Endo International PLC (ENDP) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Endo Pharmaceuticals earnings conference call. My name is Cindy and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

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

I would like to begin by reminding you that during the course of this call, Peter, Charlie, or David may make forward-looking statements concerning such topics as future results, product performance, anticipated timing of FDA approval of certain of the company's drugs or generics thereof, and possible timing of the commercial launch of certain of the company's products, as well as other nonhistorical 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 2007 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 their most directly comparable GAAP financial measures.

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

Thank you, Bill, and good morning, everyone, and thank you for joining us today.

Earlier today, we announced our financial results for the third quarter and nine months ending September 30th of 2007. I'm pleased to report that we had another excellent quarter, driven by continued strong growth across our branded portfolio.

Net sales for the third quarter of 2007 grew 24% to a record $269.5 million, compared with $217.1 million in the third quarter of 2006. Net income was $59.1 million, compared with $44.9 million in the year-ago third quarter. As detailed in the supplemental financial information in today's press release, adjusted net income for the three months ended September 30, 2007, were $61.6 million, compared with $47.2 million in the same period in 2006.

Diluted earnings per share for the three months ended September 30, 2007, were $0.44, compared with $0.33 in the comparable 2006 period. Adjusted diluted earnings per share for the three months ended September 30, 2007, were $0.46, compared with $0.35 in the same period in 2006, an increase of 31%.

These outstanding results were driven primarily by the continued growth of Lidoderm, which maintained its strong performance in the quarter. Prescriptions grew by 13% in the quarter and 15% year to date 2007. Combined net sales of Opana ER and Opana were $24 million for the quarter. Reflecting the increased level of promotional effort behind the Opana franchise, estimated prescription demand grew to $20.4 million from $16.5 million in the prior quarter. We continue to be encouraged by the market acceptance and prescription growth we are seeing and expect that the Opana franchise will benefit from the addition to our Specialty Force 2 of 95 sales representatives, who began their detailing efforts on October 1.

We also continue to see our over-all increased promotional efforts generating healthy growth in net sales and prescription demand for Frova, which had net sales of $13.5 million in the third quarter of 2007. Frova prescriptions continue to grow at a healthy pace as well, up 15% for the quarter and 11% year to date in 2007 versus the comparable prior-year periods.

Now, before I turn over the call to David Lee for an update in recent developments regarding our R&D pipeline and to Charlie Rowland for a detailed review of our financial results, I would like to discuss several recent developments.

As announced on September 30, the FDA issued a Not Approvable letter for the supplemental new drug application for Frova for the additional indication of short-term prevention for menstrual migraine. Though acknowledging that the two pivotal efficacy trials that had been submitted as part of this SNDA had met their primary end points in significantly improving the number of headache-free perimenstrual periods, the FDA questions whether the benefit demonstrated was clinically meaningful.

Though no serious adverse vascular events were observed in the clinical development program, the agency also expressed concern about the potential for increased risk of these adverse events with the new dosing regimen.

Now, we and our partner, Vernalis, with the assistance of external consultants, are continuing to evaluate the letter to fully assess each of the points the FDA raised to determine how we might address them. We also expect to request a meeting with the FDA to review their concerns with them.

In the wake of the FDA's decision on Frova, we have ceased all pre-launch activities for the menstrual migraine prophylaxis indication, the costs of which were included in our previous earnings guidance for fiscal year 2007. Due to lower-than-expected SG&A costs, therefore, we are revising our adjusted diluted EPS guidance from $1.75 to $1.80 to $1.79 to $1.84.

On October 2, our partner on Opana ER, Penwest Pharmaceuticals, announced that its 250 patent covering the formulation of Opana ER had been issued by the Patent and Trademark Office. And on the same day, Endo filed a 250 patent with the FDA for listing in its Orange Book.

On October 3, we and Penwest were notified by Impax Laboratories that they had filed an abbreviated new drug application, including Paragraph 4 certification, against Opana ER, referencing [Timerex] formulation patent that was issued the previous day.

On October 4, Impax issued a press release that acknowledged that it had been notified by the FDA that the agency had rescinded its application for its acceptance to file. We continue to evaluate Impax's Paragraph 4 certification and will provide an update on this situation once we determine the appropriate course of action.

Now additionally, last week we listed in the Orange Book two other Penwest patents licensed to Endo and expiring in 2013. These patents bring the total number of Orange Book-listed patents for Opana ER to four. We believe that these patents will need to be certified against by any future Endo filing.

Finally, we have a very active and ongoing lifecycle management strategy for the Opana franchise, which includes not only intellectual property efforts but also product development and regulatory initiatives.

Next, I'd like to update you on some of the activities in support of the Opana franchise, as follows --

Our expanded managed market strategy has resulted in continuing growth in formulary access this year that has resulted in multiple national and regional healthcare plans with Tier 2 status for Opana ER and Opana. To date, approximately 69% of covered lives have either Tier 2 or Tier 3 unrestricted access.

During the third quarter, we expanded our specialty Salesforce 2 with the addition of 95 sales representatives, who began their detailing efforts on October 1. This latest expansion creates two identically sized specialty salesforces at approximately 160 reps each, and we expect this will produce an additional 40,000 sales calls in the fourth quarter of 2007. Having two specialty salesforces that mirror each other allows us to double-cover the highest-prescribing specialty physicians in our call plan. In total, our salesforce now numbers approximately 690, and Opana ER and Opana are the primary detail emphasis in approximately 80% of our physician calls.

Now, these efforts have produced some notable results. Prescription trends continue to show steady growth at about 6500 scrips per week, and growing -- a rate that has us on track to achieve our financial guidance for the Opana franchise for the year. While approximately 54% of Opana ER prescriptions are being written by pain management specialists, the percentage of experienced primary care physicians who are prescribing Opana, our biggest growth opportunity for the product, continues to increase and is now at 35%.

Our market research also indicates that 66% of physicians who have been detailed on Opana ER anticipate increasing their prescribing. This is statistically significantly higher than those MDs detailed on other long-acting opioid products and is a strong predictor of continued prescription growth for Opana ER.

Now, before I turn the call over to David for the pipeline review, I'd like to mention one other very noteworthy development during the third quarter. On September 6, we announced the appointment of Nancy Wysenski as Chief Operating Officer. Nancy comes to Endo with an impressive track record and an extensive background across a wide spectrum of the pharmaceutical business, including startups, specialty, and big pharma. Most recently, she was president of EMD Pharmaceuticals, the US subsidiary of Merck KGAA.

Nancy is playing a key role in developing and implementing our growth strategy while continuing to drive the growth of our existing business. We look forward to benefiting from her considerable organizational skills and operational expertise as we move toward our goal of becoming the leading pain company.

Now, toward that end, following the completion of a comprehensive strategic review by management and the Board of Directors, we have embarked upon a growth strategy that will seek to maximize shareholder value by acquiring growth assets that will diversify our revenue base in the near term and strengthen our pipeline for the long term.

We continue to evaluate acquisitions of companies that are closely aligned with a specialty physician focus in high-growth therapeutic areas such as C&S disorders, rheumatology, specialty psychology, gastroenterology, and supportive care as well as therapeutic oncology.

And of course, we intend to deepen our penetration in the pain market by pursuing earlier-stage opportunities that are clinically differentiated and offer long-term patent protection. This effort will primarily include product licensing but also company acquisitions as well.

In addition, we will continue to pursue selected development of high-barrier-to-entry generic products.

Finally, we will continue to focus our organization on driving the growth of our existing business by maximizing the potential of our key on-market products and our pipeline.

So now, I'd like to turn to David Lee to have him bring us up to date on recent developments with our R&D pipeline. David?

Thanks, Peter. As Peter mentioned a few moments ago, the FDA issued a Not Approvable letter on Frova for the indication of the short-term prevention of menstrual migraine. We were surprised by the FDA's response, given what we believed was a robust and comprehensive clinical data set that included two positive Phase 3 safety and efficacy trials and one long-term safety study. In total, the clinical development program has involved approximately 1500 patients.

As Peter mentioned, the FDA raised a number of complex issues in the letter; and together with our partner Vernalis and our outside consultants, we are continuing to analyze the agency's response to fully assess how we might address each point. We're going through the process of requesting a meeting with the FDA to review in detail the agency's concerns and then determine what kind of information is needed before we decide on the most appropriate course of action.

Enrollment in our Phase 3 clinical trials for Rapinyl, our sublingual fentanyl tablet for breakthrough cancer pain, has continued to be challenging. We probably did underestimate the difficulty of recruiting cancer patients, many of whom are end stage, in a placebo-controlled clinical trial and in a therapeutic area with many ongoing clinical trials that have resulted in intense competition for suitable patients.

As a result, we have decided to conduct an interim statistical analysis of this trial. We intend to conduct this analysis as soon as possible, once a predetermined number of patients with evaluable data have completed the trial. That number will be based upon an appropriate power calculation. The purpose of this interim analysis is to determine whether or not the trail should be allowed to continue to its intended completion. Once we have completed that interim analysis, we will provide further updates.

Though we are disappointed that patient enrollment has not progressed as we had anticipated it would, we continue to believe that Rapinyl's quick dissolution and rapid absorption profile make it a potentially attractive treatment for breakthrough cancer pain.

In July, we reported that two Phase 3 trials for our topical ketoprofen patch in patients with ankle sprains and strains and in patients with tendonitis or bursitis of the shoulder, elbow, or knee did not meet their primary endpoints. Since that time, we have been evaluating and analyzing these results, which we believe may have been due to such factors as insufficient severity of pain on entry into the studies and the use of oral ibuprofen, an anti-inflammatory drug similar to ketoprofen, as rescue medication.

Based on these findings, we have amended our third Phase 3 study, which is ongoing, and evaluating the ketoprofen patch in the treatment of pain associated with tendonitis or bursitis of the shoulder, elbow, or knee.

We are pleased today to announce the positive outcome of a prospective four-week double-blind placebo-controlled efficacy trial in 309 patients that represented the first part of a three-month open-label safety study in patients with osteoarthritis flare of the knee. The final two months of the study were in open-label extension.

But the double-blind placebo-controlled portion of the study showed a statistically significant difference from placebo at day 14 on the primary outcome measure with a p value equal to 0.014.

Significant treatment differences were also observed between the treated group and placebo patients at all measurement points in this parameter during the entire double-blind phase. Secondary outcomes also demonstrated statistically significant differences from placebo.

The topical ketoprofen patch was generally safe and well tolerated for up to three months when applied to the knee area in patients with osteoarthritis. The most frequently reported adverse event during both phases of the study -- that is, the double-blind phase and in the open-label extension phase -- was application site reactions, which were generally described as mild.

The positive outcome observed in the efficacy portion of the osteoarthritis long-term safety study provides further information that could contribute to the design of additional clinical trials. And we will be meeting with the FDA to discuss our revised clinical development plans for this product.

We continue to believe that the topical ketoprofen patch is an effective product that could potentially offer significant clinical benefits and we remain hopeful about its future prospects.

We also announced today that we will very soon initiate a Phase 3 clinical development program for EN3285, the topical oral rinse product for the prevention or delay of oral mucositis. We have agreed to a trial design with the FDA under their special protocol assessment process. And we intend to initiate a multi-center double-blind placebo-controlled trial in appropriate 240 patients with oral mucositis undergoing chemoradiation therapy for head and neck cancer. The patients will be treated for the eight-week radio therapy treatment period and will then be followed for an additional 12 months. The primary endpoint will be total radiation-dosed onset of severe oral mucositis.

We believe that the FDA will require two Phase 3 double-blind placebo-controlled trials as the basis for an NDA for this indication and we expect to begin the second Phase 3 study in the coming months. We are currently projecting a 2010 NDA filing date for this product and we'll continue to provide future updates as appropriate.

Now I'll turn the call over to Charlie for an in-depth discussion of our financial results.

Thanks, David, and good morning, everyone. As Peter mentioned earlier, Endo's net sales for the third quarter of 2007 were a record $269.5 million, compared with $217.1 million in the third quarter of 2006. For the nine months ended 9-30-2007, net sales totaled a record $781 million versus $650.2 million in 2006, which represents 20% growth.

This quarterly and year-to-date performance was achieved while estimated trade inventories have decreased from a 1.3-month supply to a 0.6-month supply.

Once again, the growth in our net sales was led by Lidoderm, our topical analgesic patch indicated for the pain associated with PHN at $174.3 million compared with $127.4 million for the 2006 third quarter. Year-to-date net sales of Lidoderm were $496.9 million versus $393.3 million for the prior-year period. We estimate that prescription growth was up 13% and dispensed unit growth was up 14% in the third quarter versus the comparable 2006 period.

Prescription growth for Lidoderm was up 15% and dispensed unit growth was up 17% for the nine months ended September 30, 2007, over the comparable 2006 period. We estimate that prescription demand for Lidoderm in the third quarter of 2007 was approximately $188.5 million. The inventory draw-downs that we have seen for Lidoderm this year reflect increased efficiency in the distribution channel and should begin to stabilize in the fourth quarter. And looking ahead, we should see closer correlation between factory sales and demand sales in 2008.

Combined net sales for the Opana franchise were $24 million for the third quarter and were $78.3 million for the first nine months of 2007. The year-to-date results include the recognition of $13.8 million in 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 third quarter was approximately $20.4 million.

Net sales of Frova were $13.5 million for the three months ended September 30, 2007, and $38.4 million year to date versus $9.1 million and $29.1 million for the respective 2006 periods. Prescription growth was 15% for the quarter and 11% for the year to date in 2007 versus the comparable periods in 2006. We estimate that the third quarter 2007 prescription demand for Frova was $12.8 million. The growth we are seeing for Frova reflects the impact of increased detailing and promotional activities for this product following the expansion of our salesforce in mid-2006.

Net sales of Percocet were $31.6 million for the three months ended September 30, 2007, versus $25.3 million in the same period in 2006. For the first nine months of 2007, net sales of Percocet were $91.2 million compared with $74.9 million in year-ago nine months. We estimate that prescription demand for Percocet in the third quarter of 2007 was approximately $28.2 million.

Net sales from our generic products were $23.3 million for the third quarter and $68.4 million year to date versus $52.6 million and $142.1 million in the comparable periods of 2006, which included net sales from oxycodon extended-release tablets.

Gross profit for the third quarter of 2007 was $219.7 million, compared with $172.7 million in the same period a year ago. For the nine months, gross profit was $629.4 million in 2007 versus $506.6 million in 2006.

Gross profit margins were 81.5% for the quarter and 80.5% for the nine months, respectively, versus 79.5% in the year-ago third quarter and 77.9% for the nine months ended September 30, 2006. Margin improvement in 2007 is primarily driven by higher average selling prices than we had anticipated as our Medicaid utilization continues to decline and the ramp-up of rebates has been slower than expected. Also contributing to improved margins is favorable product mix of higher margin branded products and lower cost of goods sold versus the prior year.

Selling, general, and administrative expenses were for the third quarter of 2007 were $107.4 million versus $87.9 million for 2006. For the nine months, SG&A expenses were $287.2 million compared with $252.3 million in 2006. The year-over-year comparisons reflect increased promotional support behind our key on-market products, including the full-year impact of the expansion of our salesforce that occurred in the second half of 2006 combined with continuing investments in infrastructure to support our long-term growth and the addition of approximately 100 representatives during the second half of 2007. For the fourth quarter, we expect SG&A spending to increase based on incremental clinical and promotional expenses, including those associated with the expansion of our field force.

Research and development expenses for the third quarter of 2007 were $26.9 million versus $14.5 million in the year-ago quarter. For year to date, R&D expenses were $79.6 million versus $59.4 million in 2006. This increase is primarily attributable to the ongoing clinical development of Rapinyl, our topical ketoprofen patch, our transdermal sufentanil patch, and EN3285. We will continue to make substantial investments in R&D to support the ongoing advancement of our development pipeline. We anticipate that our R&D spending will continue to rise over the next several quarters as we initiate a number of Phase 3 trials for the topical ketoprofen patch and EN3285.

Net income for the third quarter of 2007 was $59.1 million versus $44.9 million in the comparable 2006 period. Diluted earnings per share for the third quarter of 2007 were $0.44 compared with $0.33 in the third quarter of 2006. As detailed in the supplemental financial information in today's press release, adjusted diluted earnings per share for the three months ended September 30, 2007, were $0.46 versus $0.35 for the comparable period in 2006, an increase of 31%. Year-to-date net income was $176.8 million compared to $123.1 million in 2006.

Diluted earnings per share for the nine months ended September 30, 2007, was at $1.31 compared with $0.92 in the same period of 2006. As detailed in the supplemental financial information in today's press release, adjusted EPS for the nine months was $1.40 per diluted share in 2007 compared with $1.22 per diluted share in 2006, an increase of 15%.

We generated cash flows from operating activities of $287.4 million in the nine months ended September 30, 2007, versus $275.5 million in the same period of 2006. Our cash and cash equivalents and current marketable securities totaled $882.9 million as of September 30, 2007.

And it is our intention to leverage our financial strength through the licensing and acquisition of assets that will build shareholder value by diversifying our revenue base and building out our pipeline.

Now, this concludes our financial update. And now, Peter, David, and I will open up the call for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. Please limit your initial question to one only and please re-queue for any additional follow-up questions. Your first question will come from the line of Dave Windley of Jefferies and Company. Please proceed.

Hi; thanks. Thinking which one I want to ask. Peter, on Opana, you've previously said that you were targeting exiting this year at a 10,000 scrip rate -- run rate, I suppose. Is that still a target? I think in today's call you just said you felt comfortable with guidance.

Yeah, Dave, we are certainly very comfortable with the guidance. As you can see, the sales through the third quarter are certainly on track to achieve that guidance number.

On the prescription side, we certainly expect that some of the tier-2 access wins that I described earlier are going to result in the beginning of an acceleration of prescriptions, frankly, through the first half of 2008. So we certainly believe that the financial guidance is well within our sights.

The prescription trends, we've been fortunate enough to have a favorable mix of prescription trends that allows us to achieve that number based on more higher strengths being dispensed than what we had originally forecasted.

And of course, we're benefiting from the average selling price during the first three quarters of the year being higher than originally anticipated. But we would expect that that would start to decline over the next several quarters as some of these managed care contracts come into play.

Okay; thank you.

You're welcome.

Thank you. And your next question will come from the line of Greg Frazier of Merrill Lynch. Please proceed.

(Inaudible) Gregg Gilbert. On Rapinyl, can you tell us how many patients have been enrolled in the Phase 3 studies so far and how many have completed treatment? And have you already determined the number of patients that you want for the interim analysis? Thanks.

Yes, we have determined the number that we'll need for the interim analysis. But no, we're not going to provide, at this stage, an update on the number of patients that have been enrolled. All I'll say is that the trial was of a size that is standard for this indication. And as I made clear in the prepared remarks, we are disappointed in the enrollment rate but nevertheless, we will go forward with the interim analysis at the appropriate time.

Thank you. Your next question will come from the line of Ian Sanderson of Cowen and Company. Please proceed.

(Inaudible) On the Lidoderm inventory changes -- so the difference between your estimated demand number and the reported sales in the quarter implies an inventory reduction of roughly six to seven days in the quarter. Is that consistent with your thinking? And if so, you mentioned that the wholesalers are becoming more efficient. But as I recall, we're down to two to three weeks on Lidoderm coming out of Q2. So why the continued reduction in inventory here?

Hi; this is Charlie. The inventory at the end of the third quarter was at three weeks or so; it came down from there. However, you've got to remember, there's also some seasonality with the inventory. And we do expect the inventory levels to come back a little bit in the fourth quarter as you head into the winter season and the wholesalers carry a slightly higher amount of inventory in case there are snowstorms or what have you to avoid temporary stock-outs across the country. So we think this is sort of a temporary blip-down in the third quarter and that in the fourth quarter we'll probably benefit somewhat from it going the other way.

All right; thank you.

And your next question will come from the line of James Kelly of Goldman Sachs. Please proceed.

Thank you. The question has to do with Percocet. And I think we've seen three quarters where we've had some Percocet trends-- or, revenues ahead of trends. I'm just wondering if we should be thinking about a potential reversal of that, either in the fourth quarter or into 2008.

Well, James, we haven't provided any going-forward guidance on Percocet, but clearly we have been the beneficiary of two factors here. One is that we have continued to have the opportunity for taking price increases at appropriate points in time.

We've also seen that the oxycodone-acetaminophen market has continued to grow at rates that are quite substantial compared to the fact that 98% of the market is generic. So doctors are clearly continuing to prescribe Percocet, both in written and dispensed fashions, in increasing amounts and the decline in share that we've seen has been pretty much offset by price increases. So on a go-forward basis, we'd see that those trends would undoubtedly continue.

Thank you. Ladies and gentlemen, your next question will come from the line of Scott Henry of Oppenheimer. Please proceed.

Thank you. I guess just a question for Peter -- Frova has been gaining share throughout the year as we led into the PDUFA date for the expanded indication. Now that you have not, or will not have, that expanded indication, do you expect that these trends-- that you can continue to gain share with Frova or should we start to see it flatten out here?

And also, just for clarification, there was a comment that SG&A should be up in Q4 -- is that sequentially or year over year? Thank you.

On the Frova front, we certainly see that the share has continued to increase over the first three quarters of this year. And I think it would be fairly common to assume that physicians are prescribing Frova not just for acute indications but for whatever other indications they deem appropriate.

We think that the primary growth factor here has been the expansion of our salesforce coverage. As you recall, back in the spring we redeployed a salesforce into what was the beginning of our Specialty 2 salesforce. That expanded salesforce double-covered almost 100% of the neurologists in the headache and pain centers and so we believe that we increased frequency of coverage of those high-prescribing physicians has resulted in, obviously, increased awareness and utility of the drug.

And we would think that that would continue as we've increased it to mirror the size of Specialty 1 here in the fourth quarter and into 2008. So I think the primary beneficiary of Prova's growth has been the increased awareness and ultimate utilization based on frequency of call [time].

And in terms of your second question on SG&A, that was basically giving you sort of a heads-up on sequential over the third quarter.

Thank you. Your next question will come from the line of Robert Uhl of Friedman, Billings, and Ramsey. Please proceed.

Hi. Just to get back to that Lidoderm estimate of the market demand -- could you just explain how you calculate that? And is it possible that maybe something you're using there is causing you to overestimate? Because it has been higher for three quarters now in a row, I think, than the actual shipments.

Correct. So we use Walters [Clore] data. And the way that we're comfortable with it is that we actually get, from the top wholesales, actual inventory reports by DC. And we've been able to validate their inventory work-downs versus what we see as the discrepancy between dollarized prescription data versus our factory sales.

And I think I would add to that that clearly, with the advent of these distribution service agreements that we've entered into not only in 2006 but also in 2007, the net effect of inventory reductions has really been continuous. And as Charlie indicated earlier, at 0.6 months of inventory in the trade, we believe that that's about as low as most of these wholesalers can go. Two reasons there -- one is practicality on potential out-of-stocks. And of course secondly, we also have minimum levels of inventory that is necessary to be carried, and we're not far from that at this stage.

So we don't see an awful lot of differential between demand sales and factory sales on a going-forward basis due to inventory reduction but we certainly will see fluctuations based on just normal demand variances from month to month and, of course, inventory variations based on seasonality, as Charlie mentioned.

Thank you.

Thank you. Your next question will come from the line of Gary Nachman of Leerink Swann. Please proceed.

Hi. David, on the ketoprofen patch, how do you amend the third study and when will you have data on that? And do you need that data before you meet with the FDA as far as how you're going to proceed with the whole clinical program? Thanks.

We've amended that study, taking into account the analysis and evaluations that we conducted on the first two studies. The first two soft-tissue injury studies that we conducted where we saw, we thought, a better effect in patients with a higher pain score on entry into the study. And potentially also some impact of the concomitant use, which was required by the FDA, of Advil, ibuprofen, as rescue medication, which we believe blunted the sensitivity of the study.

So we have amended the ongoing study to somewhat take account of those-- of the observations, particularly on the entry of patients with higher pain scores. We haven't provided any projection as to when that study will complete.

As far as meeting with the FDA is concerned, that will, I think, depend upon our ongoing analysis of our, let's say, going-forward decisions on whether we want to add in an osteoarthritis indication, which of course is a long-term indication and has some other developmental plan implications.

And then, of course, it's a question of negotiating a time for a meeting with the FDA, which is never as soon as one would like. So how that will all work out in relation to the completion of the ongoing soft-tissue injury study I can't say at the moment.

Okay. But you increased the size of the third study in terms of patients?

Yes, we did; yeah.

Okay, thanks.

And your net question will come from the line of Annabel Samimy of UBS. Please proceed.

Hi; thanks for taking my question. On ketoprofen, again, we noticed that the study that you just announced, it was for-- it was-- there was one month of efficacy and two months of additional safety in that. And you did an analysis at Day 14. Is there a reason why you did analysis at Day 14 as opposed to one month -- the full one month of the efficacy?

Well, to be with-- this study had been primarily set up as a safety study, a three-month-duration safety study to support the soft-tissue injury indications, which were short-term treatment indications. And so again, three months safety data was required.

We decided that we would add in the one-month placebo-controlled efficacy portion to give us at least a feel for how the product may perform in patients with acute osteoarthritis of the knee. The FDA requires for registration for such an indication studies of three months duration. So this was not intended, and we haven't described it as, a Phase 3 efficacy study. I think it's best to look at it as a Phase 2-type study. And from that, of course, we wanted to make sure that we had the ability to actually show that we could distinguish the product from placebo so we set 14 days as the primary endpoint.

Now, I think I also pointed out in my prepared remarks that we continued to show efficacy through 28 days in the double-blind portion of the study and indeed -- you have to take this for what it's worth -- that for the two months of the open label portion, we also continued to see sustained efficacy.

So even though the primary endpoint was set at 14 days -- and again, look at this as a Phase 2 study -- we certainly, we believe, have strong indication that efficacy is sustained throughout the treatment period. And if we proceed with this indication, of course this will have to be confirmed in a three-month efficacy study.

Were there background meds on this one?

There always have to be, but in an indication that's a chronic indication which is relatively stable, that potentially has less impact than in the acute soft tissue indication, where patients-- of course, they're inherently getting better anyway.

Okay, thank you.

Thank you. Your next question will come from the line of Rich Silver of Lehman Brothers. Please proceed.

Yes. You cited a couple of reasons for the improvement in the gross margins, one of them being less Medicaid usage. Can you give us some sense of these factors going forward and whether you expect them to continue?

In terms of our margins going forward, I would expect-- I said this on the previous call, that they would come down from where we've reported this quarter but we would still remain above prior year. We haven't really given-- we don't give annual guidance on margins, but I would expect to see the trend that you saw in this quarter continue.

Thank you.

Thank you. Ladies and gentlemen, your next question will come from the line of David Buck of Buckingham Research Group. Please proceed.

Yes, hi; it's Jim Dawson for David Buck. Where is the discounting for Opana and Lidoderm versus expectations? Do you expect further price discounting to large customers in 4Q or in-- and then, 2008?

Well, when you look at both of those products, the one thing is for the shift from Medicaid to Medicare Part D, the increased discounts that people have negotiated go into effect January 1. So I would expect our ASPs to decrease next year from where they are currently this year and that is consistent with our thought and with what we'll provide for guidance for next year at a later date.

And your next question will come from the line of David Lickrish of Broadpoint Capital. Please proceed.

Good morning, guys; thanks very much for taking the call.

Sure.

Just a quick question for you. In your commentary, you talked about doing some near-term acquisitions that would diversify the revenue stream away from Lidoderm. Are you talking about acquiring a company or products that are already on the market or late Stage 3? How should we be thinking about that in terms of what type of products you're targeting?

And in line with that, if the results form the Rapinyl come back and are a little bit disappointing from what you anticipate, how does that change your approach given that that's one of the late-stage programs currently under development?

Sure, David. Certainly, all of the above of what you mentioned with regards to acquisitions are on our radar screen. We clearly believe that the opportunity for us to look at pain assets at any stage of development, including earlier-stage programs that might be several years away, are something that we certainly believe, as a leading pain company, that we should be on the leading edge of.

On the other hand, as we look at acquisitions for company assets that would help to build a platform into one or perhaps two other therapeutic areas that are aligned to the pain field, we believe that that could include products on market with a platform for development. It could include, certainly, later-stage development programs that are soon to be on market. But clearly, the value proposition for where we believe these assets to reside for us over the coming years are certainly the key drivers there.

And perhaps, David, you want to address the Rapinyl question.

Well, our pipeline has always been, and will continue to be, designed to have, let's say, multiple shots on roll. And of course, there's no certainty that any product is actually going to make it out -- or even if it does make it out, that we believe that it should be commercialized.

With respect, also, to Rapinyl and this interim analysis, obviously we'll have to see how it comes out. But it certainly-- it doesn't preclude, whatever the results are, us going forward with the product, be it through to registration or NDA submission if the results are positive. Or potentially additional trials if the results don't come out exactly as we would like.

Okay. Thanks, I was just trying to focus a little bit more on the comments of you're trying to diversity the revenue in the near term. I guess, are there specific targets that you've identified that you are currently having ongoing discussions about?

Certainly, David, there are multiple targets that we have had in various stages of evaluation and assessment. And we are constantly having conversations that-- some early stage, some later stage, of discussion. But clearly, we wouldn't be in a position to disclose any of that at this stage.

Okay.

Thank you. Your next question will come from the line of Ken Trbovich of RBC Capital Markets. Please proceed.

Thanks for taking the question. I was just curious about the tax rate in the quarter and any implications for the Vernalis loan as a result of the Frova decision.

Okay, tax rate. We are-- we have lowered the tax rate. That's primarily driven by the fact that we have-- our interest income is tax free and that's been driving the rate. So as we redeploy that cash, I would see our rate come back to more historic levels.

In terms of our loan with Vernalis, we do an analysis when any market events happen with any of our partners and we are very comfortable that the loan is either collectible or the underlying collateral that secures it is more than enough value to satisfy the loan. So I don't see any issue with our loan with Vernalis.

Okay, thank you.

And your next question will come from the line of Tim Chiang of FTN Midwest Securities. Please proceed.

Hi; thanks. I just had one question about Opana ER -- the IP. How comfortable are you with it at this point? Do you expect additional patents to be issued next year for it?

Sure, Tim. The IP that already exists on Opana ER and that has just recently been listed is formulation patents that are centered around claims that obviously cover the mechanism by which the product is formulated, and obviously the results that are produced from that.

We continue to have patents that are being prosecuted in the Patent and Trademark Office so we are very comfortable that not just the existing patents are providing levels of protection but also that we're continuing to explore the other options for patent issuance to bolster that patent state.

So we certainly are very confident as we go forward that we'll continue to develop the lifecycle management of this product through the avenues that I identified earlier, not just on the patent front but also in terms of product development and in terms of other regulatory initiatives that we'll attempt to keep our franchise continuing to grow.

Okay. Great; thanks.

And your next question will come from the line of Michael Tong of Wachovia Securities. Please proceed.

Hi. I'm just wondering if you can provide an update on the sufentanil patch and the status.

The sufentanil patch continues to proceed through both its Phase 1 and characterization and a Phase 2 clinical trial that we have mentioned earlier. There are no other updates that we can provide on that at the present time but, once again, we continue to be very excited about the prospects of this product and we're very much looking forward to it continuing to progress through the development chain.

And your next question will come from the line of Christie Wong of Summer Street Research. Please proceed.

Thanks. It's actually Lei Huang from Summer Street. My question's on Rapinyl. David, can you just provide a little more clarity in terms of how to think about the interim analysis -- i.e., if you do like what you see after that analysis, does that mean you would continue enrollment despite how long it's taking and maybe just file the NDA later? Or even if you like the data but enrollment is slow, you might have to take a different pathway?

And related to that, have you talked to the FDA regarding doing this interim analysis and how the FDA might feel about it?

Well, to just address the second question first, we-- the FDA, through the correspondence that we are required to submit, is aware of the interim analysis. And this has been set up in a very carefully predefined fashion that defines a number of rules that have to be met and followed, both for the timing and the execution of the analysis and any decision that can be, or is, taken subsequent to that analysis being conducted.

We-- as I think I said in my earlier remarks, if the results do justify it -- and again, based upon the predetermined criteria that we've laid down -- we could potentially stop the study, determining that it won't meet its primary endpoint. Or obviously, and what we would like, is that the study can be terminated because it had already met a predefined endpoint and definition of positivity. So those are the sort of broad possibilities of the outcome of this analysis. And in between, of course, we may come to the conclusion that there is no decision to be taken at this time other than to continue the study to its earlier predefined endpoint.

I don't want to go into the rules themselves, but you can be assured that these have all been very carefully defined in advance and the FDA has been informed.

If I just may ask quickly, the predefined endpoints for interim analysis -- are they very different from the primary endpoints you've prespecified for the entire Phase 3 program?

No, it's the same endpoint.

It's the same. Okay, thank you.

And your next question is a follow-up question coming from the line of Dave Windley. Please proceed.

Hi. I think my question's been asked and answered; thank you.

And your next question is also a follow-up, coming from the line of Ian Sanderson. Please proceed.

Yeah, just a question on the salesforce allocation. Did you say that 80% of the total salesforce has Opana as the primary detail? And if that is the case, do you perceive that Lidoderm growth may be suffering a little bit from the redistribution of the primary detail?

Yeah. What I said, Ian, was that 80% of the details that are given by sales representatives have Opana in the first position. The remaining 20% is predominately Lidoderm but we average better than one detail per call so we get Lidoderm detailing activity continuing to happen in a second position. And depending upon the specialty and the prescribing tendencies of physicians, Lidoderm often is in the primary detail position. So over the balance of the portfolio, the detailing schedule has been derived in order for us to be able to optimize all three products.

Okay. And if I could quickly ask, on the depreciation and amortization number, that jumped in the absence of any sort of transactions this year. Can you explain why that is?

You're referring to the quarter?

Yes.

The increase-- it is unfavorable versus prior year. It's just our normal amortization. Off the top of my head, I'm not sure of anything specific that's driving that.

Okay.

Modest.

Yeah, it's a modest increase.

Thanks.

And your next question is a follow-up, coming from the line of Rich Silver. Please proceed.

Yeah. You may have already mentioned this on the call, but just on Frova for MRM, have you in fact met with the FDA?

No, not yet. We are going through the process, at this time, of requesting a meeting and that will happen, we hope, as soon as possible but it's very hard to predict exactly when.

Okay, thanks.

And ladies and gentlemen, this will conclude our question-and-answer session. I will now turn the call back to Peter Lankau for any closing remarks.

Well, thank you, Cindy. And I certainly want to thank everyone for joining us on the call today. We certainly do appreciate your continued interest and support of Endo as we continue on through the balance of 2007 and we'll see you next quarter. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's presentation and you may now all disconnect your lines. Please have a wonderful day.