Endo International PLC (ENDP) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2007 Endo Pharmaceuticals earnings conference call. May name is Eric. I'll be your coordinator today. We'll try to keep this conference to one hour today. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Bill Newbould, Vice President of Corporate Communications. Please proceed, sir.

Thank you. Good morning and welcome, everyone. With us on the call are Nancy Wysenski, Chief Operating Office, Charlie Rowland, Chief Financial Office, and David Lee, Chief Scientific Officer. I would like to begin by reminding you that during the course of this call, Nancy, Dick, 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 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 as well as those risk factors in Endo's 2007 annual report on form 10-K which we expect to file shortly. In addition, during the course of this call, Nancy, 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 attorney's announcements, and to see the reconciliation of these non-GAAP financial measures through their most directly comparable GAAP financial measures.

Before we begin the quarterly review, I'd like to take a few moments and introduce to you Nancy Wysenski. Nancy joined Endo as Chief Operating Officer in September 2007 with about 30 years of experience in the healthcare industry. Prior to joining Endo, she was President of EMD Pharmaceuticals, U.S. subsidiary of Germany based Merck KGAA. In this role, Nancy had a responsibility for the operations of this division in the U.S. and also for Day Laboratories, which is a specialty respiratory pharma business. Her extensive background also includes senior executive roles at [Netgenex] start up company and Astra Merck. Now I would like to turn the call over to Nancy.

Thank you, Bill, and good morning to everyone. I'm pleased to have the opportunity to participate in today's call. Since joining Endo, I've been extremely impressed with the company's strategic focus, highly talented and motivated workforce, strong fundamentals as evidenced by our most recent financial results. I believe all the pieces are in place for Endo's continued growth and success. I'm really excited to be a part of it. Over the next few minutes, I'll briefly review some recent developments. Then I'll turn the call over to David Lee, our Chief Scientific Officer, who will provide an update on our pipeline, and then to Charlie Rowland, our CFO, who will take us through the fourth quarter before we open up the call for your questions.

As disclosed on January 28, Peter Lankau resigned as President and CEO and as a Director to pursue other interests. We're very grateful for Peter's devoted service since 2000 and for his substantial contribution to the growth of Endo during that period. We wish him all the best in the future. The board has retained the executive search firm Russell Reynolds and is currently interviewing prospective CEO candidates. Until a new CEO is appointed, Charlie and I have assumed day-to-day responsibility for running the company. Charlie's areas of responsibility include investor relations in addition to finance. I'm responsible for operations, and we're sharing oversight of R&D in the generics business with continuing counsel and support from David Lee.

I'd like to emphasize that the board and management continue to be fully aligned on the company's strategic plan and on all business development activities that are continuing without interruption. Our executive team is well versed in all aspects of the new business opportunities we're pursuing as is the board's transaction committee, and we continue to work with outside advisors as appropriate. In another development following the end of the fourth quarter, we announced on January 25 that we filed a lawsuit against IMPAX Laboratories in connection with IMPAX's abbreviated new drug application or ANDA for Opana ER. The lawsuit is in response to IMPAX's notice to Endo and our partner, Penwest, announced on December 17, 2007, advising that as of November 23, 2007, the FDA accepted for substantive review IMPAX's ANDA containing a paragraph for certification. This follows the previous suit that we filed on November 15, 2007, in respondent to IMPAX's initial notification of the same ANDA, the acceptance of which the FDA subsequently rescinded. As it stands now, we believe we are entitled to a 30-month stay beginning on December 14, 2007.

Two additional patents that expire in 2013 were listed in the FDA's orange book for Opana ER during the fourth quarter. IMPAX did certify against these patents as well during the fourth quarter. These additional patents bring the total number of orange book listed patents for Opana ER to four and we and Penwest have a number of patent applications currently under various stages of review at the U.S. Patent and Trademark Office. As we have previously stated, Endo intends to pursue all available legal and regulatory channels in defense of Opana ER, including enforcement of our intellectual property rights and approved labeling.

In addition, we remain enthusiastic about the commercial potential for the Opana franchise and we're committed to a life cycle management strategy for the Opana franchise that includes not only intellectual property efforts but also product development and regulatory initiatives. Late last week, we and Penwest announced that we had received a notification of a paragraph 4 certification against Opana ER from activist's South Atlantic LLC which certified against all four orange book listed patents. As in the case of the IMPAX filing, we intend to vigorously pursue all available legal and regulatory avenues in defense of Opana ER, including enforcement of our intellectual property rights. Now I'd like to turn the call over to our Chief Scientific Officer, David Lee, who will provide a brief update on the pipeline.

Thank you very much, Nancy. At the end of December, we further enhanced our pipeline when we signed an agreement with Alexza Pharmaceuticals for the exclusive clinical development and commercialization rights in North America for Alexza's Staccato fentanyl product which we have since renamed as EN 3294. EN 3294 is a handheld drug delivery system that uses Alexza's proprietary Staccato inhalation technology to deliver fentanyl for the treatment of breakthrough pain. Early clinical data suggests that EN 3294, which is patent protected until 2022, could potentially have a rapid onset of action comparable to intravenous administration of fentanyl, and we believe the product would also be tamper resistant. We have evaluated many technologies and product opportunities in the pain field and believe that the Alexza's Staccato technology is best in class for the inhalation approach to pain management. Also back in December, we reported positive results from the previously announced planned interim statistical analysis of the phase III placebo controlled double blind trial of our development product Rapinyl. The data from the analysis of 61 patients demonstrated that Rapinyl met its primary end point from a pain intensity difference from baseline to 30 minutes and the results were highly statistically significant with a P value of 0.0004.

In addition, all of the secondary end points were met. Statistically, significant separation from placebo from mean intensity pain difference was seen as early as 10 minutes. Enrollment is continuing in the safety portion of this trial and also in the second phase III trial which we need to complete in order to meet the requirements for additional safety data to file a new drug application. At this time, we are not intending to provide any further updates on our pipeline. We have initiated a comprehensive review of our late stage programs. We will have further information when we have completed this process. We are anticipating that the results of this review will be available for our new CEO and our new head of R&D. I would now like to turn the call over to Charlie Rowland who will take us through the financial results. Charlie.

Thanks, David. Good morning, everyone. Earlier today we announced our financial results for the full year ended December 31, 2007. I am pleased to report another record breaking year with annual revenues exceeding the $1 billion level for the first time in our ten-year history as well as record annual earnings per share and record cash flow from operations. Driven by the continued strong growth from each of our major products, net sales in the fourth quarter rose 17% to 304.6 million compared with 259.5 million in the fourth quarter of 2006. For the year, net sales were 1,000,086 in 2007, a 19.4% increase from the 909.7 million in 2006. The 2006 performance included 57.1 million contribution from oxycodone ER, a generic product that Endo ceased selling on December 31, 2006.

This strong growth was led by Lidoderm, our topical analgesic patch indicated for post herpetic neuralgia, a form of neuropathic pain. For the fourth quarter of 2007, net sales of Lidoderm were 208.7 million, a 20% increase from 173.5 million for the 2006 fourth quarter. In 2007, net sales of Lidoderm grew nearly 25% to 705.6 million versus 566.8 million in 2006. The continued growth of Lidoderm can be attributed primarily to the expansion of our sales force in mid-2006 and again in the second half of 2007 as this has increased the number of physicians we detail and extended our reach and frequency among the middle decile specialists and primary care physicians who treat patients with post herpetic neuralgia. We estimate that both prescription growth and dispensed unit growth were up 12% in the fourth quarter versus the comparable 2006 period.

We estimate prescription demand for Lidoderm in the fourth quarter was a approximately $202.8 million. Prescription growth for Lidoderm was up 14% and dispensed unit growth was up 15% for the 12 months ended December 31, 2007, from the comparable 2006 period. As expected, the inventory drawdowns for the first nine months of 2007, which were the result of increased efficiency in the distribution channel, began to stabilize in the fourth quarter. As 2008 unfolds, we should see a closer correlation between factory sales and demand. Combined net sales for the Opana franchise were 28.9 million for the fourth quarter and 107.1 million for the full year in 2007. The 2007 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 fourth quarter was approximately 26.1 million.

We are pleased by the performance we have seen in the Opana franchise and expect steady growth in 2008 due to the continued impact of our marketing initiatives, sales force expansion, and managed care programs. Net sales of Frova or triptan for the acute treatment of migraine headaches in adults were 14.1 million for the three months ended December 31, 2007, a 23% increase from the 11.5 million in the fourth quarter of 2006. For the year, net sales of Frova grew 29% to 52.4 million versus 40.6 million in 2006. Prescription growth was up 17% for the fourth quarter and 12% for the year versus the comparable 2006 periods.

We estimate the prescription demand for Frova in the fourth quarter of 2007 was approximately 13.5 million. We believe this strong growth reflects the impact of increased detailing and promotional activities for this product and growing awareness in the marketplace of Frova's clinical attributes, particularly as an acute treatment for menstrual migraines. Gross profit for the fourth quarter of 2007 was 242.5 million compared with 199.6 million in the same period a year ago. For the 12 months, gross profit was 868.2 million versus 700.8 million in the prior year. Gross profit margins were 79.6% for the quarter and 80% for the year versus 76.9% and 77% for the respective prior year periods. This increase is primarily attributed to the favorable mix in product revenues as we derived a higher proportion of our total revenues from higher margin branded products compare to the revenues of 2006. In addition, we benefited from lower costs from our third party suppliers. This favorability was partially offset by the inclusion and cost of sales of royalties to Vernalis on Frova which became payable beginning 2007.

As disclosed earlier this week, we renegotiated the terms of our outstanding loan to Vernalis of approximately 55 million. As consideration for extinguishing this loan, Vernalis has paid us in $7 million in cash and agreed to forego future royalties on U.S. sales of Frova until annual U.S. sales exceed $85 million. For annual sales in excess of $85 million, the license agreement remains unchanged. Vernalis also announced it has terminated its co-promotion of Frova in the U.S> effective February 19, 2008.

Selling, general and administrative expenses for the fourth quarter of 2007 were 119.5 million versus 89.4 million for the same period in 2006. For the year, SG&A expenses were 411.9 million compared with 346.3 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 the field force that occurred in the second half of 2006 combined with the incremental clinical and promotional expenses, continuing investments in infrastructure to support our long-term growth, and the addition of approximately 100 sales representatives during the second half of 2007.

Research and development expenses for the fourth quarter 2007 were 54.6 million. This included 26.8 million in up-front and milestone payments to partners compared with 0.3 million occurring in the year ago quarter. For the year-to-date R&D expenses were 138.3 million in 2007 versus 86.6 million in 2006. This increase is primarily attributable to up-front and milestone payments to partners of 34.9 million in 2007 compared with 10.7 million in 2006. Plus the ongoing clinical development of Rapinyl, our topical ketoprofen patch, our transdermal fentanyl patch, and our oral rinse for mucositis. We anticipate that our R&D spending will rise substantially in 2008, reflecting the clinical development programs in support of these mid to late stage development products.

Net income for the fourth quarter 2007 was 50.6 million versus 14.8 million in the comparable 2006 period. Diluted earnings per share for the fourth quarter were $0.38 compared with $0.11 in the fourth quarter of 2006, which included 31.3 million of pretax impairment charges related to our [Depador] and [Synera] intangible assets and a $26 million charge for the write off of purchased in process research and development in connection with the October 2006 acquisition of Rx Kinetics. Adjusted diluted earnings per share for the three months ended December 31, 2007, were $0.52 compared with $0.42 in the same period in 2006, an increase of 24%. For the full year, net income was 227.4 million compared with 137.8 million in 2006.

As detailed in the supplemental financial information in today's press release, adjusted net income for 2007 was 258.1 million compared with 220.8 million in the prior year which included the aforementioned and other adjustments. Diluted earnings per share for the year ended December 31, 2007, were $1.69 compared with $1.03 in the same period of 2006. As detailed in the supplemental financial information in today's press release, adjusted diluted EPS for the year was $1.92 compared with $1.65 in 2006, an increase of 16%.

I am pleased to announce that based on our stronger than expected financial performance for the fourth quarter and full year of 2007 and a continuing growth in demand for our key products, we're revising the guidance for 2008 that we issued in early January. We are now estimating that net sales for 2008 will be between $1.225 billion and $1.250 billion from the previous guidance of $1.215 billion to $1.240 billion. We expect the adjusted diluted earnings per share in 2008, excluding estimated milestone payments to partners, certain severance costs and the expensing of stock-based compensation charges will be in the range of $2.18 to $2.22 up from the previous guidance of $2.10 to $2.15. Of course there can be no assurance that we will achieve these results.

As you are aware, we have a number of business development activities, and this revised guidance does not include for the potential impact of future business expansion opportunities such as company or product acquisitions, product licensing transactions or collaborative research deals. At such time, we revise our guidance accordingly. We generated record cash flow from operating activities of 365.7 million during the year ended December 31, 2007, versus 345.3 million for all of 2006. This performance was driven by our strong earnings growth combined with a reduction in day sales outstanding from 55 to 45 days. Our cash and cash equivalence in current marketable securities, including accrued interest, totaled 663.7 million at December 31, 2007. In addition, we have 283.3 million of long-term marketable securities that we have reclassified due to the current conditions in the auction rate securities market.

We intend 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. We have a clear vision for growth. We seek to maximize shareholder value by acquiring gross assets that will diversify our revenue base in the near-term and strengthen our pipeline for the long-term. Toward this end, we continue to evaluate acquisitions of companies that are closely aligned to our specialty physician focus and in high growth therapeutic areas. Of course, we intend to deepen our penetration in the pain market by pursuing earlier stage opportunities that are clinically differentiated and offer a long-term patent protection. This effort will primarily include not only product licensing, such as our recent licensing of the inhaled fentanyl product from Alexza, but also company acquisitions as well. In addition, we will continue to pursue selective development of difficult to formulate high barrier to entry generic products and, finally, we will continue to maintain our focus on driving the growth of our existing business by maximizing the potential of our key on market products and our pipeline. Now, Nancy, David, and I will open up the call for questions.

(OPERATOR INSTRUCTIONS)

First question comes from the line of Adam Greene with J.P. Morgan. Please proceed.

Thanks. Good morning, everyone. On Opana, the value per the script has steadily increased throughout 2007 and ended the year around $287 per script based on Rx demand. What's the right number we should think about for 2008? And then also I think the last price increase you had was in July of last year. Should we assume that you take annual price increases on Opana?

Hey, Adam this is Charlie. I would basically say that the average selling price that you're coming up with for 2007 would be something I would use going forward in your models. We don't really disclose the actual prices but you've sort of backed in based on our revenue and the scripts that are out there. That's as good as any way I see for someone to model what they think going forward. In terms of pricing, we do not talk about when we plan or the extent of price increases in the future. So, again there, you can look at what we've done historically and make your best guess.

Do you have room relative to others in the long-acting opioid market? Is there room to increase pricing more?

Yes. Our product is priced lower than the competing products for the same daily therapy.

Great. Thanks.

Okay.

The next question comes from the line of Jeff Goder with Cowhan Company. Please proceed.

Hi. It's Ian Sanderson. First for Charlie, what is the major catalyst for the increased guidance? It appears that you raised your margin assumption more than anything and so I wanted to get the outlook there. Second, given the strong start that we've seen for Alpharma's flector patch, have you seen an impact on Lidoderm prescribing other than what we've seen in the prescription trends and have you formulated a counter detail message? And related to that a year ago, Peter was more cautious on the '07 pricing outlook for Lidoderm given what he was seeing in the formulary contract negotiations. Can you provide us some color on what see for 2008?

Okay. So let's start off with the Lidoderm question. I'll turn that over to Nancy and then I'll come back to your guidance question.

Thanks, Charlie. We do have anecdotal evidence that Alpharma is targeting Lidoderm positions, but we really have seen no evidence of a negative impact on Lidoderm's total Rx's in our weekly data since the launch of the flector patch. We should note, however, that these products do have different indications, different active ingredients and different mechanisms of action and, therefore, we should not be looking for direct comparison.

Ian, when it comes to guidance, there were a couple of things that really in the fourth quarter drove us to reconsider our guidance. One is that the prescription trends continue to be very strong across our promoted products. Second, as we continually update our business and as David had pointed out, we've been re-evaluating our development portfolio and the timing of when various studies would be initiated. Then with favorable mix and also renegotiating the outstanding loan with Vernalis and a couple of other things we have done contractually where we are getting better pricing on product supply. With all those things factored in, we're very bullish that we needed to take up our guidance for the year and that's really what's reflected in that continued overperformance.

Actually, can I follow up? Can you just give us what the accounting treatment of the renegotiated deal with Vernalis might yield. Obviously take away the royalty obligation in the near-term. Then do you amortize out the debt forgiveness?

So Ian, what we end up doing there is we take the loan balance and we recharacterized it as a intangible. We are amortizing that over the remaining life of the agreement through 2015 on the product. And then that is going through cost of goods sold. And then the royalty we're no longer paying and that was recorded in cost of goods sold. Net cost of goods sold would go down.

Okay. Thank you very much.

Okay.

Next question comes from the line of Greg Gilbert with Merrill Lynch. Please proceed.

Thanks. Good morning. I want to start with a bigger picture question. Can you talk about the criteria and the time line for the CEO and head of R&D searches and in addition to those searches, is the board formally exploring all strategic options for the company in parallel? Then I have a followup. Thanks.

Sure. Thanks for the question, Greg. The board related to us yesterday during a meeting that they have been quite pleased with not only the number of individuals who have expressed interest in this opportunity, but also with the caliber of the candidates. They are committed to filling this role as quickly as possible, of course balancing their obvious drive to really recruit someone who is exceptionally well suited to this opportunity. I don't think one can ever comment on timelines associated with those processes, but it does look quite favorable at this point. I'm sure the board continues to consider all options as they always do, but I don't think that this situation has altered their direction in any substantial way.

Head of R&D?

Greg, your first question in terms of deals and so forth. The board is always interested in drive its business and maximizing shareholder value and we'll continue to do that.

I have another question about the guidance. Can you give us a little flavor for SG&A and R&D, Charlie, for '08. And also. are there any generic launches in your '08 guidance? If not, when are generic launches possible, if ever? Thanks.

We have not disclosed anything new on the generic front, in terms of whether there would be ANDA filed or launched during the year. We would announce those at the appropriate time. We do not want to give anyone a head's up from a competitive standpoint that we have some filings in the works. In terms of guidance on individual areas of spend, I really haven't -- it hasn't changed since our January guidance call. We expect increases in G&A or SG&A. I would sort of mild that off of the '07 trends if I were doing a model. You factor in your own inflation rates and so forth. Sales and marketing, again, I said you can use the Q4 trend going forward for that. There's really nothing unusual other than as we have said, R&D we do expect to have a significant increase due to the number of mid to late stage compounds that we have in development.

Charlie, I think on guidance, what you last said for SG&A was similar levels to '07. Is that still fair or did I mishear that on the January call?

Similar levels. Just to clarify that, we did expect it to grow at around inflation.

Okay. Thanks. I'll get back in line.

Okay.

Your next question comes from the line of David Windley with Jeffries Company. Please proceed.

Hi. Thanks for taking the questions. Wanted to follow up on the questions Ian asked on Frova. Just try to bottom-line that. Is it possible to quantify how much of the increase in guidance is related to the change in terms of the Frova deal?

We have not disclosed that.

Okay. Is the stock-based compensation charge in '08, will it run about the same dollar value as we just saw in the fourth quarter or will that increase in '08 from a run rate basis that is?

For the '08 number, it will increase slightly.

Okay. And then you mentioned, Charlie, that you expected sales and scripts to run a little bit more in line with each other. That said the fourth quarter sales for most of the top revenue products were above user demand. Do you expect to see some pullback and should sales be somewhat below prescription trends or end user demand in 1Q or about in line?

I think you'll start to see is that the inventories will fluctuate base on seasonality. In terms of if the wholesaler still thinks there's possible snowstorms, the inventory will probably stay where it is at the end of the first quarter. I would expect at least in the second and third quarters for the inventory levels to come down sort of where they were earlier for us at the end of the third quarter. Then I would expect them to come back up again at the end of the fourth quarter to where they are pretty comparative to where we left this year.

Okay. Thanks. And one last followup question to Ian's earlier question on the flector patch. I know that Nancy, you made the comments that different active, different label indication, that we all know that Lidoderm's used very heavily off label. It's been discussed in the past extensively. Is it realistic not to expect that flector for some of its on-label indications would affect some Lidoderm's off-label use?

Clearly just as a reminder that we do not promote Lidoderm for any indication other than post herpetic neuralgia. It's difficult to speculate. Obviously I'll have more data as time moves on. We can only report what we have to date.

Okay.

Your next question comes from the line of Gary Nachman with Leerink Swann. Please proceed.

Good morning. First to Charlie. It didn't seem you had real pressure from formularies on the rebates and discounting for Lidoderm and Opana in 2007. How do you think that's gonna play out now in 2008? Do you have visibility on that?

If I were looking at this, I would basically say, Gary, that between the price increases that we would take and the pull through of managed care with the discounts that we have there, that our average selling price probably won't be affected all that materially over the course of the year from where we leave 2007.

Okay. You guys have talked about a lot of pending deals in the hopper. Do you think you can actually get some of those done without a CEO in place or do you need to have that in place before you sign those deals?

Yes. The one thing you have to remember is that the management team and the board have the board has a transaction committee are very aligned on the strategy and the things that we are pursuing. So yes, there would be no hold up on closing any licensing deals or what have you that are in the works if we're able to get those closed.

Okay. Then for David, I know you're not giving a real pipeline update, but can you say if anything's been put on hold? Like the ketoprofen studies or are those currently ongoing? And also if you have a timeline for filing the Rapinyl NDA that would be great?

Just your first question. We have nothing on hold. All of our programs are proceeding. As I indicated in the prepared comments, we're really not prepared at this time to provide any further updates on timelines. We are undertaking reevaluation a reassessment of our pipeline and we want to have that obviously in place underway by the time head of R&D arrives. I think at that time we'll feel ourselves to be in a better position for guidance on timelines.

Okay. So could you just elaborate what needs to get done at this point for Rapinyl? Could you go over that before you could file?

Yes. As we have announced, the efficacy trials we were running came out very positive with the onset of action within ten minutes of the drug onset of pain relief ten minutes of administration. We do have to complete the collection of data from patients who were treated with the product for longer period of time for up to three months to meet FDA filing requirements. Those activities are ongoing at the moment. Again, once we continue our reassessment, we'll be in a better position to provide an update on any timelines.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of David Buck with Buckingham Research Group. Please proceed.

Thanks. Just a couple of quick ones if I could. Just on pricing, can you just review when the last price increases were? Are there any this quarter in particular for your products? Just a reminder the last one for Lidoderm and on Frova, can you talk about what you think might be behind the continued strength of that product? Obviously the new indication didn't happen, but in terms of script tends they continue to be strong. Just wondering why that is.

David, I'll answer your first question on price increases then I'll turn it over to Nancy for Frova. In terms of pricing, we have not raised any or taken any price increases in the fourth quarter. I believe our last round of price increases were in July.

Nothing in the first quarter then, either, correct?

Not to date.

Okay.

Nancy?

Related to your question on Frova, we think there may be two factors. One is the impending loss of exclusivity that is coming soon on a major competitor, Imitrex, and all the formulary reconsiderations so forth. In addition, although we did not receive an approvable letter, I believe that an awareness of our interest in this area has heightened physicians' confidence in using our product for the acute treatment of menstrual migraine as it is currently indicated.

Got it. One quick one again for Charlie. You mentioned the reclassification of some of your marketable securities to longer term. Can you talk about what market developments might actually trigger something in terms of a writedown of those securities?

Sure. Right now, in terms of the securities that we have most of them are auction rate securities. A big portion of those, probably about 60, 65% of that are student loans that are backed by the U.S. department of education through their FELD program. So we're not holding any privately issued student loans. All of the underlying issuers have AAA ratings. Historically, there's been a very low default rate on these types of loans. We've already seen some of these issues being called at par by the individual issuers because they need to refinance these so that they can bring the interest rates down. In terms of other things we are holding, our municipal bond securities and so forth, we've been able to liquidate most of those. So at this point in time, we don't anticipate their being an impairment of any type. It's more of a liquidity issue versus a credit issue at this point in time.

Just the full amount is what's listed as the $283 million?

Correct.

Okay. Thank you.

Your next question come from the line of Rich Silver with Lehman Brothers. Please proceed.

Just a quick couple. On the gross margin, sequential change, can you give us some sense of what's behind that? I know it does fluctuate quite a bit. What that might mean for the gross margin going forward. Then the second question is in terms of the decision not to provide pipeline update. At what point do you expect to be providing a pipeline update? If you don't replace your R&D head, will we still at some point this year gain a pipeline update?

Rich, in terms of margin, what drove our margin in the fourth quarter was mix as a larger portion of our revenue comes from branded products with higher margins. I would basically not expect as much of an impact of the mix change going forward. I would think that the mix is probably pretty steady from this point forward.

Rich, in response to the other questions, during times of transition it's not unusual for companies to re-examine any aspect of their business. Thus our comments about review of our R&D pipeline. I believe that by the time the new CEO arrives or shortly there after, we should have some further news to share.

Thanks very much.

Okay.

Your next question comes from the line of David Lickrish with Broadpoint Capital. Please proceed.

Most of them have been answered right now. My questions are related to the pipeline, but it doesn't sound like you're prepared to share much detail. So I want to just ask you about Opana. You went through some fairly significant changes to the sales force implemented as of October 1. Can you, and I might have missed it in the opening comments, but can you describe where you are in that process and how you see that affecting script trends going forward?

Sure, David. As we talked about before, I mean, the main reason we expanded the field force originally was because where we already had overlap we had seen much better market shares than where we did not. And even though we've only had a few months of [TRX] data since the expansion, the growth trends in the specialty audience that the new reps are focusing on is promising. In the fourth quarter, the rate of [TRX] share growth was four times that of the primary care audience. So we are doing additional ROI analyses on this data that we have. We'll continue to do that through Q1. We'll probably talk more about that at the end of the first quarter on the earnings call as we have more data.

Just to complete the thought. Are you saying you're satisfied with the restructuring as of October 1, and it's obviously an ongoing analysis changes made as required but to date it's in line with your prior expectations at the time it was implemented?

Exactly.

Okay. And my only comment would be given the importance of the pipeline and the need for visibility here, any additional details that you can share with regard to some of those later stage programs I think is only going to be helpful for everybody.

We'll keep that in mind.

Thank you.

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

Thanks for taking the question. Just a pretty broad macro question for Nancy. Having a fresh set of eyes coming into Endo and looking at its operations, can you just comment about the efficiency of the operation and what your priorities are at least going forward are for the organization? And then on R&D, can you just comment also on at least what you believe to be maybe not in specific terms but the MPV of the pipeline that you have within the portfolio, how satisfied you are with the assets that you currently have and how you see that shaping your business development and M&A strategy going forward? Thanks.

Thank you, John. That was a long one question. Let me see if I can hit it. If I miss something maybe you'll help me. First of all, my view of Endo is it's a very strong company with extremely talented individuals. And I see nothing but a bright future. I also think with what's going on in the marketplace around us, we're very well positioned because of our cash reserves that offer an advantage over other companies who in any sort of transaction would have to use the debt markets to move forward. So I think we are extremely well positioned, and also that makes us a very attractive company for the CEO candidates.

Focus, I think it is probably similar to what you've heard in the past. We continue to is up fort our sales and we're going to do everything that we can to achieve or exceed those forecasts. We, as we've stated repeatedly, are continuing with our business development efforts and, again, our confidence that there are opportunities for us there and lastly in looking at R&D, I think that David did a nice job of stating where we stand. We've had some good news lately with Rapinyl and also with our acquisition of the license from Alexza. But would I hesitate to comment on any specific MPVs relative to what we shared about the full review of the product pipeline. Be happy to share a little more detail on that once the work is complete. Did I hit all of the pieces of that question?

No, you have. Thank you.

Thank you.

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

Reporter: Nancy, quickly, if you could give us some specifics. I know you said you believe the 30-month stage started December 14. Can you give us when that is definitively started, that it's actually in place?

That is really up to the determination of the courts. So I can't give you any further information.

Okay. And then, Charlie, just really quickly, on rounding out the guidance, I understand the 49 million for the characterization? Could you give us the royalty that you're no longer paying?

We never disclose the base royalty.

Okay. Is it single digits, double digits? You're saying it's net positive. The margin we keep trying to get around for the '08 numbers.

It's not something we normally disclose.

Lastly, I know you're not specifically discussing any programs, but is there any reason to think that any of these programs under jeopardy of not moving forward? David's comments about all of them are essentially proceeding. I'm assuming that means there's no reason to believe any of these are going to be terminated.

That's correct at this time. Yes.

Okay. Thank you.

Your next question comes from the line of Annabel Samimy with UBS. Please proceed.

Hi, it's Annabel Samimy. A couple quick questions on Lidoderm. First, in terms of the guidance of Lidoderm, again someone mentioned earlier that there was an assumption of increased Medicare contracts in 2007 and that didn't play out. Are there any kind of functions regarding Medicare contracting in 2008 or is that just not an area you're going to pursue now?

I'll reiterate what I said earlier in that we anticipate in '08 that the discounting in managed care across our product line that will increase as we get greater pull-through will probably be offset to a very large extent based on the prices that we take. I'm not expecting to see a major shift during the course of '08.

Okay. Another quick question on Lidoderm. We talk a lot about business development and how there a lot of opportunities, how you have life cycle management plans for Opana. What is the life cycle management plan for Lidoderm?

With Lidoderm, we believe we have a very strong IP situation. We have a method of use patent that goes out through 2012. We then have a formulation patent that we believe has also been strengthened by the preliminary guidance put out by the FDA, in terms the patch has to be the same size, same shape, same prior drug load, same residual drug load. And then also with the citizens petition and things that we're working with with the FDA, in the end if they end up requiring someone to do clinical trials to prove efficacy and that their product works in the same mode as Lidoderm, we believe we could have exclusivity out beyond 2015.

I guess I wasn't talking so much about the IP but rather are there any follow on products that you have for a life cycle plan for the whole franchise?

Again that is not something we would comment on prior to when we would be ready to launch as we don't want to disclose any of that to competitors.

Thank you.

Your next question comes from the line of Tim Chiang with FTN Midwest Securities. Please proceed.

Thanks. Does the updated guidance still include payments to Penwest later this year? I was just trying to figure out how far along are you into the royalty holiday. There's an escalating royalty that starts at 22% to Penwest. Has there been any discussion with the board in terms of potentially looking at Penwest given where Penwest stock is these days?

Tim, first off, our guidance does include the royalties that we anticipate paying in 2008. We have not disclosed where we are in terms of eating through the royalty holiday. What we have disclosed is that on the first I think it's 185 million of sales we pay no royalty. Then on the next 256 million dollars' worth of cumulative sales we pay 50% or 11% royalty rate. And then beyond that, we would go into the base royalty rate at 22%.

Okay. But the royalty rate begins to escalate beyond that, doesn't it?

It does once you hit certain annuals sales threshold which is fairly high.

Thanks.

Your next question comes from Angela Larson with SIT. Please proceed.

A quick one, Charlie, on what happened to depreciation and amort. Then also if you could give us a little more color on what was the reason for the pipeline at this time. Why did you feel compelled to start it before you had a new CEO? Was it the balance of products phase II versus phase III or was it the distribution of the products therapeutically?

So Nancy's going to start off first on your pipeline question.

Again, Angela, I think that when there is a change in leadership, it's pretty typical to reassess your business and all of the key components. So we are looking at the entire business. Specifically at this point in time in re-examining in a comprehensive way the late-stage products.

On your question in terms of depreciation amortization, we classified that to SG&A and R&D based on the underlying assets. And that's all you saw there.

Okay. That's helpful.

Okay.

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

Thanks. One quick one for Charlie. When you talk about R&D increasing significantly in '08, is your baseline the reported number or your baseline the adjusted number excluding the milestones?

It would be the adjusted number excluding the milestones.

Great. Then a followup for Nancy. You commented that the board and management are aligned from a business development perspective. I think late last year there was some discussion about near-term opportunities of Endo venturing outside the pain management area. Is that still part of the process or have you decided otherwise?

Yes, Michael, our strategies suggest that we will consider therapeutic areas outside of pain management, so we are continuing. We obviously have a definitive interest in the pain space and in expanding it and going earlier. So we'll be looking at both.

Great. Thank you very much.

Your next question comes from the line of Lee Hong with Summer Street Research.

Thanks. I missed part of the call so I apologize if you already said this. Did you you provide any timetable on when you might have a new CEO or a ahead of R&D?

Sure, Lee. We did talk about that a little bit. Basically, what we commented on was the fact that the board is quite active in that process that Russell Reynolds is the search firm assisting them. They have a good number of candidates that they are having discussions with and they're impressed with the quality. Beyond that, as you can imagine in any particular search effort, one can really never predict the timing.

Okay. Fair enough. And then just looking on a business development front, can you give us some level of confidence that we're more likely to see more deals being actually executed and announced this year than in the past? I know it's always hard to predict that and it sounds like there's a lot of things going on. But is there anything that you're seeing or hearing or observing that gets you more confidence, yes, there would be a steadier flow of announcements coming in 2008 versus let's say 2007?

I guess our comment there has been consistent in that we have a lot of activity that's ongoing. The number of transactions that we're pursuing. We cannot and do not comment on potential timing or number of transactions to be done because they're really not predictable. You have willing buyer or seller on terms that are agreeable. We just don't comment on how many and likely timing.

Thank you.

Your next question is a follow-up question from the line of Greg Gilbert with Merrill Lynch. Please proceed.

Two followups. Charlie, sorry to beat this, but you're now saying that there will not be pressure on ASP for Opana and Lidoderm and that's different from a few months ago. Is this due to a strategy on pricing or just an increase in understanding on the different variables that go into the pricing assumption?

I think it's more of an updated analysis with better data on what the pull-through and the rate of that would be through the managed care plans versus the rate of price increases that we would take and we've gotten comfortable that net-net you're not going to see a large deterioration of our average selling price.

Okay. For Nancy, on the head of R&D, do I understand it correctly that that search will be really the new CEO's job from a timeline standpoint? I know you can't predict the CEO timeline, but would the head of R&D be a separate?

The head of R&D search has been ongoing. We have identified some very strong candidates, but it is probably less than likely that we would move on that prior to the new CEO arriving.

Lastly, going back to the board considering strategic alternatives that I asked about earlier, I think you said the board is always considering all strategic options. Isn't this a different situation? Can we at least assume when a new CEO is named, a formal process to explore all options has been completed? Thank you.

Our position there has, again, is that management and the board have been completely aligned on the strategic direction the types of things we are pursuing . One of the criteria that the board is evaluating as they interview CEO candidates, are they aligned as well with the strategy because there is no disagreement internally with inside the company and inside the board

Okay. Thank you.

That concludes our Q & A session. I Would like to turn the call over to Nancy Wysenski for closing remarks.

I'd like to thank you all for today's call. Before we close, I'd like to formally acknowledge Endo's employees whose hard work and dedication have been instrumental to the success that we demonstrated in 2007. Their singular focus on improving the lives of patients and pain is central to our goal of becoming the leading pain management company. And we thank them for these efforts. Thanks for joining.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.