Endo International PLC (ENDP) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third-quarter 2006 Endo Pharmaceuticals Earnings conference call. My name is James and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Bill Newbould, Vice President of Corporate Communications. Please Proceed.

Good morning and welcome everyone. With us on the call this morning are Peter Lankau, President and Chief Executive Officer; David Lee, Chief Scientific Officer; and Joyce LaViscount, Chief Accounting Officer.

Before we begin, I would like to remind you that during the course of this call, Peter, David or Joyce 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 or generics thereof, 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 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 2005 annual report on Form 10-K and Endo's registration statement on Form S-3, filed with the SEC on March 21st, 2006. We urge you to review these factors.

In addition, during the course of this call, Peter, David or Joyce 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; and thank you for joining us on our call. Earlier today, we reported our financial results for the third quarter and nine months ending September 30th 2006. We are pleased to have this opportunity to discuss these results with you, as well as some other recent developments.

Joining David and me on this call this morning, is our Vice President Financial Operations and Chief Accounting Officer, Joyce LaViscount. Joyce joined Endo in 2004 and has a number of years experience in the pharmaceutical industry; both at Pharmacia and Bristol-Meyers Squibb.

Joyce was named Chief Accounting Officer, following CFO Jeff Black's retirement in August. In this role, Joyce is responsible for the certification of the quarterly financial statements as our principal financial officer until a new Chief Financial Officer is appointed.

Now I'd like to take a few moments to recap our quarterly financial results and discuss some recent developments, before turning the call over to Joyce for a more-detailed financial review.

Net sales for the third quarter of 2006 were $217.1 million, compared with $245.2 million in the year-ago third quarter.

Net income was $44.9 million, compared with $66.6 million in the year-ago third quarter.

As detailed in the supplemental financial information in today's press release, adjusted net income for the three months ended September 30th 2006 was $47.2 million; verses $77.1 million in the same period of 2005.

Diluted earnings per share for the three months ended September 30th 2006 were $0.33, compared with $0.50 in the same period of 2005. Adjusted diluted earnings per share for the third quarter of 2006 were $0.35, compared with $0.58 in the year-ago quarter.

The primary factor behind our quarterly performance was inventory de-stocking by a major wholesaler which resulted in factory sales being lower than demand sales. As we disclosed on October 2nd, we signed an inventory management agreement with one of our three largest wholesale drug-distribution customers during the quarter. And in anticipation of this event, this customer reduced its inventory levels for all of our branded products.

While this affected all of our brand sales to some degree, it had the most impact on net sales of Lidoderm, our largest-selling product; which were $127.4 million for the third quarter of 2006, compared to $124.3 million in the year-ago third quarter.

We are pleased to report that the underlying demand for Lidoderm continues to be strong. We estimate that prescription demand for Lidoderm in the third quarter of 2006 was approximately $151 million. Based on prescription data from Walters Kluwer Health, the run rate on Lidoderm is now approximately $604 million.

Although we began with commercial shipment of Opana ER and Opana to our customers on July 21st, we have determined that under accounting principals generally accepted in the United States related to revenue recognition, we are not able to include net sales from these products in our 2006 third-quarter results. We expect that the recent uptrend in prescription demand for these products will enable us to recognize all or part of the deferred revenue by the end of this year. Factory sales shipments of Opana ER and Opana amounted to $12.7 million in the quarter.

I'd like to now take a few moments to update you on the status of the Opana launch. Following initiation of commercial shipments, our 590-person sales force began detailing the product. Since mid-September, we have seen a steady growth in prescription demand, reflecting the impact of increasing physician awareness resulting from the initiation of our marketing campaign and use of promotional materials.

We remain confident about the future potential of Opana ER and Opana. All of the data we have been collecting lately points in the right direction. For example, nearly 60% of the total Opana prescriptions being written are being done so by pain-management specialists, with about 27% being written by primary care. We expect this number to shift towards primary care over time.

The highest-decile prescribers; that is, the most-experienced and knowledgeable physicians in this field, have accounted for approximately two-thirds of all Opana prescriptions to this point; indicating that our strategy to focus on this group with the greatest efficiency is beginning to pay off.

So we have just now begun to see traction amongst the most-experienced [opioid] writers. And we believe there is considerable room to responsibly expand beyond this group, as our representatives continue to cycle through their call plans and call upon physicians experienced in the treatment of patients in chronic pain, but who are in the middle and lower-deciles.

95% of our details for Opana ER are in the primary physician, and we are seeing an increase in the overall [sharer] voice in the long-acting strong opioid market, which we feel can only benefit Opana as the newest product available and with the broadest label in the class.

As you may recall, we added an additional 220 representatives to our sales force, and most of our 590 representatives have at least some new territory to cover. As they begin to work through their territories and develop relationships with their new physicians, we expect Opana prescriptions to steadily increase throughout the balance of this year.

Now consistent with what we had expected, based on existing clinical practice with other long-acting opioids, the most-commonly prescribed strengths of Opana ER are the 10 and 20 mg. Not surprisingly, the immediate release Opana 5 mg is being prescribed more than the 10 mg, as physicians prefer to begin their patients at the lowest dose of the IR before converting them to the extended release.

Now as the fourth quarter unfolds, we have a full schedule of promotional and marketing activities underway to further expand awareness around Opana and Opana ER, including speaker programs and teleconferences, dinner conferences, direct-mail programs and the general ad campaign; all now utilizing our new marketing campaign messages.

We will also have a significant Opana presence at four key medical society meetings this month and next, including the American Society of Anesthesiology, and the American College of Rheumatology.

Now based on continued demand for Lidoderm and the fundamental strength of our business, we reiterate our 2006 guidance of approximately $880 to $910 million in net sales, and adjusted diluted earnings per share of $1.53 to $1.58, which reflects the previously announced dilutive impact of $0.02 per share from our recently announced acquisition of RxKinetix Inc.

We also reaffirm our full-year guidance for Lidoderm net sales at the high end of the range of $530 to $540 million. I would also like to point out that we have deferred revenue of $12.7 million for Opana ER and Opana in the third quarter. And due to the application of revenue recognition accounting principals I just mentioned, we believe it is appropriate to withdraw our full-year 2006 guidance for these products at this time. This withdrawal does not affect our overall 2006 net sales guidance.

Our guidance for adjusted diluted earnings per share excludes estimated upfront and milestone payments to partners, stock compensation charges related to the adoption of SFAS 123(R), which are estimated to be approximately $0.06 per diluted share; and compensation expense and related employer payroll taxes funded by Endo Pharma LLC.

These 2006 estimates continue to include net sales of our generic oxycodone ER of approximately $50 to $60 million, and earnings attributable to this product of approximately $0.20 to $0.24 per diluted share.

We believe the combination of our projected strong growth in Lidoderm, the ongoing launch of Opana ER and Opana and the continued development of our pipeline, leaves us well-positioned to sustain our growth as a specialty pharmaceutical company.

Now, I'd like to briefly recap some other noteworthy recent developments.

First, we announced earlier this week that the FDA's Office of Generic Drugs, or OGD, in responding to an enquiry regarding bioequivalence for Lidoderm, has recommended characterizing the pharmaco-kinetic profile of lidocaine, as well as skin irritation and sensitization study of any patch formulation. This differs from what we believe to be OGD's practice of requiring the bioequivalence for a topical non-systemic product such as Lidoderm, be demonstrated only through clinical efficacy studies. We believe that clinical studies consistent with those required for other topically-applied products are more appropriate in assessing bioequivalence to Lidoderm.

Endo has expressed this view to OGD and these discussions are ongoing. Importantly, Lidoderm is covered by five [inaudible] patents, the last of which is said to expire in 2015. These patents form the basis of what we believe is a strong intellectual property estate around Lidoderm, and cover not only the product's method of use in neuropathic pain; including post-herpetic neuralgia pain, but also it's unique formulation which we have mentioned previously, provides for analgesia without sensory nerve block or anesthesia; certainly a unique characteristic for an inherently anesthetic agent such as lidocaine.

Additionally, Endo has filed additional patents with the PTO and these are currently undergoing review. Endo intends to vigorously assert our patents against any challenge to Lidoderm.

Now second, last week we announced the acquisition of RxKinetix, a privately-held Colorado-based company that develops new formulations of approved products for oral mucositis and other supportive-care oncology conditions. This purchase was for up to $20 million up front, with the potential for an additional $95 million in earn-out payments based on achievement of certain regulatory and clinical milestones.

RxKinetix's lead product is RK-0202, which we have now designated as EN-3285, a topical oral rinse with the active ingredient formulated in a proprietary drug-delivery platform known as ProGelz. EN-3285 is in clinical phase II for the prevention of oral mucositis, the painful mouth sores that often occur in cancer patients undergoing radiation and chemotherapeutic treatments.

RxKinetix also has other products in early-stage development, based on the ProGelz technology. We are excited by this strategic acquisition which will expand our presence in the oncology market where we currently promote Opana and Lidoderm and potentially Rapinyl as well.

Third, the FDA has notified us that the package insert for Opana injection has been approved. Formally known as Numorphan injection, we expect to re-launch this product shortly into the hospital setting under the new brand name with our hospital sales force.

Fourth, on August 28th, we reached agreement with the Purdue Frederick Company to settle our patent litigation over oxycontin generic. As part of the agreement, Endo has agreed to stop selling generic Oxycodone ER by December 31st, 2006. This settlement was recently finalized when the District Court signed a consent judgment, dismissing the litigation.

And also during the third quarter of 2006, the FDA accepted for a substantive review, the supplemental new drug application for Frova for the prevention of menstrual migraine. In addition, the FDA confirmed May 19th 2007 as the review completion date for this application. We believe Frova's potential future indication for the prevention of menstrual migraine, a condition afflicting as many as 12 million women per year, makes it one of the Company's most-promising products.

And lastly, we are now in the final stages of the selection process for a new Chief Financial Officer and we expect to finalize this decision some time in the next few weeks.

And that concludes my prepared remarks. But before we take your questions, I'd like to turn the call over to Joyce LaViscount for a detailed look at our third-quarter and nine-month results. Joyce--?

Thank you, Peter and hello everyone. As Peter mentioned, Endo's net sales for the third quarter of 2006 were $217.1 million, compared with $245.2 million in the third quarter of 2005. For the nine months, net sales totaled $650.2 million in 2006, versus $579.4 million in 2005.

Due to the wholesaler de-stocking that Peter discussed, net sales of Lidoderm, our topical analgesic patch, were $127.4 million, compared with $124.3 million for the third quarter of 2005; and were $393.3 million for the nine months in 2006 versus $288.9 million year-to-date in 2005.

We estimate that prescription growth was up 19% and dispensed unit growth was up 22% in the third quarter, versus the comparable 2005 period. Prescription growth for Lidoderm was up 21% and dispensed unit growth was up 25% for the nine months ended September 30, 2006 over the comparable 2005 period. We estimate that prescription demand for Lidoderm in the third quarter of 2006 was approximately [$151] million.

Net sales of Percocet were $25.3 million for the three months ended September 30th 2006, versus $28.8 million in the same period in 2005. For the first nine months of 2006, net sales of Percocet were $74.9 million compared with $81 million in the year-ago nine months. Based on Walters Kluwer data, we estimate that prescription demand of Lidoderm in the third quarter of 2006 was approximately $25 million.

Net sales of Frova were $9.1 million for the three months ended September 30th 2006, and 29.1 for the year-to-date; versus 10.3 million and $25.1 million in the respective periods of 2005.

During the third quarter of 2006, we shipped $12.7 million of Opana ER and Opana, which included initial stocking orders by our major wholesale customers. We have determined that it is not appropriate at this time to recognize revenue for these shipments under U.S. accounting principals relating to revenue recognition. Accordingly, we are not able to include net sales for these products in our 2006 third-quarter results. Depending on end-user demands of Opana ER and Opana going forward, all or a part of these shipments may be recorded as net sales in future periods.

Reflecting increased generic competition and pricing pressure in 2006, net sales of our extended-release Oxycodone, the generic equivalent of oxycontin, were at $19.0 million for the third quarter and $43.3 million for the nine months; versus $49.3 million and $78.5 million in the respective periods of 2005. Commercial sale of all four strengths of our extended-release Oxycodone began [June] 7th 2005, followed by six months of marketing semi-exclusivity. As noted, sales of this product will cease on December 31, 2006.

Net sales from Endo's other generic products were $33.7 million for the third quarter and $98.8 million year-to-date in 2006, versus 29.2 million and $94.8 million in the comparable periods of 2005. We expect that competitors will continue to have an impact on our market share and price of both Endocet and Morphine Sulfate ER, which will adversely affect the net sales and profitability of these generic products.

Gross profit for the third quarter of 2006 was $172.7 million, compared with $183.8 million in the same period a year ago. For the nine months, gross profit was $506.6 million in 2006, versus $446.1 million in 2005. Gross profit margins were at 80% and 78% for the quarter and nine months, respectively in 2006; versus 75% in the year-ago third quarter and 77% for the nine months ended September 30th 2005.

Margin improvement in 2006 is primarily due to the $5 million write off of [Sentinel] Patch inventory in 2005, following the not-approvable letter received by [Novis] and reduced accrual rates in 2006 due to the continuing shift of certain products from Medicaid to Medicare Part D coverage.

Selling and General Administrative expenses for the third quarter of 2006 were at $87.9 million, versus $47.1 million in the year-ago third quarter. For the nine months, SG&A expenses were $252.3 million, compared with $156.3 million in 2005. The quarter and year-to-date increases in 2006 are due primarily to the expansion of our sales force in the third quarter, along with the additional investment of promotional, educational and other activities to support the launches of Opana and Synera.

Research and Development expenses for the third quarter of 2006 were $14.5 million, versus $22.4 million in the year-ago quarter, which included milestone payments to partners totaling $6.5 million. For the year to date, R&D expenses were $59.4 million in 2006 and $70.8 million in 2005. The year-to-date comparison in R&D spending in 2006 can be attributed in part to upfront and milestone payments to partners of $10.4 million in 2006, versus $26.5 million in 2005, as well as the completion of clinical studies on Opana in 2005. We expect to continue to make substantial investments in R&D to support the advancement of our development pipeline, an integral component of our growth strategy.

Net income for the third quarter of 2006 was $44.9 million, versus $66.6 million in the comparable 2005 period. Diluted earnings per share for the third quarter of 2006 were $0.33 compared to $0.50 in the third quarter of 2005. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for the three months ended September 30, 2006 were $0.35 versus $0.58 in the comparable 2005 period.

Net income for the year to date was $123.1 million in 2006, compared with $129.4 million in 2005. Diluted earnings per share for the nine months ended September 30, 2006 were $0.92, compared with $0.97 in the same period of 2005. As detailed in the supplemental financial information in today's press release, adjusted EPS for the nine months was $1.22 per diluted share in 2006, compared with $1.14 per diluted share in 2005.

We generated cash flow from operating activities of $275.5 in the nine months ended September 30th 2006, versus $171.2 million in the same period of 2005. During the three months and nine months ended September 30th 2006, net cash used in financing activities includes the $96.7 million payment to Endo Pharma LLC pursuant to the tax-sharing agreement between the Company and Endo Pharma LLC.

Endo Pharma LLC is a limited-liability company that previously held a significant portion of Endo common stock in which affiliates of Kelso and Company and certain other members of management have an interest. Under the tax-sharing agreement, Endo was required under certain circumstances, to pay Endo Pharma LLC the amount of the tax benefits that are useable by the Company as a result of the exercise of stock options granted pursuant to the Endo Pharma LLC stock option plans, which stock options are exercisable only into shares of Endo common stock held by Endo Pharma LLC and accordingly, do not dilute the ownership of the Company's public stockholders.

Additionally, Endo has recorded a liability of $99.1 million as of September 30th 2006 related to the compensation deductions taken in 2005 which amount will be paid to Endo Pharma LLC in the fourth quarter of 2006, and another $29 million related to compensation deductions expected to be taken in 2006, which if used to reduce our 2006 income taxes, will be paid to Endo Pharma LLC in 2007.

Our cash and cash equivalents totaled $674.7 million at September 30th 2006. We feel our strong financial position provides us the opportunity to use our cash and cash flow from operations to continue to pursue acquisitions, licenses and other strategic alliances within pain management and complimentary therapeutic areas, such as neurology, peri-operative care and supportive-care oncology. We believe this provides us with the opportunity to accelerate our growth as a premiere specialty pharmaceutical company.

Now Peter, David and I would be happy to take your questions.

[Operator Instructions]. Our first question comes from the line of David Windley with Jefferies & Company. Please proceed.

Hi, thanks for taking the question. I'll start with my one question on the expense side. Could you comment on the R&D and SG&A levels in the quarter and how indicative are those of the levels that we should expect going forward? Thanks.

Okay. I'll take that question. The major factors on SG&A driving our increase year over year are primarily the launch of Opana ER, Opana, and Synera. We increased our sales force to the 590 reps, and included in that we have the addition of the salary incentive comp costs, relocation, recruiting, training, call plan and everything that goes into the launching of those products; as well as infrastructure costs in the organization in our information technology, human resources and finance areas to be able to support the launches.

From an overall run-rate perspective, we do have some one-time expenses as you would expect with the launch, with the meetings. But at this point, we are continuing to put together our plan for 2007 and are not in a position to give our guidance on what that number will be going forward.

As far as our R&D expense year over year, we did mention that it was down year over year, and if you exclude the milestone payments to [Erexo], that it's basically flat from year to year. As your mix of your products that you're investing changes; last year we had Opana, this year we do not; we will continue to invest in R&D for Rapinyl, Ketoprofen and Sufentanil; and again we're rolling up our plans for those for next year, so we're not in a position at this point to talk about the run rates for those.

Our next question comes from the line of Gregg Gilbert with Merrill Lynch. Please proceed.

Thanks. I'm going to ask a two-part related question. First Peter, can you provide an update on the pharmacy-stocking program for Opana? And on Lidoderm can you discuss whether or when you might sign another large IMA for Lidoderm and the other products?

Sure, thanks Gregg. On the pharmacy-stocking program, we have continued to expand our distribution within the retail markets. We have continued to enhance that by both representative pull through activities as they go around their territories and as they enter new towns and zip codes. But we've also done some enhancements at the headquarter levels, if you will, of some of the major chains. And that has allowed us to continue to increase our pharmacy distribution, not to the level where we would expect by the end of the year yet, of course; but we are well on our way towards where we need to be and we have not have any recent antidotal of patients not being able to get product because of pharmacy out of stock.

On the Lidoderm IMA situation, as we have mentioned we now have two of our major wholesalers that have signed up with the IMAs. We do have a third regional wholesaler who is also signed up with an IMA. We do expect that the remaining customers who have expressed interest in these IMA agreements. We will be discussing the opportunity for us to be able to gain some of the benefits that we've outlined in our previous disclosure with them. However, the level of inventory we believe that is now held in the remaining customers is not at the level of this major customer and we wouldn't see the impact or wouldn't expect to see the impact of this level on a go-forward basis.

We're not in a position at this stage to outline any timeline with regards to when that might occur. We had said at the beginning of this year that we expected to have at least one additional IMA signed this year, and this certainly was with one of the largest of our customers. We are continuing to dialog as I said, with others. But we're not in a position to predict when or how that might affect the Lidoderm inventory as we go forward.

We are estimating at this time; however, that overall in the channel we have about a few weeks of inventory distributed amongst the various types of customers. And obviously the largest customers are now at levels that are-- much less than those that don't have an IMA agreement.

Our next question comes from the line of [Jeff Goder], with Cowen and Company. Please proceed.

Great, thanks for taking the question. Peter, can you just provide us an update on the discussions with Penwest and has this gone to arbitration yet?

Sure. We are in the process of going to a mediation procedure. We have not yet entered into any further dialog since the last time we disclosed this process moving forward. It's part of our normal escalation process within our contract. And we are in the process of preparing for a meeting over mediation to discuss the relative options that we may have. As we have indicated in the past, if mediation is not successful, we would certainly see that arbitration would be the step within the process. But we're not able to comment yet at all on any of those discussions at this point.

Okay, thank you.

Our next question comes from the line of James Kelley with Goldman Sachs. Please proceed.

Thank you and good morning. I have a two-part question about the deferred revenues for Opana. What level of prescriptions would start to -- or what is the trigger that we'd start to see some of those deferred revenues appear in the top line? And are there any Opana revenues, or is it completely inside the total Company revenue guidance or is that also completely out of that number? Thank you.

Jim, the level of prescriptions that would need to be generated is a somewhat arbitrary aspect to this. There are a number of different factors that go into revenue recognition under FIN 48 that we believe all have combined to make it not appropriate at this point in time to recognize that revenue. As we indicated in our prepared remarks, we do expect that the continued growth of prescriptions with Opana and Opana ER during the fourth quarter will allow us in the fourth quarter to recognize at least a part if not all, of the revenue to that point in time. So the 12.7 million that has been deferred is a number that we will -- you'll be shooting towards that plus other revenue generated in the fourth quarter by year end.

And with regards to the second part of your question, if you can just repeat that if you can please.

You addressed it. Thank you.

Okay, great. Thanks.

Our next question comes from the line of [John] Henry with Oppenheimer. Please proceed.

Hello, it's Scott Henry.

Hi, Scott.

Hi. I just wanted to dig a little deeper into the gross margin line. [And] looking at the three quarters in '06? It's at 76%, 78% and 80%. I'm trying to get an idea where that is going to be going forward. It certainly improved throughout the year; and is that sustainable or are there some one-time events that could be taking place?

Okay Scott, I'll answer that question. Right now there seem to be a few one-time events, primarily the shift from Medicaid to Medicare Part D; as we look at the patient enrollment. It's one area that we are seeing some impact on the reduced accruals. So that is driving part of the favorability that we are seeing in our margin. And it also has to do right now with the mix of our products. But we do not feel that that is something that will be sustainable over a long period of time, especially as we look at our cost structures and as the enrollment details continue to evolve.

Thank you.

Our next question comes from the line of John Boris with Bear Stearns. Please proceed.

Thanks, and good morning Peter.

Good morning, John.

Just two quick questions; just really Opana related. On primary market research, have you conducted primary market research to determine how your message is being received? And then secondly, have you gotten any indication as far as what intent to prescribe would be from the physicians that have been detailed from your sales reps? And then secondly, back to Gregg's question on Rx stocking or pharmacy stocking; do you have an absolute percent of the stores nationally that have been stocked with Opana? Thanks.

Okay, thanks for the questions. On primary market research; yes, we are conducting ongoing ATU studies; Awareness, Trial and Usage studies; that do in fact get to the very questions that you have posed. We do not yet have adequate data that would be sufficient for us to draw and interpretations on that except for just anecdotal data which of course has continued to be fairly positive. But we have indicated several weeks ago that we believe we'd need at least 8 to 12 weeks of both quantitative and qualitative information for us to be able to really make a firm determination on how the success of the launch would ultimately drive the future of Opana and Opana ER.

So we're not in the position yet to be able to give you any of that insight, so we have not yet been completed in our first wave of the ATU study.

In terms of the intent to prescribe of physicians that have been detailed, that also is obviously part of the ATU study. We certainly have seen anecdotally that there are a group of physicians who are prescribing this product after the first call, and continue to prescribe it for multiple patients. There are other physicians that are more-typical in this category of experienced opioid prescribers, who will take several calls; usually five or six calls before they begin to really become comfortable with the clinical profile and the rationale for why Opana or Opana ER would be appropriate for their patients. So we are intending to continue to monitor that over the coming months and as we get further insights around that we'll certainly be able to include that in our forecasting for 2007.

On the stocking for pharmacies, we had mentioned early on that we expected by year end we would be in about 12,000 pharmacies which represent about 80% of the strong opioid dispensing in the U.S. We are not in a position to give you specifics around that but we are well on our way towards that goal. We had estimated that we would need to be in about 8,000 or so by the time we got through our first cycle of representative detailing in order to ensure that the physician detailed would have ready-access to a pharmacy with the product available within a 24 to 48-hour basis. And we believe that, as I indicated earlier, stocking has not been at least anecdotally an issue for us of recent weeks. So we believe that we are well on our way towards accomplishing that goal.

Thanks.

Your next question comes from the line of Robert Uhl with Friedman, Billings, Ramsey. Please proceed.

Thank you. Peter, could you just be a little bit more specific about maybe some of the things you're going be doing in the Opana marketing campaign over the next couple of months and how that's different from what you were doing, say back in August-September and also comment on whether you've implemented any marketing personnel changes, either internally maybe at the project-manager level or even externally at the ad-agency or other things like that?

Let me answer your second question first. The only change that I'll comment on is actually an addition. We have added to a vacancy in our marketing department very recently, a very experienced individual that will be partially overseeing the Opana launch and ongoing marketing programs there. I won't comment at all on other personnel issues here.

With regards to the marketing campaign; yes, absolutely we are becoming now very active in being able to disseminate our marketing messages through the use of promotional materials in a number of different forum. As I mentioned earlier, we are beginning to be -- we have speakers that have now been trained on our clinical data and on our overall approach for enhancing the Opana profile within the marketplace; so speaker programs are beginning this month in October; in fact they've already begun. We have dinner programs that are being orchestrated right now with our local representatives, bringing physicians together for peer-to-peer dinner conferences to discuss the Opana clinical profiles. We are embarking upon a CME program that would allow for physicians to gather in larger numbers, either independently or associated with medical congresses or symposia. Those are ongoing.

We have our journal advertising program that has been initiated with our new campaign to highlight the features and benefits of the product. We are in fact beginning to do a lot of programming in direct mail, as an example. But our products obviously are being done -- they're being promoted I should say, very responsibly. Keep in mind that as a strong opioid, these products are appropriate only for those physicians that are experienced in the prescribing of C2 analgesics. And so this is to be expected that all these programs will help to educate experienced physicians on the advantages of Opana and Opana ER to be able to appropriately prescribe it to patients who are in chronic moderate-to-severe pain.

So those programs are now well underway and we expect to see acceleration in not only the conduct of these programs, but also the prescription generation as a result.

Your next question comes from the line of Adam Greene with JPMorgan. Please proceed.

Thanks, good morning. I have a question on Lidoderm guidance. Assuming that you come in at the high end of that $540 million, that indicates that demand sales in Q4 is about flat with Q3, about $151 million? I was just wondering if you could speak to why Q4 wouldn't be meaningfully higher than Q3.

Sure. What we are seeing right now, Adam, of course the effect of a launch process that's going on with Opana and Opana ER, along with continuing to maintain promotional levels of Lidoderm at pre-launch levels. When we expanded our sales force, of course, we did so with the idea that we would be able to maintain the then-existing level of Lidoderm over all promotional activity. But clearly with launching Opana we are putting Lidoderm for the most part in a second detail position, sometimes in the third; depending upon the target. So while the overall level is being maintained; and in fact we're bringing Lidoderm personally to physicians that we've never called on before, we feel that the quarter-over-quarter demand generation would be indicative of that promotional effort. And so as we see ourselves currently at the high end of the 530 to 540 range, we think that given the emphasis that we'll be placing on Opana in the fourth quarter, that that is an appropriate place for us to prognosticate where Lidoderm will come out by end of year.

Thanks.

Your next question comes from the line of Angela Larson with SIG. Please proceed.

Thank you for taking the question. Beyond pharmacy stocking, could you talk to us a little bit about the formulary status of Opana, patient formularies as well as hospital formulary? And then if you could also expand a little bit on the IR verses ER split and how you see that developing over time?

Sure. Thanks, Angela. On the formulary status, clearly as we had indicated early on in the launch process, we expected that Opana and Opana ER would be slotted as a third-tier co-pay; many times without having to contract until a clinical review was done. And that is occurring in a good number of the plans as we speak. So in many plans we currently have unlimited access to patients, albeit a third-tier co-pay level.

There are some other plans whereby we experiencing, as we had expected, prior authorization, accesses available to prior authorization by the physician in order to have Opana and Opana ER accessible is occurring. And here again, that is in a more limited number of plans, but yet we expect that over the course of the coming months as clinical reviews, P&T committee reviews are being done, we will have a different level of access; either a second-tier co-pay or third-tier co-pay as the priority.

And then as we've mentioned earlier, there are a number of plans currently that have no formulary status, no access available for Opana. That's a very, very small percentage. And it's likely that we may never get access there because these plans typically are generic-oriented and we feel that the discount levels would be too severe for us to access them.

So for the most part, we are on plan with regards to our expectations and coverage to this stage. We are beginning the contracting and the negotiation process with many of these plans as the clinical reviews are coming underway. And we will in fact be very clear that we do want to attain access for patients that would have a comparable product to be prescribed, if not for Opana on formulary. So that will be part of our strategy, to make sure that we are comparably positioned against other strong opioids.

The hospital market P&T process frankly will just now begin to get underway in full stead, now that we have the injectable available. Without having the injectable, this was really an out-patient oriented product. We now have the ability to have physicians initiate therapy for appropriate patients in the hospital on the injectable form, while they are in the hospital and then to be converted to either IR or ER as the case may be, post discharge. So that process is now well underway.

And I think over time we would expect the split between IR and ER to start to shift more in favor of the extended release. Certainly as we look at the market in general, the use of immediate-release formulations as a precursor to extended-release chronic use typically does happen as physicians become more used to using the molecule. And so we expect that over the next several months that that shift will start to occur. And yet we still expect the IR to be a very strong performer as it relates to not just the conversion aspects, but also the use of the product in acute severe pain conditions where other strong opioids may have been used in the past.

Our next question comes from the line of Rohit Vanjani with Leerink Swann & Company.

Hi, good morning; actually it's Gary Nachman.

Hi, Gary.

Just a few on the pipeline; first Frova for menstrual migraine, any update on how you and Vernalis plan on going after that opportunity? Next for Rapinyl, how's the phase III going and when could we see data and is filing still on track I guess for the second half of next year? And any other data points that we can see from the pipeline, I guess between now and next year on any of the products, including Lidoderm?

Let me answer the Frova menstrual migraine question and I'll have David answer the remaining pipeline questions. On the menstrual migraine opportunity, both Vernalis and Endo are in the process now of studying the way to optimize the potential for this indication in the marketplace, including looking at the potential for OB/GYNs as a potential target. We have had mixed results on looking at OB/GYNs to date. We do have a co-promotion arrangement currently with Vernalis where they are calling on OB/GYNs to really ascertain how well Frova can be positioned for menstrual migraine treatment, and then as a precursor for eventual prophylaxis.

But the specialty as a whole has been fairly reticent to use triptans in general. And this would certainly need to be a fairly concerted market development situation for us. And so we're looking at the potential opportunity for that. But in spite of that aspect, we clearly see the more-general population of triptan writers who are currently either having patients fail on abortive therapy or are having to go to long-term permanent prophylactic with drugs like valproic acid or topiramate. That is an opportunity for us to really solidify our position in menstrual migraine over the next several months as a treatment mode. And then with the advent of the prophylaxis to have a ready-made market opportunity, particularly in neurology where these patients will often find themselves because of the intractable nature; but also in the primary-care audiences where current prophylactic -- all-month prophylactic therapy is being utilized. Remember, this is a six-day per month drug regiment that we've applied for that would be very unique in the marketplace. And would really fit nicely in between those patients who have to take a prophylactic agent everyday, such as I mentioned; or those that are only able to use a triptan for abortive therapy.

And as I mentioned, there are about 12 million women who suffer from menstrual migraine of one sort or another every year. About 3 to 4 million of those we believe are pure menstrual migraine. They only get their migraine during menstruation, while the other 8 to 9 will get it during their menstruation plus other times during the month. So those all become potential candidates for us.

So, we're in the midst of completing our final research and assessment of the opportunity which we'll be implementing in our 2007 plan in both a pre-launch phase as well as a hopefully execution phase. And David, if you'd like to handle the R&D question--

Yes, Gary. The next R&D milestone that I think we can foresee is the [inaudible] for Frova menstrual migraine, which you've made the nineteenth next year. As far as Rapinyl is concerned, the phase III studies are ongoing. We are still at this time targeting the second half of 2007 for an NDA filing date. And I can't really comment any further than that on when we'll be in a position to put out any data.

These are difficult studies to do. But I think we certainly [inaudible] do to see the control trials in cancer patients. It's always challenging. But those studies are currently progressing.

Our phase III program for the Ketoprofen Topical Patch is also very much on track at the present time and we are still targeting an NDA filing in the first half of 2008.

Sufentanil Transdermal Patch will be starting U.S. phase II studies in the next few months. And so that is also proceeding according to plan at the present time.

Of course we've just added RK-0202, which Peter indicated is now called EN-3285 for the prevention of oral mucositis to our pipeline. We are anticipating the need to do additional phase II clinical trials. But we're working with our new colleagues from Boulder, Colorado at the moment to really assess the program that's been conducted and work out the further development program in more detail. And if anything material arises, obviously we'll keep your informed about that.

Are you still doing work on Lidoderm in low back pain?

We continue to do [exploratory] studies for Lidoderm in other indications. We've mentioned chronic low back pain, osteoarthritis in the knee, carpal tunnel syndrome. And those we'll continue. We have never given any indication when any results are going to be published. This is not something that we're making a big deal of because these are exploratory studies and we've always said that the outcome of these studies could be that we would want to proceed to a full phase III program, or we may want to do additional exploratory studies or we may just decide that any particular indication is not worth pursuing, perhaps because clinical trial methodologies aren't sensitive enough; we haven't got the right study design and so on. So we'll be continuing to progress those over the next few months.

Okay, thank you.

Your next question comes from the line of Ken Trbovich with RBC Capital Markets. Please proceed.

Thanks. Just curious on the financial side, can you give us a sense as to what you expect to end the year with in terms of your cash balances after you make the payment to Endo Pharma LLC?

No, not at this time. We are still working through that.

Okay, but would it be appropriate in our models to just deduct that in the fourth quarter from any cash flows we expect you to receive or--?

Absolutely, yes.

Okay. So there's no chance it can be deferred more?

No.

Okay. And then one other question I guess David, on the development side I know you mentioned that you have historically done some studies for Lidoderm for back pain. Is there any indication at this point that you might in some way, shape or form -- accelerate those programs as a result of this concern regarding the generic threat?

No. I mean I think the news that we put out this week Ken, based upon what we've heard or by [inaudible] from the FDA, hasn't changed anything at all that we're doing. As we stated earlier in the week, we believe that characterizing bioequivalence of Lidoderm to a generic using pharmaco-kinetic profiling is inappropriate. This is a topical patch and therefore comparative clinical efficacy trials in our opinion are what are needed.

This, as we've said, we have five [inaudible] patents. We'll vigorously assert those patents and obviously anybody filing and making any sort of regulatory filing with Lidoderm is [inaudible] with its generic filing or a [inaudible] would need to make a [inaudible] and certainly [inaudible]. But now we haven't been notified of anything.

So we continue to proceed along with plans [inaudible] we've always had with Lidoderm, including exploring other indications as I mentioned in my previous answer.

Your next question comes from the line of Michael Tong with Wachovia Securities. Please proceed.

A couple of quick questions; number one is there any update on LidoPAIN BP? And secondly, at what point in your detailing focus are you going to throttle back a little bit on Opana ER and put some additional effort back into Lidoderm?

I'd just like to take the LidoPAIN BP question first. Just to remind everybody there that the development of that product is the responsibility of our partner at EpiCept. We licensed the commercialization rights and some intellectual property from them and they can call on us as consultants during the development of program or the regulatory pathway if that's what they wish. As far as we know, they are still planning to begin an additional, I think late phase II, phase II-B study I think they're describing it; in the coming months. But I think you would need to consult with them for any further details.

And I'll answer the other question Michael with regards to the detailing effort. I would certainly like to be very clear that we are fully committed to the Opana and Opana ER launch and it's appropriate for us to include that product in the first position in as many appropriate physician calls as possible. As I indicated, about 95% of our primary details through the end of the first-quarter launch are on Opana ER. And we believe that that is necessary in order for us to be able to launch into a very strong market for Opana to be successful.

We have not yet determined how 2007 will look. We are clearly maintaining our overall promotional effort on Lidoderm under the tri-launch conditions in terms of overall primary detail equivalence. And as I mentioned earlier, while many of those details are now in the second position, we have in fact become very adept now at providing three product presentations to many physicians because of the need for us to be able to sell Frova, Lidoderm and Opana to most of our target audience. So we will assess the ratio of primary details for next year as we assess the opportunities for both of these drugs in the coming months and that will be part and parcel of our 2007 plan.

Your next question comes from the line Jon Stephenson with Summer Street Research. Please proceed.

Thanks. This is Jon Stephenson. Just a question on RxKinetix; I have noticed that there was a positive phase II trial earlier but I also noticed that it was stopped a little bit premature over the full enrollment. I didn't know if there were any details as to why. And secondly, on that front I was curious when you might be in a position to start the second trial.

Yes. I think RxKinetix did present the results of this trial a few months ago. The results as reported were positive. They did stop it early because I think they felt that they wanted to get the learnings from that study to begin then a [further definitive] study. In the analysis that we've done, as far as due diligence, we looked very carefully at that and will continue to analyze those data to give us guidance on the next part of the program.

I think it is important to point out that the study that was done by RxKinetix is to patients with head and neck cancer who were treated with [radio] therapy alone. And in clinical practice, current good practice and treatment of patients with advanced head and neck cancer is a combination of radio therapy and chemo-therapy. And we feel that that is the patient population that we should target for our pivotal efficacy trials. So that's the way we're going at the present time. We are just working [inaudible], obviously there's a manufacturing process to be gone through. We have to make sure that we have clinical trial material that represents the product that will be commercialized in order to run our phase III trials, our pivotal trials and that's ongoing at the moment. But again I think when we have some additional significant milestones, then we'll let you know.

Great.

Your next question comes from the line of Corey Davis with [inaudible]. Please proceed.

Thanks, very much. Joyce, I know you don't want to talk about '07 SG&A but based on all the new marketing initiatives Peter just highlighted, it seems like Q4 SG&A should be up sequentially over Q3. Is that a fair assessment? And then secondly, simply are the Opana gross margins higher or lower than the 79.5% you just reported in Q3?

Okay Corey, I'll start with your second question first. We don't comment on the gross margins of our individual products. So unfortunately I can't give you any further information on that. As far as the Q4 run rate verse Q3 on the SG&A spending, we will continue to invest as appropriate behind Opana and Synera in our launch phases. From what that number will be we have some information. It will be within the guidance as we said, and the programs that we will choose to invest in may shift; but overall we will continue to invest at the levels that we have previously communicated for the full year.

So that means it'll probably go up in Q4?

It is what it is.

Okay. Thanks.

Your next question comes from the line of Larry Neibor with Baird. Please proceed.

Thank you. Good afternoon.

Hi, how are you doing?

Are you beginning to develop any data on the percentage of patients who received Opana or Opana ER in August coming back for refills and how successful you are in keeping them on therapy?

Larry, the manner in which opioid analgesic [inaudible] are prescribed, every prescription is a new prescription. There are no refills that are trackable, because a physician must initiate a new prescription every time the former prescription expires or is gone through.

[Unidentified Company Representative] We don't have any ability to do that.

Sorry?

I was wondering whether you had any better ability to track whether the patients are remaining on therapy.

The only way to do that is to actually have access to claims data, either through a managed-care organization or through another third-party adjudicator who matches up prescription and claims information. We don't at this time have access to that. You can't determine the answer to your question through IMS or Walters Kluwer data because as I said, they're all new prescriptions. You'd only be able to get that through an actual audit of claims data that's blinded. And we have not yet been able to access that information. And frankly, it's probably premature for us to be able to do that with any robust data set that would tell us any useful information.

Any anecdotal feedback from your sales force?

Anecdotally we are certainly seeing physicians who have told us that they have prescribed it for patients on several occasions, yes. As I mentioned in the prepared remarks, we are seeing most of our use right now coming from pain-management specialists. Those patients typically do come back on a regular basis because they have been mostly converted from other analgesics to Opana and we would certainly expect anecdotally to hear that patients are continuing on it. We have not had any reports of any severe adverse events at this stage or any other kind of activity or reaction to the product that indicates anything other than it's been very useful. It has been performing as billed; [BID] dosing, useful for sustainable therapy, no major increasing of dose over the period of time that these small numbers of patients have been on it. At least we haven't heard that anecdotally. At this stage, that's about all we can really provide.

Thank you.

Your next question comes from the line of Patti Bank with Pacific Growth. Please proceed.

Good morning. Peter, I might have missed it, but did you say-- do you have what the cut is of these early prescriptions or what's coming from new patients versus switches from other opioids? And then just a broader question with the sales force; how comfortable are you that the 590 or so sales reps that you have out there is the right number to launch this product as alluded to earlier and keep up the promotion on the other products as well?

Sure. The new patient starts versus the conversion from other opioids is only available through, to us at least, either through the previously discussed claims data from managed care or through audit information that we would get through third parties. And that audit information data like NDTI or the like is usually several months behind. So we don't have access to any of that information. But our expectation certainly was that initially at least, we were going to get most patients initiated on Opana and Opana ER therapy from conversion of other opioids. And that would tend to be the normal course when a patient is not tolerating the drug well, having issues with break-through pain or intolerable side effects. So that's the normal first patient that a pain specialist would look to, to convert to a new molecule.

Over time we expect that the number of naïve patients, patients coming onto opioids for the first time in Opana ER or Opana IR being their first choice, that would increase. But that is from our market research, that's not from any definitive data at this time.

On the 590 representatives being the right number; as I mentioned earlier we have done quite a bit of assessment around the appropriate level of promotion for Opana with physicians who are experienced in prescribing opioids. We are not attempting at all to try to bring the Opana message to physicians who have little or no experience in prescribing opioids because they typically are not going to be seeing the appropriate patient for this particular drug. So as part of our responsible marketing approach, we have assessed where we need to be in the market and that has concluded that we are able to cover about 80% of the prescribers in the strong opioid marketplace, those physicians that have the most experience with these kinds of drugs.

And the 590 was actually the number that allowed us to not only launch Opana appropriately to these physicians, but also maintain the same level of promotional activity on Lidoderm and Frova as we had done previously. And remember, with the expansion of the 220 representatives, we've actually increased our call panel by almost 30,000 physicians. So we are in obviously the midst of being able to take these messages to new physicians that may not have been appropriate or geographically suited well enough to call on before. So we expect that over time that this number will start to reap the benefits for both Opana and Lidoderm and for Frova as well. Whether or not there is an increasing number of representatives, that may be looked at for the future; that is something that we'll look at over time.

And just to follow up, did you say what the call cycle is for the high prescriber physicians? Are the reps seeing these doctors every two weeks or--?

We have a mix of call frequency for physicians based on a number of characteristics. But there are a number of physicians that we will call on every two weeks. There are a number of other physicians, most of them that we call on once a month. And then there are a smaller number of physicians that we would call on every six to eight weeks, as representatives have different size and territory constraints. So the ones that we referred to earlier, where we had the largest degree of impact to date; those predominantly are physicians that we've been seeing more frequently, which certainly lends credence to the issue that a physician really needs to hear the story around Opana five to six times before they become convinced that this is a product worth using. And that's not atypical for products in not just this category, but new product launches in general. Familiarity is often one that takes a bit of time and particularly with a new molecule, where they don't have a lot of history associated with it, they will be a bit more cautious. So again, pain specialists are more often the physicians that have the experience routinely with these drugs and they'll be early adopters of products like Opana. Primary care physicians will take a little bit more time.

Thank you.

Your next question comes from the line of Andrew Swanson with Citigroup. Please proceed.

Thanks very much. I just wanted to circle back to revenue recognition briefly and I certainly recognize you're not in a position to comment on other companies' practices, but is there anything specific about your interpretation of GAAP that is preventing you from recognizing revenue at this point? Is it related to the product being an opioid and some of the hurdles that are in place because of that or if there is any additional color that you could provide? And also I was wondering if you're currently anticipating having a CFO in place for the copulation of your full-year results in January? Thanks very much.

The CFO position we expect to finalize that appointment within the coming weeks, so whether or not we are able to have that position filled by year end is one that will really be influenced by the candidate and their availability.

With regards to revenue recognition, I'll let Joyce answer that because she's the financial expert here.

Basically the approach with this is the revenue recognition is really based on our ability to make a reasonable estimate of the future return. And in looking at this, after consultation with our auditors, based on where we are in the launch phase, we felt that it was appropriate to defer the recognition. It didn't have anything to do with the specifics of the products; just the guidelines as they are outlined in FAS 48.

Thanks very much.

We have time for one more question.

Our last question comes from the line of Andrew [Scolbin]. Please proceed.

Thank you so much. One additional question about Opana and the Penwest relationship; have you finalized or determined and submitted what Penwest's share of the unfunded development costs will be in connection with the development of Opana ER?

Penwest has in fact disclosed I believe in their public documents, that their share of the unfunded development costs were I believe in the $23-30 million range. That is expenses that would have been incurred up to the launch of the drug. So that is what they have disclosed and that's all I can say on that.

But isn't that subject to your submitting some final type of a bill, so to speak, to them?

The billing process is one that is independent of the amount owed, so there is no correlation to whether or not the expenses were incurred or whether or not they've billed, as to whether or not they'll be eventually be paid. But Penwest has obviously agreed that that is the monies that are due Endo under the terms of the contract. And so we expect that those monies will be reimbursed.

One other one if you can; in terms of the mediation process that is ongoing, my understanding is that this involves post-launch costs and does not-- and that there is no dispute or disagreement of any kind with respect to all of the pre-launch costs that are involved here. Is there any discussion underway or could there be any potential for a re-negotiation of the terms and royalty rates, anything like that that might involve and go back and look at the whole structure of this from pre-launch phase?

There is an agreement that the pre-launch expenses are due and owed to Endo. The disagreement is over the manner in which the post-launch net realization as defined in the contract will be split and how that will be determined. So that is the substance of the discussions that we will go before the mediator and seek to resolve. I couldn't comment further on any of the specifics surrounding the positions of the companies, nor whether or not any further discussions of the current would occur.

There are no more questions at this time. I would now like to turn the call over to Peter Lankau for closing remarks.

Well thank you James and thank you everyone for calling in this morning. We appreciate your interest and your continuing support in the Company and we'll be certain to keep you abreast of ongoing developments as they occur. We thank you again and wish you a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.