Endo International PLC (ENDP) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Endo Pharmaceuticals Second Quarter 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Mr. Bill Newbould, Vice President, Corporate Communications. Please proceed.

Thank you. 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 this 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 and 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 1, 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 the most directly comparable GAAP financial measures.

Now I would like to turn the call over to Peter Lankau.

Thanks, Bill, and good morning, everyone and thank you for joining us on our call this morning.

We are pleased to report another strong quarterly performance. Our net sales of $257.1 million were up approximately 13% from the year-ago second quarter. Diluted earnings per share were $0.45 in the second quarter of 2007, versus $0.43 in the same period of 2006. On an adjusted basis, as detailed in the supplemental financial information in our press release that we issued earlier today, adjusted diluted earnings per share for the three months ended June 30, 2007 were $0.48 compared with $0.46 in the second quarter of 2006.

Continued strong growth of our branded products was primarily responsible for our results. LIDODERM continued its strong performance in the second quarter with sales growth of 19.7%, versus the second quarter of 2006. Prescription growth remained strong as well, up 16% in the quarter and 18% YTD. We are especially pleased by the growth we are seeing in sales of OPANA ER and OPANA.

With quarterly sales of $25 million and increasing demand from physicians and support from our managed market's efforts, we are raising our guidance for the year, which Charlie will detail in a few moments. And FROVA prescriptions are growing steadily as well, by expanding our penetration of the prescriber base.

Now I'd like to take a few moments to discuss some recent developments and then I'll turn the call over to David for an R&D update and then to Charlie for in-depth review of our financial results.

Based on our belief in the continued growth of our commercial portfolio and the anticipated label expansion for FROVA, combined with the success that we have seen by redeploying the hospital sales force earlier this year, we have decided to increase our specialty force two by 90 representatives. This expansion is designed to match the size of our specialty force one and provide double coverage for the most important physicians in our target audience.

This will bring our total sales force to approximately 690 representatives, further amplifying our already leading share voice in the pain market and we believe, positioning us well to continue growing the OPANA franchise, as well as benefiting the rest of our product line. And this expansion will help us to successfully launch FROVA to an expanded physician audience in January 2008 for menstrual migraine prophylaxis, should we receive FDA approval, with a decision expected later this month.

We are currently preparing for FROVA's new indication with a full slate of physician and patient education programs to raise awareness about menstrual migraines. Our pre-launch campaign for FROVA, the most comprehensive program we have undertaken for a new product, has included a robust, non-branded medical education plan on menstrual migraine and is complimented by direct-to-patient online, interactive programs and journal ads.

Just last week, Penwest Pharmaceuticals, our partner on OPANA ER, announced that the U.S. Patent and Trademark Office had indicated on its website that Penwest's patent application covering its TIMERx controlled release formulation had been allowed. We expect that this patent, following payment of the issue fee and subsequent publication, will be eligible for listing in the FDA's Orange Book sometime in the coming months. The patent, when issued, will expire in 2022.

As we have previously noted, we and Penwest have multiple patents on file and under various stages of review with the PTO that, if allowed, we believe would provide further patent protection for OPANA ER. In addition, we have in place a life cycle management strategy involving many options to ensure additional exclusivity for the OPANA franchise.

Now I'd like to update you on the marketing and promotional activities in support of the OPANA franchise. As we noted previously, our expanded managed markets group grew threefold earlier this year, to allow us to expand the level of our coverage beyond just the national plans and down into the regional and local carriers.

We also brought in a new vice president of managed markets to oversee this effort and fully execute our newly revised and more aggressive managed care strategy. This effort has begun to produce some very impressive results, with recent tier two formulary wins with several major national healthcare plans. Approximately 50% of the covered lives are available to OPANA ER, in either tier two or tier three, with unrestricted access.

In addition, we recently initiated an instant savings card program that provides point of service discounts, effectively ensuring that all patients prescribed OPANA ER will have access to tier two level copayments regardless of their plan's formulary status for OPANA ER.

The redeployment of our 70-person hospital sales force in March has enabled us to double cover some 6,300 high decile pain management and other specialists, physicians who have the most experience in treating chronic pain patients with extended release opioids and who are the most experienced group of physicians in our call plan. These specialists currently account for 52% of the total OPANA scripts. We look forward to increasing our coverage amongst a broader group of similar specialists when the current expansion of the specialty force two is completed by October. Complimenting these efforts is a full-scale marketing campaign that recently featured the launch of new promotional materials and a full schedule of peer-to-peer speaker programs. At the American Pain Society annual meeting in early May, we had a major commercial presence for OPANA, where posters and abstracts on OPANA data were presented and we plan a similar effort on several key medical society meetings this fall. Of course, throughout all of this, we are following our risk minimization action plan and promote appropriate prescribing of this scheduled C2 product.

We are pleased that these efforts are paying off. Prescription trends continue to show good upward growth, currently running at about 5,700 scripts per week and growing, a rate that has us on track to meet our goals for the year. Scripts of the week of August 13th represented our highest weekly market share. It should also be noted that on a rolling four-week basis total scripts are up 8.0% from the prior four weeks, an increase from the previous four-week period.

While approximately 50%-plus of OPANA ER scripts are being written by pain management specialists, the percentage of experienced primary care physicians who prescribe OPANA, our biggest growth opportunity for the product, continues to increase and is now at 33%. All other specialties account for the remainder. And our market research also indicates that 72% of physicians who have prescribed OPANA ER anticipate increasing their usage over the next six months, a strong indicator of prescription growth for our newest franchise.

So now I'd like to ask David Lee to bring us up to date on recent developments with our R&D pipeline.

Thank you, Peter and good morning, everyone.

On July the 11th we announced that we were withdrawing guidance regarding the anticipated first half of 2008 NDA filing date for the topical ketoprofen patch, which we're studying for the treatment of soft tissue injuries.

This decision was based on the outcome of two Phase III double-blind, placebo-controlled clinical trials, one evaluating the ketoprofen patch as a treatment for ankle sprains and strains and the second was targeted at treating the pain associated with tendonitis or bursitis of the shoulder, elbow or knee. No statistically significant difference was observed between the treated and placebo groups in either trial.

A third Phase III study in tendonitis or bursitis of the shoulder, elbow or knee is currently running and long-term safety study in patients with osteoarthritis flare in the knee is also ongoing. The lack of statistical significance in the first two Phase III trials that we conducted underscores the difficulty of demonstrating separation between the treated and control groups in clinical studies involving topical patches.

We are still conducting comprehensive analyses of the data from our two completed Phase III trials. But based on the analyses we have completed so far, among the factors that we now believe may have influenced the outcome of these studies includes severity of pain on entry into the studies and the use of ibuprofen as rescue medication. These observations may provide the basis of the design of additional clinical trials.

We believe the topical ketoprofen patch is an effective product that could potentially offer significant advantages for the patients with soft tissue injuries and we remain confident in the future success of this product. The Phase III program end is currently being analyzed for these potential enhancements and we anticipate new guidance on an NDA filing date when we have definitively determined our next steps.

Regarding our other products in development, in late June we initiated enrollment in a Phase II trial for our transdermal sufentanil patch and we expect to begin our next trial for EN3285, our oral mucositis prevention product, some time during the second half of this year. Enrollment also continues in our Phase III efficacy trials for Rapinyl, our treatment for breakthrough cancer pain.

Now I'll hand over to Charlie, who will discuss our financial results.

Thanks, David and good morning, everyone.

Overall, Endo posted a strong second quarter, with net sales of $257.1 million, up 13% from the prior year. Net income for the second quarter was $60.5 million or $0.45 per diluted share, compared with $57.6 million or $0.43 per diluted share in the same period of 2006. As detailed in the supplemental financial information in today's press release, adjusted net income for the three months ended June 30, 2007 was $64.3 million or $0.48 per diluted share, compared with $61.6 million or $0.46 per diluted share in the same period in 2006.

These quarterly comparisons reflect higher SG&A and R&D expenses, as we follow through on our previously stated commitment to increase the level of investment to support our on-market products, including the expansion of our sales force in mid-2006, upgrading our infrastructure and advancing our development pipeline to support our long-term growth.

Our top line growth for the second quarter was driven by continued strong sales from branded product portfolio, which represented 92% of our total sales and grew 33% from the second quarter of 2006. The quarterly comparisons for our generic business reflect the loss of revenues from our generic Oxycodone product, which we discontinued selling on December 31, 2006, and increased pricing pressure for our two main generic products, Endocet and Morphine Sulfate Extended Release tablets.

LIDODERM continued to perform well, delivering net sales of $168.5 million in the second quarter versus $140.8 million in the same period of 2006, an increase of 20%. Prescription growth for LIDODERM was up 16% and dispensed unit growth rose 17% in the second quarter versus the comparable 2006 period.

We estimate that prescription demand for LIDODERM for the second quarter of 2007 was approximately $184 million. The difference between demand and factory sales can be attributed primarily to an anticipated work-down of trade inventories.

YTD net sales of LIDODERM were $322.6 million in 2007, compared with $265.9 million in 2006, a 21% increase. Prescription growth for LIDODERM was up 16% and dispensed unit growth was up 18% for the first half of 2007 versus the prior year period.

Net sales of Percocet were $29 million for the three months ended June 30th versus $22.1 million in the same period in 2006. Estimated prescription demand for Percocet in the second quarter was approximately $27.2 million. Net sales of Percocet were $59.5 million for the first half of 2007 compared with $49.6 million in the same period in 2006.

Combined net sales for the OPANA franchise were $25 million for the second quarter of 2007 and were $54.3 million for the first six months of 2007. The first half results included the recognition of $13.8 million of deferred revenue for commercial shipments of OPANA ER and OPANA made to customers in 2006.

Estimated prescription demand for OPANA ER and OPANA in the second quarter was approximately $16.5 million. We believe the difference between demand and factory sales is due to the normal growth in absolute inventory in the retail and wholesale channels as the product grows.

Net sales of FROVA were $12.8 million for the three months ended June 30, 2007 versus $13 million in the same period in 2006. We estimate that prescription demand for FROVA in the second quarter of 2007 was approximately $12.1 million. Net sales of FROVA were $24.9 million for the first half of 2007, compared with $20 million in the same period in 2006. We believe the YTD growth is attributed to increased promotional activity and the field force expansion in mid-2006.

Gross profit for the second quarter was $203.7 million, versus $177.6 million in the year-ago second quarter, an increase of 15%. The gross profit margin rose to 79.2% from 77.9% in the year-ago quarter. This improvement is due to a more favorable product mix as we derived a larger portion of our total revenue from higher margin branded products and lower cost of goods, as we have successfully renegotiated supply agreements with several of our partners.

As we previously communicated, this represents a sequential decline from the 81% gross margin in the first quarter of 2007 and we expect this trend to continue as our levels of discounts for LIDODERM and OPANA increase throughout the remainder of the year.

Reflecting the incremental costs from the expansion of the field force in mid-2006, SG&A expenses were $87 million in the second quarter of 2007 versus $64 million in the year-ago second quarter. For the first six months, SG&A expenses were $179.8 million in 2007 versus $164.4 million in 2006. The 2006 SG&A number included $41.3 million of executive compensation funded by Endo Pharma, LLC.

As noted previously, we expect to continue to invest heavily this year in promotional and marketing initiatives in support of OPANA, FROVA and LIDODERM. In addition, we are investing in our infrastructure to ensure we have the people, the processes and systems in place to support our current and anticipated future growth.

Excluding milestone and up-front payments to partners, R&D expenses were $24.2 million versus $19.8 million in the second quarter of 2006 and were $45.1 million for the first six months of 2007 versus $34.5 million in the same period of 2006. We will continue to increase the level of R&D investment in 2007 to ensure the continuing advancement of our development pipeline, including initiating additional ketoprofen patch trials.

Once again, we generated strong cash flow from operating activities during the first six months of 2007, at $201.1 million. Our cash and cash equivalents and current marketable securities consisting of short-term auction-rate securities and variable rate demand obligations totaled $806.8 million at June 30, 2007.

With our strong balance sheet, we believe we are well positioned to pursue acquisitions and other strategic alliances that will accelerate our growth and diversify our revenues and build a more robust mid-to-long-term pipeline. Management and the Board of Directors continually evaluate our cash position and capital structure and believe it is important to invest in or acquire growth assets.

In the first half of 2007, net sales grew 18% to $511.6 million versus $433.1 million in the comparable 2006 period. Net income was $117.7 million, up 15% from the $78.2 million in the first half of 2006 and diluted earnings per share for the six months ended June 30, 2007 were $0.88 compared with $0.58 in 2006. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for the six months ended June 30, 2007 were $0.94, compared with $0.87 in the first half of 2006.

Based on our strong YTD performance, we are revising our guidance for 2007. Net sales are now expected to be approximately $1.05 to $1.075 billion, up from the previous guidance of $1.025 to $1.05 billion.

Net sales of LIDODERM in 2007 are now estimated be approximately $685 to $710 million, up from our prior guidance of $650 to $675 million. Combined net sales of OPANA franchise are expected to be approximately $90 to $110 million, up from our previous guidance of $85 to $105 million.

We estimate adjusted diluted earnings per share for 2007 to be approximately $1.75 to $1.80, up from the previous adjusted diluted EPS guidance of $1.68 to $1.72. This excludes estimated milestone payments to partners and the expensing of stock-based compensation charges. Our revised EPS guidance also reflects incremental costs from the ongoing expansion of our specialty field force two, as well as additional pre-launch spending in support of the expected label expansion for FROVA.

Lastly, we will continue our previously stated objective to invest heavily this year in our commercial and development portfolios, as well as our infrastructure improvements to support our anticipated future growth.

Now I'd like to turn the call back over to Peter for some additional comments.

Thanks, Charlie. Well, as you can see, Endo has posted a strong second quarter and we believe we are well positioned with our current prescriptions and sales trends to achieve our revised guidance in 2007. However, we are not standing still. We have been and continue to be active in our business development activities, which we believe is key to generating shareholder value in the long-term.

So, before we take your questions, I'd like to briefly summarize this growth strategy for you. As you can see, from our balance sheet, we have a strong cash position and no debt, which leaves us well positioned to seek opportunities to grow the Company.

Toward that end, management and the Endo Board of Directors has recently completed a review of our strategic plan in concert with outside advisors. Based on this review and current market conditions in the pharmaceutical industry, we believe that the most effective way to maximize our growth and build value for our shareholders is to pursue the following course of action.

We intend to continue to focus our business development activities on further diversifying our revenue base through product licensing and Company acquisitions, as well as other opportunities to enhance shareholder value.

Consistent with our goal of becoming the leading pain company, we are evaluating and pursuing opportunities to deepen and broaden our penetration of the pain market, as well as in other specialty-focused therapeutic categories that have the potential to provide diversification and growth. Toward this end, we are targeting products that are clinically innovative and differentiated, including earlier stage opportunities, while continuing to advance our current development pipeline.

Endo's management team and our Board of Directors continue to examine the best use of the Company's strong balance sheet and cash position, including consideration of opportunities in the evolving pharmaceutical market place that strengthen the Company and enhance shareholder value.

We will continue to drive our top line growth by maximizing the growth of LIDODERM and PHN, continuing to accelerate the OPANA franchise and successfully launching FROVA in the menstrual migraine prophylaxis indication, if approved. And we will continue to invest in our generics business, selectively pursuing high barrier to entry opportunities.

So now, we'd like to open the call to your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ian Sanderson of Cowen & Co.

Good morning and thanks for taking the question. Thanks also for addressing some of the strategic initiatives as we see the priorities here.

Thank you.

On the LIDODERM front, trade inventory -- the difference between the reported sales and the prescription demand and implied inventory reduction of (inaudible), I think that you reported in Q1 that you felt the trade inventory levels went from about 1.3 months down to slightly less than one month. So where do we stand, currently, on LIDODERM trade inventory levels and why do we continue to see these fluctuations just like the IMA agreement?

Yes, you are correct, at the end of last quarter, where we said that the pipeline inventories were. They've come down again from that point. The data is not exactly absolute, so there is some fluctuation in there, but we are lower than where were at the end of last quarter.

Part of that is that the wholesalers are getting more efficient in their distribution business and are squeezing down their inventories. They're staying within the terms that we've negotiated and our previous -- our guidance when we came into the year included the anticipation of these work-downs. And we expect that to continue through at least the next quarter, very unlikely it would be into the fourth quarter, but it is possible.

Okay and a quick follow-up. I think you had mentioned early in the year that you anticipated a step up in the discounting on LIDODERM and can you update us on whether that has occurred and whether you see incremental discounting in the back half?

In the first half of the year the discounting did not occur as rapidly as we had forecasted. However, our current guidance does reflect some of the anticipated erosion in margin there, or price, as we are negotiating new contracts within managed care.

Thank you.

Gregg Gilbert, Merrill Lynch.

Thanks. I have one two-part question, a quick one for David. Is it safe to assume that we're past the point where you'd expect the Panel meeting for FROVA? And for Peter, in your view and the Board's view, what's the case against doing a significant share repurchase or cash dividend and continuing to pursue acquisitions? Is it simply that you want to maintain flexibility to do very large deals and you think a share repurchase, or something like that, would hamstring you? Thanks.

We are on track at the moment to our August 19th PDUFA date for the FROVA prevention of menstrual migraine indication. The review appears to be proceeding perfectly normally, at the moment. We've not had any indication that there will be an advisory panel. That doesn't mean, of course, at any time that the agency could come back and request one for some purpose, but certainly we've not had any sign that that's going to happen.

Thanks.

And with regards, Gregg, to your question on the cash position, I would simply reiterate my comments earlier, that we believe that the opportunity to pursue both product licensing and Company acquisitions is the key driver for our future growth. And at any given point in time, we are evaluating multiple opportunities, in fact, may be in various stages of discussions for both products as well as Company opportunities.

And so we believe that the maximum flexibility at this point in time is, clearly, to allow us to have the ability to close any of these transactions in a fairly quick fashion and clearly, for us to be able to do so requires us to retain that flexibility. As you probably well know, you never know when one of these will turn towards the finish line in rapid succession. So we want to maintain that flexibility.

I guess asked a different way, is there at least a point in time at which you believe you need to do something with the cash if it is not acquisitions and product licenses? I know you probably don't want to consider the possibility that you don't get any deals done in the back half of the year, but what's a fair assumption on our part in terms of timeline?

We don't have a timeline for doing any particular assessment on alternate opportunities for us to pursue. As I said, we are continuing to evaluate the market place as it relates to these various opportunities and we look at all potential way in which we can utilize our balance sheet and so that will continue to be our focus going forward.

Okay. Thank you.

I'd like to add to that as well. We continuously monitor our capital structure and evaluate it with our Board and at such time that the Board and management concur that there's excess cash, we would look at other things to do with it. But right now that does not -- is not really our druthers. It's maintaining maximum flexibility and put that cash to use in additional growth assets.

Thank you.

Jim Kelley, Goldman Sachs & Co.

Thanks. Could you give us a little more color on what might be happening on the price component side for OPANA and this quarter? Are there differentials in the rebates between ER versus IR and how those products are being positioned on -- I know you mentioned that we'll see increasing rebate effect going into the back half of the year. Do you foresee any important offsets on that and how you're thinking about pricing strategy?

There's no differential in our assumptions on ER versus IR that I can really talk to, because we view this as a franchise. We have indicated that we expected rebates to continuously increase as more and more managed care and Medicare contracts are put in place.

As I mentioned earlier, we have been successful in the last several weeks and months of beginning that process, so we would expect that our ASP for the year will continue to decline, as those contracts begin to be pulled through. To the extent of that pull through clearly we'll evaluate how we determine the accrual rate, which will obviously affect the net ASP for the full year. But clearly, our utilization on the ER, which is now running about 75% of the total utilization in prescriptions, continues to be the driver there.

A very quick follow-up. Could we get some guidance on what your thought are for the earnings contribution or earnings impact of employee stock options? Its like it was about $0.03 in the half to date.

I think you'll see it continue to run at about the same level for this. You remember, because you're basically amortizing that over the life of the vesting period.

Great. Thank you.

Adam Greene, JP Morgan.

Thanks, good morning.

Good morning.

Two questions, first on FROVA for menstrual migraine prophylaxis. How should we think about pricing relative to the existing FROVA price now, since I believe the number of tablets per script is going to be different than the number of tabs now and if you could, also remind us on how the dosing is going to differ there? And second, on the increased sales reps, is that going to be done gradually over the next three months, six months, or what type of timeframe should we expect that to take place?

Sure, Adam. The pricing, of course, is something that we are continuously evaluating as we get closer and closer to the expected launch date and we haven't discussed or disclosed that piece of our strategy post-launch. But suffice it to say that the indication, which we would expect the FDA to approve, and the label that we would expect to be approved, will be the driver for how we will ultimately price the product.

The number of tablets that are being used on a per-prescription basis, we do expect to increase. As you may know from previous disclosures, our dosing schedule for the menstrual migraine prophylaxis studies was both a seven day -- or I should say a seven-tablet regimen over six days and a 14-tablet regimen over six days. And we believe that, on average, the 14-tablet dose will be used much more heavily, based on its clinical profile. So we will certainly look to continuously evaluate the managed care impact, the quantity limit impact and the overall market acceptability based on the label that we would be provided to determine what our final pricing strategy will be.

In terms of the number of representatives that we have announced now, that we are expanding with, that actual hiring is being done as we speak. We expect that between now and the beginning of October that that field force expansion will be completed and reps will be hitting the streets in that timeframe, so between their training period and their going out into the territory. So we would expect that it is not a gradual increase, but it is, as we have said, already well underway and we are expecting that impact to be completed by mid-quarter financially and then the expected output of that would begin in the fourth quarter.

Great, thanks.

Scott Henry, Oppenheimer and Co.

Thank you and good morning.

Good morning.

Just two questions along the line of intellectual property, first on LIDODERM. Any updates on the citizen's petition or anything else along those lines? And second, with regards to OPANA and I'm not sure you'll have any information on this, but it would seem the two hurdles for a company to go down the generic route there would be they need DEA quota for oxymorphone, as well as they would need Mallinckrodt to give them the product. Does your competitive intelligence give you any information on either of those issues? Thanks.

Well, first of all, with respect to the LIDODERM citizen's petition, no there is no update. We've only received acknowledgement from the FDA that I think, to use the wording of their letter, that the petition rate is complex issues and they need more time to review these. Sort of, I think, a standard response and we've received that basically at the six months time point after we filed the petition. So, no, we don't really expect anything further until such time as an ANDA has been filed or potentially even close to approval and that will sort of force the FDA's hand.

Of course an ANDA has not yet been filed, at least not accepted for filing, because it would be a Paragraph 4 submission and we would have to be notified and as of now, we haven't been notified.

And on the OPANA front, with regards to the quota, yes. The DEA quota must be secured in advance of the production of any large-scale validation or commercial batches. We haven't seen any substantive change in the quoted allocation. Endo continues to have the vast majority of that quota. There's still some quota that is being allocated for academic uses.

Mallinckrodt is currently the only DMF that has been approved by the agency. We would expect further DMFs to be approved over time, based on the commercial success of the product. But as of this date, they re the only approved DMF and none of our competitive intelligence would be in a position to disclose at this point.

Thank you.

David Windley, Jefferies & Co. (Note: Operator says Dave Windley of Endo Pharmaceuticals)

Obviously not.

No, obviously not.

Unless you want to make me a good offer. The question that I had on LIDODERM, first, Peter, or maybe for Charlie, was you're raising guidance for LIDODERM. But I also hear you talking about perhaps having this wholesaler inventory work-through or work-down continue on into the third quarter and I wanted make sure I understood both of those points and then ask you to reconcile them for me, please.

Let me make a comment on it from a macro level and if Charlie has any granularity he can provide that. But I think our guidance is primarily been based upon the fact that, as Charlie indicated earlier, we had not seen the anticipated deeper discounting to the rate that we had expected to see, based on earlier contracts that we found ourselves negotiating the latter part of '06 and early '07.

Okay.

And so we do expect that those discounts over time will, in fact, reappear and surface as it relates to our pricing structure for LIDODERM, now close to a $700 million product, we're forecasting. You would expect that managed care will have a significant discussion with us around where it will be positioned in their co-pay tiers.

The wholesaler inventory work-down, I would say, two parts to this. One, I think, is that we are seeing normal fluctuations between demand and purchases that normally occur during any product that's in a growth phase, based on distribution patterns and based on buying patterns. For example, last quarter we indicated that if not for one day of a purchase by a major wholesaler we would have a wholly different view.

So those can certainly come into play and I think when we talk about work-down, what we're really seeing is, I think, as Charlie indicated, the levels of inventory that are being held by any one distribution center for any particular wholesaler is starting to normalize and to reach what is an equilibrium for that particular DC. And so the DC's are all different and so of the 140 or so DC's that exist in the country, we see huge fluctuations in DC to DC. But from customer to customer, that inventory is beginning to come inline with what they will classify as normal working inventory for their overall purposes.

Okay. Thank you for that an on FROVA, Peter, in prior discussions you've left, I think, somewhat up in the air what you're go-to-market kind of promotional strategy would be vis--vis co-promotion or say rent a sales force to go to physician and prescriber audiences that wouldn't be your normal audiences. Has that changed or what framework could you provide for me there, please?

Yes. We continue to have the scenario planning with an Endo go-it-alone, with the possibility of co-promotion partner. We have been in discussions with several companies exploring the opportunities and certainly CSO is another exploration that we've had to see whether or not it would make sense for us.

I think the one area that we know for sure that we will not be entering substantively on our own is in the OB/GYN market. That is a much more longer-term market to develop, because of the fact that triptan use in general is clearly not the treatment of choice for OB/GYNs for menstrual migraine. It's predominantly a hormonal therapy for which OB/GYNs are much more comfortable and we don't have anything to compliment in the OB/GYN market. So our explorations there to date have been very minimal and we wouldn't want to go there big time with a long-term investment that would be required to change that paradigm.

So on the side, in primary care, particularly we continue to explore our options and we have what we believe to be a number of very fruitful scenarios to pursue. Here again, I would hearken that the final FDA approved label will certainly help us to dictate what our strategy will look like based on the size and scope of the potential patient population and therefore the physician audience that we would need to cover.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Gary Nachman, Leerink Swann & Co.

Hi, this is [Rogan] (inaudible) in for Gary. I was just wondering if FROVA menstrual migraine indication is included in the sales guide?

No it is not.

And just to be clear, was the specialty sales force added primarily for the FROVA launch or just for everything, all the promotional activity?

It has been added based on our need to cover our entire portfolio in the pain specialty and other specialists' offices, oncology, rehabilitation medicine, a number of different specialists. It certainly will enable us to begin in the neurology franchise to further solidify our relationship with neurologists who we already call on quite ubiquitously. But FROVA menstrual migraine is not the driver, but it is certainly a beneficiary and we expect that with the anticipated physician launch in January that we will be well positioned by that time in order for us to be able to launch the indication with new packaging and new campaigning that will allow us to take advantage of this new indication.

Okay and then the last thing is you basically just (inaudible) you'll be just targeting with FROVA menstrual migraine the pain specialists and primary care and you'll be leaving OB/GYN for another group?

We are exploring options within the OB/GYN market currently. Our efforts will primarily be focused on neurology and primary care.

Okay. Thanks.

Tim Chiang, FTN Midwest Securities.

Hi, thanks. Peter, could you provide an update on the status of your own pharmacokinetic patent application, as it refers to OPANA?

Tim, we haven't disclosed any particulars around that patent application or others that we've submitted to the PTO. We are, in fact, in the midst of prosecuting those. They are in various stages and we have not provided any further guidance on them.

Okay, great. Thank you.

Larry Neibor, Robert W. Baird & Co.

Thanks, good morning.

Good morning.

If FROVA is approved and launched in January, would you expect it to be additive to EPS in '08 or slightly dilutive?

I would expect it to be slightly sort of breakeven to slightly dilutive because we have the expenses for the direct-to-patient programs and so forth and you'd have the full impact of the field force expansion that we're doing this year in there as well.

Thanks and then secondly, I know you're not commenting on your own patents on OPANA ER, but do you feel that the patent that was allowed to Penwest would provide adequate protection until something better occurs with your own efforts?

We really can't comment on the relative strengths of any of the patents relative to their potential protection. But suffice it to say that we believe that the multitude of patent applications in addition to the one that we expect to be formally issued in the coming weeks will provide a significant opportunity for us to provide exclusivity in the market. And we'll continue to evaluate lifecycle management strategies to ensure that we are optimizing this molecule over the coming years.

David Lickrish, First Albany Capital.

Good morning, guys, thanks for taking the call. I was wondering if you'd be able to provide a little bit more detail with regard to the sufentanil program? I guess my recollection is that's a bridging study comparing the product to oral opioids of pretty shortened duration. Any estimate in terms of the number of patients required and how fast the enrollment will be?

You know, we prefer not to go into too much detail about the development program, at this stage. We would go into more detail once we completed an end of Phase II conference with the FDA and have begun a Phase III program. We currently have a Phase I program still underway, which is characterizing -- providing the basic characterization of the product, which is going to be essential before we go into a Phase III program.

And as you say, we have a Phase II study that's now enrolling patients, which is going to be helping us to determine the titration, the rate at which we can titrate patients, as we go into our Phase III program. So, increasing the dose as necessary or how frequently we can increase the dose to maintain adequate pain control and obviously we're going to be looking at further characterization of conversion from preexisting opioids to the patch. But beyond that, in terms of when the study will complete or how many patients, I think, is not something I'd like to comment on at the moment.

Fair enough. With regard to the ketoprofen patch and the results you announced earlier, is there something peculiar with a patch versus an oral formulation we should be aware of? Or was it strictly something different with respect to the -- I'm now trying to contrast the very positive results we saw out of Europe -- something different in terms of the way the study was enrolled or a different protocol or the like?

The product, first of all, is exactly the same as the product that was used in Europe. We still remain confident that the levels in plain tissue of the active ingredient are significantly higher than the standard dose of oral ketoprofen. That's what we're aiming for here, so any adequate antiinflammatory concentrations of the drug, of the active ingredient without significant systemic blood levels.

In terms of, as I said earlier, what we've discovered from these studies, we do believe now that pain on entry into the study had an impact on the outcome. So obviously patients who have more severe pain on entry in the study, and therefore we have a greater opportunity to show an effect versus placebo. We think those are the sort of patients that we need to focus on.

We also, because of an agreement with the FDA and really under very strong encouragement from the FDA, had to include a nonsteroidal antiinflammatory (NSAID) drug on all nonsteroid, in this case ibuprofen, as rescue medications, that that actually blunted the sensitivity of the study. The FDA were very keen that we included an NSAID as rescue medication to evaluate really the safety of using a topical patch together with an oral NSAID. We obviously now have a lot of safety data and we'll certainly have to take that into consideration, as we concentrate designs of any future studies.

Thank you. That's very helpful. Can I sneak in one more?

Well, we'd really like to move on, David. We've got a number of additional questions, we understand.

All right, I'll jump in the queue.

Thank you.

Gur Roshwalb, Piper Jaffray & Co.

Thank you for taking the question. I want to know what percentage of OPANA demand is not captured by IMS and a little commentary, if you could, if FROVA is approved for menstrual migraine in August why the delay till January for the launch?

Sure. The strong opiod market in general has approximately 85 to 90% of the prescription volume, we estimate, that is captured in the IMS audits. It depends on the product and what the coverage is within the VA system, within the mail order systems, and other non-retail sectors. So it depends on the product category. We haven't disclosed that explicitly for OPANA. But I think, in general, the IMS data versus what we use, Walters Kluwer, is also a bit of a different methodology in terms of how they capture. So I guess the answer is, it depends.

On FROVA, the issue on the launch date is that we are anticipating, obviously assuming approval, discussions with the FDA around the label and how the packaging for that new pack that we expect to put forth will be approved. Once that is done, it will need to go into printing. It will need to go into production and it will need to go into the packaging queue. It is manufactured in Europe and needs to be imported and so going through customs takes a fair amount of time. Drugs coming in and finished goods coming from Europe don't clear in a day. It takes several weeks.

And so the timing for us to actually get product through all of that queue and into our distribution system, ready for commercial sale, is approximately 75 to 90 days and so our estimate is that launching around the holidays, Thanksgiving and Christmas, Hanukah season, is probably not the optimal time to do so.

And we take that opportunity to further solidify our position within both the distribution channels, to make sure that the new pack is going to be available in multiple pharmacy outlets, as well as in the managed care world, to ensure that we've got the most and the widest opportunity for access to patients with this novel indication. And so we've opted, based upon those factors, plus the fact that the composition and matter patent for frovatriptan goes out to 2015, to make sure that we've got all of our ducks in a row.

Thank you.

Jim Dawson, Buckingham Research Group

Yes, hi, it's Jim Dawson filling in for David Buck. Can you confirm that you're in label discussions with the FDA for FROVA NDA for menstrual migraine and then if you could just elaborate more on your managed care access efforts? Thanks.

Yes, David, with respect to any discussions with the FDA, we really can't comment on that at the moment. All I can say is that the PDUFA date will be August the 19th or maybe August the 20th, because the 19th is a Sunday, but beyond that there's nothing further I can say.

And Jim, with relation to the -- regarding, rather, the managed care access, we know currently that triptans in general are covered under either a tier two or tier three co-pay situation. Most triptans, because of their expense, are in tier three. There are very selective tier two opportunities. We do expect that with the new indication that we will be able to carve a separate positioning for FROVA menstrual migraine that would allow managed care to look at this indication in a different light.

And we will seek to justify that through both pharmacoeconomic as well as through clinical efficacy means and to ensure that we have appropriate access with a product to enable patients who have been diagnosed with menstrual migraine to be appropriately treated without having either prior authorizations or any kind of pre-clearances to have to go through.

That process is a plan-by-plan, brick-by-brick process, but our expanded managed care team that was put in place early this year, has been very adept at getting through to the managed market's decision makers for OPANA. We expect that that will continue in the FROVA prelaunch phase through fall.

John Boris, Bear Stearns.

Thanks for taking the question and congratulations on the quarter.

Thanks, John.

Peter, as you went through the strategic review with your outside consultants and with the Board, can you just discussion how important it is to lessen your dependence on the overall earnings contribution from LIDODERM and how that might play a role in your end-licensing or acquisition strategy going forward? And then is it possible just to get an update on Rapinyl and where you stand with the Rapinyl development plan?

Yes, on the LIDODERM dependency, I think that clearly any company that has 65 to 70% of its revenue stream coming from one product clearly should be seeking to diversify and I think that's clearly been our strategy all along. We certainly believe that the introduction of the OPANA franchise into the market place is a contributor towards reducing that dependency and we believe that approval of the menstrual migraine prophylaxis indication will be another step forward.

But we clearly build that our opportunity in the near-term is going to come from opportunities that will be from business development and so we're looking to diversify in our business development activities, both in pain and in potentially non-pain areas. But most of the pain opportunities would not contribute significantly in the near-term, so we believe that being prudent and then certainly looking to ensure that we don't have untoward risks associated with our revenue streams that we would be best served by utilizing our balance sheet to optimize the opportunities in the portfolio by adding assets and potentially companies that could help to spur our growth, but also lessen dependence on LIDODERM alone.

But can you just give any color on it as far as magnitude of how much you would like to lessen that dependence, based on M&A activity, Peter?

I don't think that I could comment on that, John.

Okay.

And David can answer the Rapinyl question.

Yes, with respect to Rapinyl, as I said in my prepared statement, we're still enrolling in our Phase III studies and there's no further change or update at the present time.

Thanks.

Robert Uhl, Friedman, Billings, Ramsey & Co.

Thank you. Just wanted one quick on ketoprofen. You said there are some other ongoing studies. Would any of those be capable of being a registration trial to support approval and do they have the same design flaws that the other two that did not produce statistically significant results have in them?

Yes. We have one ongoing study in patients with tendonitis or bursitis of the knee, elbow or ankle and yes, that was basically the same design as the study that has been completed. Further than that, we do have a study in patients with osteoarthritis flair or knee osteoarthritis. That study did include a double-blind efficacy component as well as long-term safety component. We have two studies ongoing, I think the tendonitis/bursitis study would be the one that we would consider as a possibility for registration study, given the indication that we're proposing.

As I said, based upon the results and the continued analyses that we're doing , we are looking into the possibility of doing additional

Thank you.

And I would now like to turn the call back to over to Peter Lankau for closing remarks.

Well, thank you, Operator. I understand that we do have some time constraints today. So I would like to thank everyone who dialed in today and we certainly appreciate your interest in Endo and we certainly look forward to keeping you informed on our continuing progress. So, thanks again, everybody.

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

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