Endo International PLC (ENDP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Endo Pharmaceuticals 2006 fourth quarter earnings conference call. My name is Letitia, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] At this time, I will now turn the presentation over to Mr. Bill Newbould, Vice President, Corporate Communications. Please proceed, sir.

Thank you. Good morning, and welcome, everyone. With us on the the call today are Peter Lankau, President and Chief Executive Officer, Charlie Rowland, Chief Financial Officer, and David Lee, Chief Scientific Officer.

I would like to begin by reminding you that during the course of this call, Peter, Charlie, 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 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 perspectives 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 S3 filed with the SEC on March 21, 2006.

We urge you to review these factors. In addition during the course of this call, Peter, Charlie 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, and thanks for joining us. Earlier today we issued our 2006 fourth quarter and full year financial results, which I'm pleased to say capped off a year of continuing progress for Endo. I would like to briefly discuss our 2006 performance and then look ahead to what our goals are for 2007, before turning the call over to Charlie for a more detailed review of our operating results. We will then be happy to take your questions. As I noted in today's press release, 2006 was an important year for Endo in a number of key areas. Owing primarily to continued growth in net sales of Lidoderm, our topical analgesic patch, we achieved another strong top-line performance. We have confidence in Lidoderm's continued success based on growing awareness in the medical community of the product's attributes.

Operationally, we took a number of important steps that we believe will provide a strong foundation for long-term growth. We secured FDA approval on two NDAs, for Opana ER and Opana, and launched these new opioid analgesics in the second half of the year. We expanded our sales force by 60%, from 370 to 590 representatives to support these new product launches and to maintain coverage of our existing products. We filed a supplemental NDA for Frova for the short-term prevention of menstrual migraine and we have a May 19, 2007 PDUFA date. We continue to advance our development pipeline with the ongoing Phase III clinical trial programs for Rapinyl for break-through cancer pain and the topical Ketoprofen patch for a soft tissue injuries including tendinitis and bursitis.

Further back in the pipeline, we acquired RxKinetix and its supportive care oncology platform, including the development product EN3285 for the prevention of oral mucositis. And we conducted several Phase I trials for the transdermal Sufentanil patch. On the legal and regulatory fronts, we achieved an agreement with The Purdue Frederick Company on a long-standing patent challenge on generic OxyContin and also filed a citizens' petition challenging FDA's proposed recommendations on demonstrating bioequivalents to Lidoderm. Additionally, we revised our agreement with Penwest for Opana ER to a net sales royalty.

In keeping with our objective to sustain our long-term growth, we announced in early January on our guidance call that 2007 would be a year of investment for Endo. Towards that end, we plan to make substantial incremental investments in marketing and promotional activities in support of our on-market products, in particular the Opana franchise, and to prepare the market for the anticipated launch of Frova in the menstrual migraine prophylaxis indication later this year. In addition, we are investing in the people, processes and systems needed to build organizational capabilities and establish the infrastructure that will be required to sustain continued growth in sales and earnings over the long term. Further, we will be increasing the level of R&D investment as we continue to move compounds forward in Phase II and Phase III clinical trials, and conduct more post marketing clinical trials in 2007 to support our on-market products.

Finally, we expect to add significantly more resources for managing our operation, including enhanced business management tools. We've been busy following through and executing many of these initiatives already. Since January, we have redeployed our 70-person hospital sales force in what we are calling our Specialty Force II, to provide double coverage on the highest decile Opana prescribers. To increase our reach in managed care beyond national insurers, and into important regional markets, we have nearly tripled the size of our managed markets group.

In addition to broadening our presence in managed care, we now have the capability to better support the Opana franchise with expanded Tier Two and Tier Three access and have a stronger foundation to support future launches. We have a similar staffing effort well under way amongst our clinical liaison group, which we also nearly expect to double in size in order to establish relationships with regional, not just national, thought leaders around the country. The ultimate goal is to increase our ability to deliver important clinical information to these physicians, as well as medical and pharmacy directors in managed care organizations who have decision-making responsibility with respect to formulary status.

We've also been extremely active already in 2007 with marketing and promotional activities in support of the ongoing Opana launch. In just the first half of this year, we plan to conduct a total of over 570 promotional programs. In addition to the speaker programs, we have an ongoing E-detailed program that began late December. We've also held numerous educational programs, partnering with national and regional professional societies to prevent the latest advances in opioid treatment of moderate to severe pain and emphasizing the responsible prescribing and use of opioid analgesics. Endo had a substantial presence at the American Academy of Pain Management meeting held earlier this month in New Orleans, where we presented the data from the trial with opioid naive patients in chronic low back pain, one of the Phase III pivotal studies.

We look forward to presenting Opana clinical data at the American Society for Clinical Pharmacology and Therapeutics on March 21st to the 24th in Anaheim, as well as data from the trial in opioid experienced chronic low back patients at the American Pain Society annual meeting in Washington, D.C., May 2nd to the 5th. APS is the largest pain meeting of the year and we will have a major presence there as well. I'm pleased to note that the pivotal trials were recently published in peer review journals. The opioid naive trial in the January issue of Current Medical Research and Opinion, and the opioid experience trial in the February issue of The Journal of Pain. We believe that these staffing, marketing and promotional activities aimed at several key constituencies, managed care, key opinion leaders, and patients, will further generate awareness of Opana and its clinical benefits.

Overall, we remain confident in the prospects for Opana's success. We believe we will continue to gain momentum in the marketplace and are encouraged by the physician and patient feedback we have received about the product's efficacy and tolerability. At the six month time-point prescriptions are tracking above the rate of the last two opioid analgesic product launches. In addition, the prescribing mix between specialists and primary care is moving more towards primary care physicians, where we believe we will see the broadest usage. We are further encouraged by our market research that shows that our marketing messages are on target and resonating well with physicians. During January, we held a series of regional sales meetings in order to provide our representatives with updated education and training for use in promotional activities. While their absence from the field resulted in a modest decline from December in the prescription growth rate for Opana, we would expect to see the impact of their new training and education beginning over the next several months. As we previously indicated, steady progress growing in the year is expected to accelerate usage in the second half of the year.

Now, with regard to our pipeline. We're pleased to report that the progress we're seeing in enrolling patients in our Phase III clinical efficacy trials with both Ketoprofen patch and the Phase III trials for Rapinyl are on target. We're on track to submit NDAs for these products in the first half of 2008. In the first half of 2007, we anticipate initiating Phase II trials for our Transdermal Sufentanil Patch. And we expect to begin our next Phase II trial for EM3285, the oral mucositis prevention product in the latter half of this year. So in summary, we are pleased with our performance in 2006 and are encouraged by the strong start we have had so far in 2007. We are confident that the investments we make this year in support of our in-line and development products, combined with a broad-based infrastructure buildout, will insure our continued growth in 2008 and beyond. And now Charlie will review our fourth quarter and full year financial results.

Thanks, Peter. As reported earlier this morning, Endo's net sales for the fourth quarter of 2006 were $259.5 million compared with $240.8 million in the fourth quarter of 2005. Net income was $14.8 million compared with $72.9 million in the prior year. As detailed in the supplemental financial information in today's press release, adjusted net income for the fourth quarter was $56.7 million versus $77.8 million in the year-ago fourth quarter due to onetime items that I'll discuss in detail in a few moments. Diluted earnings per share for the three months ended December 31, 2006 were $0.11 compared with $0.54 in the comparable prior-year period. Adjusted diluted earnings per share were $0.42 in the 2006 fourth quarter compared with $0.58 in the same period in 2005. Net sales in 2006 were $909.7 million compared with $820.2 million in 2005, an 11% increase. Net income for 2006 was $137.8 million versus $202.3 million in 2005. As detailed in the supplemental financial information in today's press release, adjusted net income for the year ended December 31, 2006, was $220.8 million compared with $230.2 million in the same period of 2005 due to onetime items, which I'll cover again in a few moments. Diluted earnings per share were $1.03 in 2006 compared with $1.52 in 2005. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for 2006 were $1.65 compared with $1.73 in 2005.

Our top-line performance for the fourth quarter and full year 2006 was driven by continued growth in Lidoderm sales, which more than offset lower sales from generic OxyContin versus the prior year when Endo benefited from six months of marketing semi-exclusivity through December 5, 2005. Diluted earnings per share for 2006 included onetime items of $0.31 in the fourth quarter and $0.62 for the full year related to the following -- Compensation expense and related employer payroll taxes to be funded by Endo Pharma LLC of approximately $42 million; Discontinuation of DepoDur promotion and the redeployment of our hospital sales force resulting in impairment charges related to our DepoDur and Synera intangible assets of approximately $31 million; The write-off of purchased in process R&D in connection with our acquisition of RxKinetix Inc of about $26 million; stock-based compensation expense related to the adoption of SFAS 123R; Up front milestone payments to partners; and the reversal of a contingent liability. On an adjusted basis, the fourth quarter and full year EPS comparisons with 2005 primarily reflect higher SG&A costs due to a 60% expansion of our sales force in mid-2006, as well as an increasing marketing and promotional investment in support of three new product launches.

Turning to our product portfolio, net sales of Lidoderm grew to $173.5 million in the fourth quarter of 2006 compared with $130.5 million in the prior year. For the year in 2006 net sales of Lidoderm were $566.8 million versus $419.4 million in the prior year. For the fourth quarter of 2006 prescription growth for Lidoderm was up 19% and dispense unit growth was up 22% over a year-ago quarter. For the 12 months ended -- 12 months in 2006 prescription growth for Lidoderm was up 21% and dispense unit growth increased 24% versus 2005. We estimate that prescription demand for Lidoderm was approximately $170 million in the fourth quarter and $589 million in the full year 2006.

We are pleased by the continued strong performance of Lidoderm, which we believe reflects in part the addition of the 220 new sales reps in mid-2006. In 2006 net sales of Lidoderm also benefited as eligible patients shifted from Medicaid to Medicare Part D. In 2007 we are anticipating increasing discounts as we seek to maintain our status on many managed care and Medicare formularies. Net sales of Percocet were $27.8 million in the fourth quarter of 2006 compared with $29.7 million in the same period in 2005. Net sales of Percocet were $102.7 million for the year, compared with $110.7 million in 2005. Net sales of Frova were $11.5 million for the three months ended December 31, 2006, compared with $13 million in the year-ago quarter. Net sales of Frova were $40.6 million in 2006 compared with $38.1 million in 2005. We estimate that prescription demand for Frova was approximately $13 million and $46 million for the fourth quarter and full year respectively. Combined net sales for Opana ER and Opana representing end user demand were $6.8 million for the fourth quarter of 2006, although commercial shipments totaling $20.6 million of Opana ER and Opana were made to customers during the year.

It was determined that it was not appropriate to recognize revenue for these shipments at this time under accounting principals generally accepted in the United States. The approximately $13.8 million balance of deferred revenue is expected to be recorded as net sales in 2007. Net sales for our generic extended release OxyContin tablets were $13.8 million for the three months and $57.1 million for the full year ended December 31, 2006, compared with $35.5 million and $114 million for the capable periods in 2005, when Endo benefited from six months of marketing semi-exclusivity. Under the previously announced with Purdue Frederick Company, regarding our patent litigation, we discontinued sales of this product as of December 31, 2006. For the fourth quarter, net sales of other generic products were $22.9 million in 2006 compared with $28.1 million in the prior-year period. For the full year, net sales of other generic products were $121.7 million versus $123 million in 2005. The quarterly and year-to-date decline in 2006 is due to increased generic competition.

We expect this additional competition to continue to adversely affect our market share and price of both Endocet and our morphine sulfate extended release tablets. Our gross profit for the fourth quarter of 2006 was $201.6 million versus $187.7 million in the same period a year ago. For the 12 months in 2006, gross profit was $708.2 million versus $633.8 million in the comparable period of 2005. Gross profit margins were 78% for both the quarter and full year in 2006 versus 78% and 77% in both of the comparable prior-year periods. SG&A expenses were higher for the quarter and for the year in 2006 over the comparable periods in 2005, due mainly to the expansion of our sales force of approximately 590 sales representatives and increased spending behind the launches of Opana ER, Opana and Synera.

During 2007 we anticipate our SG&A expenses will be higher than in 2006, due to a substantial increase in the level of marketing and promotional initiatives, including the full year impact of the sales force expansion and our recent redeployment of the hospital field force to maximize the performance of the Opana franchise, Lidoderm and Synera. In addition, our SG&A expenses will include pre-marketing costs for Frova in the menstrual migraine indication and continuing investments in our infrastructure to support our long-term growth objectives. Research and development expenses, excluding milestone payments, were $23.2 million for the fourth quarter of 2006 versus $17.4 million in the same period of 2005. And we're $72.2 million for the 12 months in 2006 compared with $61.1 million in the prior year.

Excluding milestone payments to partners, we anticipate increasing our research and development spending in 2007, primarily for continuing clinical development programs of our five mid to late stage development products and a significant increase in post-marketing studies in support of our in-line products. Our cash and cash equivalents totalled $628.1 million at December 31, 2006, reflecting the fundamental strength of our business, net cash flows from operating activities were $345.3 million at the end of 2006, and we think our strong financial position provides us the opportunity to use our cash and cash flows from operations to continue to pursue acquisitions, licenses and other strategic alliances.

Before I conclude my remarks, I would now like to recap financial guidance for 2007. Net sales in the range of $1.025 billion to $1.050 billion. Net sales of Lidoderm between $650 million and $675 million. This estimate is driven by expected volume growth moderated by increasing discounts to managed care and government-assisted programs and the impact of an additional distribution service agreement that we expect to sign in 2007. Combined net sales for Opana ER and Opana of between $85 million and $105 million. Adjusted diluted EPS in 2007 in the range of $1.68 to $1.72. And with that I'd like to turn the call back over to Peter.

Thank you, Charlie. And now, Charlie, David and I would like to open up the call to your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Dave Windley representing Jefferies & Co., please proceed.

Hi, thanks, good morning, gentlemen. I wanted to ask questions around a couple of products. Opana ER, Peter, could you talk about at what point during the year do you expect that your promotional programming will begin to push that broadening of prescribing trends and the inflection point that you anticipate? And second, can you add a little color around Frova and how aggressively you will pursue prelaunch activities and promotional activities in anticipation of approval or will you wait until you kind of have approval in hand to really ramp that type of thing up? Thanks.

Sure. Thanks, Dave. On Opana ER we certainly think that the steady progress that we've been making in prescription demand generation over the last several months, since the real initiation of our promotional programming began primarily in the November time frame, will continue for several months into 2007. As we continue to add more and more of our promotional programs, we expect that the influence factors amongst pain specialists to primary care physicians will start to accelerate. And we think that this will primarily happen in the latter part of the year, when we would expect to see increasing weekly growth rates based on that influence taking place. As I indicated earlier, we are in fact ramping up quite significantly many of our speaker programs, our educational programs, clinical data being disseminated.

What we're finding in the field, from market research and anecdotal feedback, is physician comfort and experience are the number one and number two factors with regards to expanding prescribing for Opana and Opana ER. So that as physicians become more and more comfortable and they gain more feedback from their patients about the dosing schedule, the tolerability and the longevity of effect, I think that that will have an increasing expectation for physicians to prescribe for further patients in their practices. And we're seeing that already with pain specialists. Historically, Opana had been prescribed by pain specialists, upper 60% of all the prescriptions being written. It's now in the 50s and we expect it to go into the 40s before the end of this year. And that obviously means the reverse is happening with primary care. So the inflection point, we believe, will undoubtedly be being visible during the second half. With regards to Frova, we certainly are aggressively executing a prelaunch program that will include and continues to include activities centered around direct to patient outreach.

This is more to enable potential patients to become aware of menstrual migraine as a differentiated migraine, to be able to help them identify signs and symptoms, and for them to be able to access physician for diagnosis and treatment prior to the approval of the drug for the prevention indication. Once we see the approval come about, we would certainly flick the switch and change all of our disease and diagnostic-related outreach programs to brand-specific programs and that will take place in the post-launch period, which we are expecting to happen in the second half of 2007. So, we're certainly being very aggressive in terms of our outreach programming, educational programs for physicians, ad boards, speaker programs, CME are ongoing as we speak. And we certainly expect that with the approval that we would be able to change the emphasis to more brand-related Frova for the prevention of menstrual migraine.

Thank you.

And with Merrill Lynch with the next question, you have Gregg Gilbert. Please proceed.

Thanks, good morning. Question on Lidoderm price and inventory. What's specifically driving that discounting strategy you talked about today? And is the $170 a script we saw in the fourth quarter a decent number to use going forward given that list price will likely go up? And secondly, can you estimate the number of weeks of inventory for Lidoderm at the end of the year, please? Thanks.

Sure, Gregg. I'll let Charlie answer the inventory issues and the like, but the strategy with regards to pricing is that we are seeing a increased demand for discounts from managed care plans as the volume of Lidoderm becomes quite significant. The cost to the managed care organization is becoming -- frankly, it's hitting the radar screen. So we expect that that will increase to -- frankly, remain in the formulary position that we are currently, whether that be a tier three status or in some cases a tier two status in managed care. On Medicare Part D, we would see an increase in discounts there, also. As we know going through 2006, Medicare really -- the Medicare formularies were rally given a dispensation from the government on net losses associated with pharmaceuticals used.

That is going to begin to go away in 2007. So as the plans that were not as profitable as they would have like to be on Medicare last year will certainly look to increase their discount requirements for products like Lidoderm to remain on the formulary. So expect that the continuing pressure based on volume to ensure that there are adequate financial incentives for managed markets plans to keep Lidoderm in its current position will take place during the year.

And then, this is Charlie, in regards to the inventory levels, we exited the year at normal inventory levels on the product of approximately a month.

How would that be impacted by another IMA if you're normal already?

Well, I said approximately a month because we don't disclose by product the exact inventory level.

Nor by customer, obviously, and customers do have variation in their holding of inventory.

Thanks, I'll get back in line.

Okay.

And from the line of Cowen and Co with the next question, we have Ian Sanderson, please proceed.

Thank you very much. First on Opana, what are the -- or where do the plans stand for relaunch of the IV formulation given the redeployment of the hospital sales force? And secondly, on Oxycodone ER, any visibility on when Teva might exit the market and similarly any idea of how much of your product remains in the trade?

Yes, Ian. On the IV formulation for Opana, it is in a holding pattern right now, based on the redeployment of the hospital sales force. It is available currently as a Numorphan. It is in the process of being rebranded with the final FDA labeling approval, but our decision on when or how or if to launch it, there's a complement to the oral formulations has not been finalized yet. And that's obviously as a result of this redeployment. On the Oxycodone ER question, only thing that we know is probably what you know, which is that Teva will remain in the market until at least March 31st of this year. It suggests that there's a provision in their agreement with Purdue that would allow them to remain beyond that. But what that constitutes, the criteria, we don't know. And as terms of our own inventory, we haven't disclosed inventory on our Oxycodone ER, but I can tell you that there wasn't a pill left in the distribution center when December 31st closed.

Thank you.

[OPERATOR INSTRUCTIONS] And the next question comes from the line of Tim Chiang, representing FTN Midwest Securities. Please proceed.

Hi, Peter. Could you provide an update on when you expect additional patents on Opana ER to issue this year?

Sure, Tim. We have previously discussed that we have what we call a multitude of patents that have been filed with the Patent and Trademark Office. These are based on discovers that were made during the course of the development program. They constitute areas such as formulation patents and pharmacokinetic patents, as well as other patents that are not method of use nor composition of matter. We expect that the patents will issue. As you probably are well aware, the Patent and Trademark Office has no defined timeline for when the final prosecutions of patents can occur. We have been continuing to dialogue with the patent office around some of the claims that are contained within these patent applications and we just can't give you a specific timeline for when we expect the patents that we have applied for to issue, although we are confident that both the patents that are under the Endo as well as the Penwest auspices should be very well positioned to issue at some point in time.

Okay, great. Thanks.

And your next question comes from the line of James Kelly with Goldman Sachs. Please proceed.

Good morning. Question relates to the SG&A and R&D run rate coming out of the fourth quarter and how that relates to the growth in 2007. First of all, should we be looking at SG&A as containing that liability reversal of the $6.8 million, Charlie? And then as we look at the rest of this year, should we be thinking about SG&A and R&D as kind of growing or staying flat or how should we look at it relative to the fourth quarter of '06?

Okay. I'll start first with the reversal of the $6.8 million, I think it was, that was in our press release. That is actually impacting us up in revenue, not in SG&A, because it was a price adjustment. When it comes to the run rate for the fourth quarter as a proxy for '07, we don't give specific guidance on what the individual components are in '07. But in the first half of the year, we're making significant increases in our spending behind Opana, the pre-marketing spend for Frova's menstrual migraine indication and they are happening in the first half, so I would actually anticipate our spending not necessarily be predicted by the fourth quarter.

From the line of Oppenheimer with the next question, we have Scott Henry, please proceed.

Thank you. First, on Opana, I want to know, does the guidance for the product include the $13.8 million revenue reversal? And then just with regards to Lidoderm, I'm curious if there are any updates on the generic situation there. I believe you filed the citizens petition and was it a 90-day response we're looking for there? Or just any color on that situation. Thank you.

On the guidance for 2007, our guidance is all in. So it does in fact include the $13.8 carryover, which we would expect to book in 2007. So that is inclusive and David will address the Lidoderm issue.

Yes. We've not heard anything back from the FDA on the petition which we filed in early December. We wouldn't really expect to hear anything. They are supposed to respond within 90 days, which would bring us to early March. But to be honest, the only response that we really expect is we need more time to consider this. So we're not anticipating any definitive action, most likely, until either generic is filed or even until a generic is sort of close to approval. But obviously, if this is -- would be a paragraph four generic filing, we would have to be notified under the Waxman-Hatch Act and obviously that is an event that we would publicly disclose and that hasn't happened.

Thank you.

And your next question comes from the line of David Buck with Buckingham Research. Please proceed.

Yes, hi, it's Jim Dawson for Dave Buck. What is your latest thinking on uses of cash as well as a potential for a share buyback and will you also up to date us -- update us on any year-to-date price increases? Thanks.

Okay. In terms of share buyback, at this point in time our primary use for deploying our available cash and leverage on our balance sheet is to acquire additional growth assets, whether that be through licensing deals, product acquisitions or company acquisitions. We have a number of activities going on in that front and that would be our primary use of cash. As we've stated previously, if we are not successful in deploying a significant portion of that cash and our cash balance continues to grow, we may reconsider what we do with that cash. But our primary objective right now is to redeploy that into growth assets.

In terms of projected price increases, we don't give specific information on that. You could assume that during the course of any given 12-month period that we anticipate that selected products, at least, will have price increases and when those occur, we would provide further clarity on what those were when they actually do take place.

And your next question comes from the line of Gary Nachman representing Leerink Swann, please proceed

Hi, good morning.

Hi, Gary.

Hi. Question R&D, it came in higher than we thought in the quarter. Could you talk about where most of that spending went? And on Ketoprofen specifically, what types of long-term safety studies will you guys need and when do you think those will be completed? And lastly, I'm curious what you guys think of -- there was a diclofenac patch called Flector that was just approved by the FDA in late January. It was certainly a surprise to me. Were you guys even aware of this product? Do you know who's going to be promoting it here in the U.S.? And I guess is there a real difference between Ketoprofen and diclofenac that would potentially differentiate your product from Flector, if and when it's even launched in the U.S.?

Yes, Gary, I'll address the Ketoprofen and Flector questions. We have a long-term open label study with our Ketoprofen patch currently running. That is in patients with so-called osteoarthritis flare. And that will continue over the next few months. And we'll have data in time to make our NDA filing in the first half of 2008. Because this is a product for relatively short-term use, there's a limit to the amount of long-term safety data that is needed, but we are obviously generating a lot because we consider it an important safety element and would also be very useful in being able to describe the general safety and usability of the product. In relation to Flector, which of course contains diclofenac, another non-steroidal anti-inflammatory, not dissimilar to Ketoprofen. There are very few of the non-steroidal anti-inflammatory compounds that will actually go through the skin and diclofenac and Ketoprofen are two of them.

We were aware of Flector. It's actually being -- has been partly developed by Teikoku, which is the Japanese company that is the manufacturer of Lidoderm. This product has been in development for a very long time. I believe the NDA was actually filed in 2000. So it's taken a long time for the product to actually get out of the FDA. It has a fairly limited indication for the acute use -- the acute treatments of sprains and strains. It has to be applied twice a day. Our Ketoprofen patch, we are aiming for a broader indication, for an unrestricted period of use and it is a once a day product. As far as I'm aware, the Swiss company that owns the rights to Flector is a company called Ibsa, hasn't yet chosen a U.S. marketing firm.

Okay. Thank you.

In terms of the R&D spend in the fourth quarter, the main drivers of the increase were spending behind Rapinyl nd our Ketoprofen patch.

Okay. If I could just squeeze in one more, Charlie, what periods will you record the $14 million deferred revenue for Opana? Is it going to be piecemeal over the course of the year or is it just going to be one-shot?

No, it will be all at one point in time and I would anticipate that to be sometime in the first half of '07.

Okay, thanks.

And your next question comes from the line of Lei Huang representing Lehman Brothers. Please proceed.

Thank you. Regarding your generic product sales, excluding generic OxyContin, it looks like it's been a pretty, more or less steady number in the $29, $30, $32 million range. And in the fourth quarter that number dropped pretty sharply into the low $20 millions. Just want to see if you can provide additional color on that besides what you already said. And also if I may ask one more question, just on Synera, can you provide additional details on what you plan to do to get better penetration with that product during 2007? Thank you

Sure. On the issue of generic product sales as we indicated in the prepared remarks, we have seen continued competition coming into both the extended release morphine market, as well as the Endocet market. Our customers do periodically put product out for bid, not just in the analgesic market, of course, but across all therapeutic categories. And sometimes you, in order to retain products on the market, you need to bid lower. That's part of the price and share game that is being played by all generic competitors. So what we have seen in both Endocet and morphine is still a fairly steady decline in both share and price, as we would have expected with continued price degradation particularly and decisions that we may have made on not to go after certain customers based on the pricing points that may have been required.

On Synera we are, as we mentioned, redeploying our hospital sales team, what we are calling Specialty Force II. They will have responsibility for both double covering high decile prescribers for the strong opioid market for Opana, as well as calling on pediatric institutions and high bed count community based institutions to continue the promotional effort on Synera. We believe that the pediatric concentration for this product is key to its long-term success. We found that where we have had successes based on formulary approvals and frankly quite a high percentage of formularies that have reviewed Synera have in fact approved it. We find that that is most -- there's most of -- mostly a champion, if you will, in the pediatric institution because of the high patient population there for which Synera has a good appeal.

So we're focusing now on the predominantly pediatric institutions and those larger institutions that have a high pediatric bed count where we know we'll have both physician and nursing champions to be able to bring this product to formulary. And once we've been able to established a foothold there, we believe we'll be very readily able to expand out beyond that. But I think the key to this product's success is going to be adoption by the physician and nursing population for whom the product is intended.

And then in terms of the sales performance in the fourth quarter on the generics, I would anticipate -- the end user demand for the products were declining consistently over the course of the year. But in the fourth quarter we were trueing up some of the price that we were realizing in the marketplace as there was increased generic competition. So that was part of the reason for the lower performance in the fourth quarter.

With Bear Stearns you have a question from the line John Boris, please proceed.

Thanks and congratulations on the quarter, Peter.

Thank you, John.

Just real quickly on Lidoderm, the need to provide a higher level of discounting and rebating there, are you able to use that opportunity to further leverage better access for Opana and Frova going forward from that added discounting that you're providing? And then if I could just slip another one in on the tax rate for Charlie. In '04 your tax rate was 38%. We've seen it come down by a little over 100 bps. I guess year-over-year it's down by, I guess, about 60, 70 bps What's just contributing to that lowering of the tax rate? And any guidance going into '07 on tax.

Yes. John, with regards to the contracting issue on Lidoderm and is there any leverage there. I think that there are certainly opportunities for us to leverage the volume of Lidoderm that's being reimbursed by certain managed care or Medicare formularies to help us with access to Opana and Frova. I think the number one reason, however, that formularies will adopt a product on formulary is based on what they anticipate the utilization to be and, therefore, what is the net value, i.e., the dollars that would be rebated back to them. So demand really has a lot more to do with how well Opana and Frova can ride the coattails of Lidoderm. And we are seeing that beginning to happen. We have got several major managed care formulary review processes going on in the first half of this year where we are expecting to improve or tiering position. That will be based on the merits of the demand being generated for Opana alone. But because we do have relationships, or are building relationship's, with Lidoderm we think that that certainly can help.

With regards to Frova, we certainly see that with seven triptans being on the market currently, mostly managed care and Medicare plans, although not a lot of Medicare usage here, but managed care is typically putting one or maybe two of the triptans into a preference position and the rest are either on a high- tier or a non-formulary prior authorization position. I think the indication for prophylaxis for menstrual migraine with Frova will provide a significant opportunity for us to carve out a unique position because it won't be seen solely as an abortive therapy, but rather as a preventative therapy. But that really becomes the challenge to change the paradigm around how triptans are viewed and we're beginning that process, so we have begun that process already with managed care, our customers, as well as with our advisers in the marketplace. We believe that the ability for Frova to contract in an effective position will be very much based on how readily adaptable that new paradigm will be. And that's really where lots of our pre-marketing activities are centered right now.

And in regards to your question on the tax rate, our GAAP tax rate that's in our earnings is approximately 41%. If I adjust that for sort of onetime items, we're actually at a run rate of about 36.9% and we would anticipate that dropping a couple more basis points as we take advantage of some R&D credits and a little bit more tax efficient investment return on our cash. Between those two we should be able to drop another couple of basis points. Thanks.

And from the line of RBC Capital Markets with the next question, we have Ken Trbovich. Please proceed.

Good morning, gentlemen, I promise to keep it to one question.

Thanks, Ken.

I was wondering following up on the generic question earlier, historically you folks have looked at the generics as a selective opportunity. Given the declines that we've seen, should we really look at this from a strategic perspective as an old business unit that is no longer a core focus? Or are there still opportunities to selectively find sort of high margin opportunities in the pain space?

That's a very good question. In fact, as we have said over sort of the last several years, the generics business for us has always been a niche business, one that we sought high barrier to entry, difficult to formulate products and not just necessarily within pain, although pain clearly has been where we have been focused with larger products. But our portfolio in the past has certainly included non-pain products. And we do think that there are opportunities for this kind of a niche specialty generics play to bear fruit. We are continuing to look at opportunities here. We certainly don't see the generics business in the foreseeable future as significantly increasing its contribution to our overall business, because we think that the branded business will grow at a much faster rate.

But we do continue to look at opportunities within the generics business for these products that would have limited competition, where we could be alone in the market or where there might be one or two other players, but certainly not commodity type related products for which the margins would be a contributory to our total business. And that's continuing to be the focus for our generic organization. Okay. Thank you.

And representing Susquehanna International, the next question comes from Angela Larson. Please proceed.

Thanks for taking the question. I was hoping you could give a little more color on your managed care group and clinical liaison group on -- I know you gave us the percent expansion but just how large are those groups now? And also is there any seasonality to their business? I know in the past you've mentioned that hospital formulary committees don't necessarily meet during the summertime. Is there a time that is particularly busy for them?

Sure, Angela. Both of the groups that we referred to are going to grow, as we said, fairly significantly compared to historical measures. In the past, our managed care organizations -- or our coverage, rather, of managed care has been with the national plans. We only needed a few national account executives to do so. But when you go into the regional plans, it's quite significant. So our national and regional managed care group will grow upwards of about 17 or 18 persons to allow us to have broad-based coverage, which we estimate will cover approximately 75% of all the managed care dollars in the country. So we're very happy with this expansion. The clinical liaison group is actually going to grow to a higher number, in the low 20s, which would allow us to have penetration into the regional opinion leader world.

Historically we focused almost exclusively on pain and on national thought leaders. But now with our expansion, we expect to not only be able to continue the coverage of the pain specialists in the world, but also the neurologists and the oncologists for our expansion into those two areas with both Frova and EN3285. And so that is what is forming the basis of this expansion. It's not only to cover these key opinion leaders nationally and regionally for our current portfolio, but also preparing for the future portfolio by beginning to build those relationships now.

Thank you.

You're welcome.

And with Natexis you have a call from the line of Corey Davis. Please proceed.

Thanks. Can you tell us what percent of Lidoderm goes through Medicare Part D and I know you're not changing your guidance for us and I know you said you had to enhance the rebates, but if you just annualize the number that you reported in Q4, it's $694 million, which is substantially ahead of the guidance you gave. So, are there really going to be that much in rebating or are you just being ultraconservative?

Corey, I'll answer the first question on Medicare Part D. We estimate that our percentage of use of Medicare Part D is in the mid to high teens. We have seen a shift, as we said earlier, from Medicaid that has -- have dominance of use of Lidoderm. It used to be in the high 20s and low 30s. That has come down substantially. But the shift over into Medicare now places us, as I said, in the mid to high teens as our percentage of business. On the annualized sales volume, obviously we've seen that the prescription trends are declining. We indicated 19% growth in the fourth quarter while they had a full year in 21%. That has come down from prior years and we expect that to moderate in 2007 to probably the mid teens. And we think that that will occur because primarily we are focusing a lot more of our sales force's attention on Opana and beginning to build the base for which we'll launch Frova for national migraine.

So as the prescription growth rate comes down and if we are able to accomplish mid-teens, we certainly could have some upside. But we do believe that the discounting factors that we're looking at, as well as the impact of continuing IMA opportunities that come about, and we know that one for sure is on our horizon and there could be more, that that would have an impact on the overall net sales volume. But we do believe that the prescription trend rates are -- are going to guide us to where we currently are in our overall guidance, both the prescription and the pricing adjustments. And as of this point, we are comfortable with where we are. Obviously, we'll continue to monitor that during the course of the year and if we see opportunities for shifting that we'll certainly keep you informed.

And then secondly for Charlie, can you breakout sales of Opana IR and ER in the quarter?

No. We have not given any disclosures for actuals or for guidance in terms of the split between those at this point.

Okay. Fair enough. Thanks.

And your next question comes from the line of Thomas Russo representing Robert W Baird. Please proceed.

Good morning. First question, just can you clarify that the reversal of the Opana ER revenue roughly correlate with end market demand? And secondly, can you provide any additional color or an update on looking at business development where you see the best strategic fits? Thanks.

Okay. In terms of your first question on the Opana revenue recognition, we anticipate that we will be able to recognize that deferred revenue in the first half of '07. There's a couple of criteria that we have to meet in order to do that, which we haven't really discussed in detail externally. But that will all come back in one adjustment and it won't be spread out over a period of time.

And on the business development front, we have continued to be very active in looking at both products and technologies, as well as companies that would be good strategic fit for the business. Our primary focus has been in neurology and supportive care oncology. Witness the RxKinetix acquisition last year and we would certainly look to exploit that position with further expansion in supportive care oncology. As we noted, both Opana and Rapinyl will have a very strong presence within the oncology community as supportive care products as well. As it relates to Company acquisitions, clearly our cash position gives us a fair amount of leverage to be able to go after opportunities that provide platforms, if you will, of opportunities for companies that would be specialist driven. Here, if we were to acquire a business that had both a commercial and a pipeline opportunity in a different therapeutic area, we would certainly consider that if it was a specialist-driven pipeline, because clearly we don't want to expand into very large numbers of primary care product lines to compete with big pharma. So those are the basic emphasis areas for our business development.

Thank you.

And your next question comes from the line of Michael Tong representing Wachovia. Please proceed.

Hi, just one quick question for Charlie. Just follow-up on some of the previous questions. As far as R&D in Q4 is concerned, you talked about Rapinyl and Ketoprofen patches, Ketoprofen patch as the main driver. So is it fair to assume that the 23 million run rate is a good point to go off of as far as '07 is concerned?

The only thing we've said externally in terms of modeling R&D expense for the year is that the growth in R&D spend year to year will be higher than our sales growth. And that would not be a bad assumption to use.

Okay. Thanks.

Okay.

Ladies and gentlemen, that's all the time we have for questions today. At this time, I will turn the call over to Dr.Lankau for closing remarks.

Well, thank you, Letitia, and thank you everyone for being on the call today. We certainly appreciate your continued interest and support of Endo and we'll look forward to speaking with you again soon. Thank you again.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect, and have a good day.