Endo International PLC (ENDP) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2007 Endo Pharmaceuticals earnings conference call. My name is Paul and I'll be your coordinator for today. At this time all participants are in listen-only mode and we will conduct the question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Bill Newbould, Vice President of Corporate Communications. Please proceed, sir.

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

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 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 2006 annual report on Form 10-K filed with the SEC on March 1st, 2007.

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 -- and 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 this morning. As Bill said, earlier today we reported our financial results for the first quarter of 2007. Net sales were up 24% from the year ago first quarter despite the loss of our generic Oxycodone, which we discontinued selling as of December 31st, 2006 and which amounted to $9 million in the year ago first quarter. This resiliency reflects the strong growth and increasing diversity of our branded product portfolio. Excluding $13.8 million of deferred Opana revenues from 2006 that we recognized in the first quarter of 2007, net sales of our branded product portfolio increased 31% from the first quarter of 2006.

Diluted earnings per share were $0.43 year-to-date in 2007 versus $0.15 in the same period of 2006. On an adjusted basis as detailed in the supplemental financial information in today's press release, diluted earnings per share for the first quarter of 2007 were $0.47 compared with $0.41 in the same period a year ago. We are certainly pleased with our first quarter performance and Charlie will provide a detailed review of our quarterly results shortly.

As we had previously disclosed, 2007 will also be a year of investment spending to ensure the growth of our commercial portfolio, to continue to advance our development pipeline, and to ensure our infrastructure as they are to support our future growth. As a result, we are maintaining our financial guidance for 2007 at this time. We expect that our investment spending in these areas will continue to increase throughout the year. And we believe that we will see the results of these efforts bearing fruit going into next year.

Before I turn the call over to Charlie, I'd like to take a few moments to review some recent noteworthy developments including an update on the Opana launch. On March 16th, we announced that the FDA had asked for an extension of the May 19th PDUFA date for the supplemental NDA we filed to expand the Frova indication to include menstrual migraine prophylaxis. The agency requested no new data, but instead asks that we reformat the presentation of certain data in a way that would facilitate their review.

The new PDUFA date is August 19th and we have been working to provide the FDA the reformatted data on a timely basis. So this new PDUFA date provides an opportunity to better create an optimal launch. We're taking full advantage of the additional time by more comprehensively preparing our promotional activities, advancing our managed care strategy, and gaining advocacy for launch.

Earlier this month, we announced that Carol Ammon, Founder and Chairman of the Board, would be retiring from Endo effective May 30th, 2007 to devote more time to her philanthropic activities. We, of course, are deeply indebted to Carol for the vision, commitment, and leadership that she provided in making Endo what it is today. And we certainly wish her well in her retirement.

The board nominated Roger Kimmel, a director of Endo since 2000, to replace Carol as Chairman of the Board effective May 30th, 2007. Roger has been a valuable member of the Endo board since 2000 and we look forward to continuing to benefit from his experience as we embark on a new phase in our history.

We announced on April 10th that we were notified that a Paragraph IV 505(b)2 NDA new drug application had been filed by Anesiva, Incorporated for its Lidocaine-containing product, Zingo. The NDA referred to the patents that covered the method of use and formulation of Endo's Lidocaine-containing topical patch products, Lidoderm and Synera.

Section 505(b)2 does not allow for automatic substitution of these products for any other products. Therefore, if approved, Zingo will not be a generic to nor will it compete with Lidoderm because of Zingo's indication and formulation. Zingo may compete, however, with Synera because the indications of these two products may be similar. We continue to evaluate these notices.

Now, I'd like to review some of the activities surrounding the Opana and Opana ER launch. In terms of prescription growth, we are currently running at about 4,400 scripts per week and growing, which puts us on track to exit the year at a run rate of about 10,000 scripts a week.

To ensure that we stay on track we have recently undertaken a number of steps to build awareness of the Opana brand and drive adoption amongst appropriate prescribers as follows. We have tripled the size of our managed markets group to allow us to expand the level of our coverage beyond just national plans down into the regional and local carriers. We have also recently hired a new vice president of managed markets with extensive pharmaceutical industry experience in the managed care arena to oversee this effort and fully execute our newly revised and more aggressive managed care strategy.

Effective in mid-March, we completed the transition of our hospital sales force to a new Specialty Force II. These representatives will provide coverage for Opana and Opana ER among some 6,600 high-decile specialists, the highest prescribing group of physicians in our whole plan. We also doubled the size of our clinical liaison group to provide more widespread educational activities from a medical and scientific perspective for the key opinion leaders across the new -- across the U.S., not only the national level but also the regional levels as well.

We have a full array of promotional activities that are currently underway to support the Opana sales effort and we recently introduced new sales and marketing materials, including a new journal ad and reprints of recent publication of trial data in the Journal of Pain and current medical research and opinion. Throughout the year, we will have a significant and focused Opana commercial presence at a number of key medical society meetings, including next week at the American Pain Society meeting in Washington, D.C.

It's clear from our market research that these activities are having a favorable impact. Approximately 50% of Opana ER prescriptions are being written by pain management specialists, more than 30% are coming from primary care physicians, and all other specialties account for the remaining 20%. The PCP group continues to grow, which is indicative of their increasing confidence with the product as they typically follow the specialists' lead when trying and adopting a new drug. Most of Opana ER's prescriptions are coming at the expense of Oxycodone ER, brand or generic. Based on the results of our most recent research, it is expected that this trend will continue as Opana ER's usage increases. Approximately, three out of four physicians we'd surveyed who have prescribed Opana ER anticipate increasing their prescribing this product over the next six months.

And in terms of the patent situation with Opana, we have multiple patents on file and under prosecution at the Patent and Trademark Office covering a broad range of claims. Between Endo and Penwest, our partner on Opana ER, we expect that at least one or more patents will issue on Oxymorphone in 2007 and qualify for listing in the FDA's orange book. In addition, we have in place for the franchise, a lifecycle management strategy that involves options such as new formulations, dosage strengths, and delivery systems to ensure additional exclusivity for the Opana franchise.

With regards to our pipeline, enrolment continues in three Phase III efficacy trials for the Topical Ketoprofen Patch in two Phase III trials for Rapinyl. As previously announced, we expect to submit NDAs for these products in the first half of 2008. We anticipate initiating a Phase II trial for a transdermal Sufentanil patch in the first half. And we expect to begin our next trial for EN3285, our oral mucositis prevention product, in the second half of the year.

So with all these events shaping the landscape for Endo, it will certainly continue to be a productive year. And now I'd like to turn the call over to Charlie.

Thanks, Peter. Good morning, everyone. I'm pleased to report that we have posted very strong results for the first quarter. For the three months ended March 31st, 2007, net income was $57.1 million or $0.43 per diluted share on net sales of $254.4 million. This compares with net income of $20.5 million or $0.15 per diluted share on net sales of $205 million in the first quarter of 2006.

On an adjusted basis as detailed in the supplemental financial information in today's press release, net income was $62.5 million in the first quarter of 2007 versus $55.2 million in the first quarter of 2006. Adjusted diluted earnings per share were $0.47 for the first quarter of 2007 compared with $0.41 in the first quarter of 2006.

Our first quarter top-line growth was led by our topical analgesic patch, Lidoderm, which had net sales of $154.1 million compared with $125.1 million for the year ago quarter, a 23% increase. Prescription growth for Lidoderm was up 17% and dispensed unit growth was up 19% in the first quarter of 2007 versus the comparable period in 2006. We estimate that prescription demand for Lidoderm for the first three months of 2007 was approximately 171 million. The difference between demand and factory sales can be attributed primarily to fluctuations in the timing of wholesaler orders.

Combined net sales of Opana ER and Opana were $29.2 million for the first quarter of 2007. This includes the recognition of $13.8 million of deferred revenue for commercial shipments of Opana ER and Opana made to customers in 2006. We estimate that prescription demand for Opana ER and Opana in the first quarter of 2007 totaled approximately 10 million. We believe Opana is on track to meet out guidance of $85 million to $105 million in net sales for 2007. We believe that annualized March scripts plus first quarter actual sales will deliver $70 million to $75 million in revenue. And with our current growth trend we believe we will meet our current guidance.

Net sales of Frova were $12.1 million for the first three months ended March 31st, 2007, up 73% from $7 million in the same period a year ago. Estimated prescription demand for Frova in the first quarter was approximately 12 million.

Net sales of Percocet were $30.6 million for the first three months ended March 31st, 2007 versus $27.5 million in the same period of 2006. This reflects, in part, the impact of a 9.9% price increase effective February 1. We estimate the prescription demand for Percocet in the first quarter of 2007 was approximately 26 million. Higher factory sales versus prescription demand indicates that wholesaler inventories rose slightly during the quarter. We expect these levels to normalize in the second quarter.

For the first quarter of 2007, net sales from our generic product portfolio were $25.8 million versus $40.7 million in 2006. If you recall, the first quarter of 2006 included $9 million in net sales of extended release Oxycodone tablets. On December 31st, 2006, as per our agreement with the Purdue Frederick Company, we stopped selling our extended release Oxycodone tablets, the generic equivalent of OxyContin. Net sales of our generic products in the first quarter of 2007 were also adversely affected by increased generic competition with both Endocet and our morphine sulphate extended release tablets.

Gross profit for the first quarter of 2007 was $206 million versus $156.3 million in the same period of 2006, an increase of 32%. The gross profit margin improved to 81% from 76.2% in the year ago first quarter. This improvement is due to a favorable product mix as we derived a higher proportion of total revenue from higher margin branded products as well as lower cost of goods since we have successfully renegotiated supply agreements with several of our partners. However, we believe the current margin level of 81% will mitigate as we continue to increase our levels of discounts for Lidoderm and Opana throughout the remainder of the year.

Selling, general, and administrative expenses were $92.8 million versus $100.2 million in the first quarter of 2006. Our SG&A expenses in 2007 reflected the incremental costs from the expansion of our field force in mid-2006. The year ago quarter included compensation expense and related employer payroll taxes funded entirely by Endo Pharma LLC of $42.4 million.

As noted in our guidance for 2007, we expect to invest heavily this year in promotional and marketing initiatives in support of Opana, Frova, Lidoderm, and Synera. In addition, we're investing in our infrastructure to ensure we have the people, processes, and systems in place to support our current and anticipated future growth. We also anticipate a higher level of spending in the second quarter as many of our investment programs continue to ramp up.

Excluding milestones and upfront payments to partners, research and development expenses were $20.8 million in 2007 compared with $14.8 million in the first quarter of 2006. We will continue to increase the level of our R&D investment in 2007 to ensure that we continue the advancements of our development pipeline.

Once again, we generated very strong cash flows from operating activities of $128.5 million in the first three months of 2007. A key component of this strong performance was that we were able to reduce our day sales outstanding from 54 to 44 days. In addition, due to the favorable interest rate environment, we generated $7 million in interest income in the first quarter. Our cash and cash equivalents were $730.9 million at March 31st, 2007. We feel our strong financial position with good cash flow and no debt provides us an opportunity to pursue acquisitions and other strategic alliances which we believe will accelerate our growth in 2008 and beyond.

To reiterate our previously announced guidance for 2007, we expect net sales to be approximately $1.025 billion to $1.050 billion. We estimate net sales of Lidoderm in 2007 to be approximately $650 million to $675 million and combined sales from the Opana franchise of $85 million to $105 million reflecting the substantial investments we are making in support of our on-market and development products.

Adjusted earnings per share for 2007 are expected to be approximately $1.68 to $1.72. This excludes estimated upfront and milestone payments to partners and stock compensation charges. Of course, there could be no assurance of Endo achieving these results. Now, we'd like to turn the call over to Bill and we'll take your questions.

Okay, Operator, can you begin the question-and-answer period please?

(OPERATOR INSTRUCTIONS). And your first question is from the line of Gregg Gilbert. Please proceed, sir.

Thanks. I have a two-part question. First, Charlie, can you give us inventory levels for each key product? And secondarily, you touched on this a bit, but does your calculation of demand sales for Lidoderm build in any effect from the new rebating and pricing strategy that you mentioned last quarter?

Okay, let me start first with the inventory levels. Inventory levels on Lidoderm decreased during the quarter from about 1.3 month's supply at the end of the year to less than a month. On Opana, the inventory levels came down as well, but I don't have those figures at the tip of my fingers.

And then your second question was related to discounting. Yes, our guidance for the year does take into account the incremental discount that we expect to give on both Lidoderm and Opana.

But none of that action occurred during Q1?

Very little.

Thanks. I'll get back in line.

Okay.

And your next question comes from the line of Ian Sanderson with Cowen and Company. Please proceed, sir.

Thanks for taking my question. And follow on to Gregg's question on the discounting and rebating on Lidoderm and Opana. Is that across the board? Or I guess a more definitive question is, what percent of your sales of those two products would you expect this discounting to apply to?

Yes, Ian, the discounting on both Lidoderm and Opana are expected to be, by and large, across all of our Medicare Part D plans and in our commercial managed care plans. In the Medicaid arena, clearly there we are also looking at appropriate levels of discounts to gain access.

We estimate that for both of these products and just using all those three discounting markets combined that they will account for close to 90% to 95% of the prescription business that is generated for these products. But not all those plans in that -- in those markets, however, will have these levels of discounts that we're talking about, but most will. We haven't disclosed what that level is, of course, and nor would we get into which plans are being discounted versus others. But clearly we believe that the landscape has changed somewhat for Lidoderm based on the fact that it is now clearly on the radar screen for many of the third party payers. And just on the volume basis alone to maintain the access that we currently have, we're being asked to provide the incremental value back to those plans, and particularly in light of the Medicare Part D environment beginning to extract the higher levels of discounts going into the '08 and '09 timeframes.

On Opana, our strategy here is to remain at parity with the branded opioids in the class. We have in fact embarked upon a fairly aggressive strategy to expand our coverage to the regional level and the local level plans where we haven't had a lot of emphasis to date. But with our newly expanded managed markets group and a new leader of that group in place, we are expecting to begin a very aggressive marketing and value-added campaign that will result, we believe, in incremental discounts where we are able to attain Tier 2. We will in fact be aggressive in trying to establish the Tier 2 position for Opana and Opana ER. But for the most part, the strategy will continue to be parity pricing to the other brands and parity tiering to the other brands in the category.

Okay, thank you.

And your next question is from the line of Jim Kelly with Goldman Sachs. Please proceed, sir.

Good morning. My first question has to do with cash utilization. And Peter, I'm just interested, and Charlie, you had about $100 million of cash come out of the quarter. And I'm just interested in how you're thinking about that relative -- I know you've talked about the biz dev activities. But also how do you think about it in terms of potentially returning it to shareholders either with the share purchase, even if it's open-ended so you could still proceed with your business development activities?

Okay. Jim, this is Charlie. As we've said before, our primary use of our cash balance and our balance sheet strength is going to be redeploying it into growth assets. If we get six, seven months from now, what have you, and the rate at which we are licensing or acquiring things with our increasing cash flow gets to a point where we view that we have excess capacity, we would then at that point -- sort of look at do we do a share buyback, do we do a special dividend, what have you. But right now that is not our primary driver.

And I would add as well, Jim, that in the context of our current business development activities, although clearly we don't disclose our current level of discussions on various projects, we do have an ongoing and very active set of negotiations and analyses and evaluations for many projects, some of which are in various stages of those evaluations and negotiations. And so we couldn't comment on where we might be at any point in time. But clearly the one piece that's probably invisible here, of course, is that we do have many projects ongoing simultaneously. And so the use of our cash for the licensing of products and also on the M&A front for potential companies that could be a good strategic fit for the Endo business is constantly being looked at and evaluated.

Great, and just lastly on Rapinyl, could we just get an update on the progress of that product through the clinic and any updated thoughts on the competitive landscape there?

We are still on track to file an NDA for Rapinyl in the first half of 2008. Recruitment in the clinical trials remains challenging. I'm sure everybody working in this area has found exactly the same thing. And it's obviously it's not our policy to comment specifically on any recent announcements by competitors, and I -- again, I would just reiterate that we're on track to file our NDA in the first half of 2008.

Thank you.

You're welcome.

And your next question is from line of Scott Henry with Oppenheimer. Please proceed, sir.

Thank you. First, if I could just ask you a couple of specific questions for Charlie. I don't know if you're going to give the specific split between Opana IR and ER revenues. And also with regards to the Lidoderm, it looks like about 17 million de-stocking in the quarter. I guess what I'm wondering is do we get some of that back later in the year or is this to get down to levels where you want to be and kind of along those lines if there is any update on the one remaining IMA that you are looking to sign.

Okay, Scott. Let me first start -- your first question, would we spilt out Opana ER from the -- from just Opana. And our answer to that is actually quite simple, no. We're reporting those combined. In terms of -- on Lidoderm, the 17 million that you sort of estimated on de-stocking, as we sort of highlighted on the call that inventories there did go down. It was not something that we consciously did. It was really just the result of order patterns by the wholesalers. And so we expect that to sort right size itself over the course of the year. It just -- depending on what day of the week the quarter ends and who's placing their larger orders and when, you're going to have some fluctuations quarter to quarter.

Okay. Thank you and if I could just ask one kind of bigger picture question for Peter on the quarter. I mean things look pretty strong. Certainly the earnings was pretty good. I just want to get an idea. Do you feel, perhaps, better about the full-year guidance right now or did you anticipate that earnings would be this strong in Q1, any color there?

Yes, I think that our assessment right now is that yes, we are feeling that the quarter was a good and strong quarter for us. We are still expecting to continue the investment levels that we had indicated earlier in the year that we anticipated during this year. Not all of those expenses have been executed in the first quarter.

As an example, the increase in the size and scope of both our clinical liaison group and our managed care group, we're not fully expensed in the first quarter. They will be in the second quarter. Several of our programs for initiation of the Frova educational programs and market research and managed care strategy research have not been done fully. Those are expected to come about in the second quarter.

So I think that our overall stance at this stage is that we do expect that the investments that we've indicated earlier that we are expecting to make for the full year will begin to continue throughout the balance of the year and those that we didn't initiate in the first quarter will be initiated subsequent to that. And that continues to give us faith that our full-year guidance as we currently see the year unfolding is solid and we're very confident in that level.

Thank you for taking the question.

And you're welcome.

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

Yes, thanks. A couple of quick questions. First, on the pricing of Opana and Lidoderm. It looks like based on the demands that you gave that we're looking at about $253 or so for the Opana franchise on average. And is that reflecting a lack of some of the managed care efforts? Do you expect that to go down dramatically? Can you give us some sense there of what the timing of the drop, I guess, in discounting is? And did you have any price increases at all for the products in the second quarter, i.e., in April and/or in the first quarter that we didn't know about? And those are the main ones, thanks.

Okay. On the discounting with regards to Opana first, we do anticipate that the level of discounting will accelerate during the balance of this year. As we've mentioned, the timing of our initial contract programming was such that the first quarter did not reflect what we believe will be the full level of discounts for the balance of the year and we expected that will go further in the second quarter and probably even further in the third and fourth as many of the managed care and Medicare plans accept the level of discounts that will allow us to access favorability or at least parity within the plans. So the first quarter does not reflect what we do believe to be the full extent of the managed care contracting discounts for the full year.

On Lidoderm, we do expect that that will be somewhat reflective as -- the first quarter will be somewhat reflective as the year pans out because we don't expect any bolus of activity on Lidoderm for any of these changes. These would normally come about during the year. As the contracts expire, we renew them. And as we're renewing them, we are, as we have indicated previously, being pushed for incremental levels of rebates to maintain our status. There were no price increases on Lidoderm nor Opana in the first quarter that are reflected here.

How about the second quarter, April?

We don't pre-announce price increases, so I couldn't comment on that.

And just a quick one for Charlie on the gross margin. Was there any benefit from deferred revenue coming in this year that didn't have cost of goods sold associated with it?

No, that would -- that did not drive any of the incremental margin.

Okay, thank you.

And your next question is from the line of Gary Nachman with Leerink Swann. Please proceed, sir.

Hi, good morning, a couple of questions. First, a follow-up on Scott's question from earlier. Should the additional IMA later this year, I guess that you're still expecting, affect the inventory levels more than what we saw in the first quarter? Could you touch on that?

Well, I mean -- what we've said before is that our full-year guidance has [baked] in the impact of any additional IMAs that we'd be in. But we do not expect any of the incremental IMAs to be significant in terms of the impact. And I don't know that the first quarter impact is -- I think at some point in the year, it will reverse itself because this was not something that was driven by us working down inventory levels. It was just driven by the timing of wholesaler order patterns.

Okay. And Charlie, could you explain how you were able to recognize the deferred revenue in the first quarter? I guess I thought it was going to be in the second quarter. And could you also review your comments, I sort of missed it, as far as where Opana is annualizing right now?

Sure. In terms of -- the reason we were able to recognize revenue is that we were able to -- we've already sold through more than the initial stocking into the trade. We had very good handle on what we expected in terms of returns and where the discounting and so forth were coming back. So we now have the ability to estimate all of the sort of end-realized price that would come back from -- on the product. And as a result of that, we were able to make supportable estimates so we could recognize the revenue.

And in terms of where we are on a run rate standpoint, if you take March prescriptions and annualize those for the rest of the year and then add the first quarter sales for Opana to that, that gets you a number between $70 million and $75 million. And so the reason I'm comfortable reiterating guidance of 85 to 105 is that we still anticipate to have growth as we move throughout the year.

Okay, that's helpful. Thanks.

(OPERATOR INSTRUCTIONS). And your next question is from the line of Lei Huang with Lehman Brothers. Please proceed, sir.

Hi, thank you. Can you talk a little more -- a little bit more about the renegotiated payments or royalty payments to partners that affected your margin and provide a little more color on how we can think about that for the rest of the year? Thanks.

Okay, we did not renegotiate royalty rates. We renegotiated supply prices of a broad array of our products. And so that's reflected in the first quarter.

What you will see, though, in terms of the benefit in the first quarter was not just a reduction of our cost of goods but also the fact that with Lidoderam and Opana, we are having a higher selling price than what we anticipate to have in the fourth quarter. So our margins will mitigate over the course of the year but will probably still be favorable to last year. So that should help you a little bit.

Yes. And if I may ask just one more question. On Lidoderm, in light of what of you talked about with more rebating as the year progresses, do you still see room for price increases such as the ones you've taken in the past? Thanks.

Surely. The rebating as we've said are really specific to each and every plan that has a contract that is up for renewal.

We do expect price increases for our products in general to still be available to us based on competitive positioning, and certainly that will be mostly reflected in cash-paying customers.

But those discounts that will increase to managed care or Medicare customers, we wouldn't comment on whether or not there'd be a positive or negative effect by customer, but clearly we believe that the overall impact of these discount levels will increase rather substantially from our previous modest levels in order for us to maintain the same access as we have in the past.

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

Thank you, good morning.

Good morning.

As regards to Opana ER, are you more narrowly focusing your marketing efforts on a smaller number of -- deciles of prescribers in order to increase your impact on the market or are you satisfied with the impact you have had so far across the wider range of deciles?

Good question, Larry. We certainly believe that our higher decile or physicians who obviously are the busier physicians and therefore more difficult to access on a regular basis will benefit with regards -- we will benefit with regards to the incremental sales activity from our Specialty Force II. And so the overlay that we've now employed on the top 6,600 specialists will enable us to have better frequency and therefore increase our ability to bring our message and the potential advantages of Opana and Opana ER for these physicians.

We have concentrated our efforts on those higher level deciles. On the lower end of the scale, we have certainly reevaluated the effect that we can have on the, let's say, Decile 2 physicians who are representing the bottom of the prescription potential. And if those physicians are called on, it's usually being -- they're being called on because they're high Lidoderm or high Frova physicians. They would -- we will not call on them solely for Opana and so therefore the activity can be reallocated to higher valuable or higher potential physicians for the Opana franchise.

Thank you.

And your next question is from the line of John Boris with Bear, Stearns. Please proceed.

Thanks for taking my questions. Congratulations on the quarter. On Opana, can you just comment on the -- what your average daily dose assumption is as you exit the year on Opana? And then when you put your original plan together of the $85 million to $105 million on the brand, was your assumption that Teva was going to exit the market or were you assuming that they were going to be in the market? And then just on Lidoderm, any update on the citizens' petition and also what prompted you to add some language to your 10-K where I think you're indicating that to your knowledge there is no competitive Lidoderm-type product that has been or is being developed, so just what may have prompted you to add that to your K?

Okay, I'll try to answer your questions in the order. Comment on the daily dose of Opana. The dosing is hard to say on a patient-by-patient basis. But what we are seeing is an increase in the utilization of the higher strengths and a less emphasis on the lower strengths. So as an example, the 40-mg Opana is now representing, I believe, somewhere in the order of around 20% of our prescribing. The 5 mg, the lower strength, has decreased in its percentage of the overall probably to a down -- down to around 15% or so. I think those are accurate numbers. But the trend certainly is encouraging because it means that the higher strengths, which are obviously priced higher, will have more impact and favorability on the brand over the course of the year.

We have always assumed that a generic Oxycodone ER was going to be in the market for the full year of 2007. Even as the expected departure of Teva was anticipated in March of this year, we always would have expected that residual generic products would remain in the market for the full balance of the year. In fact even today, Endo's Oxycodone ER is still being dispensed. We still have about a 16% market share even though we discontinued the product four months ago. So we would have expected that Teva and the impacts to be in the market for the full year. So it doesn't have any impact on our expectations for Opana at all.

I mean from a promotional perspective, we always have anticipated continued promotional [sharer] voice competition coming from Purdue, but they're still out there selling OxyContin even though 85% of it's being dispensed generically as well as the Avinza and Acadian sales forces as well. So that doesn't change our assumptions at all what happened recently with the Teva announcement.

On the Lidoderm citizens' petition, there really is no update. We have nothing further to report. And on the 10-K, there really is no difference in our assumptions around the current competitive landscape on a potential generic. The language may be somewhat different, but it doesn't connote at all a different level of belief and knowledge on a potential generic filer. We will state again that we have no knowledge of a generic filer either in development or at FDA. And we do continue to believe very strongly that our patent protection, our five Orange Book-listed patents are providing formidable obstacles for any potential filer. And clearly our belief that if that were to happen, which you can never guarantee that it won't, that we would be very -- very much in a strong position to defend our patent stay.

Can I clarify just one point on Opana, please?

Sure.

Okay. Just on the average daily dose, for instance, there is a higher 40 mg utilization. When you exit the area, you're assuming then it might be on average 30 or 35 mg, the average dose and then on the DACON or average daily consumption, is it 2.0 or is it north 2.2, 2.3 tablets per day?

I can't comment at all on what we think the average daily dose will be at the end of the year. We haven't gone into that level of detail. But as I said, the trend is continuing to grow towards the higher strengths. It will equilibrate at some time. Whether that's this year or next, I couldn't comment on that. And with regards to the DACON, we are almost spot on 2.0. Month-to-month, it does fluctuate a little bit. But between 2 -- 2.0 and 2.1 is probably where we're at.

Thank you, very much.

And your next question is from the line of Himanshu Rastogi with Jefferies & Co. Please proceed.

Hello Peter, thanks for taking the question. My question is on Synera. What progress you're making on that drug now with the hospital sales force being converted to the specialty sales force?

Yes. We have taken a concentrated position on the Synera promotion to focus exclusively on two types of hospitals. Pediatric hospitals, those that only treat pediatric patients, and those that have high concentrations of pediatric beds as a proportion of their overall bed count. So really where the pediatric department is an important influencer to the use of products like Synera that can be used to drive already existing protocols with the use of this particular product.

And so in redeploying our Specialty Force II, they are in fact spending about 75% of their time in the office-based environment doing the double coverage of specialists for Opana, and about 25% of their time in these pediatric and pediatric concentrated hospitals continuing the promotion of Synera.

And any update on the trials that are going on in children for Synera?

No, we haven't provided any update on those. They're still running.

Okay. Thank you.

And your next question is from the line of Ken Trbovich with RBC Capital Markets. Please proceed, sir.

Thanks for taking my question. I guess, I was trying to get some clarification around the channel inventory comments that were made earlier, especially with regard to Opana. If we back out the one-time recognition of the deferred, you shipped 15.4 -- I'm sorry, you recognized or shipped 15.4, but demand you're saying was only 10.4, and yet, earlier in the call you said that the -- you thought that the inventory levels were lower. Could you help us to reconcile that?

Yes, Ken, this is Charlie. You have to realize this is a product that in its launch phase. So what's happening is we're getting better coverage at retail outlets, which is really what we view as being wholesaler inventory levels.

Okay. So really it's from pharmacy distribution as opposed to wholesale inventory levels on that product specifically?

Exactly.

And then a point of clarification, I apologize, with regard to the comment that the IMA is not expected to be material, is that only as a result of the de-stocking that occurred? In other words, these are a net wash or did you always think it was immaterial from the time that you first started guiding the concern about the IMA?

Well, as we said on our guidance color, in the year we didn't expect them to be material, sort of, period over the course of the year.

Okay. Thank you.

And your next question is from the line of Angela Larson with SIG. Please proceed, ma'am.

I just wanted to follow up on the revenue recognition of the Oxycodone generic to OxyContin generic. As you said, you're not booking revenues, but you're still representing 14% of market share out there. Was all of that booked in 2006?

Yes, it was. You know, all that was sold by December 31st, and so there is inventory in the trade. So we will continue to have share in the marketplace even though we are no longer selling new product into the marketplace.

Okay. And a quick follow up on Frova. It was purely a reformatting issue. They didn't issue an approvable or anything, they just extended the deadline?

That's correct, yes.

Thank you.

And your next question is from the line of Annabel Samimy with UBS. Please proceed.

Hi, thanks for taking my call. Just really quickly on the Opana demand versus the actual sales that were booked excluding the $13.8 million. When you're saying that you were -- there was more inventories at pharmacy and distribution level, could you just give us some statistics around how many pharmacies you're in right now, what your goal is for the end of the year, and does that change at all? And separately, if you could provide a little bit of an update on the Opana patent strategies and if there has been any change with regard to the recent patent that was rejected, if there is any new strategies around that?

Sure Annabel. With regards to the pharmacy goal, we haven't provided any further clarification on pharmacy distribution for 2007. We had said in 2006 that we expected by the end of December the first five to six months on market that we expected to be in excess of 12,000 retail stores. We did, in fact, exceed that at the end of last year. And so today, as Charlie indicated, we are continuing to see expansion of that pharmacy distribution, based on the increasing prescribing levels that clearly are, I believe, four times what they were in the fall of last year. So, we would expect that to continue throughout the balance of the year. We don't expect to continue to provide any further quantification of that.

On the patent strategy, as I'm sure all of you are aware, and as Annabel indicated, we did have posted on the PTO website a non-final rejection of one of the patents that Endo has filed and as you all know Endo and Penwest are collaborating quite closely with regards to a multitude of patents that we have filed around various discoveries and inventions that have been made during the course of the clinical development of this drug. The 192 patent is, in fact, a patent that Endo was responsible for. It is going through prosecution. This non-final rejection is a standard practice amongst PTO to allow companies to really rethink and re-narrow, I suppose, their expected claims.

We do expect that the 192 patent will continue to be prosecuted with the PTO. And we believe that there will, in fact, be one or more of these multitude of patents that we'll issue in 2007. But beyond that, we've not provided any further guidance.

And your next question is from the line of Corey Davis with Natexis. Please proceed.

Thanks very much. First one's just a point of clarification, Charley. Did you say that you don't expect any major inventory shifts in Opana and that script should just track demand for the rest of the year?

I think, Corey, as the product grows you're going to have two things happen. You're going to have more bottles or -- on any particular retail outlet as well as more outlets will carry a bottle on their shelf. And then just because as the product grows the amount of inventory in the trade will grow, so four weeks of inventory today is not worth as much as four weeks of inventory at the end of the year. So other than those phenomenon that as this product grows, the amount of inventory in the trade will naturally rise for the same number of day's coverage. We're not expecting anything outside of that.

That makes sense, thanks. And then for Peter, little more philosophically, can you simply describe the landscape currently for doing deals in licensing products? All companies are saying the same thing that competition is going up, prices are going up, so a) do you agree with that, and b) do you worry that you won't be able to get some things that you want because of that?

Yes. Corey, I think that certainly the landscape is getting thinner as I would probably term it. The price for a particular product, I think, depends on what the stage of development is, and what the appetite might be for various companies that are in that game. I do think that -- and those provide a very valuable outlet for any company based here or abroad that is looking to have an experienced pain management sales and development team that can bring these products to the market, but I do think that the level of [the] products that are in development that are in later stage, are somewhat more diminished than they were several years ago. There are a good number of early-stage programs that are going through various levels of evaluation around the globe and I think that we have our eye on all of them.

We continue to evaluate the products regardless of whether or not they're 505(b)2 formulation plays or whether or not -- whether they're NCEs, we have a pretty good handle on that, and as it relates to our appetite, we clearly believe that we would have the ability should we choose to, to pay what's necessary to get to a valuable asset, because we believe that our execution will be probably our biggest competitive advantage, on both the development and the -- on the sales and marketing front.

And based on that fact and our relationships with the key opinion leaders, our current position in the market as it relates to the prescribing physician, I think, our company that are looking to have those products available in the U.S. Endo is an obvious choice.

And then -- and the last question. I think everybody is doing the same math that gets to $250 per prescription for Opana, and I know you said it's obviously going to come down, throughout the course of the year, but can you tell us if the value is materially different between the IR and the ER right now?

I think that -- I would say this that the -- with the use of the IR is starting to dwindle as it relates to the volume of the ER. So as we look at the mix -- and almost everyone has a view on the prescription side that you can see there's probably about a three to one ratio right now, ER to IR, that's much higher on the IR than we would've expected.

In other words, we're getting more IR use than we had originally anticipated. And we think that that's for two reasons. One, that physicians are in fact doing a fair amount of titrating to ensure that they've got the appropriate daily dose before converting to the ER, and frankly we are getting a lot more acute use than what we had originally anticipated, and we're reviewing that as we speak to identify it. In fact, there aren't other avenues for us to be able to exploit in the short-acting opioid market. But in terms of the dollars per prescription or the relative value split, we're not splitting that at this time.

Thanks a lot.

And your next question is from the line of Noelle Tune with Soleil Security, please proceed.

Good morning, thanks for taking the question, just wondering if you could give us any additional color on the -- your managed care efforts as it pertains to Opana and in particular, have you made any progress, year-to-date, in terms of maybe getting Opana into more of a Tier 2 position versus Tier 3?

Yes, the positioning that we've taken on Opana, as I said earlier is that we want to be in the access position that's comparable to the other brands in the category. And I'll explain that a little bit further.

One is that if all the other brands are on a Tier 3 copay within a particular plan, we would be very satisfied to be on a Tier 3 copay, as opposed to a non-formulary or a -- even a prior authorization; we want to be comparable.

If there's an opportunity in that kind of a plan where we can access Tier 2 at the expense of the other brands, we will exploit that. We will try to take advantage of that. So in those kinds of plans where typically their opioids are all going to be in a Tier 3, but they may be reserved one slot for a Tier 2 option, we want to be that option, and so we are seeking that opportunity.

On the other hand, where there are plans, where there are multitudes of products on Tier 2 and then multitudes of products on Tier 3, we are certainly looking to access the Tier 2 situation where possible. Because the review processes and the cycles for these plans vary and in fact many plans will not even review you until you've been on the market 6 to 12 months out, that process is ongoing and expect that to continue to occur during the course of this year. We have been successful in a number of instances over the last several months in accessing Tier 2 copays with fairly large national plans.

Again, we don't indicate specifically where we are for obvious competitive reasons, but we are in fact gaining success in that regard, and we've had a series of wins in both Tier 2 as well as the comparable Tier 3 plans over the course of the last several months and we expect that that trend will continue and even accelerate as our new managed markets group gets underway and really begins to get to those plans that we haven't accessed before, where now, we're going to develop those opportunities to allow for further access, which we will probably see benefiting us in the second half of the year.

Great, thanks.

And the next question is a follow-up from the line of Gregg Gilbert with Merrill Lynch, please proceed.

Thanks. A couple of tie-ups here. First, Charlie, is the migration of Medicaid patients to Part D now totally reflected in your gross to net across all products?

Well, the migration is in terms of the fact that as they migrated over, we actually were realizing a higher average selling price; however, there'll be a reverse migration impact as we start to discount now within those plans to where our average selling price will come back down.

Understood. And then what specifically drove the DSO improvements in this -- is this new low -- is this lower level a sustainable level?

Well, one of the main drivers with all the generic products that we sold in December of last year and the dating that was associated with that and so since that now is not going forward, yes, this is probably a more realistic level of DSOs for us.

That's great and lastly, Peter, have you actually noticed any changes in Purdue's behavior, either share of voice wise or from a contracting standpoint?

No, I think what -- Purdue has continued to be a very viable competitor in this marketplace, and as we've indicated earlier, they are as purposeful in what they've been doing since they've been genericized as they were beforehand, except for the level of promotional activity, particularly from the sales force side that we believe has come down a fair amount. But we estimate that their share of voice is still very present.

One thing that we can point to is that the Endo's share of voice in this market is the largest. We expect it will continue to be the largest for the balance of this year. 2008 might be another story, I don't know what the plans might be, but certainly we're preparing scenarios to look at what happens when and if Oxycodone generic is no longer being sold and therefore no longer being available.

But that certainly will be well into 2008, and I don't care to predict what the -- one of our competitors might do between now and then, but we continue to do scenario planning and have the ability to enhance our activity in this area of marketing presence as we have with our Specialty Force II redeployment, and that we'll continue to look at those kinds of options as we go forward.

Thanks guys.

And your next question is a follow-up from the line of Ian Sanderson with Cowen and Co. Please proceed.

Hello, thanks for taking the follow-up. Peter, has the Opana marketing message changed in any way over the past few months, especially as you seek to differentiate it for Tier 2 positioning, or you're just basically sticking to the original message?

No, the marketing message has not substantively changed at all. What we have done of course is to reformat and kind of repackage our promotional materials and how we position the various bits of data that are available, but we've been very strong on ensuring that our top three messages continue to be carried forward.

The fact that we continue to be the one product in the category that appears to have predictability in terms of its dosing schedule, this is predominantly as I said before on the DACON comment. This is a b.i.d. drug. We do believe that physicians who have kept patients on it for a period of time are seeing little to no dose escalation over time. So once they've achieved their level of desired dose and have adequate pain control, that that dose seems to maintain those patients over time, and therefore the little to no dose escalation is a good thing.

And clearly the tolerability of the drug once reached to adequate pain relief is continuing to be reported back as a very valuable benefit, so we're continuing to reinforce those messages, and I believe that those messages are continuing to resonate. We believe that pain specialists are in fact beginning to see the availability of this new option and (inaudible) is being a very important option. And that is beginning to trickle down to the primary care physicians as we've noted with the shift in prescribing in Opana and Opana ER away from a predominantly pain specialist driven to what we expect to be more primary care driven as we complete the year.

Is it possible to track on a post-marketing basis abuse of Opana and come up with any comparative data there?

No, it isn't. We have a risk minimization action plan in place that we agreed with the FDA at the time that the product was approved. And that risk minimization action plan includes us actually tracking the use of or the misuse or the potential diversion of Opana through a variety of databases, including the so-called RADARS database. And so that allows us to keep an eye on what's going on. And we have not seen anything alarming at the present time.

And at this time, I'd like to turn the call back over to Peter for closing remarks.

Well, thank you, everyone. We appreciate the opportunity to share our first quarter results with you this morning. And we certainly look forward to speaking with you again shortly. And thank you once again and have a great weekend. Bye-bye.

Thank you for attending today's conference. This concludes the presentation and you may now disconnect. Have a great day.