Endo International PLC (ENDP) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Endo Pharmaceuticals earnings conference call. My name is Francine, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, Mr. Blaine Davis, Vice President of Corporate Affairs. Please proceed, sir.

Thanks, Francine, and good morning, everyone. Thanks for joining us. I will begin today's call with a brief summary of the third quarter financial results we reported this morning and then Dave Holveck, our President and CEO, and Nancy Wysenski, our Chief Operating Officer, will provide an outlook for the business. Following our prepared remarks we will open the call for your questions. In addition to Dave and Nancy joining us on the call for the Q&A session are Ed Sweeney, our Vice President and Controller, as well as [Karen Adler], Vice President of Finance and Treasurer. I will remind you that any forward-looking statements by management are covered under the Private Securities Litigation Reform Act of 1995 and subject to change. Risks and uncertainties are described in today's press release and in our filings with the SEC. 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.

In addition, during the course of the call, we 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 differ from other non-GAAP financial measures used by other companies. Investors are encouraged to review Endo's current report on Form 8-K filed with the SEC earlier today for Endo's reasons for including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in our sales and earnings press release issued earlier this morning.

Now, let me briefly summarize our third quarter financial results. Net sales increased 18% during the third quarter to $316.8 million versus $269.5 million a year ago, while nine months net sales increased 17% to $913.2 million compared with $781 million in 2007. As Nancy will describe in a few moments these increases were driven mainly by the growth in net sales of Lidoderm and Opana. Third quarter earnings per share also increased over the same period in 2007. Third quarter diluted earnings per share were up 30% over 2007 to $0.57 per share in the 2008 third quarter and up 13% for the nine months ending September 30th, 2008 to $1.48 per share versus $1.31 per share in 2007. Adjusted diluted earnings per share rose 39% from $0.46 in the third quarter in 2007 to $0.64 per share in the 2008 third quarter and rose 21% to $1.70 per share for the nine months ending September 30th, 2008. Now I will turn the call over to Dave.

Thanks, Blaine. And welcome. I believe our financial results for the third quarter demonstrates the consistent and solid performance of our business and reflects our efforts to increase revenues, control expenses and operate more efficiently. As Nancy will describe in a moment, we continue to enjoy a strong reputation in our target markets, demand for our products remains high, and our field teams are working smarter and more effectively. All of this translates into a solid performance for our brands. I also believe the recent reorganization is beginning to produce tangible results and will allow us to create and capture significant value in the long run. One of the benefits of the reorganization has been the flexibility to pursue new products and technology that fit our core strengths in pain management, especially generics and drug development. Our business development activities are focused on finding new opportunities to expand our business in therapeutic categories that can be associated with our expertise in pain, including the management of both benign and malignant disease in areas such as oncology, nephrology and urology.

While I am not going to predict when we will find the next product or technology to acquire or end license, I can tell you that our business development activities are my top priority. I am committed to strengthening and expanding our product line, increasing revenues and creating value for patients and shareholders. While I take a long view on our mission and appreciate that there may be some impatience to see us get deals done, I assure you that we are pursuing all avenues of new business opportunities before us. I feel the sense of urgency, which is why I am focusing much of my time on evaluating future business opportunities for Endo. Our primary mission is to build the business and grow revenues. I am confident the team appreciates this dynamic and remains focused on those objectives. The team also appreciates the competitive environment in which we operate. Speed and efficiency are important factors in developing and marketing drugs successfully. Our new head of R&D, Dr. Ivan Gergel, is refining his organization to build core capabilities and functions so that we can take on a greater number of early and late stage projects. Ivan is in the process of building a virtual R&D model which will allow us to run multiple development projects in parallel without dramatically increasing the size or cost of his team.

Our sales organization remains one of Endo's strongest assets that we will continue to leverage as we search for new business opportunities and evaluate potential partnerships in the pain space and other therapeutic areas. It is also a flexible asset, since a portion of our sales effort is supplied through a contract sales organization whose size we can adjust if necessary. Our search for a new financial officer is well underway, and I am confident that we will be able to attract a highly qualified executive to fill that position. With the exception of the CFO position, I feel that we now have the right senior management team in place to build and grow our business. In summary, demand for our products remains strong, our cost control measures are improving our bottom line, we're making good progress in streamlining the organization, and we're actively pursuing new opportunities to expand and strengthen our business. In addition, based upon our product sales, effective expense management and share repurchasing activity, we are raising our adjusted diluted earnings per share guidance from a range of $2.15 to $2.19 to a new range of $2.26 to $2.30 per diluted share. I am very pleased with the performance of the business for the quarter and committed to our new strategies to support growth of this business. So now I will turn it over the call to Nancy for what could be a more detailed review of our commercial operations and outlook. Nancy.

Thanks, Dave. Good morning to everyone on the call. I'm pleased to report we had a very solid third quarter for three important reasons. First, we examined our current physician targeting efforts and made some changes. We took the time to better understand our health care providers and develop the revised physician targeting program for our reps. These changes enable us to focus the strengths of our salesforce on the most appropriate and productive targets. Second, we've optimized our sampling efforts to provide a greater degree of focus on where sampling will provide the best return for the investment. Third, we changed the product mix of our pharma 1 primary care salesforce and our pharma 2 contract sales organization. During the third quarter we added Voltaren gel to our primary care salesforce mix and added Lidoderm to our contract salesforce mix. We believe these changes as well as additional changes we're planning will leverage our current assets to produce a greater return by maximizing the productivity of our sales efforts.

In a few moments I will describe some of the enhancements to our commercial business that we're currently testing to help us increase revenues. But before I do that, let me comment on our product performance for the quarter. I would like to start with Lidoderm which grew 11% in the third quarter to $194.1 million in net sales. This reflects good but maturing demand for the product as we pursued a renewed focus across high prescribing physicians who treat patients with post herpetic neuralgia to sustain our sales growth. The numbers also reflect the impact of new managed care agreements on pricing discounts which are likely to continue. Lidoderm is a strong franchise which we believe will benefit from new sales and marketing strategies that we're in the process of implementing. Sales of Opana and Opana ER were up 73% in the third quarter to $41.5 million, reflecting strong demand for these products and the success of new physician targeting programs. The results also reflect our successful managed care contracting strategy for Opana, which has increased sales volume but occasionally resulted in lower unit price as we recently saw with a large managed care contract. We anticipate that there will continue to be fluctuations in price and volume with new managed care contracts, but we believe this is the right sales and marketing strategy for the Opana franchise.

The launch of Voltaren gel also continues to go well. Prescription trends reflect solid growth, and we see good opportunities to build this brand and expand the topical pain market in osteoarthritis. We're doing a lot of medical education and getting good responses from our primary care physicians, specialists, and pharmacists. Sales of both Frova and Percocet were in line with our expectations for the quarter and seem to be tracking with the general market for each product. In terms of our specialty generics business, we're now focusing on higher value generics where our formulation expertise, ability to develop high potency compounds, and expertise in drug delivery capabilities can be applied. This approach is working well. We currently have six ANDAs under review by the FDA, and we're pursuing a growing number of development projects within our generics business.

In addition to the sales initiatives Dave and I have already described, we're also testing the new approach within one of our primary care sales groups. We've rolled out flexible analytics to the sales team who can now make adjustments to call plans at the territory level. This new capability enables them to leverage their extensive knowledge of both local prescribers and managed care formularies to best promote our products to the most appropriate healthcare professionals. In addition, we're pursuing efforts to better coordinate our managed care contracting and medical affairs support to meet the local and regional needs of our prescribing audience. Augmented by further enhancements in sales training and patient education support, we intend to make Endo's sales force even more effective. We believe this investment in staff education and redeployment will have a measurable impact on sales. Our industry is slowly adapting to the ever-changing operating environment in healthcare today, and we think we're ahead of the curve by implementing these changes. In summary, it was a good quarter for the commercial business thanks to the consistent and solid performance of our brands, the execution of changes to our sales and marketing organization, and the implementation of new programs to support our future growth. Thanks to this performance we remain on track for our 2008 net sales guidance. That concludes my prepared remarks, so let me turn it back to Blaine to begin our Q&A session.

Thanks, Nancy. Francine, I think we're ready to start the Q&A session. Just as a reminder for everyone on the call, we do also have Ed Sweeney and Karen Adler here from our Finance function. They're available to answer your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Ian Sanderson of Cowen and Company. Please proceed.

Good morning. Thanks for taking the question. A couple here. First, could you perhaps provide a bit more color on the cost reduction moves in Q3 and particularly as they relate to the R&D side of things? There was a contract termination charge and maybe you can elaborate on that. Secondly, on the balance sheet has there been any change in the status of the auction rate securities in Q3 and maybe if you can break out the operating cash flow in the quarter.

This is Dave Holveck. Let me take the first part, and I will ask either Ed or Karen to give you a little bit of an update relative to the auction rate. Relative to the cost reduction, as we indicated to you, a couple elements play into the expense changes relative to the third quarter. One is the decisions we made on our product pipeline, and that was a major element that impacted our third quarter expenses. The other area was relative to a lot of what Nancy described in terms of our sales team, marketing efforts, and to some extent just the way we've changed the organization and reduced the organization, we've gained some efficiencies in that area, so I would say that the bulk of the expense is a function of the R&D as well as the restructuring of our commercial organization. Now, relative to the second part of your question, the auction rate, I would like Karen to give a perspective on that.

Okay. In the third quarter we actually reduced it by almost $20 million, our auction rate securities, and actually subsequent to the end of the third quarter we actually had another $11 million called, so our balance was $285 million at the end of the third quarter. We did also have an unrealized loss on that of $27 million as well. Does that answer your question? Would you like me to --

It does. Maybe if you could give us just a sense of the operating cash flow in the quarter and share repurchase activity in the quarter?

Okay. Ed Sweeney is going to take that.

Okay. The operating cash flow during the nine month period, which is what we disclosed, has declined from the prior year due to significant AR collections on sales of Opana ER that took place at the end of '06, so those collections were significant in the beginning of '07, so that is the main driver of the decline in our operating cash flows from the prior year.

Okay. And share repurchase activity in the quarter?

During the quarter we repurchased another 3.8 million shares.

Okay. Thank you very much.

Thanks, Ian.

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

Good morning. First question is could you give some more detail around the types of managed care wins that you're getting on Lidoderm and Opana. You seem to be doing a good job there, and the impact on pricing for those products.

Sure, go ahead.

Talking over each other. As I stated during the prepared remarks, part of what you're seeing in the third quarter is the successful execution of our contracting strategy for Opana specifically. We have 80% coverage commercial plans and about 65% on Part D plans at either the tier 2 or tier 3 level. In the third quarter alone, we have signed five new agreements, and what that means is that we're seeing a little bit of the impact of the pricing that goes with those agreements prior to having the benefit of the volume that will come with them. Now, Lidoderm is a slightly different situation because, of course, that product has been contracted a little bit longer. The good news is that we continue to see re-uptake, if you will. When contracts expire, they're resigned. And we have seen a slight decline in pricing which is very typical I would say for a mature product at this stage in its life cycle.

Okay. So should we assume continued price declines going forward when we model this out for both of these products?

We do expect to continue to see some decline, and in the case of Opana that should be offset by volume increase.

Okay. Also on Lidoderm, are you guys still expecting a big bump in the fourth quarter because of wholesalers. So should we look at the growth rate in the third quarter, is that sort of reflective of what we should expect in the fourth quarter?

I wish I could give you the answer, Gary. It is really hard to speculate on the purchasing patterns.

Okay. Lastly on Voltaren gel was there some stocking or recognition of deferred revenue in there in the quarter and how many tubes for RX are you up to and what's your new target for that product, and RXs have gone up dramatically. Is it being used chronically at all or just for acute pain at this point?

Yes, well, a lot of questions. Let me see if I can get them and I then I'm going to go to Ed to catch whatever I miss. Voltaren gel is performing well. As you said, the TRXs are picking up. We have now booked $11.3 million in sales, and part of that is due to recognition now on the stocking, and I will let Ed speak to that in just a moment. The physician community is really welcoming this product, both in primary care and specialists. We're now at a point where primary care physicians are ready to surpass specialists in terms of the total number of scripts they're writing, and we think that is due at least in part to the fact that we finally have a full promotional campaign out there. We have a very energized salesforce behind this product, and we think that it is definitely contributing to growth of the topical osteoarthritis market. Ed, do you want to take the specifics on the revenue recognition?

Sure. We were able to begin recognizing revenue on a complete basis during the third quarter due to the fact we met the accounting rules for the recognition of revenue.

I might come back to one question you also asked, Gary, which was about the chronic versus acute nature of the drug. As you know our indication is for osteoarthritis, and that is a chronic disease, so we would expect that over time we will have a growing number of TRX relative to new RXs.

Just on the tubes for Rx? The (multiple speakers).

Yes. We're at about two tubes per RX right now, and we anticipate that will continue to grow over the next twelve months.

Okay. Any target there? Could you double it potentially?

Not exactly certain yet. We're looking at that right now.

Okay. Thank you.

Thank you.

Our next question comes from the line of Annabel Samimy.

Hi. Thanks for taking my call. Can I reiterate the question on Voltaren gel? I didn't quite understand the stocking or the revenue recognition response that we heard. The prescriptions clearly didn't seem to imply $10 million, so if you can go through that a little bit more clearly.

Sure. At the end of the third quarter we had recognized revenue just based upon prescription demand, so it is only the tubes that had actually made its way into the hands of patients we recognized revenue on. During the fourth quarter -- or I am sorry, during the third quarter we were able to recognize revenue based on our shipments to the wholesaler. Does that answer the question?

Yes, yes, that's great. And also you mentioned that you have six ANDAs filed. Can you give us an idea what those ANDAs might be or are you keeping that under wraps.

Yes. For competitive purposes, we prefer to not share that.

Okay. And just separately on the gross margins, notice that it has come down a little bit. Can you talk about that? Is it mix shift and what is pulling it down?

The majority of that decline was due to some of the rebating effects on pricing that we saw on Opana and Lidoderm.

Okay. And one last question if I may. In this environment there has been a lot of discussion about companies not being in financial positions to continue through clinical development of some of their products. Have you seen opportunities improve over the last month or so as we are seeing this environment deteriorate and what would your first priority be for business development? Are you still focused on trying to get some products for 2009?

Yes, it's a good question. Yes, I think that the environment again from the position of where we sit relative to our cash position does give us certainly greater opportunities. I certainly came back from my recent visit over at the European partnering conference and, again, I think the discussions as well as the environment is an element that does give us some opportunities, and so we're pursuing those. I think how we look at our business going forward, our strength is certainly in the pain area, and we're going to continue to leverage and focus in that area. As I indicated, we also see some related areas where pain has a great entree for us, and again until we get more specific and understanding around those opportunities, I am not going to say much more, but that's certainly where we're looking at right now in the priorities. So as I mentioned in my commentary, pain will be an immediate short-term focus for us.

Next question comes from the line of David Buck from Buckingham Research Group. Please proceed.

Hi. It is Jim Dawson for David Buck. Just would you explain the inventory changes in Opana and Opana ER?

Sure. Right now the inventory there is pretty flat. It looks as though there was a little bit of a decline because we stocked the new strengths during the second quarter.

Okay. Due to the new strengths?

I am sorry, I couldn't hear.

Due to the new strengths, you said?

In the second quarter we stocked new strengths, which actually increased inventory overall because there is a net increase in the total, but in looking at the in-line dosage strength, it is pretty flat.

Okay. Thanks. And then just on pricing, pricing per RX for Opana, Opana ER and Voltaren gel, what should we be using for as a proxy?

Yes. I can't give you a specific number as we mentioned earlier. Those numbers are fluctuating based upon the contracts that are signed both up and down depending upon when you sign the contract and give the price concession versus when the volume comes through, so it is a little tough for me to be any more specific for you.

Okay. Thanks. And then at any price increases in the quarter or just after for any of your drugs?

We took a price increase on Opana IR effective October 1.

Of?

It was 9.9%.

Okay. Thanks. And then when should we expect an update on the pipeline R&D front? (multiple speakers) on that or --?

I think it would be -- again, it is interrelated with some of my other activities on this development, and I would say you will get that update in due course again. I just can't be any more specific on that.

Just to remind you, the comments we made on the previous quarter relative to two of the projects, the oil rents ongoing preclinical work there that we expect to have some additional information later this year, and then on the Sufentanil patch we had indicated an end-of-Phase II meeting which is likely to happen in the early part of 2009.

Next question come from the line of Ken Trbovich from RBC Capital Markets. Please proceed.

Thanks for taking the question. I wanted to start, obviously, with the fact you had a great quarter and yet while you're raising the guidance, there is some question in my mind as to the message you're trying to send as to whether the restructuring is complete or if you have some specific planned spending for the fourth quarter that perhaps we're not aware of. Do you have some plans specifically maybe on DTC advertising for Voltaren or something of that nature because it would seem that these expense reductions that we're seeing here in the third quarter really would be something that would carry through moreso than has been implied in the guidance.

I think your -- appropriate question to ask, and I am going to let both Nancy and Karen give you a little bit more granular. The aspects of again how we looked at the restructuring, which we really completed to the level of the organization, alignments, projects, as I indicated relative to R&D, as well as some of the support expenses that were built into the organization, we took in sense of various contracts that we had from consultants and such along with Nancy's comments, the efficiencies under which she built into the organization from a marketing and sales perspective. Now to some extent you're seeing that in the third quarter, but at the same point, some of that, yes, will start to come back into the fourth quarter, but I will let Nancy give you a little bit more specific on how she sees that going.

Thanks, Dave. As you know, when you go through a period where you restructure, you're moving people around and sometimes that disrupts your spending a little bit. But now folks are in those new roles, ready to roll, and we therefore expect the SG&A spending for the fourth quarter to increase over what we saw in the third quarter. We expect to see an increase in medical grants, the initiation of new marketing campaigns, as I explained for Lidoderm, work on Opana and Voltaren gel, and increase in sales training as we're rolling out these new programs and better preparing our salesforce, and also an increase in sampling for Voltaren gel, so we do think that the general rate will rise in the fourth quarter.

I would just say that the range that we're giving you again is built around those caveats or anticipations in that or assumptions in that. Okay? (multiple speakers)

Sure. Appreciate it. I guess on the accounting side, just really quickly, in terms of the impairment charges, the long lived assets that we've seen here in the current quarter, could you give us some granularity on that? And then help us to understand obviously this is a period of restructuring, at what point do these extraordinary items sort of discontinue and become a normal course of business?

I will take the first question on the impairment charge during the quarter. That charge related to the E-pedigree project we had initiated, and during the quarter it was determined that the project was going to move in a different direction and the costs we had incurred no longer had any value.

Okay.

For a little bit more detail there, that was due to decisions that have been taken in the State of California regarding changes in their law, so there is not the urgency that we had anticipated there, and we would prefer to wait and have the great benefit of what will happen across the industry and not have to bear all of that cost ourselves. Also, I would say secondary to the restructuring, that was here in headquarters. We're done, and I think things are starting to roll at a pretty normal rate now. Most of the changes that I alluded to where expenses are growing are related to these efforts to take our fine field salesforce and make them even more effective.

I guess from my perspective I just meant in terms of the presentation on a quarterly basis that, clearly, some of these charges are things we'd expect. I just think at some point we'd expect it wraps up and that we don't see these sort of ongoing charges that get broken out. Are we at the period that that process is complete?

I would say probably, yes. I would say the answer is yes, and I would also say that we went through this process in a fairly straight-forward aggressive way, so that we had the head room to again make some of the future growth decisions that we're working on fit into a model that I think gives us the near-term as well as the long-term sustainability. So from your question, yes, we're through the bulk of it, and now we'll go from here.

It is Blaine. The only thing I would add to that, is obviously we don't have a crystal ball or a predictive measure of some of the issues, for example, related to E-pedigree and changes in the law, so I think that those are things that are just not predictable, that do come up. You saw it this quarter, and you may see it in the future. It is just hard to say.

Okay. And then final question, just in terms of pipeline, I know you've talked about the two programs in terms of new product opportunities. Are you going to give us any insight into life cycle management, whether it is Lidoderm, Voltaren, anything in that sense and whether these might tie into some of those ANDAs that have been filed?

Well, I think that [to] just generalize, your answer is that there is a lot of what I believe this company has is synergies in terms of, as I mentioned, the pain as a great entree, and I think the special generics is equally an ability to get some synergies. So as you talk about life cycle management and as we move forward with decisions, I think you'll get a greater appreciation of how we're thinking and how it fits together, but to your question, be assured that we're trying to leverage those positions we have.

Okay. Thank you.

The next question comes from the line of David Windley from Jefferies & Company. Please proceed.

Good morning. Thanks for taking the questions. Follow up on Annabel's earlier question about environment and how that affects the flow of your BD opportunities. I wonder, Dave, if you can comment about the relative stage that is -- that represents your greatest interests? I mean, maybe the environment allows to you look a little bit later in the pipeline and still get better value relative to where things were six months ago or things of that sort. I guess I am just looking for some indications of where in the pipeline you would like to bring products into the fold?

Well, okay, let's take it as the company looks, its strength is in the development side, so in areas where we can accent that, and I think we'll do it. I keenly am aware of the fact that we want to continue to see our revenue growth go, and so priorities are certainly looking at areas in which we can see revenue impacted more near term. I think the midterm is also an area where I think our development expertise is going to be an advantage. Again, with the environment there are people who are sitting out there that don't have the cash in order to take that next step, and our expertise along with our cash position enables that, so midterm. And I think for the long-term is really Ivan's work relative to the virtual R, where we can start to build that in a nice progression, sort of the call, walk, run progression under which we can get it started and build out for what I will call more longer sustainable innovation pipeline. So that's how again we're working it and how I am thinking about it.

On the long-term portion of that, the virtual R, are these situations where you might be partnering with offshore companies with chemistry capability or something to do some formulation work for you or do some lead optimization for you and do that at risk or could you delve into that a little bit more?

I think you're correct in that certainly the utilization of offshore is a source that -- and again, I don't think it is any surprise relative to Ivan and his background and experience. We're going to leverage that. That was certainly a philosophical agreement that we had and I think as was his desire, so those are definitely going to be there. I think that where we can gain that leverage along with our capabilities, that's how we're going to look at it. Again, I think we've got to have a balance on our position for the long-term growth. And from the long-term perspective innovation will do it through the leverage and risk management of the offshore opportunities.

On the other end of things, is acquiring approved products even if they might not be -- continuum of analysis, but even though they might not be particularly novel, is acquiring products already in the market or ready to be marketed as in a Voltaren gel, is that possible or is that an opportunity?

I think you're right. Yes, sure. Again, with our capabilities that we have existing in the infrastructure of our business in the marketplace, any way we can get more leverage out of that, makes a lot of sense. So, yes, I don't think anything is off the table. We're going for all opportunities against that continuum of near term, mid term, long-term.

Okay. On the commercial side, change in the mix of products carried by the two forces, were those replacements or just additions to the bag?

They're additions.

And could you review what each team then is carrying in all positions?

Sure. I know this is something that shifts so much that, sometimes when you're not dealing with it every day, it is a little bit hard to track. So as you know we have our own pharma, what we call Pharma 1 force of 360 reps who call on primary care physicians. And they now have everything in our line, so they are carrying Frova, Lidoderm, Opana, and we just added Voltaren gel. As you know, in May we put up a contract sales organization. We sometimes refer to them as Pharma 2. That's an additional 275 person effort. They began their focus with Voltaren gel, and we have now added Lidoderm. We're actually doing that as we speak to their bags. And then I am sure you're aware, we also have two specialty pharma salesforces, and the first specialty force carries Frova, Lidoderm, and Opana, and the second specialty force carries Lidoderm, Opana, and Voltaren gel.

Okay. And on the contract for --

David, in the interest of time, can we just go to the next person and maybe loop back in, that would be great.

Our next question comes from the line of Tim Chiang from FTN Midwest Research.

Thanks. You mentioned six ANDAs that you have under development or, I don't know if they were filed or not, but the generic market is such a tough market. It is pretty much a commodity market here in the U.S. Unless you have some niche or differentiation with your filings, it is tough to sustainably grow a generic business. I am sure you guys have gone through this, but are these very tough to develop type products that you're looking at for the generic market?

Yes, Tim, first of all I want to be clear those six ANDAs have all been filed with the FDA. In addition to that, we've got a growing number of projects back here that we're working to develop, so you hit it. Yes, this is a specialty generics business, and that means that we focus on specific segments that we think we can do well in, but for competitive reasons, we obviously don't want to disclose anything too much more specific than that.

Okay. And then just one follow-up. I know that at some point you'll need a line extension strategy to Lidoderm, and I noticed Alpharma licensed in a longer acting PHN patch, what are your thoughts on that, potentially working on a much longer acting version of Lidoderm? Is that something that you think would commercially make sense?

Again, I am not going to make a comment on that. Let me -- because I don't want to be that specific on that particular part of your question. I do think the abilities to look at line extension are not always just going to be handled by us by just looking at the topical approach, so there is other ways to leverage our position in that market. And let's just say that how we look at that is not as discrete as you defined it.

Our final question comes from the line of Gene Mack from Lazard Capital Markets. Please proceed.

Thanks for taking the question. David, I guess can you just give us a bit of an idea how you're sort of evaluating opportunities that are out there. In other words, my guess is that it must be tough for one person to sort of kick the tires on these things, so maybe you can give us a little bit of an idea of how you sort of go about evaluating things. Has Ivan's input been -- to what point is Ivan participating and who else at the organization is?

Well, first of all, there is a team approach here. Certainly, Ivan and myself -- I came in also with an experience if you would or some insights again from my days either in the biotech arena or more recently with the J&J and the JDDC, meaning the venture area. So there were some certainly preconceived ideas and positions that I came in with, and I think the organization was very strong relative to the business development area. It is not that the skill sets weren't in place, so from that standpoint that was a positive, and I was able to bring a couple of the players forward, one of which Bob [Cabuzzi] did who is a part of the team leading the business development is there. I also brought in another individual from my past life to help support some of the technical, so I think we're at a position where we can do a fairly quick and efficient broad review because of the experienced nature of the players. Ivan's team has grown, the business development internal organization, and then my past experience. So in aggregate we're able to clip through it pretty quickly, and we have, so that's where we sit.

I didn't mean to imply that your experience at [Senecor] didn't help out or anything like that.

No, no, nor did I take it that way. I think that one of the experience aspects was really the learning experience I had at J&J. The opportunity to participate in the broad elements of the technology base that the JDDC looks across meaning the device, pharma, consumer. And I think being able to see that from that position was to me valuable learning, and again it certainly forged some ideas and beliefs coming in here. So it is really exciting to be able to take the next step and build off on that experience and maybe some of the hypothesis that experience led me to.

A quick accounting question. With the Penwest royalty, can you just remind us again how that's booked, how you recognize that, and has there been any change, incremental change over the last quarter or so?

The Penwest royalty was not significant in Q3. That's when it first started -- first became a liability for us. We do expect it to be around 11% of net sales of Opana ER in the fourth quarter, and we will recognize that in cost of sales.

Okay. Okay. Great. Thank you.

I would now like to turn the call over to Dave Holveck for closing remarks.

Close out by simply saying I hope you're feeling again much the way I feel and I hope however we can transmit some of this to you is that the team is really come together in a good short period of time. The functionality, the ability to target and look at specifics and put together a plan that we can engage and work on through '09 and '10 and ongoing. And I think leaving at that at this point I appreciate again the time, the support, and look forward to our next quarterly call. Thank you.

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