased to 31.7 million in 2006 from 37.3 million at 2005 due to increased generic competition with both Endocet and the Company's morphine sulfate extended-release tablets.

Gross profit for the first quarter of 2006 was 156.3 million versus 108.2 million in the same period of 2005, an increase of 44.5%. The gross profit margin declined to 76.2% from 78.5% in the year-ago first quarter due to the increased price pressure with certain of our generic products.

Selling, general and administrative expenses were 100.2 million in the first quarter 2006 compared with 53.4 million in the same period of 2005. The increase in SG&A is due primarily to the compensation expense and related employer payroll taxes, funded entirely by Endo Pharma LLC, of 42.4 million, and pre-launch expenses for oxymorphone ER and IR and Synera, the FDA-approved topical analgesic patch we licensed in January 2006.

Excluding milestones and upfront payments to partners, research and development expenses were 14.8 million in the first quarter 2006 versus 11 million in the year-ago first quarter, as we advance our pipeline products. We generated cash flow from operating activities of 165.3 million in the 2006 first quarter. Our cash and cash equivalents were 583.9 million as of March 31, 2006. We feel our strong financial position with good cash flow and no debt provides us an opportunity to pursue acquisitions and other strategic alliances, which would, we believe, accelerate our growth as a premier specialty pharmaceutical company.

To reiterate our previously-announced guidance for 2006, we expect net sales in 2006 to be approximately 860 to $880 million. We estimate net sales of Lidoderm in 2006 to be approximately 530 to $540 million and adjusted earnings per share for 2006 to be approximately $1.75 to $1.80. This excludes estimated upfront and milestone payments to partners; stock compensation charges related to the adoption of FAS 123R, estimated to be approximately $0.05 per diluted share; and compensation expenses and related to employer payroll taxes, funded by Endo Pharma LLC. Of course, there can be no assurance of Endo achieving these results.

Our guidance also does not reflect net sales of extended-release and immediate-release versions of our developmental product, oxymorphone, nor the associated launch costs. These 2006 estimates include net sales of the Company's generic OxyContin of approximately 50 to $60 million and earnings attributable to generic OxyContin of approximately $0.20 to $0.24 per diluted share.

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

Thanks, Jeff. There will certainly be much excitement in anticipation at Endo over the next several months, which we believe promises to be a very active and significant period for us. I'd like to review with you some of the upcoming key milestones and significant events that bear watching.

On June 22nd, we expect action letters from the FDA for oxymorphone ER and IR. If approved, we anticipate launching these important new opioid analgesics shortly thereafter. Much preparation work has been and continues to be done in anticipation of the approvals, as this has been a high priority for our clinical, regulatory, manufacturing and marketing organizations in particular.

The launch of Synera is also anticipated in the second half of this year, and we are preparing the market as we speak for this FDA-approved topical analgesic patch, indicated for the use in children and adults to numb the skin before various medical procedures, such as IV infusions or blood draws. It will be promoted by our hospital sales team.

Data from the confirmatory Phase III trial of Frova in menstrual migraine prophylaxis is expected in the coming weeks, and the subsequent filing of the supplemental NDA for this indication is expected by the end of June. We expect to announce the top-line data prior to this expecting filing and to present the details of this trial at an upcoming medical conference later this year.

At the upcoming American Pain Society Annual Meeting in early May, we will be presenting the details of the efficacy and safety data from the two Phase III trials for oxymorphone ER in opioid-naive and opioid-experienced patients as well as the Phase III trial data for oxymorphone IR. We will begin before the end of June, the Phase III clinical trials for our topical ketoprofen patch, intended as a treatment for the pain associated with soft-tissue injuries, such as sprains and strains.

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

(OPERATOR INSTRUCTIONS). Ian Sanderson, SG Cowen.

Congratulations, Jeff. On generic OxyContin, it looks like the prescription demand numbers, assuming an 85% discount to the brand, would indicate Q1 sales of in the high teens, somewhere 15 to 20 million. So, was there a big reserve taken in Q1, or was there an inventory adjustment there? Maybe if you can answer that, also what the impact on the gross margin might have been from that on generic OxyContin.

Then secondly, how comfortable are you with the 50 to $60 million sales guidance for 2006 on that product?

Sure. We are comfortable with the 50 to $60 million for OxyContin generic, for the full year. As you are aware, as we previously disclosed, the generic market is from a pricing perspective is much less attractive than what we thought it would be when we entered into this. There was, for the first quarter, some destocking so to speak of inventory levels out in the trade from levels that were carried at year-end when we had more exclusivity or at least shared exclusivity for three of the four springs. So it took some time for there to be sort of a wind-down of inventory levels out the trade, which is reflected in the first-quarter numbers. However, for the full year obviously, we are still comfortable with the 50 to $60 million.

From a margin perspective, there has not been any significant movements in price from where they had been once the four players entered the marketplace. We do expect that there could be or may be additional pricing pressures on this product, which obviously do impact the margins of the product. We haven't separately disclosed the margin on OxyContin itself. But it does obviously impact our overall corporate margin, which is down year over year.

So, just on the 50 to $60 million guidance, that would imply a bit of a recovery in the quarterly sales from this level. Do you see that happening, given the dynamics in the market?

We do expect there to be a recovery from what we ship out the door versus what was in the first quarter, which is why we are still comfortable with the 50 to 60 million, given the market dynamics today that we are comfortable with it, certainly to the extent there are changes in the market dynamics, either pricing or additional competition, movements by customers to other suppliers. We would update you if that occurs.

Dave Windley, Jefferies & Co.

Jeff, congratulations from me too. On the SG&A and R&D expenses, the mix of those was a little different than I had expected. On the SG&A, is the second quarter likely to look a lot like the first quarter? In other words, are the launch expenses that elevated that number likely to continue at a similar level into the second quarter and beyond that, if that's applicable?

Sure. As you know, we don't provide individual line item guidance as to SG&A or R&D, just sort of directionally. As we had disclosed in 2006, we do expect the rate of increase over 2005 full year to be similar for R&D and SG&A, certainly with some of the pre-launch costs that were incurred in the first quarter and will continue to be incurred in the second quarter in advance of both oxymorphone and Synera. We would expect that activity to continue and maybe even accelerate a bit.

Historically and no different this year, we hold our national sales meeting in the first quarter of each year, so that's somewhat unusual. There's obviously a lot of factors that contribute to what the increases are. You know, we expect R&D over time -- not speaking quarter-to-quarter but over the coming years -- to increase as we bring in all these developmental products that we expect to bring to market at some point. So we will continue to invest in SG&A and R&D for the future, and we hope those do increase so we can continue building this Company.

Right, thanks. On the revenue line and on the branded side on Lidoderm, you had I guess destocking heavily in the first quarter of last year and then maybe a little bit of recovery late last year, and then it looks like destocking again this year -- or the first quarter anyway. Could you characterize levels of inventory in the channel? Are there contractual issues that are influencing those levels? Should we be concerned that they could continue to go down?

Sure. As far as contractual issues, we have disclosed that we had entered into inventory management agreements or whenever the terminology is for this particular one back in the fourth quarter of 04, I believe, with one of the big three wholesalers we have that have to do with second inventory management agreement with one of these ones that are not in the big three. We do expect, given that the wholesale industry is moving towards the fee-for-service-type model, that we will enter into more of those in the future, and that certainly would help with some of the fluctuations that occur from what we ship versus what the IMS demands us.

You know, we try to disclose both numbers, both IMS demand and what we ship for transparency purposes, so you can see the fluctuations that occur from time to time. On occasion, they go the opposite direction. This quarter, it happened that the IMS demand is actually stronger than what we shipped out the door. There's nothing contractual, so to speak, in terms of what that is. Customers order product based on what they believe the demand is. Or under the old model, at least they also tried to anticipate when price increases will occur. So, it does fluctuate from quarter to quarter and month to month and year to year, demand versus supply. We try to provide that to you, so you can analyze the data as you see fit. But if we reported our numbers based on underlying IMS demand, it would have been a stronger quarter for us certainly.

Sure. Can you put a number around what you think channel inventories are right now?

For all products now, I think they are somewhat what we would expect them to be -- in the normal range, which is typically for our products in the month to 1.5 month-ish range.

David Buck, Buckingham Research.

Just first to add to the best wishes for Jeff. I will add a question for David Lee on oxymorphone. What type of discussion have you had around the alcohol interaction data, if any, with the agency? Can you confirm whether or not you are in labeling discussions? Then, I have a follow-up.

Well, we haven't actually had really any discussion with the FDA over the alcohol issue, beyond what we had discussed with them towards the end of last year, when we agreed with them that any data that we had generated would be submitted within 3 months of us filing the complete response. We did submit that alcohol data within that 3-month time window, and so we assumed that it's now under review by the agency, together with the data submitted as part of the complete response.

This is not a division that typically enters into a lot of ongoing discussions with sponsors, particularly during the sort of early part of the review period. So we don't expect, really, much interaction and certainly no interaction on the wording of the label until much closer to the June 22nd PDUFA date.

A question for Jeff, just back on the inventories and the trade and the destocking. What contractually had been the inventory levels that you were expecting to keep under the fee-for-service agreement that you had signed? Can you give us some sense of the target of what they would be and timing when you would add the rest of the big three? What is the risk of another shortfall in putting down inventories to revenues when that process happens?

I can't predict really when we will enter into new ones. We would like to do that to help with the transition there I guess from a financial perspective a little bit negative to us at the end of the day; although, we do perceive receive additional services, including more transparent reporting, and we are able -- there are some benefits certainly of entering into them from a financial perspective that are you pay a fee, so it's negative. So, we haven't been sort of rushing to the table to try to do that. But given that the model is moving to fee-for-service, we expect to enter into others' at least big wholesalers.

I can't disclose contractually what the inventory levels are. I can say that under the new model, they are not motivated to carry a lot of inventory on-hand typically. So we would expect it maybe to be lower than what they would in the past. But that's a negotiated range or number that will have to occur on a customer-by-customer basis. I think that's --

In some cases, that's also to their disadvantage to carry excess inventory. Because for any price adjustments, Endo is credited for the amount of inventory that they have on-hand so that may in fact provide for the disincentive to stock up.

Just one final, any price increases that were during the quarter?

We took price increases effective April for a couple of the products but nothing (multiple speakers)

Nothing in the quarter.

What was the magnitude of those?

I don't recall at the top of my head. I think Percocet was about a 9, almost 10% price increase.

No Lidoderm, no Frova?

Not that we recall, no.

Angela Larson, CE Unterberg, Towbin.

Jeff, I absolutely wish you the best. I was hoping that you could update us on what was the milestone reached that triggered the payment on the fentanyl patch. David, if you would be kind enough to give us a little bit greater description on the nature of the Phase III studies, the primary endpoint and just describe the basics.

On the sufentanil patch?

Yes, I mean the milestones that were paid and expensed in the first quarter were not related to the sufentanil patch; it was actually related to the ketoprofen patch and to Rapinyl milestones that were achieved in those development programs of which we haven't disclosed what that milestone is. David, you can --

Yes, if your question is related to the sufentanil patch, that is really just in early clinical developments at the moment. We are working through the Phase I studies that we need to do, as you do on any transdermal patch product. We hope that we will be into a Phase II program in patients to expand on the sort of early initial stuff that DURECT had done in Europe sometime in the coming months. But we are a long way from Phase III at the present time.

I am sorry. I meant the ketoprofen patch.

The ketoprofen patch, we will be in Phase III before the end of the first half of this year. Our normal process here is that we will have an end of Phase II meeting with the FDA, await the minutes of that meeting so that we can confirm that our understanding of what the agency expects is what we believe was said at the meeting and we heard at the meeting. We will then make sure that we are comfortable with the timelines and projections internally. At that point, we will make an announcement as to what our Phase III program is and when we expect to file on the NDA.

It is our policy now with our Phase III clinical trials to host those on the ClinicalTrials.gov website to sort of preannounce them, as I think most of the pharmaceutical companies are now doing. At that time, we will be able to say a little bit more about what we see as the primary endpoints in these studies and the sort of basic design of them.

Have you also already met with the FDA or are you just now awaiting the minutes?

Yes, again we -- that will happen during the first half of this year. We are confident that we will be in the Phase III program. As I said, at that time, we will make the appropriate announcements. We tend not to talk much about the timing of meetings that we have with the FDA. We just think that our interactions in general with the FDA should be kept confidential between us and the agency.

Greg Gilbert, Merrill Lynch.

I have a few. First, for Jeff, can you walk us through the DSO adjustment that you usually give us?

Sure. The DSO for March is about 48 days. As we've talked about in the past, our brand sales have terms of 30 days and our generics have terms of 60 days. Unfortunately, nobody pays us on time, but they at least do pay. Historically, they've sort of been in that low 50, high 40, low 50 range. 48 is what it is as of March.

A couple pipeline questions. David, can you update us on Rapinyl enrollment and describe to us how, if at all, it might be different from the Cephalon product?

Yes, the Rapinyl, we have two Phase III studies now underway. We have a double-blind, placebo-controlled trial really following what has now become the standard design for the evaluation of products that breakthrough pain. Then we have an open-label safety study to provide the FDA with the data that they are looking for relatively prolonged exposure. Of course, this is an acute use product so that prolonged exposure is not that long.

We don't provide updates on enrollment. We have said that we anticipate the filing of an NDA in the second half of 2007. As the enrollment unfolds or if there are any changes in that projection over the next few months, we will certainly make that clear.

Any potential differentiation versus the other fentanyl similar product out there?

That's really only speculative at the present time. Obviously, we can't have done any head-to-head comparisons as yet. We believe that Rapinyl will be very patient-friendly; it is a small tablet that goes underneath the tongue. That is in contrast to Actiq, which of course the patient has to swab the inside of their mouth and the lollipop construction. The new Cephalon product, which I understand is a buccal tablet and is actually sucked on the inside of the cheek and takes several minutes to dissolve or disintegrate. Rapinyl disintegrates in 30 to 60 seconds. Under the tongue, there is far less possibility, we think, for any of the fentanyl to be swallowed where it wouldn't be absorbed. So we think it's a much easier product to use and will be certainly more efficient in terms of the amount of drug needed in order to achieve therapeutic drug levels. My hope of course is that we're going to get very rapid onset of action, but I can't really comment on that relative to any of the other products at the moment because we obviously need to generate more data first.

On oxymorphone, when will you know if you can get new chemical under the exclusivity? Does anything need to occur between now and June 22nd with the DEA?

We certainly won't get new chemical entity exclusivity. Oxymorphone is a known molecule. Even though it has not been obviously actively promoted for many years and the NDAs that were filed were filed in 1960. As far as we've been able to ascertain under the current regulations, the FDA is still obliged to see that as an existing molecule.

Now, in the end, that all has to be confirmed at the time of approval, but that is certainly our current anticipation.

Sorry, then your second question there--?

What needs to happen with the DEA between now and June 22nd?

Oh, yes. Nothing that we are aware of. Oxymorphone is a Schedule 2 product, and we're certainly not trying to get that changed. It will be a Schedule 2 product. We don't anticipate that there will be any issues with the DEA. Obviously, we have included an abuse liability package with the original NDA, and we've not had any substantial questions on that that I can recollect. The DEA has no role now in determining risk minimization, action plans or anything else, beyond their normal responsibilities around quota. They were given some additional powers in the last year or two, but those powers have in fact been rescinded by Congress. So we don't expect any particular interactions with the DEA between now and June.

Ken Trbovich, RBC Capital Markets.

David, just to follow-up, you mentioned the risk minimization action plans. Could you give us some details with regard to whether you submitted one with the oxymorphone NDA and what sorts of restrictions, if any, regarding prescribing or patient and physician education were included as a part of that as well as post-approval databases that you might be expected to maintain?

Yes, we did submit a risk minimization action plan with the original NDA. There was no real discussion around that at the time, other than the fact the FDA said that as the regulatory process proceeds, there will undoubtedly be further discussion around it. Although they told us at the time that they did not anticipate that this would in any way impact the final approvalability of the product.

We updated the risk minimization action plan when we submitted the complete response in December to reflect both changing ideas since the original submission and our own experience. We had a risk minimization action plan agreed with the FDA as part of our launch of our generic OxyContin products, and so we already have a lot of experience in this area. We don't disclose a lot of details about the plan. That is proprietary information. Obviously, from a competitive perspective, we don't want to say too much about it.

The FDA has set out a guidance for industry on what they expect to see in a risk minimization action plan in general terms in relation to product labeling; education for healthcare providers; patients and patient caregivers; the management at the distribution channel; and tracking of signs of diversion, misuse, excessive use and so forth and any intervention steps that should be taken as a consequence of those signals. So our risk minimization action plan addresses all of those areas. But again, we tend not to provide details for competitive reasons.

I guess a different way of asking the question, should we expect you to have voluntary restrictions, the way Purdue did with Palladone, or is that something you're not willing to proceed with?

Yes, in relation to those -- to the labeling requirements, obviously, until we enter into the labeling discussions with the agency, we don't know exactly where their thinking is. We had, as far as we are aware, a much more substantial clinical program for oxymorphone extended-release than was done for Palladone. We have 15 studies. We have thousands of patients, patients who are opioid-naive and experienced, with a variety of different types of chronic pain. The agency in general provides a label and allows promotion that reflects the studies that were done as part of the clinical program, particularly clinical studies. As far as we can tell, what Palladone was required to do was really a reflection of what their clinical program actually was. So, with a more extensive clinical program, we currently don't anticipate restrictions. But again obviously, that's something that the agency will determine as part of their review.

Also, I think it's worth keeping in mind that Palladone is a once-a-day product, so there's a large amount of opioid in the formulation. The FDA is always concerned about the abuse that may be associated with that. Oxymorphone of course is a twice-a-day formulation, so there's less active product per unit dose. So again, we expect a broad label, but that will in the end be determined by the final discussions that we have with the FDA around the labeling.

I appreciate the detailed response. Quick questions for Jeff -- I know you folks have avoided giving guidance with the launch included, but you have mentioned previously a plan to expand the sales force, potentially as early as the back half to support the launch. Should we be thinking of the launch phase as dilutive or accretive, just in a general sense?

I will try to dance around this without giving any guidance.

I appreciate it.

There are certainly costs associated with launching the product that will be significant that we expect to spend, including the expansion of the sales force above what it is today, to not only promote oxymorphone but also to continue to support Lidoderm as it deserves, as does Frova. So we will expand the sales force and spend a lot of money on launch costs. We will obviously, hopefully assuming approval, we will launch the product in the second half and get some sales. Although how much those sales reflect underlying demand versus the prescription demand versus what we ship out the door in terms of inventory build will be, in part at least, related to timing of that approval, again, which we hope to get on June 22nd.

The costs associate with oxymorphone, not only the incremental ones we will incur but also ones that are sort of on our books today, our existing sales force, infrastructure, etc., will also support oxymorphone. As you are aware, oxymorphone has a profit split with our partner, Penwest. We will be able to burden oxymorphone, so to speak, with certain of the costs associated with the business that will reduce that. Part of it will be paid so to speak by Penwest, so it is a significant launch for us. Certainly, we expect very big things from this product. It's our near-term and driver of a lot of our potential growth, we think. So, I can't give you any sort of numbers around it, just that the magnitude will be big. But it's not borne 100% by us.

But in terms of those upfront costs, typically, you folks don't recognize revenues other than what's represented by pull-through on Rx?

We will have to assess it at the time. Certainly from a GAAP perspective to the extent you can estimate the returns that will occur as a result of products shipped out the door if you are allowed to book sales, so we haven't made that determination yet. We have launched a lot of product in this space. DepoDur was a little bit unusual for us, at least in that it was our first entry into the hospital arena, so we took maybe a little bit more conservative approach and waited until we saw some pull-through with other products that we've launched in the past, such as Lidoderm, Nurofen, Percocet, etc., where we knew this space real well from a retail perspective, customer base and patient base. We have booked sales. We haven't made that final determination at this point. But we certainly would expect to the extent we get approval on June 22nd and launch the product shortly thereafter that we will have quite a bit of underlying prescription demand growth to justify booking at least some sales.

Robert Uhl, FBR.

Just, could you give us an update on the current status of the generic OxyContin patent challenge case, and if there are hearings or briefs to be filed or any dates to watch out for?

Sure, Robert. We've had an administrative hearing with the judge to review the time and events for how the litigation will proceed. Dates have been established for briefings. We expect to have our first briefing sometime in the early part of May. There will be a response from Purdue that will occur thereafter, and we expect our final response will be done by the end of June. We do believe that there will be oral arguments that will be scheduled, but those have not yet been scheduled. So, until that occurs, we will be proceeding as Judge Stein has directed.

All right. As far as you know, the only thing going on with that product is with Judge Stein and his court. There's nothing else at the Court of Appeals level or anything like that?

That's correct.

Then my second question is, the hospital business looking at the results of the DepoDur in the latest quarter seem to be going pretty much nowhere fast and you've dropped propofol. I mean, what's your level of commitment to that hospital business? Can you quantify maybe how much it's losing on an operating business a year for us?

Our belief in DepoDur is still very strong. We do see better than 90% of the formula reviews have resulted in an approval and placement on formulary, as we've indicated in the past. It has had a slower-then-anticipated uptake in terms of patient use. We have in fact just recently submitted and have accepted at the American Society of Regional Anesthesia a new clinical trial demonstrating the safety profile of DepoDur, particularly when administered concurrently with a local anesthetic agent. We believe that the safety data will certainly enhance the ability for physicians to have greater confidence in the use of the product in their standard of care. So we do certainly believe that DepoDur will be and continues to be a product of importance for us in the hospital marketplace.

Of course, as you know, we are launching Synera into the hospital marketplace as well. That is expected in the second half of the year. This will be primarily focused on inpatient IV blood, IV infusions and blood draws for pre-treatment to anesthetize the skin. That will certainly have an important role to play in the hospital arena.

Of course, our oxymorphone is going to be launched in the hospital arena as well, as many patients who are initiated on opioid therapy, they usually start in the hospital and continue therapy throughout outpatient care. Of course, we also have an IV formulation of oxymorphone that is already approved that will be rebranding into the hospital arena upon the approval of the oral formulation. So, by the second half of this year, we will have three product lines for our hospital sales team to continue to promote in the institutional environment. Certainly, we continue to look for other opportunities to expand our presence within the institutional marketplace as well. You know, certainly on a cost basis, I will let Jeff answer the questions relative to cost. We don't give an awful lot of detail on that. But Jeff, you want to comment?

Yes, I mean certainly currently, the DepoDur is only -- is supported by the 70% hospital rep team plus obviously promotional costs, etc. We don't break out that on an individual basis, but certainly it's not being paid for currently by DepoDur alone. Again, as Peter mentioned, it has not gone as well as we had hoped. We do still hope and belief that there is good potential for this product. And then added to the oxymorphone and Synera that Peter mentioned, we think this is a good space for us to be in.

Lei Huang, Lehman Brothers.

I'm not sure if you covered these topics already. But on the tax rate, it looked a little bit low for the quarter. Is it just a blip and should we assume sort of the normal 37 to 38% range for the foreseeable future?

The tax rate is lower than what it has been historically. For a full year, as we've said somewhat in the past, we are probably going to be closer to 37, 38%, somewhat of a unique dynamic this year versus last year is there's a manufacturing deduction you're permitted that last year, we were not able to utilize because of the stock compensation charges -- deductions that we took for income tax purposes -- put us into a loss for a tax purpose in 2005. As a result of that, we were not able to take advantage of those manufacturing deductions. Whereas this year, we are able to take advantage of it so that has helped us to a certain extent from the effective rate standpoint versus where we were last year. But certainly, we expect probably to hover closer to the 37% range.

On the gross margins, your guidance is for a slight year-over-year decline. Assuming that guidance holds still, should we assume a recovery or pick-up in the guidance -- in the gross margin level in future quarters?

Without getting to specifics, we do expect a decline year over year. You know, it's obviously product mix related and the pressure on the generic products is one of the drivers. Although we do have generic products, those margins have historically been relatively high margins for generics and brand like in a lot of ways. Whereas some of our branded products -- although promoted and priced like a brand -- because of the royalty structures, etc., may not be as high as had we developed the drugs ourselves. So, it's a mix of products on brands that are higher than generics. Some generics are higher than brands. But it will probably depend on the pricing pressure that we feel on the generics over the remainder of the year.

Got it. So going back to your early comment you do expect generic OxyContin sales to pick up maybe in the rest of the year a little bit, so your margin could have improved from this level even with just with that pick-up?

Without -- trying not to comment on individual product margins, that is a good margin product for us, certainly.

Then, just last question on oxymorphone ER, is there still a chance that the FDA could come back to you and extend your PDUFA date?

There's always a chance that the agency could in fact request additional data or time to review. We don't anticipate that, given the fact that this is a complete response to a previously-issued approvable letter. But that certainly is always a possibility.

Rich Watson, William Blair & Co.

Given everything you know now about the OxyContin market and what's kind of transpired on the generic Durogesic effort, do you guys see yourselves investing in those kind of opportunities going forward? That's one question.

Then more broadly speaking, obviously a lot of cash now, can you talk about some of the uses for the cash and specifically whether the propofol market, that sort of market is still where you might want to look to get into? Would you consider share repurchase programs and things like that, now that you have a fairly large float? Thanks.

Sure. Certainly, our strategy on the generics side has always been niche-oriented, high barrier to entry, difficult to formulate, difficult to source products, those that we would anticipate having few competitors in the marketplace. As you know, we don't have a broad offering here; it's very limited. So that continues to be our focus as it relates to future generic opportunities. We won't be in commodity generics by any stretch of the imagination. So as we identify opportunities within particular generic markets that can reflect the parameters I just mentioned, we will continue to look at those as opportunities.

Relative to our cash position, certainly our expectation is to be able to continue our business and corporate development strategy to identify products within the pain management arena as well as complementary therapeutic areas. We have been and continue to be very active in our business development activities, particularly as it relates to licensing of products and technologies.

We are also actively assessing potential Company acquisition opportunities that would be good strategic fit for the business to help us to continue to grow. So that's really where our predominant focus has been over the last several years, and we expect to continue to be. While we wouldn't discount potentially an ultimate use of cash, we think that the opportunity for us to continue to invest in the business is our priority.

As it relates to the propofol market, primarily in the hospital arena, certainly we are continuing to be committed to that arena, as I mentioned earlier. Obviously, general anesthesia and new product development in anesthesia has been somewhat limited, particularly for products like new formulations of propofol. There are some pro-drug formulations that have been in development that similarly would be potentially attractive for this particular marketplace. But in general, I think the hospital arena as a whole, as a concentrated marketplace and whether it's in pain or complementary areas to pain, is one that we will continue to try to take opportunities in.

Michael Tong, Wachovia Securities.

A quick one for Jeff -- as you mention the rate of increased borrowing year over year is pretty much the same in '06 relative to '05. Is that on a GAAP basis?

Secondly, for Peter, as you think about the oxymorphone ER opportunity, what is the marketing message or value proposition message that you're going to take to the marketplace to drive penetration? How soon after launch do you anticipate ramping up the sales force, given the fact that you've previously mentioned the current sales force should be fully trained at launch?

As far as the reference to the increase year over year, that was excluding milestone payments to partners, so not a GAAP number.

As it relates to oxymorphone, we are certainly looking to continue to refine and hone our marketing message as we speak up to the actual launch date. But in essence, based on our clinical trial experiences, we certainly see oxymorphone as a product that has first and foremost a new option for physicians in the marketplace, which is particularly important for patients rather who are intolerant to particular side effects or can't achieve the level of efficacy that's required for a particular molecule and opioid rotation has become much more a standard approach towards achieving optimal ratio of product benefits versus side effects. So we will obviously look to exploit the fact that oxymorphone is the first new opioid in an oral formulation to be introduced in years as a new option for physicians.

It has clearly demonstrated in its clinical program, particularly in the last two clinical trials, which are going to be highlighted at the APS, it does demonstrate a remarkable ability to maintain a BID dosing schedule, which is unusual for opioids in controlled-release formulations. Most are administered either 3 times a day or even as many as 4 times a day. Even the patches are often administered on every 2-day rather than 3. Oxymorphone ER has been able to maintain a very high rate of BID dosing, and we certainly see that having a strong pharmaeconomic advantage in the marketplace, where proportionately more patients can be maintained on that level.

We have also seen in terms of the titration capability of the drug, a very important element is being able to maintain patients on the drug as you're getting them to optimal level of pain control. In both of the clinical trials that we will highlight at the APS, we were able to demonstrate that with very low dropout rates comparative to other opioid studies that had been conducted in the past, even those on oxymorphone previously. So we think that tolerability of the drug is going to be one that will be an important attribute.

In that same vein, we've also seen the over the course of the 3-month duration that the potential lack of dose escalation, patient maintaining the same level of dosing over that 3-month period of time with comparable pain relief scores, indicates that we may very well may have a drug that allows physicians to be confident that what they prescribe and obtain as a dosing level can be maintained for an extended period without having to increase the dose due to lack of efficacy. So we think that those parameters will be very important in allowing physicians to have a new treatment option.

Now, as it relates to the sales force, we have in fact indicated in the past that we are expecting to increase the size of the sales force. We've indicated upwards of 200 representatives. We've already included in our pre-launch budget monies to begin recruiting and to have representative candidates identified and potentially ready to make offers to upon the approval of the drug. So we expect that within weeks of approval, an expanded sales force can in fact be put into place, along with the existing 370 representatives that will be fully trained and ready to launch the drug almost immediately upon approval. So, it won't be an extended period of time before the full complement of sales effort against this product will be put into place.

I also add, by the way, relative to the promotional effort on oxymorphone, I think it's important in that we are very diligent around how we are turning our sales force and preparing them to market this product appropriately for physicians and for appropriate patients to ensure that we are not creating a situation where the drug could be used inappropriately. So we will be very diligent, not only with our risk management program that David referred to earlier, but also on our sales training program to ensure that representatives and ultimately physicians and patients are prescribed this drug only as appropriate.

Jon Stephenson, Summer Street Research.

Question -- a couple of just -- most of my questions have been answered. A couple quick ones on Frova -- they're looking at the prescription trends. It looks like the ship has kind of turned around on that front the more recent 6 to 8 weeks or so. Is there anything going on there in terms -- I mean obviously, you've had the first Phase III trial. But have you had any incremental gains on the managed care side in terms of number of contracted lives covered or the allowance for some prophylactic use?

We really haven't had a significant change in our contracting status. Frova is available in a fair number of managed care plans and particularly for triptans in general. These are usually third-tier co-pay and many potential prior authorization because of the expense, so there hasn't been any shift there.

What we have, however, seen is a fairly nice change in the trajectory of the prescribing, particularly in the neurology area. In fact, if we look at the first-quarter prescription growth rates, we are actually the second-fastest growing triptan in the market in the first quarter and nearly double that of the market for neurologists in general. So we've had a very concentrated effort for neurologists. These are the physicians of course that treat these intractable migraine patients for whom we believe Frova is most appropriate. We have in fact begun to really emphasize the fact that many of these intractable patients are menstrual migraine patients. So beginning to get physicians to see the advantages of this for acute treatment, such that if in fact we are able to secure a supplemental indication for prevention, it would be a natural extension of their awareness and usage of Frova. So we are beginning to see traction on this drug, and we are very happy to be able to prepare for what we expect to be a very nice filing here at the end of the first half.

Then in terms -- just following up on a question that was asked earlier regarding uses of cash, what types of capabilities would you be looking to bring into the portfolio of assets of the Company? I mean, are you looking for additional formulation work, new chemical entity capabilities, new therapeutic areas? What do you think is the most attractive or most desired assets in that sense?

Yes, we are primarily focused on therapeutic areas of interest rather than necessarily any particular technology or platform. So, as that would suggest, any kind of product that provides some degree of innovative approach, perhaps better for patients segmentation and particularly as it relates to sustainability of a drug over time, those are the main attributes that we look at.

NCEs are certainly things that would be very attractive in our search for new opportunities. Those are rare in the pain space. But in neurology and supportive care oncology and in the perioperative space as we expect to expand at it more readily into those areas, we certainly would see those as opportunities.

Delivery technologies are ones that we look to apply to molecules that do have a track record of use. We've done that in many of our product acquisitions. I think as I referred to earlier, we are looking at more significant expansion of our presence in the market by potentially tapping into synergies with particular companies that would have a good strategic fit for us. We continue to be very interested in identifying those potential opportunities.

So, there's not one particular platform that we look to take advantage of. But certainly therapeutically, we wish to stay within our existing space. We're going to continue to be specialty focused and look at specialists as being the drivers for the products that we do bring to the market and only go to primary care, where frankly we have to because of where the prescriptions are written. But that's really our core business strategy.

Just quickly following up on the inventory stuff, you mentioned you were about a month, 1.5 month on most of the products. At what level in terms of weeks' worth of demand do you typically see stock-outs at some of the pharmacies?

Stock-outs generally are pretty rare actually. It's usually -- you'd have to be below a week these days I think to really see that occur. The time of delivery from order to acceptance of a shipment at a wholesaler is usually within a day or two. Today, we have a central distribution center that actually supplies most of the major wholesaler central distribution centers as well, so the point of contact is usually pretty direct. They of course usually maintain, as Jeff indicated before, a fair amount of supply for our drugs in general. So stock-outs are generally not an issue for us.

Then lastly on Rapinyl, you've obviously disclosed a target for a second-half '07 filing and mentioned that you've got two trials ongoing. Do you expect to start additional Phase III trials and might we see top-line results in either the ongoing trials at some point in the second half of this year?

David, do you want to answer that one?

I am sorry. I missed the -- could you just repeat the question again?

Yes, I was just saying you had mentioned you might be in a position to file the Rapinyl application in the second half of next year, and you've got two trials ongoing. I was wondering first, would you anticipate starting other Phase III trials. Then second, might we be able to see top-line results from the first two trials potentially by the end of this year?

At the moment, I'm not sure that we will be needing any additional trials. Although, obviously that very much depends on the data that we generate. We will -- and I would think also our partner, Orexo, would want to put out any top-line data on the efficacy studies as soon as we get them. I can't predict whether that will be this year at the present time. Again, the only thing we are saying at the moment is that an NDA filing in the second half of '07 is our current target.

Patti Bank, Pacific Growth.

I just wanted to ask a question, go back to Synera in terms of in the hospital market, whether you can define that market a little bit better for us and whether -- I presume the bigger market here is the pediatric offices and what you're doing in that space. Then also, along those lines too, how you plan on competing once the core Genentech product gets out there in terms of them having a faster onset of action.

The hospital market for Synera, we've generally described as being reflective of a number of patient days for which at least one IV infusion or blood draw has been made, and there's about 11.5 million patient days per year, particularly for pediatric patients where that does occur.

You know, currently the standard of care in hospitals has been to take these patients -- and in fact there are many protocols already in place -- to take these patients and administer aesthetic creams or ointments in advance of an IV infusion or a blood draw. These often take upwards of an hour to actually have full effect. So certainly from a nursing convenience perspective and from an efficacy perspective, it is quite cumbersome. So we expect that Synera will be a significant advantage, slip right into existing protocols as it were and allow for these patients to be pretreated within -- we generally stay within a 20 to perhaps 30-minute timeframe.

What's unique about Synera of course is that it is a patch formulation with a heating element attached. It looks like a Band-Aid, and you simply peel it off and stick it on. It's that simple. There's no electromagnetic device that's attached to it. There is no recharging of batteries. There is no having to discard the device once it has exceeded the limit. So we certainly see that the simplicity and the convenience and certainly the onset is well within acceptable and frankly desirable ranges for nursing staff and for pediatric physicians to use.

The pediatric market external to the hospitals is certainly an opportunity that we are currently exploring as well. We certainly want to establish our presence within the institutional environment first because clearly that's where the majority of these procedures are performed. But we will certainly be looking at the outpatient market for potential expansion, as we develop our product profile during the launch phase of Synera.

All right. Assuming this has to get on the hospital formulary, can you just talk about -- I know with DepoDur, you had said that process has been very slow, any correlation there?

Very different, we believe. As I said, there are already existing protocols in many, many hospitals for these patients. Protocol development and agreement within an institution is probably the most time-consuming element, which is why changing the paradigm with DepoDur has been such a time-consuming process.

We don't have to change the paradigm of Synera of all. This is simply a product swap out, we believe, for an existing method of treating these patients. So that method already exists and the rationale for that pre-treatment already exists. This is simply slipping a more convenient form of a local anesthetic agent in a patch formulation that should be quite straightforward.

Jim Molloy, Oppenheimer.

Just a quick one -- any chance the Board would consider a dividend [in out] some of the cash? I know there might be some bylaws against that, but you guys are getting to the point where it might be attractive.

Certainly, the most attractive use of cash for us is to buy additional growth opportunities, whether on market products or pipeline products or a company's. That's the number one use of cash.

There are no current bylaws restricting dividends to my knowledge. We do have a credit facility in place that we've never borrowed against so that does restrict dividend payments. I'm not sure that's meaningful. I'm sure we could negotiate that out, and that expires in December this year anyway. As I mentioned, we've never burrowed under that facility.

So, if in the future, we don't believe there's additional growth opportunities or we think that it makes sense from that standpoint, I'm sure the Board will consider all uses of cash as opportunities, whether it's share buybacks, which we historically haven't done because of our ownership structure on an historic basis and/or dividends, maybe something that is considered in the future. Regardless of whether there's growth opportunities, there's always borrowing capacity of the Company to fund those types of things. So I think the Board will continue to look at best use of cash as will management look at the best use of cash and make those determinations in the future.

Just last question on Lidoderm, there's about 8 million of destocking in the first quarter, any thoughts on how stockings might go for the rest of year? I think we'll restock up or some more coming out of the channel.

Yes, I think when we provided our 2006 guidance of 530 to 540, we did also indicate that we expect to enter into additional inventory management agreements over the -- this year. Because of that, we would expect -- again because customers are not incentivized to carry a lot of inventory typically under the inventory management agreements, we would expect inventory to come down over the course of year, which was baked into our 530 to 540 guidance.

We have no further questions.

Okay, well, thank you, everyone. We appreciate your participation on our call today, and we thank you for your continued interest in Endo. We look forward to keeping you apprised of our progress, and I am sure you will all join me in wishing Jeff the best in the future. Thank you, everyone.

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